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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
September 30, 1999 0-24133
FRANKLIN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 62-1376024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Public Square, Franklin, Tennessee 37064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 790-2265
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Not applicable
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(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, No Par Value 30,659,231
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Class Outstanding at November 12, 1999
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PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands)
September 30, December 31,
Assets 1999 1998
<S> <C> <C>
Cash and cash equivalents $ 10,872 13,089
Federal funds sold -- 8,229
Investment securities available-for-sale, at fair value 44,532 40,135
Mortgage-backed securities available-for-sale, at fair value 44,176 32,406
Investment securities held-to-maturity, fair value $2,810,000
at September 30, 1999 and $4,395,000 December 31, 1998 2,807 4,171
Mortgage-backed securities held-to-maturity, fair value
$428,000 at September 30, 1999 and $602,000
at December 31, 1998 426 591
Federal Home Loan and Federal Reserve Bank Stock 1,580 1,371
Loans held for resale, at cost, which approximates market 12,116 23,643
Loans - portfolio 251,103 215,928
Allowance for loan losses (2,395) (2,194)
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Loans, net 248,708 213,734
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Premises and equipment, net 8,202 7,532
Accrued income receivable 2,488 2,126
Mortgage servicing rights 1,606 1,257
Other assets 3,885 1,584
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$ 381,398 349,868
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Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 33,973 33,317
Interest-bearing 302,239 279,080
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Total deposits 336,212 312,397
Repurchase agreements 2,421 3,421
Other borrowings 17,382 8,424
Accrued interest payable 1,124 1,087
Other liabilities 705 950
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Total liabilities 357,844 326,279
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Stockholders' equity:
Common stock, No par value. Authorized
500,000,000 shares; issued 30,658,641 and 30,470,803
at September 30, 1999 and December 31, 1998,
respectively 11,208 11,092
Unrealized (loss)gain on securities available-for-sale (2,365) 159
Retained earnings 14,711 12,338
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Total stockholders' equity 23,554 23,589
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$ 381,398 349,868
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</TABLE>
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except for per share information)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 6,394 5,696 18,464 16,426
Investment securities, taxable 1,175 949 3,078 2,768
Investment securities, tax-exempt 171 107 519 282
Federal funds sold 47 63 148 138
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Total interest income 7,787 6,815 22,209 19,614
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Interest expense:
Deposits 3,634 3,209 10,340 9,198
Other borrowings 176 183 570 530
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Total interest expense 3,810 3,392 10,910 9,728
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Net interest income 3,977 3,423 11,299 9,886
Provision for loan losses 10 105 230 270
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Net interest income after
provision for loan losses 3,967 3,318 11,069 9,616
Other income:
Service charges on deposit accounts 452 365 1,276 1,031
Mortgage banking activities 196 658 1,608 1,465
Other service charges, commissions and fees 234 259 702 777
Realized gains on securities transactions -- 88 104 229
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Total other income 882 1,370 3,690 3,502
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Other expenses:
Salaries and employee benefits 1,714 1,512 5,094 4,231
Occupancy expense 575 520 1,650 1,414
Mortgage banking expense 458 76 1,288 281
Other operating expenses 614 592 1,717 1,522
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Total other expenses 3,361 2,700 9,749 7,488
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Income before income taxes 1,488 1,988 5,010 5,670
Income taxes 487 728 1,719 2,064
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Net income $ 1,001 1,260 3,291 3,606
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Net income per common
and common equivalent share: $ 0.03 0.04 0.11 0.13
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Net income per common share -
assuming full dilution: $ 0.03 0.04 0.09 0.10
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Weighted average shares outstanding:
Basic 30,658 28,662 30,558 28,251
Diluted 34,730 35,233 34,779 34,747
</TABLE>
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,291 3,606
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 804 699
Provision for loan losses 230 270
Loans originated for sale (69,179) (78,252)
Proceeds from sale of loans 82,340 73,281
Gain on sale of securities (104) (229)
Loss on sale of loans sold 422 8
Increase in accrued income receivable (362) (141)
Increase (decrease) in accrued income payable 37 (81)
Increase in other assets (1,445) (893)
Decrease in other liabilities (147) (206)
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Net cash provided by (used in) operating
activities 15,887 (1,938)
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Cash flows from investing activities:
Decrease (increase) in federal funds sold 8,229 (7,553)
Proceeds from maturities of securities available-for-sale 9,299 12,985
Proceeds from sale of securities available-for-sale 8,545 57,518
Proceeds from maturities of securities held-to-maturity 1,525 978
Purchases of securities available-for-sale (37,907) (84,215)
Purchases of securities held-to-maturity -- --
Purchase of Federal Home Loan and Federal Reserve Stock (209) (224)
Net increase in portfolio loans (37,260) (21,417)
Purchases of premises and equipment (1,298) (1,234)
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Net cash used by investing activities (49,076) (43,162)
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Cash flows from financing activities
Net proceeds from issuance of common stock 116 582
Dividend paid (917) --
Increase in deposits 23,815 40,294
Decrease in repurchase agreements (1,000) (1,000)
Increase in other borrowings 8,958 5,656
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Net cash provided by financing activities 30,972 45,532
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Net (decrease) increase in cash (2,217) 432
Cash and due from banks at beginning of period 13,089 10,696
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Cash and due from banks at end of period $ 10,872 11,128
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Cash payments for interest $ 10,873 9,808
Cash payments for income taxes $ 1,313 2,338
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</TABLE>
4
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FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998.
NOTE B - COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS establishes
standards for reporting comprehensive income. Comprehensive income includes net
income and other comprehensive income which is defined as non-owner related
transactions in equity. The following table sets forth (in thousands) the
amounts of other comprehensive income included in equity for the nine months
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
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<S> <C> <C>
Net unrealized loss on securities available for sale $(2,524) $48
</TABLE>
NOTE C - STOCK SPLITS AND DIVIDENDS
During June 1998, the Company effected a four-for-one stock split, and in May
1997 and February 1998 the Company effected two-for-one stock splits. All per
share data and weighted average share data has been restated as if the splits
had occurred at the beginning of the years presented.
In March and May of 1999, the Company's Board of Directors declared $.01 per
share cash dividends payable on April 7, 1999 and July 7, 1999, respectively.
Also in September 1999, the Company's Board of Directors declared a $.01 per
share cash dividend payable October 6, 1999 to shareholders of record on
September 24, 1999.
NOTE D - SEGMENTS
During fiscal 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This standard requires
disclosure of segment information in a company's financial statements. The
Company has only one reportable segment under the quantitative guidelines of
SFAS No. 131 therefore, substantially all of the assets, liabilities, and
operations presented in the consolidated financial statements are attributable
to Franklin National Bank. The Bank provides a variety of banking services to
individuals and businesses through its branches in Brentwood, Franklin, Fairview
and Spring Hill, Tennessee. Its primary deposit products are demand deposits,
savings deposits and certificates of deposits, and its primary lending products
are commercial business, real estate mortgage, and consumer loans.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Franklin National Bank (the "Bank") represents virtually all the assets of
Franklin Financial Corporation (the "Company"). The Bank, located in Franklin,
Tennessee, was opened in December of 1989 and continues to experience
substantial growth. The Bank has five full service branches. In August, 1996 the
Bank opened an insurance subsidiary, Franklin Financial Insurance (formerly
Hometown Insurance Agency.) In October, 1997 the Bank opened a financial
services subsidiary, Franklin Financial Securities. The subsidiary offers
financial planning and securities broker services through Legg Mason Financial
Partners. In January, 1998 the Bank began operating its mortgage division as a
separate subsidiary, Franklin Financial Mortgage. Also in January, 1998, the
mortgage subsidiary began a wholesale mortgage operation located in an office in
Bartlett, Tennessee and in August, 1998 opened a retail mortgage origination
office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells
and services mortgage loans.
FINANCIAL CONDITION
Total assets have grown $31.5 million since December 31, 1998, for a total of
$381.4 million at September 30, 1999. The growth has been funded by a $23.8
million increase in deposits, a $9.0 million increase in other borrowings and
$3.3 million in earnings in 1999.
The Bank continues to experience strong loan demand. Net loans have increased
16.4% or $35.0 million since December 31, 1998, to $248.7 million at September
30, 1999. Securities available-for-sale increased $16.2 million or 22.3% while
securities held-to-maturity decreased $1.5 million or 32.1% during the nine
months ended September 30, 1999. Loans held for resale decreased $11.5 million
or 48.8% since December 31, 1998. This is due to a decrease in mortgage loan
originations relating to current economic market conditions.
Premises and equipment increased by $670,000 since December 31, 1998 primarily
due to land purchased for the Fieldstone Farms branch location of $736,000 and
additional computer equipment added related to overall Bank and employee growth
offset partially by $670,000 in depreciation expense.
Accrued income receivable increased $362,000 or 17.0% since December 31, 1998.
This increase is due to the combined increase of $38.2 million in loans and
securities since December 31, 1998.
Mortgage servicing rights increased $349,000 or 27.8% since December 31, 1998.
The increase is due to additional mortgage loans originated and sold with
servicing retained.
The allowance for loan losses increased $201,000 since December 31, 1998, for a
total of $2.4 million or approximately 0.9% of total loans. This increase is
primarily additional provision for loan losses to allow for growth in the loan
portfolio. Net charge-offs were $30,000 during the first nine months of 1999.
Asset quality remains good and management believes that the allowance for loan
losses is adequate at September 30, 1999. Management reviews in detail the level
of the allowance for loan losses on a quarterly basis. In addition, Professional
Bankers Services, Inc., an external bank consulting firm, performs an annual
review of the loan portfolio to provide management an independent third party
opinion regarding the adequacy of the allowance for loan losses. The allowance
is below the Bank's peer group average as a percentage of loans. However, this
level is supported based on two significant facts: the Bank has no loans
accounted for on a nonaccrual basis at September 30, 1999 and past due loans, at
0.3% of total loans, are substantially below the peer group average.
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LIQUIDITY AND CAPITAL RESOURCES
Management continuously monitors the Bank's liquidity, but strives to maintain
an asset/liability mix that provides the highest possible net interest margin
without taking undue risk with regard to asset quality or liquidity.
Liquidity is at an adequate level with cash and due from banks of $10.9 million
at September 30, 1999. Loans and securities scheduled to mature within one year
exceed $153 million at September 30, 1999, which should provide further
liquidity. In addition, approximately $88.7 million of securities are classified
as available-for-sale to help meet liquidity needs should they arise. The
Company has lines of credit of $7.5 million with lending institutions and the
Bank is approved to borrow up to $10.0 million in funds from the Federal Home
Loan Bank and $31.0 million in federal funds lines to assist with capital and
liquidity needs. The Company has $2.3 million in borrowings against its line of
credit and the Bank has $8.4 million in federal funds purchased outstanding at
September 30, 1999. Due to the escalation of short term interest rates, the Bank
has chosen to borrow against federal funds lines instead of replacing some
brokered deposits at higher costs. In February and August, 1998 the Bank entered
into long term convertible Federal Home Loan Bank advances with a 10/1 call
option totaling $6.0 million. The Bank has $2.4 million outstanding in
repurchase agreements to further develop it's relationship with a customer. The
Bank has approximately $32.1 million in brokered deposits at September 30, 1999
to help fund strong loan demand. The majority of these deposits are $100,000 or
less, but they are generally considered to be more volatile than the Bank's core
deposit base.
Approximately $30.8 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $48.8 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
The Bank has been approved to open a full service branch in the Cool Springs
area of Franklin. In October, 1998 the Company purchased a parcel of land in
this area for $650,000. Expenditures related to the facility are expected to be
approximately $500,000, with completion expected in the first quarter of 2000.
The Bank has been approved to open a replacement branch facility in Brentwood,
Tennessee, with an anticipated opening date of first quarter of 2000. The
Brentwood facility will be leased with annual payments of $124,000 and
constructed to the Bank's specifications accordingly, no renovation expenditures
are expected. The Bank has been approved to open a full service branch facility
in the Fieldstone Farms area of Franklin. In July, 1999 the Company purchased a
parcel of land in this area for $740,000 with additional expenditures related to
this facility expected to be approximately $700,000. The expected completion
date is during the second quarter of 2000. The Bank is also reviewing a
potential branch site in the Green Hills area of Nashville, Tennessee. If this
site is chosen and proper regulatory approval is received, the land and building
expenditures will be approximately $1.7 million. Other than as set forth above,
there are no known trends, commitments, or uncertainties that will result in the
Company's liquidity increasing or decreasing in a material way.
The Company had a net decrease in cash and due from banks of $2.2 million during
the nine months ended September 30, 1999 as compared to a $432,000 increase for
the same period in 1998. Cash provided by operating activities increased $17.8
million during the first nine months of 1999, as compared to the same period in
1998. This increase is due to loan proceeds from sales net of loans originated
for sale of $13.2 million in the first nine months of 1999 compared to loans
originated for sale net of loan proceeds from sales of $5.0 million for the same
period in 1998. This increase is offset slightly by a $552,000 decrease in cash
flow from other assets for the nine months ended September 30, 1999 as compared
to the previous year.
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Net cash used by investing activities increased by $5.9 million during the first
nine months of 1999 compared to the same period in 1998. The net increase in
cash flow from portfolio loans used $15.8 million more in funds for the nine
months ended September 30, 1999 as compared to the same period in 1998. With
regard to the securities portfolio, investing activities required $5.8 million
more use of funds during the nine months ended September 30, 1999 as compared to
the previous year. Federal funds sold provided $8.3 million in funds for the
nine months ended September 30, 1999 as compared to using $7.6 million in funds
for the same period in 1998.
Cash provided by financing activities decreased $14.6 million during the first
nine months of 1999 as compared to the same period in 1998. The decrease is
attributable to a $16.5 million decrease in cash flow from deposits during the
first nine months of 1999 as compared to the same period in 1998 offset by a
$4.3 million increase in other borrowings. Cash dividends of $917,000 were paid
on common stock in the first nine months of 1999 compared to none for the same
period in 1998.
Equity capital exceeds regulatory requirements at September 30, 1999, at 6.8% of
average assets. The Company and Bank's minimum capital requirements and
compliance with the same are shown in the following table.
<TABLE>
<CAPTION>
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL RISK-BASED CAPITAL
--------------------- ---------------------- ------------------------
REGULATORY REGULATORY REGULATORY
MINIMUM ACTUAL MINIMUM ACTUAL MINIMUM ACTUAL
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Company 3.0% 6.8% 4.0% 9.3% 8.0% 10.2%
Bank 3.0% 7.2% 4.0% 10.0% 8.0% 10.8%
</TABLE>
RESULTS OF OPERATIONS
The Company had net income of $1.0 million in the third quarter and $3.3 million
for the first nine months of 1999 compared to net income of $1.3 million and
$3.6 million for the same periods in 1998. Net income for the third quarter and
nine months ending September 30, 1999 decreased $259,000 and $315,000,
respectively, as compared to the same periods in 1998. Increases in net interest
income, mortgage banking fees and other fees offset by increases in expenses
related to the overall growth of the Bank are the primary reasons for the
decrease in earnings for the three and nine months ended September 30, 1999 as
compared to the same periods in 1998.
Total interest income increased $972,000 or 14.3% in the three months ended
September 30, 1999 and $2.6 million or 13.2% for the first nine months of 1999
compared to the same periods in 1998. The increase in total interest income is
primarily attributable to the similar increase in average earning assets for the
first nine months of 1999 compared to 1998. Total interest expense increased
$418,000 or 12.3% in the third quarter and $1.2 million or 12.2% in the first
nine months of 1999 as compared to the same periods in 1998. Total
interest-bearing liabilities have increased 10.7% from December 31, 1998 and
20.4% from September 30, 1998. The increases in deposits and other borrowings
coupled with increases in treasury rates are the primary reasons for the
increase in interest expense. Net interest income increased $554,000 or 16.2%
during the third quarter and $1.4 million or 14.3% in the first half of 1999 as
compared to the prior year. Total earning assets increased 17.6% since September
30, 1998 and was the primary factor in the increase in net interest margin.
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The provision for loan losses was $10,000 for the three months ended September
30, 1999 as compared to $105,000 for the same period in 1998. The year-to-date
provision is $230,000 for the nine months ended September 30, 1999 as compared
to $270,000 for the same period in 1998. While the Bank's asset quality remains
good, provisions for loan losses continue to be needed to allow for growth in
the Bank's loan portfolio.
Total other income of $882,000 in the third quarter of 1999 is $488,000 or 35.6%
less than the same period in 1998. The decrease is primarily attributed to a
decrease in mortgage banking fees resulting from an decrease in loans
originated. Total other income of $3.7 million for the nine months ended
September 30, 1999 is $188,000 or 5.4% more than the same period in 1998.
Service charges on deposit accounts increased $245,000 or 23.7% for the nine
months ended September 30, 1999 as compared to the same period in 1998. Mortgage
banking fees increased $143,000 or 9.8% for the nine months ended September 30,
1999 as compared to the same period in 1998. Other fees decreased $75,000 or
9.7% for the first nine months of 1999 as compared to the same period in 1998.
The decrease is primarily the result of a $234,000 decrease in investment
portfolio call option fees.
Total other expenses increased $661,000 or 24.5% during the third quarter and
$2.3 million or 30.9% for the first nine months of 1999 as compared to the same
periods in 1998. The increases are attributable to additional mortgage banking
expenses related to loan origination and servicing, additional facilities growth
and additional personnel and other incremental costs related to the overall
growth of the Company.
ACCOUNTING PRONOUNCEMENTS
In September 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. In September 1999, SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133", was issued which extended the effective date of
SFAS No. 133 for all fiscal quarters of fiscal years beginning after June 15,
2000. Management has not yet assessed the impact the adoption of this Standard
will have on the Company's financial statements.
YEAR 2000
A critical issue affecting companies that rely extensively on electronic data
processing systems, such as the Company, is the Year 2000 issue. The Year 2000
issue has arisen due to the widespread use of computer programs that rely on
two-digit date codes to perform computations or decision-making functions. Many
of these programs may fail as a result of their inability to properly interpret
date codes beginning January 1, 2000. For example, such programs may
misinterpret "00" as the year 1900 rather than 2000. In addition, some
equipment, being controlled by microprocessor chips, may not deal appropriately
with the year "00." This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in similar normal business
activities.
The FFIEC (Federal Financial Institutions Examination Council) has issued
guidelines for financial institutions to follow with respect to Year 2000
compliance. The Company's Year 2000 action plans are based primarily on the
guidelines and timetables outlined in this guidance. During 1997, the Company
formed an internal task force, chaired by the Vice President of Information
Systems, to address the Year 2000 issue, including a comprehensive review of the
Company's systems and to insure that the Company take any necessary measures for
Year 2000 compliance. The Company has (1) performed assessments of Year 2000
issues, (2) completed testing and validation of internal and external mission
critical systems, (3) begun customer awareness efforts of Year 2000, and (4)
completed contingency planning. Management reports to the Board of Directors
monthly on the status of Year 2000. The Company believes that since the majority
of its equipment is relatively new and since software utilized by the Company is
provided by third-parties, the Year 2000 issue will not pose
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<PAGE> 10
significant internal operational problems or generate additional material
expenditures. Management currently does not expect Year 2000 issues to have a
material impact on its financial position or results of operations. The Company
spent approximately $10,000 on Year 2000 issues in 1998 and expects expenditures
to be approximately $160,000 in 1999. These expenditures include independent
third-parties utilized for testing validation.
In the second and third quarter of 1998, the Company performed an inventory of
its computer and embedded systems. The Company uses externally provided
standardized software for its processing needs. During assessment, the Company
identified eight mission critical software systems. The Company finalized its
assessment and testing of mission critical embedded systems by June 30, 1999 and
these systems are believed to be Year 2000 compliant. The Company has identified
essential and non-essential systems and processes. The Company initiated
communications with suppliers and vendors to determine the potential impact of
such third-parties' Year 2000 compliance status. These third-parties include
suppliers, telephone and utility providers and other financial institutions.
The Company began testing of mission critical software systems in the third
quarter of 1998 and has completed testing of these mission critical systems and
these systems are believed to be Year 2000 compliant. The Company tested
critical dates outlined in the FFIEC guidelines. The Company initiated
certification requests from mission critical vendors seeking assurance that
these systems will be Year 2000 compliant. The Company validated test results of
mission critical systems internally and through an independent third-party
during the first quarter of 1999. Testing of key computer hardware was completed
in the first quarter of 1999.
An area of concern by the Company is the effect of Year 2000 issues on deposit
and loan customers. Members of the Company's management have given Year 2000
issue speeches to local groups to try to heighten awareness of Year 2000 issues.
The Company plans to use statement stuffers and other forms of communication to
try to raise customer awareness. The Company also has a Year 2000 statement on
its website. During the third quarter of 1999 the Bank, in conjunction with
business sectors, held a Year 2000 "Town Meeting" to try to help address
concerns in the local community. Failure of certain customers to address Year
2000 related issues could have a significant impact on the ability of these
customers to continue operations. The Company's loan portfolio could be
negatively impacted if customers are unable to repay loan agreements as a result
of failure to address Year 2000 issues. In the third quarter of 1998, the
Company began reviews of loan relationships to determine the potential effect of
Year 2000 issues on the customers' operations. The Company reviews loan
relationships in excess of $1,000,000, individual loans in excess of $750,000
and any other loan the primary lender feels necessary to review. The primary
focus of this review was to determine the readiness of the customer to address
Year 2000 issues and the impact of such readiness on the customer's ability to
repay loans. Management identified a small number of customers which could be
potentially impacted by Year 2000 issues, addressed the concern with these
customers and continues to monitor their status. The Company now includes Year
2000 compliance requirements in its standard loan agreements. Although the
Company has taken steps to address customer Year 2000 issues, there can be no
assurance that these customers will be Year 2000 compliant.
The Company completed its Year 2000 contingency plan. Contingency plans were
developed to cover unforeseen Year 2000 issues, should any arise. Contingency
plans include use of manual systems.
Although the Company has taken extensive steps to address Year 2000 related
issues, there can be no assurance that unforeseen difficulties or costs will not
arise. In addition, there can be no assurance that the systems of other
companies on which the Company's systems rely will be modified on a timely
basis, or that the failure by another company to properly modify its systems
will not negatively impact the Company's systems or operations. The Company's
Year 2000 compliance program is an ongoing process involving continual
evaluation and may be subject to change in response to new developments.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Form 10-Q contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "estimate," "anticipate,"
believe," "target," "plan," "project," or "continue" or the negatives thereof or
other variations thereon or similar terminology, and are made on the basis of
management's plans and current analyses of the Company, its business and the
industry as a whole. These forward looking statements are subject to risk and
uncertainties, including, but not limited to, economic conditions, competition,
interest rate sensitivity and exposure to regulatory and legislative changes.
The above factors, in some cases, have affected, and in the future could affect,
the Company's financial performance and could cause actual results for fiscal
1999 and beyond to differ materially from those expressed or implied in such
forward-looking statements. The Company does not undertake to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this report:
Exhibit
Number Description of Exhibit
------- ----------------------
27.1 - Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended September 30, 1999.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN FINANCIAL CORPORATION
Dated: November 12, 1999 By: /s/ Richard E. Herrington
----------------- -------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive officer)
Dated: November 12, 1999 By: /s/ Lisa L. Musgrove
----------------- --------------------
Lisa L. Musgrove, Senior Vice President and
Chief Financial Officer (principal financial
officer)
13
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