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Filed pursuant to rule 424(b)(4)
Registration Nos. 333-38674
333-38674-01
PROSPECTUS
16,000 Preferred Securities
FRANKLIN CAPITAL TRUST I
Floating Rate Trust Preferred Securities
(Liquidation Amount $1,000 Per Preferred Security)
Guaranteed by
FRANKLIN FINANCIAL CORPORATION
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THE TRUST:
Franklin Capital Trust I is a Delaware business trust and a wholly owned
subsidiary of Franklin Financial Corporation. The Trust will:
- Sell preferred securities to the public and common securities to Franklin
Financial Corporation;
- Use the proceeds from these sales to buy an equal principal amount of
floating rate subordinated debentures due October 15, 2030 of Franklin
Financial Corporation; and
- Distribute the cash payments it receives from Franklin Financial
Corporation on the debentures to the holders of the preferred securities
and the common securities.
FRANKLIN FINANCIAL CORPORATION:
- Franklin Financial Corporation will effectively fully and unconditionally
guarantee the preferred securities on a subordinated basis based on its
obligations under a guarantee, a trust declaration, an indenture and an
expense agreement, but only to the extent that the Trust has sufficient
funds to satisfy payments on the preferred securities.
THE OFFERING:
- The Trust is offering a minimum of 10,000 preferred securities and a
maximum of 16,000 preferred securities at a price of $1,000 per preferred
security. The preferred securities mature on October 15, 2030.
- For each preferred security that you own, you will receive cumulative cash
distributions accumulating from the date of issuance at an annual rate of
three-month LIBOR plus 3.50% of the liquidation amount of $1,000 per
preferred security on January 15, April 15, July 15 and October 15 of each
year, beginning October 15, 2000.
- The Trust may redeem the preferred securities, at a redemption price of
$1,000 per preferred security plus accrued and unpaid distributions, at
any time on or after October 15, 2005 or earlier under certain
circumstances.
- The preferred securities will be marketed through Morgan Keegan & Company,
Inc. Although Morgan Keegan will use its best efforts to market and sell
the securities, there is no guarantee that the minimum number of preferred
securities will be sold.
- We will deposit all subscription funds in an escrow account with an
independent escrow agent.
- If we have not received subscriptions for at least 10,000 preferred
securities by August 9, 2000 (unless extended for an additional 30 days),
we will return all funds to subscribers.
It is not expected that the preferred securities will be listed on The
Nasdaq Stock Market or any national securities exchange.
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INVESTING IN THE PREFERRED SECURITIES INVOLVES RISKS WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NONE OF THE SECURITIES OFFERED BY THIS PROSPECTUS ARE DEPOSITS OR ACCOUNTS
OF A BANK. THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
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<TABLE>
<CAPTION>
MINIMUM MAXIMUM
PER SECURITY OFFERING OFFERING
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<S> <C> <C> <C>
Public offering price.................................... $1,000 $10,000,000 $16,000,000
Placement agent fee (paid by Franklin Financial
Corporation)........................................... $ 30 $ 300,000 $ 480,000
Proceeds to the Trust.................................... $1,000 $10,000,000 $16,000,000
</TABLE>
MORGAN KEEGAN & COMPANY, INC.
The date of this prospectus is July 10, 2000
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.................. 1
Special Note Regarding
Forward-Looking Information....... 8
Risk Factors........................ 9
Use of Proceeds..................... 17
Accounting Treatment................ 17
Ratio of Earnings to Fixed
Charges........................... 18
Capitalization...................... 19
Selected Consolidated Financial
Data.............................. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 29
Management.......................... 55
Security Ownership of Certain
Beneficial Owners and
Management........................ 57
Description of Preferred
Securities........................ 58
Description of the Subordinated
Debentures........................ 72
Book-Entry Issuance................. 82
Description of the Guarantee........ 84
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Expenses and Liabilities
Agreement......................... 87
Relationship among the Preferred
Securities, the Subordinated
Debentures and the Guarantee...... 87
Material United States Federal
Income Tax Consequences........... 89
ERISA Considerations................ 94
Plan of Distribution................ 95
Transfer Agent...................... 96
Legal Matters....................... 96
Experts............................. 96
Where You Can Find More
Information....................... 96
Incorporation of Certain Documents
by Reference...................... 97
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
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YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF THE
PREFERRED SECURITIES MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO
SELL OR SOLICITATION OF AN OFFER TO BUY THE PREFERRED SECURITIES IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
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PROSPECTUS SUMMARY
This summary highlights information from this prospectus. The summary is
not complete and does not contain all of the information that you should review.
You should read the entire prospectus carefully before investing in the
preferred securities.
The term "Trust" refers to Franklin Capital Trust I, a Delaware business
trust organized to purchase our subordinated debentures and issue the preferred
securities. We use the terms "bank subsidiary" and "the Bank" to refer to
Franklin National Bank, our national bank subsidiary. The terms "we," "our,"
"us," "the Company" and "Franklin Financial" refer to Franklin Financial
Corporation and, unless the context requires otherwise, will include the Trust
and our bank subsidiary.
FRANKLIN FINANCIAL CORPORATION
We are a registered bank holding company under the federal Bank Holding
Company Act of 1956 and own 100% of the outstanding stock of Franklin National
Bank, headquartered in Franklin, Tennessee. Franklin National Bank is a full
service commercial bank without trust powers. We operate six banking offices
located in Williamson and Maury Counties in central Tennessee. We offer a full
range of traditional banking services, including consumer and business checking,
savings and money market accounts, individual retirement accounts and a variety
of consumer and business loans. In addition, we also offer products and services
such as travelers and cashiers checks, Mastercard and Visa accounts, safe
deposit boxes, direct deposit, wire transfer and cash management services, debit
cards, ATMs, an internet banking product and a 24-hour telephone inquiry system.
We also operate three companies that are subsidiaries of Franklin National
Bank. Franklin Financial Insurance was opened in August 1996 and sells property
and casualty, business and life insurance. In October 1997, we opened Franklin
Financial Securities which offers financial planning and securities brokerage
services through Legg Mason Financial Partners. In December 1997, we formed
Franklin Financial Mortgage which originates and services mortgage loans.
Our focus has been to take advantage of the current and anticipated growth
in our market area as well as to serve the needs of small and mid-sized
commercial borrowers -- customers that we believe are underserved as a result of
banking consolidation in the industry generally and within our market
specifically. We have experienced significant growth in our operations while
maintaining high levels of asset quality and profitability. This is demonstrated
by:
- Total assets increasing 185% to $462.3 million at March 31, 2000 from
$162.4 million at December 31, 1995;
- Total loans increasing 159% to $290.9 million at March 31, 2000 from
$112.1 million at December 31, 1995;
- Total deposits increasing 179% to $419.7 million at March 31, 2000 from
$150.4 million at December 31, 1995;
- Asset quality remaining high with net charge-offs as a percentage of
average loans outstanding consistently under 0.10% since 1995,
non-accrual loans of $190,000 at March 31, 2000 and zero non-accrual
loans at any year-end since 1995; and
- Annualized returns on average equity and assets of 19.32% and 1.02%,
respectively, for the three-month period ended March 31, 2000. Returns on
average equity and assets have been above 19.00% and 1.00%, respectively,
at each of the last four year-ends.
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Our primary goal is to maximize long-term shareholder value by building a
diversified financial services organization with strong growth and earnings
potential. We plan to achieve this goal by executing our strategy of:
- Growing our community banking franchise through de novo branch expansion
in selected markets where we can gain a competitive advantage while
providing our customers with superior levels of service;
- Continuing to expand our sales of insurance, securities and mortgage
products and services to produce stronger and more diversified sources of
fee income and to broaden our customer base;
- Maintaining high levels of asset quality through solid underwriting and
approval processes and stringent loan management; and
- Achieving sustained high levels of earnings and return on equity,
commensurate with the top performing financial services companies in the
industry.
Our common stock is quoted in the "pink sheets" under the symbol "FNFN."
Our corporate offices are located at 230 Public Square, Franklin, Tennessee
37064, and our telephone number is (615)790-2265. Our web site is
www.FranklinNetBranch.com. The information on our web site is not incorporated
into this prospectus.
FRANKLIN CAPITAL TRUST I
The Trust is a Delaware business trust and a wholly owned subsidiary of
Franklin Financial Corporation. The Trust exists for the purpose of issuing and
selling the common securities to us and the preferred securities to the public
and investing the proceeds from the sale of the preferred securities and the
common securities in the subordinated debentures. The Trust will also engage in
other limited activities that are necessary, advisable and incidental to those
purposes. SunTrust Bank will serve as the trustee under the indenture, the
property trustee under the trust agreement, and the trustee under the guarantee.
Richard E. Herrington and Lisa L. Musgrove, both officers of Franklin Financial,
will serve as the administrative trustees of the Trust. Wilmington Trust Company
will serve as the Delaware trustee under the trust agreement. The administrative
trustees, the property trustee and the Delaware trustee are sometimes
collectively referred to in this prospectus as the "Securities Trustees." The
Trust's principal executive offices are located at 230 Public Square, Franklin,
Tennessee 37064 and its telephone number is (615) 790-2265.
THE OFFERING
Securities offered......... The Trust is offering for sale up to 16,000
preferred securities at an offering price of $1,000
per preferred security. To complete this offering,
we must sell a minimum of 10,000 preferred
securities by August 9, 2000 (unless we elect to
extend the offering period). The preferred
securities represent an indirect interest in our
subordinated debentures which will be purchased by
the Trust with the proceeds of this offering. The
Trust will sell its preferred securities to the
public and its common securities to us. Together,
the preferred securities and the common securities
are referred to as the "trust securities."
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Use of proceeds............ The Trust will use the proceeds from the sale of
the trust securities to buy our subordinated
debentures which will have the same payment terms
as the preferred securities. We plan to use the net
proceeds of approximately $15.3 million from the
sale of the subordinated debentures, assuming the
sale of the maximum number of preferred securities,
and after deducting the placement agent fee and
estimated offering expenses payable by us:
- to repay indebtedness under our line of credit
($7.4 million); and
- for general corporate purposes, including capital
investments in and advances to our banking
subsidiary for expansion and the opening of
additional branches.
The precise amounts and timing of expenditures of
the net proceeds will depend on our funding
requirements and the availability of other capital
resources. See "Use of Proceeds."
Plan of distribution....... Morgan Keegan & Company, Inc. will market and sell
the preferred securities on a best efforts basis.
They will receive a placement agent fee, which will
be paid by us, equal to 3.00% of the aggregate
amount of preferred securities sold by them, or
$480,000, if the maximum amount of preferred
securities are sold. The closing is expected to
occur on or before August 9, 2000, unless we decide
to extend the offering for an additional 30 days.
We will be able to extend the offering without
giving notice to you. See "Plan of Distribution."
Escrow arrangements........ We will place all funds received as subscriptions
in an escrow account with an independent escrow
agent until the offering is completed. If we have
not received subscriptions for at least 10,000
preferred securities by August 9, 2000 (or by the
end of the extension period), we will return to the
subscribers all funds placed in the escrow account,
with interest earned. Once the minimum offering is
attained, one or more closings will be held and the
escrow agent will release all funds to the Trust.
Stated maturity of
subordinated debentures.... The subordinated debentures will mature on October
15, 2030, unless extended or advanced as provided
in this prospectus. You will be required to sell
your preferred securities to the Trust at the
liquidation amount upon the stated maturity date of
the subordinated debentures.
Payment of distributions... You are entitled to receive cash distributions on
the preferred securities payable at an annual rate
equal to three-month LIBOR plus 3.50% of the
liquidation amount of $1,000 per preferred
security. Distributions will accumulate from the
date of issuance of the preferred securities and
will be paid quarterly in arrears on January 15,
April 15, July 15, and October 15 of each year,
beginning on October 15, 2000. See "Description of
Preferred Securities -- Distributions -- Payment of
Distributions."
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Deferral of
distributions.............. We have the right, at any time, so long as we are
not in default with respect to the subordinated
debentures, to defer paying interest to the Trust
on the subordinated debentures for up to 20
consecutive quarters. As a result, the Trust may
defer quarterly distributions on the trust
securities. During any deferral period, you will
accumulate distributions at the distribution rate,
plus you will earn additional interest at the
distribution rate, compounded quarterly on the
deferred distributions.
During any deferral period, we will be prohibited
(with certain exceptions) from declaring or paying
a dividend or making any other payment or
distribution on our common stock or debt securities
that rank equal with or junior to the subordinated
debentures. After we terminate any deferral period
and have paid all amounts then due, we may commence
a new deferral period, subject to the preceding
requirements. See "Description of Preferred
Securities -- Distributions -- Extended Interest
Payment Period" and "Description of Subordinated
Debentures -- Option to Extend Interest Payment
Period."
If we defer distributions, you will be required to
include deferred interest income in your gross
income for United States federal income tax
purposes before you receive the cash distributions
with respect to such deferred interest payments.
For further information on deferrals and their tax
consequences, see "Material United States Federal
Income Tax Consequences -- Interest Income and
Original Issue Discount."
Ranking.................... The preferred securities, subordinated debentures
and guarantee will rank as follows with regard to
right of payment:
- the preferred securities will rank equal with,
and payments on the preferred securities will be
made pro rata with, the common securities of the
Trust, except as described under "Description of
Preferred Securities -- Subordination of Common
Securities."
- the subordinated debentures will be unsecured and
subordinate and junior in right of payment to
other debt of Franklin Financial to the extent
and in the manner set forth in the indenture. See
"Description of Subordinated Debentures."
- the guarantee will constitute an unsecured
obligation of Franklin Financial and will rank
subordinate and junior in right of payment to
other debt of Franklin Financial to the extent
and in the manner set forth in the guarantee. See
"Description of the Guarantee."
In addition, because Franklin Financial is a
holding company, the subordinated debentures and
the guarantee will be effectively subordinated to
all existing and future liabilities of our
subsidiaries, including our bank subsidiary's
deposit liabilities. At March 31, 2000, we and our
subsidiaries had total liabilities (excluding
intracompany liabilities) of approximately $438
million, all of
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which will rank senior to the subordinated
debentures. See "Description of Subordinated
Debentures -- Subordination."
Optional redemption........ Subject to any regulatory approvals that may then
be required, we may redeem the subordinated
debentures prior to maturity:
- in whole or in part, at any time, on or after
October 15, 2005, at the redemption price; or
- in whole but not in part, within 180 days
following the occurrence of certain regulatory or
tax events at the redemption price.
The redemption price will be equal to 100% of the
aggregate principal amount of the subordinated
debentures, together with any accrued but unpaid
interest to the date fixed for redemption. The
preferred securities are also redeemable on the
same terms and conditions as the subordinated
debentures. Upon any redemption of the subordinated
debentures, your preferred securities will be
redeemed at the liquidation amount of $1,000 per
share plus any accrued and unpaid distributions as
of the redemption date. See "Description of
Subordinated Debentures -- Redemption or Exchange"
and "Risk Factors -- Preferred Securities Risk
Factors."
No rating or listing....... The preferred securities will not be rated by any
rating service and we do not intend to list them on
the Nasdaq National Market or any national
securities exchange.
Distribution of
subordinated debentures.... We have the right at any time to dissolve the Trust
and cause the subordinated debentures to be
distributed to you in exchange for your preferred
securities. If that happens, you will receive
subordinated debentures in exchange for the same
principal amount of your holdings of preferred
securities. However, we must pay any creditors of
the Trust and receive prior approval of the Federal
Reserve, if then required, before we dissolve or
liquidate the Trust. For further information
concerning distribution of the subordinated
debentures, see "Description of Preferred
Securities -- Redemption of Preferred Securities"
and "Description of Preferred
Securities -- Liquidation Distribution Upon
Termination."
Guarantee.................. We have guaranteed the payment of all distributions
the Trust is obligated to make, but only to the
extent the Trust has sufficient funds to satisfy
those payments. We believe that, taken together,
the obligations of Franklin Financial under the
guarantee, the trust agreement, the subordinated
debentures, the indenture and the expense agreement
provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis,
of all of the obligations of the Trust under the
preferred securities. If we do not make principal
or interest payments on the subordinated
debentures, the Trust will not have sufficient
funds to make distributions on the preferred
securities, in which event the guarantee will not
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apply to such distributions until the Trust has
sufficient funds available. For further information
concerning our guarantee of the preferred
securities, see "Description of the Guarantee."
Voting rights.............. As a holder of preferred securities, you will have
very limited voting rights. The affirmative consent
of the holders of at least 66 2/3% of the
outstanding preferred securities will be required
by the Trust for amendments to the trust agreement
that would affect adversely the rights or
privileges of the holders of the preferred
securities. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust
Agreement."
Book-entry issuance........ You will not have a certificate for your preferred
securities. Instead, the preferred securities will
be represented by a global security that will be
deposited with The Depository Trust Company or its
custodian and registered in the name of The
Depository Trust Company or its nominee.
ERISA considerations....... Prospective purchasers that are plans or other
entities whose assets include "plan" assets subject
to ERISA or Section 4975 of the Internal Revenue
Code of 1986 should consider the matters described
under "ERISA Considerations."
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FRANKLIN FINANCIAL CORPORATION
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income................. $ 4,240 $ 3,488 $ 15,506 $ 13,296 $ 11,625 $ 8,979 $ 5,956
Provision for loan losses........... 180 70 350 515 420 420 320
Non-interest income................. 933 1,464 4,665 5,124 2,774 1,802 1,326
Non-interest expense................ 3,304 3,100 13,006 10,251 7,841 6,359 5,277
Income before income taxes.......... 1,689 1,782 6,814 7,653 6,139 4,002 1,685
Net income.......................... 1,130 1,160 4,470 4,886 3,888 2,565 1,123
PER COMMON SHARE DATA:
Earnings-diluted.................... $ 0.03 $ 0.03 $ 0.13 $ 0.15 $ 0.12 $ 0.08 $ 0.04
Book value.......................... 0.77 0.78 0.74 0.77 0.64 0.49 0.40
Weighted average shares outstanding
(thousands)....................... 34,442 35,006 34,393 33,182 32,613 30,604 29,343
BALANCE SHEET DATA AT PERIOD END:
Total assets........................ $462,308 $363,820 $430,400 $349,867 $274,433 $215,667 $162,361
Total loans......................... 290,861 251,344 271,423 240,086 194,522 157,816 112,127
Allowance for loan losses........... 2,649 2,272 2,480 2,194 1,828 1,472 1,062
Total investment securities......... 138,006 81,527 130,538 77,303 61,014 43,288 35,589
Total deposits...................... 419,650 327,185 383,857 312,397 247,572 199,911 150,368
Notes payable and borrowings under
lines of credit................... 14,113 8,517 19,052 8,424 3,030 1,050 --
Accumulated other comprehensive
(loss) income..................... (3,664) (602) (3,988) 159 214 51 226
Total stockholders' equity.......... 23,927 23,698 22,859 23,589 17,790 13,504 10,998
Loan to deposit ratio............... 69.31% 76.82% 70.71% 76.85% 78.57% 78.94% 74.57%
PERFORMANCE RATIOS:
Return on average assets............ 1.02%(2) 1.32%(2) 1.20% 1.59% 1.55% 1.38% 0.82%
Return on average stockholders'
equity............................ 19.32(2) 19.52(2) 19.23 22.97 24.35 21.10 11.23
Net interest margin................. 4.10(2) 4.23(2) 4.43 4.61 4.94 5.18 4.71
Efficiency ratio(1)................. 63.21 61.99 63.88 55.30 54.15 58.57 71.83
ASSET QUALITY RATIOS:
Net charge-offs to average loans.... 0.02%(2) (0.01)%(2) 0.02% 0.07% 0.04% 0.01% 0.02%
Nonperforming loans to total
loans............................. 0.07 -- -- -- -- -- --
Nonperforming assets to total
assets............................ 0.01 -- 0.06 -- -- -- --
ALLOWANCE FOR LOAN LOSSES AS A
PERCENTAGE OF:
Total loans......................... 0.91% 0.90% 0.91% 0.91% 0.94% 0.93% 0.95%
Nonperforming loans................. 1,394 -- -- -- -- -- --
CAPITAL RATIOS AT PERIOD END:
Leverage capital ratio.............. 6.30% 6.90% 6.50% 7.00% 6.49% 6.24% 6.63%
Tier 1 risk-based capital........... 8.80 9.40 9.20 9.68 9.05 8.46 9.79
Total risk-based capital............ 9.60 10.30 10.10 10.59 9.99 9.39 10.75
EARNINGS TO FIXED CHARGES RATIOS:
Including interest on deposits...... 1.33x 1.50x 1.44x 1.57x 1.55x 1.51x 1.27x
Excluding interest on deposits...... 4.18x 9.01x 7.07x 8.92x 10.15x 16.45x 10.37x
</TABLE>
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(1) Calculated by dividing non-interest expense by the sum of fully taxable
equivalent net interest income and non-interest income.
(2) Annualized for the periods indicated. Results for the three months ended
March 31, 2000 and 1999 may not be indicative of full year results.
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains "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 of these words or other variations or
similar terminology. Such statements are made on the basis of our plans and
current analyses of our company, our business and the banking industry as a
whole. These forward-looking statements are subject to risks 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, our
financial performance and could cause actual results for fiscal 2000 and beyond
to differ materially from those expressed or implied in such forward-looking
statements. These and other material risk factors relating to our company and
the preferred securities are more fully described under the caption "Risk
Factors." We do not undertake to publicly update or revise our forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied by such statements will not be realized.
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RISK FACTORS
An investment in the preferred securities involves a number of risks, some
of which relate to the terms of the preferred securities or the subordinated
debentures and others of which relate to Franklin Financial and our business.
You should carefully review the following information about these risks together
with other information contained in this prospectus before purchasing any
preferred securities.
PREFERRED SECURITIES RISK FACTORS
YOU ARE MAKING AN INVESTMENT DECISION WITH REGARD TO THE SUBORDINATED DEBENTURES
AS WELL AS THE PREFERRED SECURITIES.
The Trust will rely on the payments it receives from us on the subordinated
debentures to fund all payments on the preferred securities. In addition, the
Trust may distribute the subordinated debentures in exchange for the preferred
securities upon liquidation of the Trust. Accordingly, you should carefully
review the information in this prospectus regarding both of the subordinated
debentures and the preferred securities.
THE HOLDERS OF OUR SENIOR DEBT WILL BE PAID BEFORE YOU ARE PAID UNDER THE
GUARANTEE OR THE SUBORDINATED DEBENTURES.
Our obligations under the guarantee and under the subordinated debentures
are unsecured, and rank junior in right of payment to all of our senior
indebtedness, which comprises all of our existing indebtedness. See "Description
of the Guarantee -- Status of Guarantee" and "Description of Subordinated
Debentures -- Subordination."
Because Franklin Financial is a bank holding company, its right to
participate in any distribution of the assets of its bank or non-banking
subsidiaries, upon a subsidiary's dissolution, winding up, liquidation or
reorganization or otherwise, and thus your ability to benefit indirectly from
such distribution, is subject to the prior claims of creditors of that
subsidiary. There are legal limitations on the extent to which some of our
subsidiaries, including Franklin National Bank, may extend credit, pay dividends
or otherwise supply funds to, or engage in transactions with, us or our other
subsidiaries. Accordingly, the subordinated debentures and the guarantee will be
effectively subordinated to all existing and future liabilities of our
subsidiaries, and holders of subordinated debentures and the guarantee should
look only to our assets for payments on the subordinated debentures and the
guarantee.
Neither the trust agreement, the indenture governing the subordinated
debentures, nor the guarantee relating to the preferred securities, place any
limitation on our ability to incur additional indebtedness in the future.
PAYMENTS ON THE PREFERRED SECURITIES ARE DEPENDENT ON OUR ABILITY TO MAKE TIMELY
PAYMENTS ON THE SUBORDINATED DEBENTURES.
The Trust's ability to pay timely distributions on the preferred securities
and to pay the liquidation amount depends upon our making timely payments on the
subordinated debentures. In turn, our ability to make payments on the
subordinated debentures depends primarily upon our receipt of cash dividends
from our subsidiaries. Dividend payments from bank subsidiaries are subject
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to a number of operational, regulatory and other risks which we describe in more
detail under the caption "Risk Factors Relating to Franklin Financial
Corporation."
If we default on our obligations under the subordinated debentures, the
Trust will not have sufficient funds to pay distributions or the liquidation
amount. As a result, you will not be able to rely on the guarantee for payment
of these amounts because the guarantee only applies if we make a payment of
principal or interest on the subordinated debentures. Instead, the property
trustee (or you, if we fail to pay interest or principal on the subordinated
debentures or if the property trustee fails to act) will have to sue us to
enforce the rights of the Trust as the holder of the subordinated debentures.
For more information on our obligations under the preferred securities, the
subordinated debentures and the guarantee, see "Description of Preferred
Securities -- Distributions -- Extended Interest Payment Period," "Description
of Subordinated Debentures -- Option to Extend Interest Payment Period,"
"Description of Subordinated Debentures -- Enforcement of Certain Rights by
Holders of the Preferred Securities," "Description of Subordinated
Debentures -- Debenture Events of Default," and "Description of the Guarantee."
YOU WILL NOT RECEIVE TIMELY DISTRIBUTIONS IF WE ELECT TO DEFER INTEREST
PAYMENTS.
We may defer the payment of interest on the subordinated debentures at any
time for up to 20 consecutive quarters, provided that (1) no deferral period may
extend beyond the maturity date of the subordinated debentures and (2) we are
not in default under the indenture governing the subordinated debentures. If we
elect to defer interest payments on the subordinated debentures, the Trust also
may defer distributions on the preferred securities. During such a deferral
period, your distributions will continue to accrue, and interest on the unpaid
distributions will compound quarterly.
At the end of any deferral period and after all accrued and unpaid interest
has been paid, we may elect to begin a new deferral period, subject to the
limitations described above. There is no limitation on the number of deferral
periods. See "Description of Preferred Securities -- Distributions -- Extended
Interest Payment Period," and "Description of Subordinated Debentures -- Option
to Extend Interest Payment Period."
IF WE ELECT TO DEFER INTEREST PAYMENTS, YOU WILL HAVE TO INCLUDE INTEREST IN
YOUR TAXABLE INCOME BEFORE YOU RECEIVE THE CASH TO PAY RELATED INCOME TAXES.
Although you will not be receiving cash distributions during a deferral
period, you will be required to continue to accrue interest income for U.S.
federal income tax purposes on your proportionate share of the subordinated
debentures held by the Trust, even if you are a cash basis taxpayer. As a
result, you will need to include this income in your gross income for U.S.
federal income tax purposes in advance of the receipt of cash. You also will not
receive the cash related to any accrued and unpaid interest income from the
Trust if you dispose of the preferred securities prior to the record date for
the payment of distributions. For further information, see "Material United
States Federal Income Tax Consequences -- Interest Income and Original Issue
Discount."
THE PRICE OF THE PREFERRED SECURITIES MAY NOT REFLECT UNPAID INTEREST AND YOU
MAY SUFFER ADVERSE TAX CONSEQUENCES OR A LOSS IF YOU SELL THEM WHILE INTEREST
REMAINS UNPAID.
If we exercise our right to defer interest payments on the subordinated
debentures, the price at which you could sell the preferred securities may
decline. Accordingly, the preferred securities or the subordinated debentures
that you may receive on liquidation of the Trust may sell at a discount to the
price that you paid.
10
<PAGE> 13
The preferred securities may trade at a price that does not reflect the
value of accrued but unpaid interest on the underlying subordinated debentures.
If you use the accrual method of accounting for tax purposes (or if you use the
cash method and the preferred securities are deemed to have been issued with
original issue discount) and you dispose of your preferred securities between
record dates for any distribution payments, you will have to include as ordinary
income for United States federal income tax purposes an amount equal to the
accrued but unpaid interest on your proportionate share of the interest on the
subordinated debentures through the date of your disposition. You will recognize
a capital loss on the amount that the selling price is less than your adjusted
tax basis. See "Material United States Federal Income Tax
Consequences -- Interest Income and Original Issue Discount" and
" -- Disposition of Preferred Securities" for more information on possible
adverse tax consequences to you.
WE MAY REDEEM THE SUBORDINATED DEBENTURES (1) AT ANY TIME ON OR AFTER OCTOBER
15, 2005; OR (2) WITHIN 180 DAYS FOLLOWING THE OCCURRENCE OF SPECIFIED TAX OR
REGULATORY EVENTS.
On or after October 15, 2005, we may redeem the subordinated debentures at
any time in whole or in part. In addition, we may redeem the subordinated
debentures in whole at any time within 180 days following the occurrence of
specified tax or regulatory events, including:
- any change in tax laws or regulations that poses a substantial risk that
the preferred securities might lose their special tax treatment (see
"Description of Preferred Securities -- Redemption of Preferred
Securities -- Capital Event, Investment Company Event or Tax Event
Redemption");
- any change in laws or regulations that would prevent us from being able
to treat the preferred securities as Tier 1 capital for purposes of the
Federal Reserve capital adequacy guidelines (see "Description of
Preferred Securities -- Redemption of Preferred Securities -- Capital
Event, Investment Company Event or Tax Event Redemption"); and
- any change in laws or regulations that would render the Trust an
"investment company" that would be required to be registered under the
Investment Company Act of 1940 (see "Description of Preferred
Securities -- Redemption of Preferred Securities -- Capital Event,
Investment Company Event or Tax Event Redemption").
If we redeem the subordinated debentures, the Trust will be required to
redeem the preferred securities. We may need the prior approval of the Federal
Reserve to make a redemption, if then required under applicable Federal Reserve
or other applicable regulatory authority capital guidelines or policies.
THE TRUST MAY DISTRIBUTE THE SUBORDINATED DEBENTURES IN EXCHANGE FOR THE
PREFERRED SECURITIES, WHICH COULD AFFECT THE PRICE AND COULD BE A TAXABLE EVENT.
We may dissolve the Trust at any time. After satisfying its liabilities to
its creditors, the Trust may distribute the subordinated debentures to the
holders of the trust securities. We will not dissolve the Trust without the
prior approval of the Federal Reserve, if then required under applicable Federal
Reserve or other applicable regulatory authority capital guidelines or policies.
See "Description of Preferred Securities -- Redemption of Preferred Securities."
There is no public trading market for the preferred securities or for the
subordinated debentures that may be distributed in exchange for preferred
securities. If you were to sell either the preferred
11
<PAGE> 14
securities or the subordinated debentures that you may receive on liquidation of
the Trust, the price you receive may be discounted from the price that you paid
to purchase the preferred securities.
Under current U.S. federal income tax law and assuming, as we expect, that
the Trust will not be classified as an association taxable as a corporation, you
should not be taxed if we dissolve the Trust and the Trust distributes
subordinated debentures to you. If the Trust were to become taxed on the income
received or accrued on the subordinated debentures due to a change in the tax
laws, however, both you and the Trust might be taxed on a distribution of the
subordinated debentures by the Trust. For further information, see "Material
United States Federal Income Tax Consequences -- Receipt of Subordinated
Debentures or Cash Upon Liquidation of the Trust."
WE MAY SHORTEN THE MATURITY DATE OF THE SUBORDINATED DEBENTURES.
We will have the right at any time to shorten the maturity of the
subordinated debentures to a date not earlier than October 15, 2005. The
exercise of such right is subject to our having received prior approval of the
Federal Reserve or other applicable regulatory authority if then required under
applicable capital guidelines or policies of the Federal Reserve or other
applicable regulatory authority.
IN AN EVENT OF A DEFAULT UNDER THE DEBENTURES, YOU MAY BE REQUIRED TO RELY ON
THE PROPERTY TRUSTEE OF THE TRUST TO ENFORCE YOUR RIGHTS.
You may not be able to directly enforce rights against us if we default
with respect to the subordinated debentures. For a list of events of default,
see "Description of Preferred Securities -- Events of Default; Notice" and
"Description of Subordinated Debentures -- Debenture Events of Default."
If we default under the subordinated debentures and the default is
continuing, this event will also be an event of default under the preferred
securities. In that case, you generally would first have to rely on the property
trustee's enforcement of its rights as holder of the subordinated debentures
against us. If the property trustee fails to exercise its rights under the
subordinated debentures, you will then, to the extent permitted by applicable
law, be able to exercise any other remedies available under the subordinated
debentures. However, if the default arises because we fail to pay interest or
principal (except during a deferral period) on the subordinated debentures, you
may proceed directly against us for payment of your share of such amount without
first relying on the property trustee.
LIMITED COVENANTS RELATING TO THE PREFERRED SECURITIES AND THE SUBORDINATED
DEBENTURES WILL NOT NECESSARILY PROTECT YOU.
The governing documents impose only limited obligations on us with respect
to the preferred securities and the subordinated debentures. As a result, the
governing documents will not necessarily protect you in the event of an adverse
change in our financial condition or results of operations. The governing
documents do not limit the ability of us or our subsidiaries to incur additional
debt which would rank senior to the preferred securities and the subordinated
debentures. You should not consider the covenants contained in the governing
documents to be a significant factor in evaluating whether we will be able to
comply with our obligations under the subordinated debentures or the guarantee.
12
<PAGE> 15
AN ACTIVE TRADING MARKET IS UNLIKELY TO DEVELOP FOR THE PREFERRED SECURITIES OR
SUBORDINATED DEBENTURES.
The preferred securities and the subordinated debentures will be new issues
of securities for which there currently exists no market. We do not intend to
list the preferred securities or the subordinated debentures on any stock
exchange or the Nasdaq Stock Market to facilitate such trading, and we do not
expect an active or liquid market to develop for the preferred securities or the
subordinated debentures in the foreseeable future.
YOU WILL HAVE LIMITED VOTING RIGHTS.
We will hold all the common securities of the Trust. These securities give
us the right to control nearly all aspects of the administration, operation or
management of the Trust, including selection and removal of the administrative
trustees. The preferred securities, on the other hand, will generally have no
voting rights. You will be able to vote only on matters relating to the
modification of the terms of the preferred securities or the subordinated
debentures, the acceleration of payments and other matters described in this
prospectus. See "Description of Preferred Securities -- Voting Rights; Amendment
of Trust Agreement."
POSSIBLE TAX LAW CHANGES MAY AFFECT THE PREFERRED SECURITIES.
From time to time, various proposals are considered by the United States
Congress which could adversely affect the tax consequences of the subordinated
debentures and the preferred securities for you and/or Franklin Financial. We
cannot assure you that Congress will not pass legislation that would apply to
either the subordinated debentures or the preferred securities or that such
legislation would not be retroactive in effect. We also cannot assure you that
courts with appropriate jurisdiction will not render judicial decisions
interpreting laws, regulations, policies or guidelines which could adversely
affect the tax consequences of the subordinated debentures and the preferred
securities for you and/or Franklin Financial. The passage of any such
legislation or rendering of any such judicial decision could give rise to a
change in the tax laws, which would permit us to cause early redemption of the
preferred securities. See "Description of Subordinated Debentures -- Redemption
or Exchange" and "Description of Preferred Securities -- Redemption of Preferred
Securities." See also "Material United States Federal Income Tax Consequences."
13
<PAGE> 16
RISK FACTORS RELATING TO FRANKLIN FINANCIAL CORPORATION
WE MAY NOT SUCCEED IN IMPLEMENTING OUR GROWTH STRATEGY.
We have grown significantly since our inception and our strategy
contemplates further growth and expansion. Although successfully managed in the
past, our growth strategy involves a variety of risks, including our ability to:
- attract the talent needed to maintain adequate depth of management
throughout our organization as we continue to grow;
- maintain adequate sources of funding at attractive pricing;
- maintain adequate underwriting practices, as well as monitoring systems,
to maintain credit quality and manage a growing loan portfolio in the
future; and
- implement appropriate policies, procedures and operating systems
necessary to support a larger organization while maintaining a low
efficiency ratio.
Failure to address these issues successfully as we grow could adversely
affect our results of operations and financial condition. See
"Business -- Business Strategy."
OUR RESULTS OF OPERATIONS ARE SIGNIFICANTLY AFFECTED BY THE ABILITY OF OUR
BORROWERS TO REPAY THEIR LOANS.
Lending money is an essential part of the banking business. However,
borrowers do not always repay their loans. The risk of non-payment is affected
by:
- credit risks of a particular borrower;
- changes in economic and industry conditions;
- the duration of the loan; and
- in the case of a collateralized loan, uncertainties as to the future
value of the collateral.
If our borrowers do not repay their loans, we may suffer credit losses.
Credit losses are inherent in the lending business and could have a material
adverse effect on our operating results and our ability to make payments on the
debentures. We make various assumptions and judgments about the collectibility
of our loan portfolio and provide an allowance for loan losses based on a number
of factors. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, beyond our
control. Such losses may exceed current estimates. If our assumptions are wrong,
our allowance for loan losses may not be sufficient to cover our losses, thereby
having an adverse effect on our operating results, and may cause us to increase
the allowance in the future. Additions to our allowance for loan losses would
decrease our net income.
OUR ABILITY TO PAY DIVIDENDS IS LIMITED.
We derive our income solely from dividends from our subsidiaries. The
declaration and payment of dividends by our bank subsidiary is limited by law,
and any funds held by us that are available for payment of distributions are
subject to restrictions imposed by Federal Reserve policy. Our ability to pay
cash dividends is also restricted, under our line of credit, if Franklin
National Bank's leverage capital ratio is less than 7%.
14
<PAGE> 17
WE ARE SUBJECT TO SIGNIFICANT COMPETITION.
The financial services industry in Tennessee is extremely competitive. We
compete, and will compete, with financial institutions that are well
established, several of which have significantly greater resources and lending
limits than we do. Some of these competitors provide certain services, such as
trust and international banking services, which we do not currently provide.
MONETARY POLICIES AND ECONOMIC FACTORS AFFECT OUR FINANCIAL PERFORMANCE.
Our ability to attract deposits and extend loans is affected by the
monetary policies of federal regulatory authorities, particularly the Federal
Reserve, and by economic conditions in our service area and the United States
generally. We cannot predict the nature and timing of any changes in such
conditions and policies or their impact on us or our bank subsidiary.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR EARNINGS.
During periods of rising interest rates, our bank subsidiary may have loans
outstanding at interest rates that are lower than interest rates our bank
subsidiary pays for certain of its interest-bearing deposits and liabilities.
This would result in a negative interest rate spread with respect to those
loans. This disparity could have an adverse effect on our bank subsidiary's
earnings and likewise the earnings of Franklin Financial, and this risk would
increase in the event that interest rates continued to rise while our bank
subsidiary had outstanding loans at fixed interest rates that could not be
adjusted to a higher interest rate.
OUR PROFITABILITY IS DEPENDENT ON LOCAL ECONOMIC CONDITIONS.
Our profitability depends on the profitability of our bank subsidiary,
whose operating results and asset quality may be significantly affected by
national and local economic conditions. We make loans primarily to borrowers who
are located in Williamson County and secure these loans in substantial part with
real estate collateral located in the area. We are subject to adverse changes in
general economic conditions in the United States such as inflation, recession
and high levels of unemployment, consumer credit and bankruptcies. We are also
subject to unfavorable changes in economic conditions affecting our markets
which could adversely affect our bank subsidiary's financial performance,
particularly its ability to attract deposits and extend loans. Such changes
could result from numerous factors beyond our control, including a reduction in
real estate values, business closings or layoffs, inclement weather, natural
disasters and adverse trends or events affecting various industry groups such as
agriculture, real estate and real estate development construction.
OUR OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION AND LEGISLATION.
Franklin Financial, as a registered bank holding company, Franklin National
Bank, as a national bank, and Franklin National Bank's subsidiaries are subject
to extensive governmental regulation and control. We cannot predict the nature,
timing and effect of any changes in such regulation and control. Changes in
applicable laws could have a material adverse effect on our business and
financial condition. See "Business -- Supervision and Regulation."
OUR DIRECTORS AND EXECUTIVE OFFICERS ARE ABLE TO CONTROL THE OUTCOME OF MATTERS
REQUIRING A SHAREHOLDER VOTE.
Our directors and executive officers are able to control our management
policies and decisions and matters which require a shareholder vote. Their
interests may differ from the interests of other
15
<PAGE> 18
shareholders with respect to management issues. As of June 15, 2000, our
executive officers and directors beneficially owned 23,980,860 shares, or 66.9%
of the outstanding shares of our common stock, which includes 16,454,276 shares,
or 48.2% of the outstanding shares of common stock owned by Gordon E. Inman, our
Chairman of the Board. As a result of their ownership, management is in a
position to amend our charter, to effect or prevent a merger, a "going private"
transaction, a sale of assets, or other business acquisition or disposition, and
to otherwise control the outcome of all matters requiring a shareholder vote.
WE HAVE A CONTINUING NEED FOR TECHNOLOGICAL CHANGE, BUT MAY HAVE FEWER RESOURCES
THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.
The financial services industry is undergoing rapid technological changes
with frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success and ability to implement our growth strategy will depend in part upon
our ability to address the needs of customers by using technology to provide
products and services that will satisfy customer demands for convenience as well
as to create additional efficiencies in our operations. Many of our competitors
have substantially greater resources to invest in technological improvements. We
cannot provide you with assurance that we will be able to effectively implement
new technology-driven products and services or be successful in marketing such
products and services to our customers.
16
<PAGE> 19
USE OF PROCEEDS
The Trust will use the proceeds from the sale of the trust securities to
purchase the subordinated debentures from us. The net proceeds from the sale of
the subordinated debentures are expected to be approximately $15.3 million if
the Trust sells the maximum number of preferred securities or approximately $9.5
million if the Trust sells the minimum number of preferred securities, each
after deducting the placement agent fee and offering expenses payable by us.
However, if 10,000 preferred securities are not sold by August 9, 2000 (unless
we elect to extend the offering for an additional 30 days), we will terminate
the offering and promptly return all funds received from subscribers, with
interest earned.
We intend to use approximately $7.4 million of the net proceeds from the
subordinated debentures to repay outstanding indebtedness under our line of
credit with AmSouth Bank, which provides for maximum outstanding amounts of up
to $10.0 million and has a maturity date of November 30, 2000. Interest accrues
on outstanding borrowings under the line of credit at a rate equal to
three-month LIBOR plus 1.20%. For a more detailed description of our line of
credit, see Note 10 to the Consolidated Financial Statements.
We intend to use the balance of the net proceeds for general corporate
purposes, including capital investments in, and advances to, Franklin National
Bank to finance the continued implementation of our growth strategy, including
the opening of additional branches in 2000. The precise amounts and timing of
expenditures of the net proceeds will depend on our funding requirements and the
availability of other capital resources. Pending application of the net proceeds
as described above, we intend to invest such proceeds in short-term and
intermediate-term interest-bearing securities or in deposits in our bank
subsidiary.
ACCOUNTING TREATMENT
For financial reporting purposes, Franklin Financial will treat the Trust
as its subsidiary. Accordingly, Franklin Financial will include the accounts of
the Trust in its consolidated financial statements. The preferred securities
will be presented in the consolidated balance sheet of Franklin Financial under
the caption "Other Borrowings" and appropriate disclosure about the preferred
securities, the guarantee and the subordinated debentures will be included in
the notes to the consolidated financial statements. Franklin Financial will
record distributions on the preferred securities as interest expense in its
consolidated statements of income.
17
<PAGE> 20
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth Franklin Financial's consolidated ratios of
earnings to fixed charges for the periods indicated. For purposes of computing
the ratios of earnings to fixed charges, earnings represent income from
continuing operations before income taxes, extraordinary items and cumulative
effect of changes in accounting principles plus fixed charges. Fixed charges
represent total interest expense, including and excluding interest on deposits,
as applicable, as well as the interest component of rental expense.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------ ---------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to fixed charges:
Including interest on
deposits................... 1.33x 1.50x 1.44x 1.57x 1.55x 1.51x 1.27x
Excluding interest on
deposits................... 4.18x 9.01x 7.07x 8.92x 10.15x 16.45x 10.37x
Pro forma earnings to fixed
charges(1):
Including interest on
deposits................... 1.26x 1.31x
Excluding interest on
deposits................... 2.69x 2.94x
</TABLE>
-------------------------
(1) Pro forma earnings for purposes of these ratios are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Historical pretax income...................... $1,689,000 $ 6,814,016
Incremental interest expense on proceeds from
sale of $16,000,000 preferred securities
(assumed interest rate of 10.6175%)......... (287,572) (1,553,998)
Amortization of Debt Issuance Costs........... (5,875) (23,500)
---------- -----------
Pro Forma Pretax Income....................... $1,395,553 $ 5,236,518
========== ===========
</TABLE>
18
<PAGE> 21
CAPITALIZATION
The following table shows the consolidated capitalization of Franklin
Financial at March 31, 2000, and as adjusted to give effect to the receipt and
application of the estimated net proceeds from the sale of subordinated
debentures to the Trust assuming the sale of the maximum and the minimum number
of preferred securities.
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------------------------------
AS ADJUSTED FOR THE AS ADJUSTED FOR THE
ACTUAL MAXIMUM OFFERING MINIMUM OFFERING
------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt................................ $ 6,718 $22,718 $16,718
Stockholders' equity:
Common stock, no par value per share;
500,000,000 shares authorized;
31,054,187 shares issued and
outstanding............................ 11,346 11,346 11,346
Accumulated other comprehensive loss........ (3,664) (3,664) (3,664)
Retained earnings........................... 16,245 16,245 16,245
------- ------- -------
Total stockholders' equity............... 23,927 23,927 23,927
------- ------- -------
Total capitalization..................... $30,645 $46,645 $40,645
======= ======= =======
Ratio of equity to assets..................... 5.18% 5.08% 5.15%
Regulatory capital ratios:
Leverage capital ratio...................... 6.30% 8.24% 8.35%
Tier 1 risk-based capital................... 8.80% 11.52% 11.63%
Total risk-based capital.................... 9.60% 14.52% 12.75%
</TABLE>
A substantial portion of the proceeds from the sale of the preferred
securities is expected to qualify as Tier 1 capital with respect to Franklin
Financial under the risk-based capital guidelines established by the Federal
Reserve. These guidelines currently provide that the Tier 1 capital related to
the preferred securities cannot constitute more than 25% of the total core
capital elements of Franklin Financial. We expect that amounts in excess of this
25% limitation will constitute Tier 2 capital of Franklin Financial.
19
<PAGE> 22
FRANKLIN FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our selected consolidated financial data as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, which are derived from our consolidated financial statements
audited by Deloitte & Touche LLP which appear elsewhere and are incorporated by
reference in this prospectus. The selected consolidated financial data as of
December 31, 1997, 1996 and 1995 and for each of the two years in the period
ended December 31, 1996, have been derived from the audited consolidated
financial statements of Franklin Financial Corporation, which do not appear in
this prospectus. The selected consolidated financial data as of March 31, 2000
and 1999 and for the three months ended March 31, 2000 and 1999 are derived from
our unaudited consolidated financial statements which, in the opinion of
management, include all adjustments (which consist of only normal, recurring
adjustments) necessary for a fair presentation of our financial condition and
results of operations. The following data should be read in conjunction with
"Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income................. $ 9,338 $ 6,988 $ 30,691 $ 26,438 $ 22,521 $ 16,710 $ 11,980
Interest Expense................ 5,098 3,500 15,185 13,142 10,896 7,731 6,024
Net interest income............. 4,240 3,488 15,506 13,296 11,625 8,979 5,956
Provision for loan losses....... 180 70 350 515 420 420 320
Non-interest income............. 933 1,464 4,665 5,124 2,774 1,802 1,326
Non-interest expense............ 3,304 3,100 13,006 10,251 7,841 6,359 5,277
Income before income taxes...... 1,689 1,782 6,814 7,653 6,139 4,002 1,685
Net income...................... 1,130 1,160 4,470 4,886 3,888 2,565 1,123
PER COMMON SHARE DATA:
Earnings-Diluted................ $ 0.03 $ 0.03 $ 0.13 $ 0.15 $ 0.12 $ 0.08 $ 0.04
Book Value...................... 0.77 0.78 0.74 0.77 0.64 0.49 0.40
Dividends....................... 0.0125 0.01 0.0425 0.01 -- -- --
Weighted average shares
outstanding (thousands)....... 34,442 35,006 34,393 33,182 32,613 30,604 29,343
BALANCE SHEET DATA AT PERIOD
END:
Total assets.................... $462,308 $363,820 $430,400 $349,867 $274,433 $215,667 $162,361
Total loans..................... 290,861 251,344 271,423 240,086 194,522 157,816 112,127
Allowance for loan losses....... 2,649 2,272 2,480 2,194 1,828 1,472 1,062
Total investment securities..... 138,006 81,527 130,538 77,303 61,014 43,288 35,589
Total deposits.................. 419,650 327,185 383,857 312,397 247,572 199,911 150,368
Notes payable and borrowings
under lines of credit......... 14,113 8,517 19,052 8,424 3,030 1,050 --
Accumulated other comprehensive
(loss) income................. (3,664) (602) (3,988) 159 214 51 226
Total stockholders' equity...... 23,927 23,698 22,859 23,589 17,790 13,504 10,998
Loan to deposit ratio........... 69.31% 76.82% 70.71% 76.85% 78.57% 78.94% 74.57%
AVERAGE BALANCE SHEET DATA:
Total average assets............ $442,349 $352,058 $373,901 $308,287 $251,333 $186,021 $137,070
Total average stockholders'
equity........................ 23,393 23,768 23,250 21,271 15,970 12,159 10,002
Average equity to average
assets........................ 5.29% 6.75% 6.22% 6.90% 6.35% 6.54% 7.30%
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets........ 1.02%(3) 1.32%(3) 1.20% 1.59% 1.55% 1.38% 0.82%
Return on average stockholders'
equity........................ 19.32(3) 19.52(3) 19.23 22.97 24.35 21.10 11.23
Net interest margin............. 4.10(3) 4.23(3) 4.43 4.61 4.94 5.18 4.71
Efficiency ratio(1)............. 63.21 61.99 63.88 55.30 54.15 58.57 71.83
Dividend payout ratio(2)........ 41.67 33.33 32.69 6.67 -- -- --
ASSET QUALITY RATIOS:
Net charge-offs to average
loans......................... 0.02%(3) (0.01)%(3) 0.02% 0.07% 0.04% 0.01% 0.02%
Provision for loan losses to
average loans................. 0.07 0.03 0.14 0.24 0.24 0.32 0.35
Nonperforming loans to total
loans......................... 0.07 -- -- -- -- -- --
Nonperforming assets to total
assets........................ 0.01 -- 0.06 -- -- -- --
ALLOWANCE FOR LOAN LOSSES AS A
PERCENTAGE OF:
Total loans..................... 0.91% 0.90% 0.91% 0.91% 0.94% 0.93% 0.95%
Nonperforming loans............. 1,394 -- -- -- -- -- --
CAPITAL RATIOS AT PERIOD END:
Leverage capital ratio.......... 6.30% 6.90% 6.50% 7.00% 6.49% 6.24% 6.63%
Tier 1 risk-based capital....... 8.80 9.40 9.20 9.68 9.05 8.46 9.79
Total risk-based capital........ 9.60 10.30 10.10 10.59 9.99 9.39 10.75
EARNINGS TO FIXED CHARGES
RATIOS:
Including interest on
deposits...................... 1.33x 1.50x 1.44x 1.57x 1.55x 1.51x 1.27x
Excluding interest on
deposits...................... 4.18x 9.01x 7.07x 8.92x 10.15x 16.45x 10.37x
PRO FORMA EARNINGS TO FIXED
CHARGES RATIO(4):
Including interest on
deposits...................... 1.26x 1.31x
Excluding interest on
deposits...................... 2.69x 2.94x
</TABLE>
-------------------------
(1) Calculated by dividing non-interest expense by the sum of fully taxable
equivalent net interest income and non-interest income.
(2) Calculated by dividing dividends per share by diluted earnings per share.
(3) Annualized for the periods indicated. Results for the three months ended
March 31, 2000 and 1999 may not be indicative of full year results.
(4) Pro forma earnings for purposes of these ratios are calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Historical pretax income...................... $1,689,000 $6,814,016
Incremental interest expense on proceeds from
sale of $16,000,000 preferred securities
(assumed interest rate of 10.6175%)......... (287,572) (1,553,998)
Amortization of Debt Issuance Costs........... (5,875) (23,500)
---------- ----------
Pro Forma Pretax Income....................... $1,395,553 $5,236,518
========== ==========
</TABLE>
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Details regarding our financial performance are presented in the following
discussion, which should be read in conjunction with the consolidated financial
statements and notes to the consolidated financial statements included elsewhere
in this prospectus.
GENERAL
Franklin National Bank represents virtually all the assets of Franklin
Financial Corporation. Franklin National Bank, located in Franklin, Tennessee,
opened in December 1989 and continues to experience substantial growth. We have
six full service branches located throughout Williamson County and expect to
open one additional branch in the second quarter of 2000. In August 1996,
Franklin National Bank opened an insurance subsidiary, Franklin Financial
Insurance (formerly Hometown Insurance Agency). In October 1997, Franklin
National Bank opened a financial services subsidiary, Franklin Financial
Securities. The financial services subsidiary offers financial planning and
securities brokerage services through Legg Mason Financial Partners. In December
1997, Franklin National Bank began operating its mortgage division as a separate
subsidiary, Franklin Financial Mortgage. In August 1998, the mortgage subsidiary
opened a retail mortgage origination office in Chattanooga, Tennessee. Franklin
Financial Mortgage originates, sells and services retail and wholesale mortgage
loans.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Management continuously monitors Franklin National 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 management involves meeting the funds flow
requirements of customers who may withdraw funds on deposit or have need to
obtain funds to meet their credit needs. Banks in general must maintain adequate
cash balances to meet daily cash flow requirements as well as satisfy reserves
required by applicable regulations. The cash balances held are one source of
liquidity. Other sources are provided by the investment portfolio, federal funds
purchased, sales of loan participations, loan payments, Federal Home Loan Bank
advances, brokered and public funds deposits and our ability to borrow funds as
well as issue new capital.
Management believes that liquidity is at an adequate level with cash and
due from banks of $13.4 million at March 31, 2000. Loans and securities
scheduled to mature within one year exceeded $173 million at March 31, 2000,
which should provide further liquidity. In addition, approximately $134.9
million of securities are classified as available for sale to help meet
liquidity needs should they arise. Franklin Financial has a line of credit of
$10.0 million with a lending institution secured by all of the outstanding
capital stock of Franklin National Bank. Franklin National Bank is approved to
borrow up to $10.0 million in funds from the Federal Home Loan Bank and $33.5
million in federal funds lines to assist with capital and liquidity needs. At
March 31, 2000, Franklin Financial had $7.4 million in borrowings against its
line of credit and Franklin National Bank had no federal funds purchased. In
February and August 1998, Franklin National Bank entered into long-term
convertible Federal Home Loan Bank advances with a 10 year maturity and one year
call option totaling $6.0 million. During the fourth quarter of 1999, these
advances converted to variable rate advances which reprice quarterly based on
LIBOR. Franklin National Bank has $1.4 million outstanding in repurchase
agreements to further develop its relationship with a customer. Franklin
National Bank had approximately $49.7 million in brokered deposits at March 31,
2000 to help fund strong loan demand. The majority of these brokered deposits
are $100,000 or less, but they are generally considered to be more volatile than
Franklin National Bank's core deposit base.
22
<PAGE> 25
Approximately $20.8 million in loan commitments are expected to be funded
within the next six months. Furthermore, Franklin National Bank has
approximately $54.1 million of other loan commitments, primarily unused lines
and letters of credit, which may or may not be funded.
CAPITAL EXPENDITURES. In May 2000, Franklin National Bank opened a full
service branch in the Cool Springs area of Franklin. In October 1998, Franklin
Financial purchased a parcel of land in this area for $650,000. Expenditures
related to the facility are expected to be approximately $1.1 million. Franklin
National Bank also opened a replacement branch facility in Brentwood, Tennessee
in the first quarter of 2000. The Brentwood facility is being leased for annual
payments of approximately $124,000. Franklin National Bank has also been
approved to open a full service branch facility in the Fieldstone Farms area of
Franklin. In July 1999, Franklin Financial purchased a parcel of land in this
area for $740,000 with additional expenditures related to this facility expected
to be approximately $1.2 million. Franklin Financial expects to complete
construction during the second quarter of 2000.
Management monitors our asset and liability positions in order to maintain
a balance between rate sensitive assets and rate sensitive liabilities and at
the same time maintain sufficient liquid assets to meet expected liquidity
needs. We believe that our liquidity is adequate at March 31, 2000. Other than
as set forth above, there are no known trends, demands, commitments, events or
uncertainties that will result in or are reasonably likely to result in our
liquidity increasing or decreasing in any material way. We are not aware of any
current recommendations by the regulatory authorities which if they were to be
implemented would have a material adverse effect on our liquidity, capital
resources, or results of operations.
CASH FLOWS. Net cash flow provided by operating activities was $2.0
million for the first three months of 2000 compared to $800,000 during the same
period in 1999, an increase of $1.2 million. The increase in cash flow is due to
the sale of loans exceeding loans originated for sale by $2.3 million for the
three months ended March 31, 2000 as compared to the loans originated for sale
exceeding the sale of loans by $377,000 for the three months ended March 31,
1999. The majority of this change is due to the increased sale of loans as
compared to originations in the mortgage banking segment. The increase in cash
flow is offset partially by an increase in other assets of $2.1 million in the
first three months of 2000 as compared to an increase of $190,000 for the same
period in 1999, as well as an increase in other liabilities of $508,000 in the
first three months of 2000 compared to a decrease of $244,000 for the same
period in 1999. The increase in cash flow is also slightly offset by accretion
exceeding depreciation and amortization for the three months ended March 31,
2000 as compared to depreciation and amortization exceeding accretion in the
same period in 1999 from an increase in the purchase of zero coupon agency
securities.
Net cash flow provided by operating activities was $18.7 million in 1999
compared to net cash flow used of $3.9 million in 1998, an increase of $22.6
million. The increase in cash flow is due to the sale of loans exceeding the
loans originated for sale by $13.7 million in 1999 as compared to the loans
originated for sale exceeding the sale of loans by $7.9 million in 1998. The
majority of this change is due to the increased sale of loans in the mortgage
banking segment. The increase in cash flow is offset slightly by a decrease in
net income of $416,000, coupled with decreases in noncash items such as
depreciation and other assets.
Net cash used in investing activities was $30.7 million for the three
months ended March 31, 2000 compared to $17.9 million for the three months ended
March 31, 1999, representing a $12.8 million increase, which was largely due to
the banking segment. The increase in the change in net loans was $21.7 million
for the first three months of 2000 compared to $10.9 million in the first three
months of 1999. The change in the net investment portfolio also increased from
$5.4 million for the three months ended March 31, 1999 to $6.2 million for the
three months ended March 31, 2000.
23
<PAGE> 26
Net cash used in investing activities was $99.2 million in 1999 compared to
$64.2 million in 1998, representing a $35.0 million increase, which was largely
due to the banking segment. The increase in the change in net loans of $45.5
million in 1999 compared to $37.6 million in 1998 was offset by a decrease in
federal funds sold of $8.2 million in 1999, compared to an increase of $8.2
million in the prior year. The change in the net investment portfolio also
increased from $16.2 million in 1998 to $59.8 million in 1999.
Net cash provided by financing activities was $29.5 million for the first
three months of 2000 compared to $13.6 million for the same period in 1999, a
$15.9 million increase. The increase is primarily due to an increase in deposits
of $35.8 million in the first three months of 2000 compared to $14.8 million for
the same period in 1999. The increase is partially offset by a decrease of $4.9
million in other borrowings for the three months ended March 31, 2000 compared
to an increase of $93,000 for the same period in the preceding year. The
decrease in other borrowings is due to less federal funds purchased at March 31,
2000.
Net cash provided by financing activities was $80.1 million in 1999
compared to $70.5 million in 1998, a $9.6 million or 14% increase. The increase
is primarily due to an increase in deposits of $71.5 million in 1999 compared to
$64.8 million in the preceding year. The increase is attributable in part, to
Franklin Financial borrowing $5.6 million on its line of credit in 1999 as
compared to repaying $600,000 in 1998. During the first quarter of 1997, the
Bank entered into a $4.4 million repurchase agreement to further develop its
relationship with a customer, of which $1.0 million matured in 1999.
INTEREST RATE SENSITIVITY. The following is an analysis of rate sensitive
assets and liabilities as of March 31, 2000:
<TABLE>
<CAPTION>
0-3 MOS. 3-12 MOS. 1-5 YRS. 5 OR MORE YRS. TOTAL
--------- --------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Securities..................... $ 5,700 $ 16,246 $ 73,100 $44,590 $139,636
Loans.......................... 149,726 49,404 89,655 2,076 290,861
Federal funds sold............. 2,000 -- -- -- 2,000
--------- --------- -------- ------- --------
Total rate sensitive
assets.................... 157,426 65,650 162,755 46,666 432,497
NOW deposits................... 38,357 -- -- -- 38,357
Savings deposits............... 78,888 -- -- -- 78,888
Time deposits.................. 172,514 84,845 9,318 -- 266,677
Repurchase agreements.......... -- 1,421 -- -- 1,421
Other borrowings............... 14,113 -- -- -- 14,113
Total rate sensitive
liabilities............... 303,872 86,266 9,318 -- 399,456
--------- --------- -------- ------- --------
Excess (deficiency) of rate
sensitive assets less rate
sensitive liabilities........ $(146,446) $ (20,616) $153,437 $46,666 $ 33,041
========= ========= ======== ======= ========
Excess (deficiency) as a
percentage of earning
assets....................... (33.9)% (4.8)% 35.5% 10.8% 7.6%
Cumulative excess
(deficiency)................. $(146,446) $(167,062) $(13,625) $33,041 $ 33,041
========= ========= ======== ======= ========
Cumulative excess (deficiency)
as a percentage of earnings
assets....................... (33.9)% (38.7)% (3.2)% 7.6% 7.6%
</TABLE>
As indicated in the preceding table, the negative gap in the 0-3 month and
3-12 month categories between rate sensitive assets and rate sensitive
liabilities would allow Franklin Financial to reprice its liabilities faster
than its assets in a falling rate environment which should have a positive
effect on earnings. However, in an increasing interest rate environment,
Franklin Financial may
24
<PAGE> 27
experience a short-term decrease in earnings. The above table has been prepared
based on principal payment due dates, contractual maturity dates or repricing
intervals on variable rate instruments. With regard to mortgage-backed
securities, the estimated prepayment date is used. Actual payments on
mortgage-backed securities are received monthly and therefore should occur
earlier than the contractual maturity date.
CAPITAL ADEQUACY. Stockholders' equity at March 31, 2000, was $23.9
million, or 5.2% of total assets compared to $22.9 million, or 5.3%, of total
assets at December 31, 1999. As set forth in the following table, equity capital
of Franklin Financial and Franklin National Bank exceeded regulatory
requirements as of March 31, 2000:
<TABLE>
<CAPTION>
MINIMUM
FOR CAPITAL FOR "WELL COMPANY
ADEQUACY CAPITALIZED" CONSOLIDATED BANK'S
PURPOSES CATEGORY ACTUAL ACTUAL
----------- ------------- ------------ ------
<S> <C> <C> <C> <C>
Leverage....................................... 4.00% 5.00% 6.3% 7.8%
Tier 1 risk-based.............................. 4.00 6.00 8.8 10.9
Total risk-based............................... 8.00 10.00 9.6 11.7
</TABLE>
FINANCIAL CONDITION
Total assets have grown $31.9 million, or 7.4%, since December 31, 1999 to
a total of $462.3 million at March 31, 2000. The growth during 2000 has been
funded by a $35.7 million increase in deposits and net income of $1.1 million
offset partially by a decrease in other borrowings of $4.9 million and dividends
declared of $388,000. Total deposits were $419.6 million at March 31, 2000.
We continue to experience excellent loan demand as demonstrated by the
growth in net loans of $21.1 million, or 8.2%, since December 31, 1999. The
allowance for loan losses increased $169,000, or 6.8%, since December 31, 1999,
for a total of $2.6 million or approximately 0.9% of total loans. The increase
is primarily the result of growth in the loan portfolio and not because of a
decline in asset quality. We have seen significant growth in construction and
commercial real estate loans which carry a higher reserve factor. We believe
that the level of the allowance for loan losses is adequate at March 31, 2000.
Management reviews in detail the level of the allowance for loan losses on a
quarterly basis. In addition, Professional Bank Services, 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 Franklin National Bank's peer
group average as a percentage of loans. However, the level for loan losses is
primarily due to the fact that Franklin National Bank has only one loan
accounted for on a non-accrual basis at March 31, 2000 and Franklin National
Bank's past due loans, at 0.4% of total loans, are substantially below the peer
group average. At March 31, 2000, Franklin National Bank had loans that were
specifically classified as impaired of approximately $500,000. The allowance for
loan losses related to impaired loans was $101,000 at March 31, 2000.
At March 31, 2000 the cost of securities classified as available-for-sale
exceeded the fair value of the securities by $5.9 million. At December 31, 1999,
the cost of securities classified as available-for-sale exceeded fair value of
the securities by $6.6 million. As a result, unrealized loss net of taxes of
$3.7 million and $4.0 million at March 31, 2000 and December 31, 1999,
respectively, is included in "Other Comprehensive Loss" in the stockholders'
equity section of the balance sheet. The unrealized loss is primarily due to
economic market conditions and increases in interest rates during 1999 and for
the three months ended March 31, 2000.
25
<PAGE> 28
Securities available-for-sale increased $7.6 million, or 5.9%, during the
three months ended March 31, 2000 due to overall bank growth. Premises and
equipment increased by $537,000 since December 31, 1999 primarily due to costs
related to the relocation of the Brentwood branch location during the first
quarter of 2000 and construction costs related to the Cool Springs and
Fieldstone Farms branch facilities. Accrued income receivable increased
$279,000, or 9.9%, since December 31, 1999. This increase is due to the combined
increase of $26.7 million in loans and securities since December 31, 1999 and
increases in Franklin National Bank's prime lending rate. Stockholders' equity
increased $1.1 million, or 4.7%, from December 31, 1999 to March 31, 2000. The
increase is attributable to $1.1 million in net income and a $324,000 decrease
in other comprehensive loss offset by $388,000 in dividends declared.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
We had net income of $1.1 million in the first quarter of 2000 compared to
net income of $1.2 million for the same period in 1999. We had income before
taxes of $1.7 million for the three months ended March 31, 2000, representing a
5.6% decrease from the $1.8 million recorded for the three months ended March
31, 1999.
Total interest income increased $2.4 million, or 33.6%, in the three months
ended March 31, 2000 compared to the same period in 1999, while total interest
expense increased $1.6 million, or 45.7%, for the three months ended March 31,
2000 compared to the same period in 1999. The increase in total interest income
is primarily attributable to the increase in earning assets of $88.3 million, or
25.9%, for the first three months of 2000 compared to 1999 and a slight increase
in yield. The increase in total interest income is primarily due to the banking
segment. Interest bearing liabilities increased $97.1 million, or 32.1%, at
March 31, 2000 as compared to the same period in 1999. The banking segment
continues to experience strong deposit rate competition and cost of deposits
increasing in anticipation of Federal Reserve Bank rate increases prior to loan
prime lending rates actually increasing.
The provision for loan losses was $180,000 for the three months ended March
31, 2000 as compared to $70,000 for the same period in 1999. While our asset
quality remains good, provisions for loan losses continue to be needed as a
result of growth in our loan portfolio. Net charge-offs were $11,000, or 0.004%,
of loans outstanding at March 31, 2000 compared to net recoveries of $8,000 or
0.003% of loans outstanding at March 31, 1999.
Total other income of $933,000 in the first quarter of 2000 decreased
$531,000, or 36.3%, from $1.5 million for the same period in 1999. The decrease
was largely attributable to a decrease of $535,000, or 67.5%, in loan
origination fees related to the mortgage banking segment and a decrease of
$72,000, or 100%, in gains on the sale of investment securities in the banking
segment. These decreases were slightly offset by an increase of $30,000, or
7.9%, in service charges on deposit accounts in the banking segment. Mortgage
servicing income contributed $33,000 and $410,000 for the three months ended
March 31, 2000 and 1999, respectively, to the mortgage banking segment. Other
service charges and fees increased $21,000, or 16.8%, during the first quarter
of 2000 compared to the first quarter of 1999, primarily due to income from the
insurance subsidiary increasing from $51,000 for the first quarter of 1999 to
$83,000 for the first quarter of 2000. Income from the securities subsidiary
increased $25,000, or 27.2%, to $117,000 during the three months ended March 31,
2000, compared to $92,000 during the same period in 1999.
Total other expenses increased $205,000, or 6.6%, during the first quarter
of 2000 as compared to the same period in 1999. Salaries and employee benefits
expense increased $171,000, or 10.2%, primarily due to additional personnel in
the banking segment. Salaries and employee benefits expense
26
<PAGE> 29
for the mortgage banking segment was $296,000 for the three months ended March
31, 2000 compared to $409,000 for the same period in 1999. The decrease is
attributable to a decrease in commission expense from $111,000 in 1999 to
$20,000 in 2000 due to the decrease in mortgage loan originations. Occupancy and
furniture and equipment expense increased $75,000, or 25.0%, and $13,000, or
5.8%, respectively, from the three months ended March 31, 1999 compared to the
same period in 2000. The increases are attributable to the costs associated with
the relocation of our Brentwood branch facility and overall bank growth.
Mortgage banking segment expenses decreased $157,000, or 53.2%, from the first
quarter of 1999 compared to the first quarter of 2000 primarily due to a
decrease in mortgage correspondent pricing related to the decrease in loan
originations. Other expenses have increased as a result of the overall growth of
the banking segment.
FISCAL 1999 COMPARED TO FISCAL 1998
We had net income of $4.5 million in 1999 compared to $4.9 million in 1998.
We had income before taxes of $6.8 million in 1999, representing an 11.0%
decrease from the $7.7 million recorded in 1998.
Total interest income increased $4.3 million, or 16.1%, in 1999 as compared
to 1998, while total interest expense increased $2.0 million or 15.5% in 1999 as
compared to 1998. The increase in total interest income is attributable to an
increase in average earning assets of $61.9 million, or 21.5%, in 1999,
partially offset by a decrease in yield. The increase in total interest income
is primarily due to the banking segment. Average interest bearing liabilities
increased $61.4 million, or 23.9%, in 1999. A slightly lower interest rate
environment in 1999 as compared to 1998, strong rate competition, and fourth
quarter 1999 deposit interest rate increases due to year 2000 issues, resulted
in a decrease in net yield from 4.61% in 1998 to 4.43% in 1999.
The provision for loan losses was $350,000 in 1999 as compared to $515,000
in 1998. Provisions for loan losses have been necessary due to growth in
Franklin National Bank's loan portfolio. Net charge-offs were $64,000, or .02%,
of average loans outstanding in 1999, as compared to $149,000, or .07%, of
average loans outstanding in 1998.
Total other income of $4.7 million in 1999 decreased $459,000, or 9.0%,
from 1998. The decrease was largely attributed to a decrease of $285,000, or
12.8% in loan origination fees related to the mortgage banking segment and a
decrease in security call option fees of $379,000 or 93.6% at Franklin National
Bank. These decreases were partially offset by an increase of $324,000, or
23.3%, in service charges on deposit accounts at Franklin National Bank.
Mortgage servicing income contributed $629,000 and $1.1 million in 1999 and
1998, respectively, to the mortgage banking segment. Other service charges,
commissions and fees decreased $419,000, or 45.2%, primarily due to security
call option fees offset by income from the insurance subsidiary of $236,000 in
1999 as compared to $131,000 in 1998. Income from the securities subsidiary
increased $119,000, or 43.5%, to $392,000 in 1999 as compared to $273,000 in
1998.
Total other expenses increased $2.8 million, or 26.9%, during 1999 as
compared to 1998. Salaries and employee benefits expense increased $1.1 million,
or 18.7%, primarily due to additional personnel in the banking segment. We had
170 full time equivalent employees at December 31, 1999 as compared to 156 a
year earlier. Salaries and employee benefits expense for the mortgage banking
segment was $1.4 million in 1999 as compared to $1.1 million in 1998. The
increase is primarily due to an increase in support staff to handle servicing
and secondary marketing issues. Included in salaries and employee benefits
expense are commissions related to the mortgage banking segment of $300,000 in
1999 compared to $412,000 in 1998. Occupancy expense and furniture and equipment
expense increased $130,000, or 11.4%, and $143,000, or 17.7%, respectively, from
1998 to 1999 primarily due to new facility and overall Bank growth. Mortgage
banking segment expenses increased $610,000, or
27
<PAGE> 30
136%, in 1999 as compared to 1998. The increase is primarily due to an increase
in mortgage servicing rights amortization and correspondent loan pricing fees on
wholesale loans originated. Gain (loss) on the sale of mortgage loans is a
realized loss of $447,000 in 1999 compared to a gain of $103,000 in 1998. The
primary reason for the loss is interest rate fluctuations. Other expenses have
increased as a result of the overall growth of Franklin National Bank.
FISCAL 1998 COMPARED TO FISCAL 1997
We had net income of $4.9 million in 1998 compared to $3.9 million in 1997.
We had income before taxes of $7.7 million in 1998, representing a 25% increase
over the $6.1 million recorded in 1997.
Total interest income increased $3.9 million, or 17%, in 1998 as compared
to 1997, while total interest expense increased $2.2 million, or 21%, in 1998 as
compared to 1997. The increase in total interest income is attributable to an
increase in average earning assets of $53.2 million, or 22%, in 1998. Average
interest bearing liabilities increased $46.6 million, or 22%, in 1998. A
slightly lower interest rate environment in 1998 as compared to 1997 and strong
rate competition resulted in a decrease in net yield from 4.94% in 1997 to 4.61%
in 1998.
The provision for loan losses was $515,000 in 1998 as compared to $420,000
in 1997. Provisions for loan losses have been necessary due to growth in our
loan portfolio. Net charge-offs were $149,000 or less than .07% of average loans
outstanding in 1998.
Total other income of $5.1 million in 1998 increased $2.5 million, or 88%,
from 1997. The increase was attributed to an increase of $295,000, or 27%, in
service charges on deposit accounts directly related to the increase in deposit
accounts and an increase of $1.1 million, or 97%, in mortgage banking
activities. Mortgage servicing rights contributed $1.1 million and $239,000 in
1998 and 1997, respectively, to mortgage banking activities. Other service
charges, commissions and fees increased $515,000, or 125%, primarily due to
security call option fees of $405,000 in 1998 as compared to $147,000 in 1997,
income from the insurance subsidiary of $131,000 in 1998 as compared to $53,000
in 1997 and income from the securities subsidiary of $273,000 in 1998 as
compared to $12,000 in 1997.
Total other expenses increased $2.4 million, or 31%, during 1998 as
compared to 1997. Salaries and employee benefits increased $1.4 million or 31%
primarily due to additional personnel. We had 156 full time equivalent employees
at December 31, 1998 as compared to 134 a year earlier. Included in salaries and
employee benefits are commissions related to the mortgage banking department of
$412,000 in 1998 compared to $281,000 in 1997. Occupancy expense and furniture
and equipment expense increased $248,000, or 27%, and 131,000, or 19%,
respectively, from 1997 to 1998 primarily due to the new Fairview branch and
Franklin Financial Insurance Center facilities. Other expenses have increased as
a result of the overall growth of Franklin National Bank.
ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. In June 1999, SFAS No. 133 was amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 delays the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The company will adopt SFAS No. 133 effective January 1,
2001. Management has not yet assessed the impact the adoption of this Standard
will have on our financial statements.
28
<PAGE> 31
BUSINESS
GENERAL
Franklin Financial Corporation is a registered bank holding company under
the federal Bank Holding Company Act of 1956, as amended, and owns 100% of the
outstanding capital stock of Franklin National Bank, Franklin, Tennessee.
Franklin Financial was incorporated under the laws of the State of Tennessee on
December 27, 1988, as a mechanism to enhance Franklin National Bank's ability to
serve its future customers' requirements for financial services. The holding
company structure provides flexibility for expansion of Franklin Financial's
banking business through acquisition of other financial institutions and
provision of additional banking-related services which the traditional
commercial bank may not provide under present laws.
SUBSIDIARY BANK
Franklin National Bank commenced business operations on December 1, 1989 in
a permanent facility located at 230 Public Square, Franklin, Tennessee 37064.
The approximately 12,000 square foot facility is being leased from Gordon E.
Inman, the Chairman of the Board of Franklin Financial. Franklin National Bank
has five full service branches: one located in the Williamson Square Shopping
Center, which opened in April 1994; one located in Spring Hill, Tennessee, which
opened in January 1995; one located in Brentwood, Tennessee, which opened in
April 1995; one located in Fairview, Tennessee, which opened in May 1997; and
one located in the Cool Springs area of Franklin, which opened in May 2000.
Franklin National Bank also leases 9,000, 4,000 and 3,000 square foot facilities
from Mr. Inman which house its mortgage banking subsidiary, securities
subsidiary and insurance subsidiary sales function.
Franklin National Bank is a full service commercial bank, without trust
powers. Franklin National Bank offers a full range of interest bearing and
non-interest bearing accounts; including commercial and retail checking
accounts, negotiable orders of withdrawal ("NOW") accounts, money market
accounts, individual retirement accounts, regular interest bearing statement
savings accounts, certificates of deposit, commercial loans, real estate loans,
commercial and consumer lines of credit, letters of credit, mortgage loans, home
equity loans and consumer/installment loans. In addition, Franklin National Bank
provides such consumer services as travelers checks, cashiers checks, Mastercard
and Visa accounts, safe deposit boxes, direct deposit, wire transfer and cash
management services, debit cards, automatic teller machines, an internet banking
product and a 24-hour telephone inquiry system.
SUBSIDIARIES OF FRANKLIN NATIONAL BANK
Insurance Agency. In August 1996, the bank opened an insurance subsidiary,
Franklin Financial Insurance. The insurance subsidiary sells property and
casualty, business and life insurance and provides products and services to both
bank and nonbank customers. A large portion of its sales are generated by
referrals from bank employees. Bank employees are trained to recognize
cross-sale opportunities for insurance products. The insurance subsidiary has
increased its commissions from $131,000 in 1998 to $236,000 in 1999. For the
three months ended March 31, 2000, commissions were $83,000. Management of the
agency has 22 years of combined experience in the insurance industry. The
insurance subsidiary has three full-time and one part-time sales agents.
Securities Company. Franklin Financial Securities commenced operations in
October 1997. The securities subsidiary offers financial planning and securities
brokerage services through Legg Mason Financial Partners. Similar to the
insurance subsidiary, the securities subsidiary receives referrals from
29
<PAGE> 32
Franklin National Bank employees. The securities subsidiary currently has four
licensed brokers. The securities subsidiary was started to respond to
competition from other financial service companies that offer similar services.
By offering these securities products and services, we believe we can gain a
greater share of the customer's business and have better opportunities for
revenue generation. The securities subsidiary's revenues were $392,000 in 1999
and were $117,000 for the three month period ended March 31, 2000.
Mortgage Company. Franklin Financial Mortgage opened in December 1997 to
originate and service mortgage loans. Since our inception, we have focused on
real estate lending. The mortgage subsidiary intends to capitalize on this
lending expertise. The mortgage subsidiary primarily originates conforming
residential mortgages that are then sold to certain other mortgage companies and
government entities such as Freddie Mac on a service-retained basis. The
mortgage subsidiary has offices in Williamson and Hamilton Counties in
Tennessee. There are approximately 25 employees of the mortgage subsidiary. The
mortgage subsidiary's originations totaled $79.5 million in 1999 and $7.9
million for the three month period ending March 31, 2000. An unfavorable
interest rate environment has been a substantial contributor to a drop-off in
originations after the first quarter of 1999.
BUSINESS STRATEGY
Our primary goal is to maximize long-term shareholder value by building a
diversified financial services organization with strong growth and earnings
potential. We plan to achieve this goal by executing our strategy of:
- Growing our community banking franchise with de novo branch expansion in
selected markets where we can gain a competitive advantage while
providing our customers with superior levels of service;
- Continuing to expand our sales of insurance, securities and mortgage
products and services to produce stronger and more diversified sources of
fee income and to broaden our customer base;
- Maintaining high levels of asset quality through solid underwriting and
approval processes and stringent loan management; and
- Achieving sustained high levels of earnings and return on equity,
commensurate with the top performing financial services companies in the
industry.
Grow Franchise. Since our inception in 1989, we have focused on building a
diversified financial services franchise that serves the needs of the customers
in our market areas and provides our shareholders a high rate of return. We are
headquartered in, and do a majority of our business in the Williamson County
area. Williamson County has one of the highest per capita income levels in the
state of Tennessee and the country and is also considered one of the fastest
growing counties in the state. We intend to capitalize on these two favorable
factors and continue to capture market share and grow our franchise.
We currently have six offices and plan to open an additional office in the
second quarter of 2000. Our strategy has been to open offices in markets in
which we believe we can gain a competitive advantage. To date, this has resulted
in a deposit market share rank of second in Williamson County as of June 1999,
based on statistics provided by the Federal Deposit Insurance Corporation. We
believe there continues to be significant opportunity for financial services
business in and around Williamson County and will open offices as appropriate to
continue to build greater market share.
30
<PAGE> 33
Providing products and services at a fair price while giving superior
levels of service to our customers has helped us build a solid customer base and
has contributed to our growth in loans, deposits, fee income and market share.
We seek to provide customers the personal attention they desire while having the
technological ability to provide services that require less customer contact to
other segments of the population.
Expand Sales of Insurance, Securities and Mortgage Products and
Services. In the past three years, we have opened three subsidiaries that focus
on selling additional products and services to customers and potential customers
of Franklin National Bank. As interest margins have declined over the past
several years, it has become more important for financial services companies to
find new sources of revenue. Non-interest income helps to offset some of the
risk associated with our net interest margin because it can provide a recurring
source of revenue. Making non-interest income a larger part of our total revenue
stream is an integral part of our strategy. For the three months ended March 31,
2000, our non-interest income as a percentage of total revenue was 18.0%.
Also, we seek to broaden our base of customers through sales of these
products and services. As the population becomes more sophisticated financially,
it becomes more imperative for us to continue to meet our customers changing
needs. This requires us to continually evaluate our line of products and
services and make additions where we believe we can compete with other major
financial services providers. It is our intent to understand our customers'
needs and be able to provide them with all of their financial services through
our subsidiaries. This can create opportunities to further cross-sell our
products and services to clients who might not otherwise do business with us.
Maintain High Levels of Asset Quality. Since our inception in 1989, we
have maintained a focus on loans secured by real estate with solid underwriting
standards and procedures. We have experienced lenders and a loan approval
process that requires detailed knowledge of the customer's ability to repay a
loan. This has resulted in strong asset quality for Franklin National Bank. Our
net charge-offs for the three months ended March 31, 2000 were $11,000. Net
charge-offs to gross loans was 0.02% in 1999 and has never been above 0.10%
since 1995. Total net charge-offs since inception are approximately $546,000.
Non-accrual loans remain low at $190,000 as of March 31, 2000 and we did not
have any non-accrual loans at any year-end since 1995. We believe our
conservative lending philosophy has enabled us to maintain these low levels of
losses while not hindering the overall growth of the loan portfolio.
Achieve Sustained Levels of High Performance. It is our goal to achieve
and maintain returns commensurate with the highest performing companies in the
financial services industry. Our ability to do this hinges on being able to meet
the three goals outlined above. We believe it is important to be a diversified
financial services provider in order to compete effectively in this changing
industry. While dropping somewhat in 1999 from our record levels in 1998, our
performance continues to be very solid. Returns on average equity were 19.3%
(annualized), 19.2% and 23.0% for the three months ended March 31, 2000, the
years ended December 31, 1999 and 1998, respectively. Returns on average assets
were 1.0% (annualized), 1.2% and 1.6% for the same time periods. These returns
compare favorably with other companies in our industry. We maintain our focus on
our strategy in order to maintain or increase our levels of profitability.
OPERATING OBJECTIVES
There are three specific operating objectives of our business strategy. We
intend to grow loans and deposits, increase fee income and consistently improve
our operating efficiency.
Loan and Deposit Growth. Loan and deposit growth, and consequently net
interest income, is our primary focus and is critical to achieving our goals. As
of March 31, 2000, net loans had
31
<PAGE> 34
increased 160% to approximately $287.7 million from approximately $110.8 million
at December 31, 1995. As of March 31, 2000, deposits had increased 179% to
approximately $419.6 million from approximately $150.4 million at December 31,
1995. We believe that strong community relationships and customer service are
the catalyst to continued loan and deposit growth.
Increase Fee Income. We must continue to grow our operations while at the
same time diversify our income stream. By focusing on the growth of non-banking
businesses, we expect a positive impact on earnings without relying as heavily
on our net interest margin. Non-interest income as a percentage of revenue for
the year ended December 31, 1999 was 23.1%, compared to 18.2% as of December 31,
1995. Non-interest income has grown to approximately $4.7 million for the year
ended December 31, 1999 from approximately $1.3 million for the year ended
December 31, 1995, an increase of 262%. We believe that our efforts in
delivering new products and services to customers will help strengthen our base
of non-interest income. Further, by evaluating the fees charged for banking
services on an annual basis, banking related fees offer another opportunity to
increase non-interest income.
Improve Operating Efficiency. Our objective is to consistently improve our
operating efficiency and ultimately become a low-cost provider of financial
services. Our efficiency ratio was 63.21% for the first three months of 2000
compared to 61.99% for the first three months of 1999 and 63.88% and 55.30% for
the full years 1999 and 1998, respectively. We have made substantial capital
investments in and incurred significant expenses associated with our future
growth through the opening of two branches in the second quarter of 2000. While
this has increased our efficiency ratio in the short-term, we believe a slower
growth rate of capital expenditures and related expenses should result in an
improved efficiency ratio.
MARKET AREA
The primary service area for Franklin National Bank is centered around
Franklin, Tennessee and encompasses Williamson, Maury and Davidson Counties in
Tennessee. Williamson County has the highest per capita income in the state of
Tennessee. According to a May 1998 survey by Syracuse University, Williamson
County ranked ninth in the nation for per capita income. Estimations of the 1998
average household income for Williamson County residents was $85,301.
The diversified economy in our market area is reflected in recent business
development projects including a Maryland Farms Office park that recently
completed a 103,000 square foot office building, a Marriott adult care facility
and mainstay suites, a Land Rover dealership and a 280,000 square foot shopping
center. In Franklin specifically, two major corporate campuses were developed
containing more than 2 million square feet in the Cool Springs Galleria Mall and
neighboring retail power centers. The initial 1,000 acre development and the 87
acre office complex with the adjoining Parkway Center of 272 acres located south
of Cool Springs Boulevard are Franklin's premier office locations.
Williamson County's population has increased 24% from 81,000 in 1990 to
100,000 in 1999. The median age of the county is 36 and the estimated number of
households is 39,258 as of 1999, up from 18,723 in 1980.
COMPETITION
Competition among financial institutions in our primary service area is
intense. Financial institutions primarily compete with one another for deposits.
In turn, a bank's deposit base directly affects such bank's loan activities and
general growth. Primary methods of competition include interest rates on
deposits and loans, service charges on deposit accounts and the designing of
unique
32
<PAGE> 35
financial services products. We are competing with financial institutions which
have much greater financial resources than us and which may be able to offer
more and unique services and possibly better terms to their customers. However,
we believe that Franklin National Bank will be able to attract sufficient
deposits to enable us to compete effectively with other area financial
institutions.
Franklin National Bank competes with existing area financial institutions
other than commercial banks and savings and loan associations, including
insurance companies, consumer finance companies, brokerage houses, credit unions
and other business entities which have recently entered the traditional banking
markets. Due to the rapid growth of our market area, it is anticipated that
additional competition will continue from new entrants to the market.
STOCK ACTIVITY
During January 1998, our Board of Directors approved a two-for-one stock
split payable on February 19, 1998 to shareholders of record at the close of
business on February 2, 1998. During March 1998, we also declared a four-for-one
stock split payable June 3, 1998 to shareholders of record at the close of
business on May 20, 1998. All share data in this prospectus reflects the stock
splits as if they had occurred at the beginning of the years presented.
33
<PAGE> 36
AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The following is a presentation of the average consolidated balance sheet
of Franklin Financial for the three months ended March 31, 2000 and 1999 and for
the years ended December 31, 1999, 1998 and 1997. This presentation includes all
major categories of interest-earning assets and interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and due from banks................. $ 10,678 $ 10,116 $ 10,550 $ 9,335 $ 7,435
Interest-earning deposits............... -- -- -- -- --
Securities.............................. 136,945 79,850 90,366 70,173 54,206
Federal funds sold and reverse
repurchases........................... 899 6,550 3,805 3,482 3,018
Net loans............................... 276,080 243,326 256,206 214,792 178,047
-------- -------- -------- -------- --------
Total earning assets.................. 413,924 329,726 350,377 288,447 235,271
-------- -------- -------- -------- --------
Other assets............................ 17,747 12,216 12,974 10,505 8,627
-------- -------- -------- -------- --------
Total assets.......................... $442,349 $352,058 $373,901 $308,287 $251,333
======== ======== ======== ======== ========
</TABLE>
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non interest-bearing deposits........... $ 32,006 $ 30,112 $ 32,116 $ 29,103 $ 24,360
NOW deposits, including MMDA............ 101,481 71,356 82,091 63,818 48,411
Savings deposits........................ 12,512 10,485 11,520 8,729 7,307
Time deposits........................... 242,421 202,737 208,113 172,213 146,995
Repurchase agreements................... 2,091 3,121 2,594 3,596 3,670
Other borrowings........................ 25,877 8,571 13,829 8,400 3,793
Other liabilities....................... 2,568 1,908 388 1,157 827
-------- -------- -------- -------- --------
Total liabilities..................... 418,956 328,290 350,651 287,016 235,363
Stockholders equity..................... 23,393 23,768 23,250 21,271 15,970
-------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $442,349 $352,058 $373,901 $308,287 $251,333
======== ======== ======== ======== ========
</TABLE>
34
<PAGE> 37
INTEREST RATES AND INTEREST DIFFERENTIAL
The following tables present analyses of the net interest earnings of
Franklin Financial for the periods indicated with respect to each major category
of interest-earning assets and each major category of interest-earning
liabilities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------- ----------------------------------------
INTEREST AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ NET AVERAGE INTEREST YIELD/ NET
AMOUNT EXPENSE RATE PAID YIELD AMOUNT EARNED RATE PAID YIELD
-------- -------- --------- ----- -------- -------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
deposits................ $ -- $ -- -- $ -- $ -- --
Securities................ 136,945 9,144 6.68% 79,850 4,304 5.39%
Federal funds sold........ 899 64 7.12 6,550 312 4.76
Net loans................. 276,080(1) 28,144(2) 10.19 243,326(3) 23,336(4) 9.59
-------- ------- -------- -------
Total earning assets.... $413,924 $37,352 9.02% 4.10% $329,726 $27,952 8.48% 4.23%
======== ======= ======== =======
LIABILITIES
NOW deposits, including
MMDA.................... $101,481 $ 4,356 4.29% $ 71,356 $ 2,316 3.25%
Savings deposits.......... 12,512 324 2.59 10,485 268 2.56
Time deposits............. 242,421 13,904 5.74 202,737 10,764 5.31
Other borrowings.......... 27,968 1,808 6.46 11,692 656 5.61
-------- ------- -------- -------
Total interest-bearing
liabilities........... $384,382 $20,392 5.31% $296,270 $14,004 4.73%
======== ======= ======== =======
</TABLE>
-------------------------
(1) Includes non-accrual loans of $63,000.
(2) Interest earned on net loans includes $621,000 in loan fees and loan service
fees.
(3) Includes non-accrual loans of $0.
(4) Interest earned on net loans includes $515,000 in loan fees and service
fees.
35
<PAGE> 38
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998
----------------------------------------- -----------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE YIELD/ YIELD/ NET AVERAGE INCOME/ YIELD/ NET
AMOUNT EXPENSE RATE PAID YIELD AMOUNT EXPENSE RATE PAID YIELD
-------- -------- --------- ----- -------- -------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning deposits......... -- -- -- -- -- --
Securities........................ $ 90,366 $ 5,311 5.88% $ 70,173 $ 4,101 5.84%
Federal funds sold and reverse
repurchases..................... 3,805 195 5.12 3,482 196 5.63
Net loans......................... 256,206(1) 25,185(2) 9.83 214,792(1) 22,141(3) 10.31
-------- ------- -------- -------
Total earning assets............ $350,377 $30,691 8.76% 4.43% $288,447 $26,438 9.17% 4.61%
======== ======= ======== =======
LIABILITIES
NOW deposits, including MMDA...... $ 82,091 $ 2,925 3.56% $ 63,818 $ 2,337 3.66%
Savings deposits.................. 11,520 298 2.59 8,729 226 2.59
Other time deposits............... 208,113 11,100 5.33 172,213 9,840 5.71
Other borrowings.................. 16,423 861 5.24 11,996 739 6.16
-------- ------- -------- -------
Total interest-bearing
liabilities................... $318,147 $15,184 4.77% $256,756 $13,142 5.12%
======== ======= ======== =======
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997
-----------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ NET
AMOUNT EXPENSE RATE PAID YIELD
-------- -------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest-earning deposits......... -- -- --
Securities........................ $ 54,206 $ 3,489 6.44%
Federal funds sold and reverse
repurchases..................... 3,018 161 5.33
Net loans......................... 178,047(1) 18,872(4) 10.60
-------- -------
Total earning assets............ $235,271 $22,522 9.57% 4.94%
======== =======
LIABILITIES
NOW deposits, including MMDA...... $ 48,411 $ 1,825 3.77%
Savings deposits.................. 7,307 190 2.60
Other time deposits............... 146,995 8,390 5.71
Other borrowings.................. 7,463 491 6.58
-------- -------
Total interest-bearing
liabilities................... $210,176 $10,896 5.18%
======== =======
</TABLE>
-------------------------
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $2,321,000 in loan fees and loan
service fees.
(3) Interest earned on net loans includes $2,211,000 in loan fees and loan
service fees.
(4) Interest earned on net loans includes $1,782,000 in loan fees and loan
service fees.
36
<PAGE> 39
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect on interest income, interest expense and net interest income in
the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. The effect of change in rate has been determined by applying the
average balance in the earlier period to the change in average rate in the later
period, as compared with the earlier period. Changes resulting from average
balance/rate variances have been determined by applying the change in average
balance to the change in average rate in the later period, as compared with the
earlier period. The changes attributable to the combined impact of balance and
rate have all been allocated to the changes due to volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1999
INCREASE (DECREASE) DUE TO:
---------------------------------
VOLUME RATE TOTAL
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits.......................... $ -- $ -- $ --
Securities......................................... 3,812 1,028 4,840
Federal funds sold................................. (402) 154 (248)
Net loans.......................................... 3,339 1,469 4,808
------ ------ ------
Total earning assets............................ 6,749 2,651 9,400
------ ------ ------
Interest paid on:
NOW deposits, including MMDA....................... 1,293 746 2,039
Savings deposits................................... 53 4 57
Time deposits...................................... 2,274 865 3,139
Other borrowings................................... 1,051 100 1,151
------ ------ ------
Total interest expense.......................... 4,671 1,715 6,386
------ ------ ------
Change in net interest income........................ $2,078 $ 936 $3,014
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
COMPARED WITH
YEAR ENDED DECEMBER 31, 1998
INCREASE (DECREASE) DUE TO:
------------------------------
VOLUME RATE TOTAL
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earned on:
Securities................................................ $1,187 $ 23 $1,210
Federal funds sold........................................ 17 (18) (1)
Net loans................................................. 4,071 (1,027) 3,044
------ ------- ------
Total earning assets................................... 5,275 (1,022) 4,253
------ ------- ------
Interest paid on:
NOW deposits, including MMDA.............................. 651 (64) 587
Savings deposits.......................................... 73 0 73
Time deposits............................................. 1,915 (654) 1,261
Other borrowings.......................................... 232 (110) 122
------ ------- ------
Total interest expense................................. 2,871 (828) 2,043
------ ------- ------
Change in net interest income.......................... $2,404 $ (194) $2,210
====== ======= ======
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
COMPARED WITH
YEAR ENDED DECEMBER 31, 1997
INCREASE (DECREASE) DUE TO:
----------------------------
VOLUME RATE TOTAL
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest earned on:
Securities................................................ $ 933 $(321) $ 612
Federal funds sold........................................ 26 9 35
Net loans................................................. 3,788 (519) 3,269
------ ----- ------
Total earning assets................................... 4,747 (831) 3,916
------ ----- ------
Interest paid on:
NOW deposits.............................................. 564 (52) 512
Savings deposits.......................................... 37 (1) 36
Time deposits............................................. 1,441 9 1,450
Other borrowings.......................................... 279 (31) 248
------ ----- ------
Total interest expense................................. 2,321 (75) 2,246
------ ----- ------
Change in net interest income.......................... $2,426 $(756) $1,670
====== ===== ======
</TABLE>
DEPOSITS
Franklin National Bank offers a full range of interest bearing and
non-interest bearing accounts, including commercial and retail checking
accounts, negotiable order of withdrawal ("NOW") accounts, money market
accounts, individual retirement accounts, regular interest bearing statement
savings accounts and certificates of deposit with fixed and variable rates and a
range of maturity date options. The sources of deposits are residents,
businesses and employees of businesses within our market area, obtained through
the personal solicitation of our officers and directors, direct mail
solicitation and advertisements published in the local media. We pay competitive
interest rates on time and savings deposits up to the maximum permitted by law
or regulation. In addition, we have implemented a service charge fee schedule
competitive with other financial institutions in our market area, covering such
matters as maintenance fees on checking accounts, per item processing fees on
checking accounts, returned check charges and the like.
The following tables present, for the periods indicated, the average amount
of and average rate paid on each of the following deposit categories:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ---------------------------------------------------------------
2000 1999 1998 1997
------------------- ------------------- ------------------- -------------------
INTEREST INTEREST INTEREST INTEREST
AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE
DEPOSIT CATEGORIES AMOUNT PAID AMOUNT PAID AMOUNT PAID AMOUNT PAID
------------------ -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits...... $ 32,006 -- $ 32,116 -- $ 29,103 -- $ 24,360 --
NOW deposits, including MMDA.............. 101,481 4.29% 82,091 3.56% 63,818 3.66% 48,411 3.77%
Savings deposits.......................... 12,512 2.59 11,520 2.59 8,729 2.59 7,307 2.60
Time deposits............................. 242,421 5.74 208,113 5.33 172,213 5.71 146,995 5.71
</TABLE>
38
<PAGE> 41
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities for the three months ended
March 31, 2000 and the year ended December 31, 1999 :
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
TIME CERTIFICATES OF DEPOSIT MARCH 31, 2000 DECEMBER 31, 1999
---------------------------- ------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
3 months or less...................................... $142,347 $ 85,266
3-6 months............................................ 19,315 42,622
6-12 months........................................... 22,363 23,069
over 12 months........................................ 5,361 4,824
-------- --------
Total............................................... $189,386 $155,781
======== ========
</TABLE>
LOAN PORTFOLIO
Franklin National Bank engages in a full complement of lending activities,
including commercial, consumer/installment and real estate loans.
Commercial lending is directed principally towards businesses whose demands
for funds fall within Franklin National Bank's legal lending limits and which
are potential deposit customers of Franklin National Bank. This category of
loans includes loans made to individual, partnership or corporate borrowers, and
obtained for a variety of business purposes. Particular emphasis is placed on
loans to small and medium-sized businesses. Franklin National Bank's real estate
loans consist of residential and commercial first and second mortgage loans, as
well as real estate construction loans and real estate acquisition and
development loans.
Franklin National Bank's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes, including
education and automobile loans to individuals and pre-approved lines of credit.
At March 31, 2000, loans within four broad categories exceeded 10% of total
loans: single family residential real estate loans ($71.2 million or 24% of
total loans), commercial real estate loans ($56.2 million or 19% of total
loans), commercial and industrial loans ($54.7 million or 19% of total loans)
and residential construction loans ($43.9 million or 15% of total loans).
At December 31, 1999, loans within four broad categories exceeded 10% of
total loans: single family residential real estate loans ($70.0 million or 26%
of total loans), commercial real estate loans ($51.4 million or 19% of total
loans), commercial and industrial loans ($51.9 million or 19% of total loans)
and residential construction loans ($39.0 million or 14% of total loans).
Management believes that there is material borrower diversification within both
the single family residential real estate, commercial and industrial, and
commercial real estate loan categories. A substantial majority of these loans
are secured by properties located in the primary services area of Franklin
National Bank (Williamson County and surrounding counties).
39
<PAGE> 42
The following table presents various categories of loans contained in our
loan portfolio for the periods indicated and the total amount of all loans for
such period:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------------------
TYPE OF LOAN 2000 1999 1998 1997 1996 1995
------------ --------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, financial and
agricultural................ $ 92,241 $ 82,288 $ 60,418 $ 44,824 $ 34,280 $ 24,143
Real estate -- construction... 43,922 38,982 29,335 33,708 23,307 13,073
Real estate -- mortgage....... 135,400 130,483 132,327 100,989 86,999 62,895
Consumer loans................ 19,298 19,670 18,006 15,001 13,230 12,016
-------- -------- -------- -------- -------- --------
Total loans................. 290,861 271,423 240,086 194,522 157,816 112,127
Less: deferred loan fees...... (543) (512) (516) (440) (362) (296)
Allowance for possible loan
losses................... (2,649) (2,480) (2,194) (1,828) (1,472) (1,062)
-------- -------- -------- -------- -------- --------
Total (net of allowance).... $287,669 $268,431 $237,376 $192,254 $155,982 $110,769
======== ======== ======== ======== ======== ========
</TABLE>
The following is a presentation of an analysis of maturities of loans as of
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------------------------------- -------------------------------------------
DUE IN DUE AFTER DUE IN DUE AFTER
1 YEAR 1 TO 5 DUE AFTER 1 YEAR 1 TO 5 DUE AFTER
TYPE OF LOAN OR LESS YEARS 5 YEARS TOTAL OR LESS YEARS 5 YEARS TOTAL
------------ -------- --------- --------- -------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural........................ $ 66,949 $ 24,922 $ 370 $ 92,241 $ 57,251 $24,965 $ 72 $ 82,288
Real estate -- construction........... 41,709 2,213 -- 43,922 37,080 1,902 -- 38,982
Real estate -- mortgage............... 55,681 68,719 11,000 135,400 62,110 55,587 12,786 130,483
Consumer loans........................ 6,804 12,461 33 19,298 7,084 12,568 18 19,670
-------- -------- ------- -------- -------- ------- ------- --------
Total............................... $171,143 $108,315 $11,403 $290,861 $163,525 $95,022 $12,876 $271,423
======== ======== ======= ======== ======== ======= ======= ========
</TABLE>
The following is a presentation of an analysis of sensitivities of loans to
changes in interest rates as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans due after 1 year with predetermined interest
rates................................................... $95,826 $87,260
Loans due after 1 year with floating interest rates....... 23,892 20,638
</TABLE>
40
<PAGE> 43
The following table presents information regarding non-accrual, past due
and restructured loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------
2000 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Number........................................ 1 -- -- -- -- --
Amount........................................ $190 $ -- $ -- $ -- $ -- $ --
Accruing loans which are contractually past due
90 days or more as to principal and interest
payments:
Number........................................ 5 4 4 -- -- --
Amount........................................ $371 $769 $195 $ -- $ -- $ --
Loans defined as "troubled debt restructurings":
Number........................................ -- -- -- -- -- --
Amount........................................ $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
As of December 31, 1999, there were no loans classified by the regulators
as doubtful, substandard or special mention that have not been disclosed in the
above table, which (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
Accrual of interest is discontinued on a loan when management of Franklin
National Bank determines upon consideration of economic and business factors
affecting collection efforts that collection of interest is doubtful.
Additional interest income of approximately $0 in 1999, $0 in 1998, $0 in
1997, $0 in 1996 and $423 in 1995 would have been recorded if all loans
accounted for on a non-accrual basis had been current in accordance with their
original terms. No interest income has been recognized during the five year
period ended December 31, 1999 on loans that have been accounted for on a
non-accrual basis.
At March 31, 2000, management has identified other possible credit problems
as follows (in thousands):
<TABLE>
<S> <C>
Special mention............................................. $1,684
Substandard................................................. 2,674
Doubtful.................................................... 81
Loss........................................................ 20
------
Total..................................................... $4,459
======
</TABLE>
These loans are performing loans but are classified due to payment history,
decline in the borrowers financial position or decline in collateral value.
Loans categorized as "special mention" are currently protected but are
potentially weak. These loans constitute an undue and unwarranted credit risk
but not to the point of justifying a classification of substandard. Loans
classified as "substandard" are inadequately protected by the current sound
worth and paying capacity of the obligor or the collateral pledged, if any.
Loans so classified must have a well-defined weakness or weakness that
jeopardizes the liquidation of the debt. Loans classified as "doubtful" have all
the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
41
<PAGE> 44
questionable and improbable. Loans classified as "loss" are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. Management has provided specific allocations of the allowance
for probable loan losses of $131,000 relating to such loans. There are no other
identified loans which are not disclosed above, but where known information
about possible credit problems of borrowers causes management to have doubts as
to the ability of such borrowers to comply with the present loan repayment
terms.
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of Franklin National Bank's loss experience is furnished in the
following table for the periods indicated, as well as a breakdown of the
allowance for possible loan losses:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $2,480 $2,194 $2,194 $1,828 $1,472 $1,062 $ 762
Charge-offs:
Commercial, financial and
agricultural............. 15 -- 25 112 36 4
Consumer loans.............. 6 -- 66 47 40 18 38
Real estate -- mortgage..... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------
21 -- 91 159 76 22 38
------ ------ ------ ------ ------ ------
Recoveries:
Commercial, financial and
agricultural............. 3 5 9 2 1 -- 4
Consumer loans.............. 7 3 18 8 11 12 14
Real estate -- mortgage..... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net charge-offs............... (11) 8 (64) (149) (64) (10) (20)
------ ------ ------ ------ ------ ------ ------
Additions charged to
operations.................. 180 70 350 515 420 420 320
------ ------ ------ ------ ------ ------ ------
Balance at end of period...... $2,649 $2,272 $2,480 $2,194 $1,828 $1,472 $1,062
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to average
loans outstanding during the
period...................... 0.02% (0.01)% 0.02% 0.07% 0.04% 0.01% 0.02%
====== ====== ====== ====== ====== ====== ======
</TABLE>
The allocation of the allowance for loan losses by loan category at March
31, 2000 and December 31 of the years indicated is presented below, along with
percentage of loans in each category to total loans:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------ ------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural... $ 964 31.7% $ 882 30.3% $ 686 25.2% $ 489 23.1% $ 272
Real estate --
construction....... 450 15.1 449 14.4 352 12.2 377 17.3 331
Real
estate -- mortgage.. 977 46.6 886 48.1 840 55.1 813 51.9 735
Consumer loans....... 249 6.6 255 7.2 211 7.5 109 7.7 98
Unallocated.......... 9 -- 8 -- 105 -- 40 -- 36
------ ----- ------ ----- ------ ----- ------ ----- ------
Total.............. $2,649 100.0% $2,480 100.0% $2,194 100.0% $1,828 100.0% $1,472
====== ===== ====== ===== ====== ===== ====== ===== ======
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------- ----------------
PERCENT AMOUNT PERCENT
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial, financial
and agricultural... 21.7% $ 189 21.6%
Real estate --
construction....... 14.8 172 11.6
Real
estate -- mortgage.. 55.1 479 56.1
Consumer loans....... 8.4 79 10.7
Unallocated.......... -- 143 --
----- ------ -----
Total.............. 100.0% $1,062 100.0%
===== ====== =====
</TABLE>
42
<PAGE> 45
LOAN LOSS RESERVE
In considering the adequacy of our allowance for probable loan losses,
management has focused on the fact that as of March 31, 2000, 19% of outstanding
loans are in the category of commercial and industrial loans. Commercial and
industrial loans are generally considered by management as having greater risk
than other categories of loans in our loan portfolio. However, approximately 87%
of these commercial loans at March 31, 2000 were made on a secured basis.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio greatly reduces any risk of loss inherently
present in commercial loans.
Our consumer loan portfolio is also well secured. At March 31, 2000, the
majority of our consumer loans were secured by collateral primarily consisting
of automobiles, boats and other personal property. Management believes that
these loans involve less risk than other categories of loans.
As of March 31, 2000, real estate mortgage loans constituted 47% of
outstanding loans. Approximately $70 million, or 52%, of this category
represents first mortgage residential real estate mortgages where the amount of
the original loan generally does not exceed 80% of the appraised value of the
collateral. The remaining portion of this category consists primarily of
commercial real estate loans. Risk of loss for these loans is generally higher
than residential loans. Therefore, management has allocated a significant
portion of the allowance for probable loan losses to this category.
Our Board of Directors monitors the loan portfolio quarterly to enable it
to evaluate the adequacy of the allowance for loan losses. The loans are rated
and the allowance established based on the assigned rating. The provision for
loan losses charged to operating expenses is based on this established
allowance. Factors considered by the Board of Directors in rating the loans
include delinquent loans, underlying collateral value, payment history and local
and general economic conditions affecting collectibility.
INVESTMENTS
As of March 31, 2000 and December 31, 1999, investment securities,
including mortgage-backed securities, comprised approximately 30% of Franklin
National Bank's assets and loans comprised approximately 62% of Franklin
National Bank's assets at both dates. Franklin National Bank invests primarily
in obligations of the United States or obligations guaranteed as to principal
and interest by the United States, other taxable securities and in certain
obligations of states and municipalities. The majority of the mortgage-backed
securities are instruments of U.S. Government agencies. In addition, Franklin
National Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of Federal
Funds amounts to a short-term loan from Franklin National Bank to another bank.
Since Franklin National Bank is now in a taxable position and expects to be in a
taxable position in the future, more tax exempt securities have been purchased.
43
<PAGE> 46
The following tables present, for the periods indicated, the carrying
amount of Franklin National Bank's investment securities, including
mortgage-backed securities, separated by those available-for-sale and those
held-to-maturity. Franklin National Bank has no investment securities which are
held-for-trading.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------
INVESTMENT CATEGORY 2000 1999 1998 1997
------------------- --------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and other U.S.
Agencies......................................... $ 44,389 $ 43,488 $25,881 $20,862
Obligations of States and Political Subdivisions... 16,706 14,149 14,254 4,189
Mortgage backed securities......................... 73,244 69,526 32,406 29,654
Other securities................................... 565 187 -- 350
-------- -------- ------- -------
Total............................................ $134,904 $127,350 $72,541 $55,055
======== ======== ======= =======
HELD-TO-MATURITY:
Obligations of U.S. Treasury and other U.S.
Agencies......................................... $ -- $ -- $ 1,354 $ 2,098
Obligations of States and Political Subdivisions... 2,736 2,809 2,817 2,974
Mortgage backed securities......................... 366 380 591 857
Other securities................................... -- -- -- 30
-------- -------- ------- -------
Total............................................ $ 3,102 $ 3,189 $ 4,762 $ 5,959
======== ======== ======= =======
</TABLE>
44
<PAGE> 47
The following tables indicate for the periods indicated, the amount of
investments due in (i) one year or less, (ii) one to five years, (iii) five to
ten years, and (iv) over ten years:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INVESTMENT CATEGORY AMOUNT YIELD AMOUNT YIELD(1)
------------------- -------- ---------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and other U.S.
Agencies:
0 through 1 Yr............................ $ 4,892 5.19% $ 4,979 4.91%
Over 1 through 5 Yrs...................... 14,930 5.10 15,644 5.13
Over 5 through 10 Yrs..................... 9,630 4.98 9,433 4.97
Over 10 Yrs............................... 14,938 8.73 13,432 7.73
Obligations of States and Political
Subdivisions:
0 through 1 Yr............................ 248 5.50 249 5.50
Over 1 through 5 Yrs...................... 556 6.28 562 6.29
Over 5 through 10 Yrs..................... 1,345 6.53 1,328 6.10
Over 10 Yrs............................... 14,556 7.33 12,010 6.79
Other Securities:
Over 1 through 5 yrs...................... 243 7.71 -- --
Over 10 Yrs............................... 322 7.69 187 7.69
Mortgage-backed securities.................. 73,244 7.06 69,526 6.92
-------- ---- -------- ----
Total available-for-sale............... $134,904 6.84% $127,350 6.54%
======== ==== ======== ====
HELD-TO-MATURITY:
Obligations of U.S. Treasury and other U.S.
Agencies:
0 through 1 Yr............................ $ 0 0% $ 0 0%
Obligations of States and Political
Subdivisions:
0 through 1 Yr............................ 0 0 75 8.00
Over 1 through 5 Yrs...................... 449 8.45 370 8.67
Over 5 through 10 Yrs..................... 2,010 7.54 2,087 7.15
Over 10 Yrs............................... 277 7.31 277 7.25
Mortgage-backed securities.................. 366 7.11 380 7.04
-------- ---- -------- ----
Total held-to-maturity................. $ 3,102 7.60% $ 3,189 7.34%
======== ==== ======== ====
</TABLE>
-------------------------
(1) Franklin National Bank has invested in tax exempt obligations. Yields are
presented based on adjusted cost basis of securities available-for-sale.
Yields based on carrying value would be lower since fair value exceeds
adjusted cost. Yields on tax exempt obligations have been computed on a tax
equivalent basis. Income from tax exempt obligations is exempt from federal
income tax only, therefore only the federal statutory rate of 34% has been
used to compute the tax equivalent yield.
45
<PAGE> 48
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity for
the periods indicated are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------- ---------------------
2000 1999 1999 1998 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Return on average assets................. 1.02%(1) 1.32%(1) 1.20% 1.59% 1.55%
Return on average equity................. 19.32(1) 19.52(1) 19.23 22.97 24.35
Average equity to average assets ratio... 5.29 6.75 6.22 6.90 6.35
Dividend payout ratio.................... 41.67 33.33 32.69 6.67 --
</TABLE>
-------------------------
(1) Annualized for the periods indicated. Results for the three months ended
March 31, 2000 and 1999 may not be indicative of full year results.
ASSET/LIABILITY MANAGEMENT
It is the objective of Franklin National Bank to manage assets and
liabilities to provide a satisfactory, consistent level of profitability within
the framework of established cash, loan investment, borrowing and capital
policies. Our officers are responsible for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix,
stability and leverage of all sources of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management seeks
to invest the largest portion of Franklin National Bank's assets in commercial,
real estate and consumer loans.
Our asset/liability mix is monitored on a daily basis with a monthly report
reflecting interest-sensitive assets and interest-sensitive liabilities being
prepared and presented to Franklin National Bank's Board of Directors. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on our
earnings.
CORRESPONDENT BANKING
Correspondent banking involves the providing of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. Franklin National Bank purchases correspondent services
offered by larger banks, including check collections, purchase of federal funds,
security safekeeping, investment services, coin and currency supplies, overline
and liquidity loan participations and sales of loans to or participations with
correspondent banks.
DATA PROCESSING
We have in-house data processing which provides a full range of data
processing services including an automated general ledger, deposit accounting,
commercial, real estate and installment lending data processing and central
information file. We have an ATM processing agreement with Intercept Systems,
Inc.
46
<PAGE> 49
FACILITIES
Main Office. Franklin National Bank subleases from Franklin Financial a
two-story commercial facility (approximately 12,000 square feet) located in
Franklin, Tennessee, which houses Franklin National Bank's main office. The
facility includes a main banking floor with six teller stations and nine
offices, and has an ATM (automated teller machine) and two drive-in windows. The
second floor of the facility consists of the personnel department, the marketing
department, the call center, four executive offices and the facilities
management office. Franklin National Bank also has two off-site ATMs. Franklin
Financial leases these facilities from Gordon E. Inman, our Chairman of the
Board.
Spring Hill Branch. The Spring Hill branch is located in a 2,700 square
foot building in Spring Hill, Tennessee. The branch includes four offices and
three teller stations, two drive-in windows and an ATM.
Williamson Square Branch. The Williamson Square branch is located in a
5,000 square foot commercial building located on Highway 96 West at the
Williamson Square Shopping Center in Franklin. The branch banking floor includes
five teller stations and six offices, and has an ATM and two drive-in windows.
Brentwood Branch. The Brentwood branch is located in a 4,900 square foot
leased building in Brentwood, Tennessee. The branch has six offices, four teller
stations, four drive-in windows and an ATM.
Fairview Branch. The Fairview branch is located in a 5,000 square foot
building in Fairview, Tennessee. The branch includes four offices, four teller
stations, two drive-in windows and an ATM.
Cool Springs Branch. The Cool Springs branch is located in a 4,900 square
foot building in the Cool Springs area of Franklin, Tennessee. The branch
includes eight offices, five teller stations, four drive-in windows and an ATM.
Administrative and Other Offices. Franklin National Bank leases facilities
at four separate locations in Franklin which house Franklin National Bank's
securities subsidiary, mortgage banking subsidiary, insurance subsidiary, data
processing, operations and administrative functions. Franklin National Bank
leases these facilities from Gordon E. Inman, our Chairman of the Board.
Franklin National Bank is also leasing an office suite in Chattanooga,
Tennessee which houses mortgage loan origination offices.
Franklin National Bank has been approved for a full service branch facility
in the Fieldstone Farms area of Franklin. In July 1999, Franklin Financial
purchased a parcel of land and has begun construction on the facility which is
expected to open during the second quarter of 2000.
EMPLOYEES
As of March 31, 2000, Franklin Financial employed 178 persons on a
full-time basis, including 55 officers. Franklin Financial will hire additional
persons as needed, including additional tellers and financial service
representatives.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Franklin Financial
or Franklin National Bank is a party or of which any of their properties are
subject; nor are there material proceedings known to Franklin Financial to be
contemplated by any governmental authority; nor are
47
<PAGE> 50
there material proceedings known to Franklin Financial, pending or contemplated,
in which any director, officer or affiliate or any principal security holder of
Franklin Financial, or any associate of any of the foregoing is a party or has
an interest adverse to Franklin Financial or Franklin National Bank.
MONETARY POLICIES
The results of operations of Franklin National Bank are affected by credit
policies of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. Government securities, changes in the discount
rate on member bank borrowings, changes in reserve requirements against member
bank deposits and limitations on interest rates which member banks may pay on
time and savings deposits. In view of changing conditions in the national
economy and in the money markets, as well as the effect of action by monetary
and fiscal authorities, including the Federal Reserve Board, no prediction can
be made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of Franklin National Bank.
SUPERVISION AND REGULATION
We operate in a highly regulated environment, and our business activities
are governed by statute, regulation and administrative policies. Our business
activities are closely supervised by a number of federal regulatory agencies,
including the Federal Reserve Board, the Office of the Comptroller of the
Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC").
Franklin Financial is regulated by the Federal Reserve Board under the
federal Bank Holding Company Act, which requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before acquiring more
than 5% of the voting shares of any bank or all or substantially all of the
assets of a bank, and before merging or consolidating with another bank holding
company. The Federal Reserve Board (pursuant to regulation and published policy
statements) has maintained that a bank holding company must serve as a source of
financial strength to its subsidiary banks. In adhering to the Federal Reserve
Board policy Franklin Financial may be required to provide financial support to
a subsidiary bank at a time when, absent such Federal Reserve Board policy,
Franklin Financial may not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, Franklin Financial or any other bank holding company located in Tennessee
is able to acquire a bank located in any other state, and a bank holding company
located outside Tennessee can acquire any Tennessee-based bank, in either case
subject to certain deposit percentage and other restrictions. The legislation
also provides that, unless an individual state has elected to prohibit
out-of-state banks from operating interstate branches within its territory,
adequately capitalized and managed bank holding companies will be able to
consolidate their multistate bank operations into a single bank subsidiary and
to branch interstate through acquisitions.
De novo branching by an out-of-state bank is permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state remains subject to applicable
state branching laws. Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act, the State of Tennessee adopted legislation that
authorizes out-of-state banks to operate interstate branches which have been
acquired through acquisition within its territory effective June 1, 1997.
On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act was signed into law. The Financial Services Modernization Act
eliminates the barriers erected by the
48
<PAGE> 51
1933 Glass-Steagall Act and amends the Bank Holding Company Act of 1956, among
other statutes. Further, it allows for the affiliation of banking, securities
and insurance activities in new financial services organizations.
A dominant theme of the new legislation is functional regulation of
financial services, with the primary regulator of Franklin Financial being the
agency which traditionally regulates the activity in which Franklin Financial
wishes to engage. For example, the Securities and Exchange Commission will
regulate bank securities transactions, and the various banking regulators will
oversee banking activities.
The principal provisions of the Financial Services Modernization Act will
permit Franklin Financial, if it meets the standards for a "well-managed" and
"well-capitalized" institution and has at least a "satisfactory" Community
Reinvestment Act performance, to engage in any activity that is "financial in
nature," including security and insurance underwriting, investment banking, and
merchant banking investing in commercial and industrial companies. Franklin
Financial, if it satisfies the above criteria, can file a declaration of its
status as a "financial holding company" ("FHC") with the Federal Reserve, and
thereafter engage directly or through nonbank subsidiaries in the expanded range
of activities which the Financial Services Modernization Act identifies as
financial in nature. Further, Franklin Financial, if it elects FHC status, will
be able to pursue additional activities which are incidental or complementary in
nature to a financial activity, or which the Federal Reserve subsequently
determines to be financial in nature. The Financial Services Modernization Act
will also allow Franklin National Bank, with OCC approval, to control or hold an
interest in a "financial subsidiary" which may engage in, among other things,
the activities specified in the Financial Services Modernization Act as being
financial in nature. Such a subsidiary, though, is not permitted to engage in
insurance underwriting or annuity issuance, real estate development, investment
activities, or merchant banking activities. Further, any financial subsidiary
that Franklin National Bank created would generally be treated as an affiliate
of Franklin National Bank, rather than as a subsidiary for purposes of affiliate
transaction restrictions of Sections 23A and 23B of the Federal Reserve Act.
It is expected that the Financial Services Modernization Act will
facilitate further consolidation in the financial services industry on both a
national and international basis, and will cause existing bank holding companies
to restructure their existing activities in order to take advantage of the new
powers granted and comply with their attendant requirements and conditions.
A bank holding company which has not elected to become a FHC will generally
be prohibited from acquiring control of any company which is not a bank and from
engaging in any business other than the business of banking or managing and
controlling banks. However, these non-FHC bank holding companies will still be
able to engage in certain activities which have been identified by the Federal
Reserve Board to be so closely related to banking as to be a proper incident
thereto and thus permissible for bank holding companies.
The permissible nonbanking activities, including those listed below, are
left unchanged by the Financial Services Modernization Act which does not
prohibit non-FHC bank holding companies from engaging in these activities.
Effective April 21, 1997, the Federal Reserve Board revised and expanded the
list of permissible non-banking activities, which includes the following
activities: extending credit and servicing loans; acting as investment or
financial advisor to any person, with certain limitations; leasing personal or
real property or acting as a broker with respect thereto; providing management
and employee benefits consulting advice and career counseling services to non-
affiliated banks and nonbank depository institutions; operating certain nonbank
depository institutions; performing certain trust company functions; providing
certain agency transactional services, including securities brokerage services,
riskless principal transactions, private placement services, and acting as a
49
<PAGE> 52
futures commission merchant; providing data processing and data transmission
services; acting as an insurance agent or underwriter with respect to limited
types of insurance; performing real estate appraisals; arranging commercial real
estate equity financing; providing check-guaranty, collection agency and credit
bureau services; engaging in asset management, servicing and collection
activities; providing real estate settlement services; acquiring certain debt
which is in default; underwriting and dealing in obligations of the United
States, the states and their political subdivisions; engaging as a principal in
foreign exchange trading and dealing in precious metals; providing other support
services such as courier services and the printing and selling of checks; and
investing in programs designed to promote community welfare.
In determining whether an activity is so closely related to banking as to
be permissible for bank holding companies, the Federal Reserve Board is required
to consider whether the performance of such activities by a bank holding company
or its subsidiaries can reasonably be expected to produce benefits to the public
such as greater convenience, increased competition and gains in efficiency, that
outweigh such possible adverse effects as undue concentration of resources,
decreased and unfair competition, conflicts of interest and unsound banking
practices. Generally, bank holding companies are required to obtain prior
approval of the Federal Reserve Board to engage in any activity not previously
approved by the Federal Reserve Board or to modify in any material respect an
activity for which Federal Reserve Board approval has been obtained.
Franklin National Bank is also subject to the Tennessee banking and usury
laws restricting the amount of interest which it may charge in making loans or
other extensions of credit. In addition, Franklin National Bank, as a subsidiary
of Franklin Financial, is subject to restrictions under federal law in dealing
with Franklin Financial and other affiliates, if any. These restrictions apply
to extensions of credit to an affiliate, investments in the securities of an
affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
In addition, a national bank may grant loans and extensions of credit to any one
person up to 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations at
least equal to the amount of funds outstanding. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government, and loans or extensions of credit which have the approval of the OCC
and which are made to a financial institution or to any agent in charge of the
business and property of the financial institution.
Both Franklin Financial and Franklin National Bank are subject to
regulatory capital requirements imposed by the Federal Reserve Board and the
OCC. The Federal Reserve Board and the OCC have issued risk-based capital
guidelines for bank holding companies and banks which make regulatory capital
requirements more sensitive to differences in risk profiles of various banking
organizations. The capital adequacy guidelines issued by the Federal Reserve
Board are applied to bank holding companies on a consolidated basis with the
banks owned by the holding company. The OCC's risk capital guidelines apply
directly to national banks regardless of whether they are a subsidiary of a bank
holding company. Both agencies' requirements provide that banking organizations
must have capital equivalent to at least 8% of weighted risk assets. The risk
weights assigned to assets
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Depending upon the riskiness of a particular asset, it is assigned to a risk
category.
For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category, while a risk weight
of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. At March 31, 2000, Franklin
Financial's consolidated total risk-based capital and Tier 1 ratios were 9.6%
and 8.8% respectively. Both the Federal Reserve Board and the OCC have also
implemented minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital adequacy of banks and
bank holding companies. Under these rules, banking institutions are required to
maintain a ratio of at least 3% "Tier 1" capital to total assets (net of
goodwill, certain intangible assets, and certain deferred tax assets). Tier 1
capital includes common stockholders equity, noncumulative perpetual preferred
stock and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements. They are applicable to all banking institutions unless the
applicable regulatory authority determines that different minimum capital ratios
are appropriate for a particular institution based upon its circumstances.
Institutions operating at or near these ratios are expected to have
well-diversified risk, excellent control systems, high asset quality, high
liquidity, good earnings and in general, have to be considered strong banking
organizations, rated composite 1 under the CAMELS rating system for banks or the
BOPEC rating system for bank holding companies. The OCC requires that all but
the most highly rated banks and all banks with high levels of risk or
experiencing or anticipating significant growth will maintain ratios at least
100 to 200 basis points above the stated minimums. The Federal Reserve Board
requires bank holding companies without a BOPEC-1 rating to maintain a ratio of
at least 4% Tier 1 capital to total assets; furthermore, banking organizations
with supervisory, financial, operational, or managerial weaknesses, as well as
organizations that are anticipating or experiencing significant growth, are
expected to maintain capital ratios well above the 3% and 4% minimum levels.
The FDIC adopted a rule substantially similar to that issued by the Federal
Reserve Board, establishing a minimum leverage ratio of 3% and providing that
FDIC-regulated banks with anything less than a CAMELS-1 rating must maintain a
ratio of at least 4%. In addition, the FDIC rule specifies that a depository
institution operating with less that the applicable minimum leverage capital
requirement will be deemed to be operating in an unsafe and unsound manner
unless the institution is in compliance with a plan, submitted to and approved
by the FDIC, to increase the ratio to an appropriate level. Finally, the FDIC
requires any insured depository institution with a leverage ratio of less than
2% to enter into and be in compliance with a written agreement between it and
the FDIC (or the primary regulator, with the FDIC as a party to the agreement).
Such an agreement will nearly always contemplate immediate efforts to acquire
the capital required to increase the ratio to an appropriate level. Institutions
that fail to enter into or maintain compliance with such an agreement will be
subject to enforcement action by the FDIC.
The OCC's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets, whether originated
or purchased and excluding any interest-only strips receivable related thereto.
Furthermore, the OCC's guidelines formerly provided that the amount of such
qualifying intangibles that may be included in Tier 1 was limited to a maximum
of
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<PAGE> 54
50% of total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets. Furthermore, banks may now deduct from Tier 1
capital disallowed servicing assets on a basis that is net of any associated
deferred tax liability. Deferred tax liabilities netted this way may not also be
netted against deferred tax assets when determining the amount of deferred tax
assets that are dependent upon future taxable income.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The rules clarify that even though those transactions are
treated as asset sales for bank Call Report purposes, those assets will still be
subject to a capital charge under the risk-based capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board and
the FDIC explicitly include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates to ensure that the guidelines
take adequate account of interest rate risk. Interest rate risk is the adverse
effect that changes in market interest rates may have on a bank's financial
condition and is inherent to the business of banking. The exposure of a bank's
economic value generally represents the change in the present value of its
assets, less the change in the value of its liabilities, plus the change in the
value of its interest rate off-balance sheet contracts. Concurrently, the
agencies issued a joint policy statement to bankers, effective June 26, 1996, to
provide guidance on sound practices for managing interest rate risk. In the
policy statement, the agencies emphasize the necessity of adequate oversight by
a bank's Board of Directors and senior management and of a comprehensive risk
management process. The policy statement also describes the critical factors
affecting the agencies' evaluations of a bank's interest rate risk when making a
determination of capital adequacy. The agencies' risk assessment approach used
to evaluate a bank's capital adequacy for interest rate risk relies on a
combination of quantitative and qualitative factors. Banks that are found to
have high levels of exposure and/or weak management practices will be directed
by the agencies to take corrective action.
The OCC, the Federal Reserve Board and the FDIC added a provision to the
risk-based capital guidelines that supplements and modifies the usual risk-based
capital calculations to ensure that institutions with significant exposure to
market risk maintain adequate capital to support that exposure. Market risk is
the potential loss to an institution resulting from changes in market prices.
The modifications are intended to address two types of market risk: general
market risk, which includes changes in general interest rates, equity prices,
exchange rates, or commodity prices, and specific market risk, which includes
particular risks faced by the individual institution, such as event and default
risks. The provision defines a new category of capital, Tier 3, which includes
certain types of subordinated debt. The provision automatically applies only to
those institutions whose trading activity, on a worldwide consolidated basis,
equals either (i) 10% or more of total assets or (ii) $1 billion or more,
although the agencies may apply the provision's requirements to any institution
for which application to the new standard is deemed necessary or appropriate for
safe banking practices. For institutions for which the modifications apply, Tier
2 capital may not be included in the calculation rendering the 8% credit risk
ratio; the sum of Tier 2 and Tier 3 capital may not exceed 100% of Tier 1
capital; and Tier 3 capital is used in both the numerator and denominator in the
normal risk-based capital ratio calculation to account for the estimated maximum
amount that the value of all positions in the institution's trading account, as
well as all foreign exchange and commodity positions, could decline within
certain parameters set forth in a model defined by the statute. Furthermore,
beginning no later than January 1, 1999, covered institutions must "backtest,"
comparing the actual net trading profit or loss for each of its most recent 250
days against the corresponding measures generated by the statutory model. Once
per quarter, the institution must
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<PAGE> 55
identify the number of times the actual net trading loss exceeded the
corresponding measures generated by the statutory model. Once per quarter, the
institution must identify the number of times the actual net trading loss
exceeded the corresponding measure and must then apply a statutory
multiplication factor based on the number for the next quarter's capital charge
for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the FDICIA does not change any of the minimum capital requirements, it
directs each of the federal banking agencies to issue regulations putting the
monitoring plan into effect. The FDICIA creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
FDICIA and which will be used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., a holding company) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution drops to lower capital levels, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The FDICIA also provides that banks will have to meet certain safety and
soundness standards. In order to comply with the FDICIA, the Federal Reserve
Board, the OCC and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which the
FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
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<PAGE> 56
In response to the directive issued under the FDICIA, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established under the FDICIA.
The following table reflects the capital thresholds:
<TABLE>
<CAPTION>
TOTAL RISK-BASED TIER 1 RISK-BASED TIER 1
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
---------------- ----------------- --------------
<S> <C> <C> <C>
Well capitalized(1)......................... >= 10% >= 6% >= 5%
Adequately capitalized(1)................... >= 8% >= 4% >= 4%(2)
Undercapitalized(4)......................... <= 8% <= 4% <= 4%(3)
Significantly undercapitalized(4)........... < 6% < 3% < 3%
Critically undercapitalized................. -- -- < 2%
</TABLE>
-------------------------
(1) An institution must meet all three minimums.
(2) > 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) < 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(4) An institution falls into this category if it is below the specified capital
level for any of the three capital measures.
As a national bank, Franklin National Bank is subject to examination and
review by the OCC. This examination is typically completed on-site at least
every eighteen months and is subject to off-site review as well.
As a bank holding company, Franklin Financial is required to file with the
Federal Reserve Board quarterly reports of its operations and such additional
information as the Federal Reserve Board may require pursuant to the Act. The
Federal Reserve Board may also make examinations of Franklin Financial and each
of its subsidiaries.
The scope of regulation and permissible activities of Franklin Financial
and Franklin National Bank is subject to change by future federal and state
legislation.
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<PAGE> 57
MANAGEMENT
The executive officers and directors of Franklin Financial are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gordon E. Inman........ 61 Chairman of the Board
Richard E. Harrington.. 52 President and Chief Executive Officer and Director
J. Myers Jones, III.... 49 President of Franklin National Bank
Lisa L. Musgrove....... 37 Senior Vice President and Chief Financial Officer
George J. Regg, Jr..... 55 Senior Vice President, Secretary and General Counsel
Charles R. Lanier...... 43 Director; Executive Vice President of Franklin
National Bank
James W. Cross, IV..... 36 Director
D. Wilson Overton...... 50 Director
Edward M. Richey....... 48 Director
Edward P. Silva........ 57 Director
Melody J. Smiley....... 47 Director
</TABLE>
GORDON E. INMAN has served as Chairman of the Board of the Company since
December 1988 and of the Bank since May 1989. In addition, he was the owner of
Inman Realtors, a real estate brokerage firm, from 1979 to 1996. Mr. Inman is
also a Trustee of Belmont University in Nashville, Tennessee.
RICHARD E. HERRINGTON has served as President and Chief Executive Officer
of the Company since December 1988 and of the Bank from May 1989 to July 1992.
From 1985 to 1988, he served as President of Security Information Systems, Inc.,
a subsidiary of Security Federal Savings and Loan, Nashville, Tennessee. Mr.
Herrington has served as a director of the Company since 1988.
J. MYERS JONES, III has served as President and Chief Executive Officer of
the Bank since August 1992. From 1989 to 1992, he served as County Executive
Officer of NationsBank of Tennessee, N.A.
LISA L. MUSGROVE has served as Senior Vice President and Chief Financial
Officer of the Company since March 1999 and as Senior Vice President and
Controller of the Bank since July 1994. She served in various capacities with
Tennessee National Bank from 1989 to 1994, including Vice President, Controller
and Treasurer.
GEORGE J. REGG, JR. has served as Senior Vice President, Secretary and
General Counsel of the Company since November 1997. He served as President of
Goodman, Inman & Richey, Inc., a weight loss franchise operation, from 1994 to
1997, and as its Vice President and General Counsel from 1983 to 1994.
CHARLES R. LANIER has served as Executive Vice President of the Bank since
July 1989. He served in various capacities with Sovran Bank (formerly Williamson
County Bank) in Williamson County, Tennessee from 1978 to 1989, including
Assistant Vice President for Commercial Lending. Mr. Lanier has served as a
director of the Company since 1989.
JAMES W. CROSS, IV has been the owner and President of Century Construction
Company, Inc. since 1983. Mr. Cross has served as a director of the Company
since May 2000.
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<PAGE> 58
D. WILSON OVERTON is an independent Certified Public Accountant. From
September 1996 through 1999, Mr. Overton was a CPA with and a shareholder of
Williams, Crosslin, Sparks & Vanden, P.C. From 1992 to September 1996, he was a
shareholder in the regional accounting firm of Home CPA Group, a professional
association. Mr. Overton has served as a director of the Company since 1988.
EDWARD M. RICHEY was the owner and a director of Goodman, Inman & Richey,
Inc., a weight loss franchise operation from 1976 to 1997, and served as its
President from 1979 to 1986. In addition, he has served as President of Richey
Insurance Service, Inc. since 1976. Mr. Richey has served as a director of the
Company since 1988.
EDWARD P. SILVA is an attorney-at-law who has been a partner in the law
firm of Hartzog, Silva & Davies since 1974. He has served as a director of the
Company since 1988.
MELODY J. SMILEY is a Certified Public Accountant and has been the sole
owner of Melody J. Smiley, CPA, since 1986. Ms. Smiley has served as a director
of the Company since May 2000.
There are no family relationships between any director or executive officer
and any other director or executive officer of the Company.
BOARD OF DIRECTORS
Franklin Financial's Board of Directors is comprised of one class of
directors, elected annually. Each director serves for a term of one year and
until his or her successor is duly elected and qualified. The number of
directors is currently set at eight, and the Board of Directors has the power to
fix or change the number of directors by resolution and without any further
action of the stockholders in accordance with Franklin Financial's bylaws. Each
member of our Board of Directors is also a member of the Board of Directors of
Franklin National Bank.
Our Board of Directors has two standing committees -- the Audit Committee
and the Stock Option Committee. The Board of Directors does not have standing
nominating or compensation committees, such functions being reserved to the full
Board of Directors.
The Audit Committee presently consists of D. Wilson Overton, Edward M.
Richey and Melody J. Smiley. The Audit Committee has been assigned the principal
function of reviewing the internal and external financial reporting of the
Company, reviewing the scope of the independent audit and considering comments
by the auditors regarding internal controls and accounting procedures and
management's response to these comments.
The Stock Option Committee presently consists of D. Wilson Overton, Edward
M. Richey and Edward P. Silva. The Stock Option Committee has been assigned the
functions of administering our stock option plan and granting options
thereunder.
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<PAGE> 59
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 15, 2000 with
respect to ownership of the outstanding common stock of Franklin Financial by
(i) all persons known to us to own beneficially more than 5% of the outstanding
shares of the common stock of Franklin Financial, (ii) each director of Franklin
Financial, (iii) each executive officer who earned more than $100,000 in 1999,
and (iv) all executive officers and directors of Franklin Financial as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING SHARES
---------------- ----------------------- ------------------
<S> <C> <C>
Richard E. Herrington(2)........................... 1,311,778 4.1%
Gordon E. Inman(3)................................. 16,454,276 48.2
J. Myers Jones, III(4)............................. 734,596 2.3
George J. Regg, Jr.(5)............................. 244,422 *
Charles R. Lanier(6)............................... 343,705 1.1
James W. Cross, IV................................. 49,703 *
D. Wilson Overton.................................. 300,380 1.0
Edward M. Richey(7)................................ 4,355,152 14.0
Edward P. Silva.................................... 104,908 *
Melody J. Smiley................................... 44,636 *
All executive officers and directors as a group (11
persons)(8)...................................... 23,980,860 66.9%
</TABLE>
-------------------------
(1) Except as otherwise indicated, each person named in this table possesses
sole voting and investment power with respect to the shares beneficially
owned by such person. "Beneficial Ownership" includes shares for which an
individual, directly or indirectly, has or shares voting or investment power
or both and also includes warrants and options which are exercisable within
sixty days of the date hereof. Beneficial ownership as reported in the above
table has been determined in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934, as amended. The percentages are based upon 31,197,717
shares outstanding, except for certain parties who hold presently
exercisable warrants or options to purchase shares. The percentages for
those parties who hold presently exercisable warrants or options are based
upon the sum of 31,197,717 shares plus the number of shares subject to
presently exercisable warrants or options held by them, as indicated in the
following notes.
(2) Includes 981,136 shares subject to presently exercisable stock options. Also
includes 6,512 shares held by the individual retirement account of Mr.
Herrington's wife.
(3) Includes 2,924,000 shares subject to presently exercisable stock options.
Mr. Inman's business address is 230 Public Square, Franklin, Tennessee
37064.
(4) Includes 533,360 shares subject to presently exercisable stock options.
(5) Includes 5,200 shares subject to presently exercisable stock options.
(6) Includes 171,168 shares subject to presently exercisable stock options.
(7) Mr. Richey owns 3,857,872 shares individually and 497,280 shares are owned
by Richey Insurance Service, Inc., an entity owned by Mr. Richey. Mr.
Richey's address is P. O. Box 277, Franklin, Tennessee 37065.
(8) Includes 4,650,764 shares subject to presently exercisable options.
There are no arrangements known to us the operation of which may at a
subsequent date result in a change in control of Franklin Financial.
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<PAGE> 60
DESCRIPTION OF PREFERRED SECURITIES
The Trust will issue the preferred securities and the common securities
under the trust agreement for the Trust. The trust agreement will be qualified
as an indenture under the Trust Indenture Act. The property trustee will act as
indenture trustee for the preferred securities under the trust agreement. The
terms of the preferred securities will include those stated in the trust
agreement. The following summary of certain provisions of the preferred
securities and the trust agreement is not complete. You should read the trust
agreement, which is filed as an exhibit to the registration statement of which
this prospectus is a part. See "Where You Can Find More Information."
In addition, the terms of the preferred securities include those made a
part of the trust agreement by the Delaware Business Trust Act. Therefore, this
summary is qualified by reference to the Delaware Business Trust Act.
GENERAL
The preferred securities will be limited to an aggregate liquidation amount
of $16 million. See "Plan of Distribution."
The administrative trustees, on behalf of the Trust, will issue the common
and preferred securities. Franklin Financial will own all of the common
securities. The Trust will use the proceeds from selling the preferred and
common securities to purchase the subordinated debentures from us.
The preferred securities will represent preferred undivided beneficial
interests in the assets of the Trust. The preferred securities will generally
rank equally, and payments will be made pro rata with the common securities.
However, as a holder of the preferred securities, you will be entitled to a
preference in certain circumstances with respect to distributions (as described
below) and amounts payable on redemption or liquidation over the common
securities, as well as other benefits as described in the trust agreement. The
trust agreement does not permit the Trust to issue any securities other than the
common and preferred securities or permit the Trust to incur any indebtedness
for borrowed money.
The property trustee will hold legal title to the subordinated debentures
for the benefit of the holders of the preferred and common securities. The
guarantee will be a guarantee on a subordinated basis with respect to the
preferred securities, but will not guarantee payment of distributions or amounts
payable on redemption or liquidation of the preferred securities when the Trust
does not have funds on hand available to make such payments. See "Description of
the Guarantee."
The preferred securities, as well as the subordinated debentures, are
scheduled to mature on October 15, 2030.
If we do not make interest payments on the subordinated debentures, the
property trustee will not have funds available to pay distributions to you on
your preferred securities. We guarantee the payment of distributions to you only
if and to the extent the Trust has funds on hand available for the payment of
such distributions. See "Description of the Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. Distributions mean amounts payable in respect of
the common and preferred securities. You will receive distributions on each
preferred security at the annual rate of three-month LIBOR plus 3.50% of the
stated liquidation amount of $1,000 (the "liquidation amount"), payable
quarterly in arrears on January 15, April 15, July 15, and October 15 of each
year,
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<PAGE> 61
to record holders on the first day of the month of the relevant distribution
date. Each date on which distributions are payable is called a distribution
date.
Distributions will accumulate from the date your preferred securities are
originally issued. The first distribution date for the preferred securities will
be October 15, 2000. In the event that any date on which distributions are
payable on the preferred securities is not a business day, then payment of the
distributions payable on such date will be made on the next succeeding day that
is a business day (without any additional distributions, interest or other
payment because of the delay), with the same force and effect as if made on the
date such payment was originally due and payable. As used in this prospectus,
the term "business day" means any day other than a Saturday or Sunday, or a day
on which banking institutions in Nashville, Tennessee are authorized or required
by law, executive order or regulation to remain closed, or a day on which the
corporate trust office of the property trustee or the debenture trustee is
closed for business.
DETERMINATION OF THREE-MONTH LIBOR. The distribution rate for the period
beginning on (and including) the date of original issuance and ending on (but
excluding) October 15, 2000, and each succeeding distribution date and ending on
(but excluding) the next succeeding distribution date (each, a "distribution
period") in respect of the preferred securities will be a rate per annum
determined by reference to the sum of the three-month LIBOR, determined as of
the determination date as described below, plus 3.50%. "Determination date"
means the date that is two London Banking Days (i.e., a day in which dealings in
deposits in U.S. dollars are transacted in the London interbank market)
preceding the particular distribution period for which a distribution rate is
being determined. "Three-month LIBOR" means, with respect to a distribution
period relating to a distribution date, the London interbank offered rate for
three-month, Eurodollar deposits determined in the following order of priority:
(a) The rate (expressed as a percentage per annum) for Eurodollar
deposits having a three-month maturity that appears on Telerate Page 3750
as of 11:00 a.m. (London time) on the particular determination date
("Telerate Page 3750" means the display designated as "Page 3750" on the
Dow Jones Telerate Service (or such other page as may replace Page 3750 on
that service or such other service or services as may be nominated by the
British Bankers' Association as the information vendor for the purpose of
displaying London interbank offered rates for U.S. dollars deposits));
(b) If such rate does not appear on Telerate Page 3750 as of 11:00
a.m. (London time) on the determination date, three-month LIBOR will be the
arithmetic mean of the rates (expressed as percentages per annum) for
Eurodollar deposits having a three-month maturity that appear on Reuters
Monitor Money Rates Page LIBO ("Reuters Page LIBO") as of 11:00 a.m.
(London time) on the particular determination date;
(c) If such rate does not appear on Reuters Page LIBO as of 11:00 a.m.
(London time) on the related determination date, the debenture trustee will
request the principal London offices of four leading banks in the London
interbank market to provide such banks' offered quotations (expressed as
percentages per annum) to prime banks in the London interbank market for
Eurodollar deposits having a three-month maturity as of 11:00 a.m. (London
time) on such determination date. If at least two quotations are provided,
three-month LIBOR will be the arithmetic mean of such quotations;
(d) If fewer than two such quotations are provided as requested in
clause (c) above, the debenture trustee will request four major New York
City banks to provide such banks' offered quotations (expressed as
percentages per annum) to leading European banks for loans in Eurodollars
as of 11:00 a.m. (London time) on such determination date. If at least two
such
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<PAGE> 62
quotations are provided, three-month LIBOR will be the arithmetic mean of
such quotations; and
(e) If fewer than two such quotations are provided as requested in
clause (d) above, three-month LIBOR will be a three-month LIBOR determined
with respect to the Distribution Period immediately preceding such current
Distribution Period.
If the rate for Eurodollar deposits having a three-month maturity that
initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may
be, as of 11:00 a.m. (London time) on the related determination date is
superseded on the Telerate Page 3750 or Reuters Page LIBO, as the case may be,
by a corrected rate before 12:00 noon (London time) on such determination date,
then the corrected rate as so substituted on the applicable page will be the
applicable three-month LIBOR for such determination date.
The distribution rate for any distribution period will at no time be higher
than the maximum rate then permitted by Tennessee law as the same may be
modified by United States law.
All percentages resulting from any calculations on the preferred securities
will be rounded, if necessary, to the nearest one hundred-thousandth of a
percentage point, with five one-millionths of a percentage point rounded upward
(e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .09876455)), and
all dollar amounts used in or resulting from such calculations will be rounded
to the nearest cent (with one-half cent being rounded upward).
CALCULATION OF DISTRIBUTION AMOUNT. The property trustee will, on each
determination date, calculate the amount of distribution payable for the
following distribution period. Such distribution amount will be calculated by:
1. applying the distribution rate of three-month LIBOR plus 3.50% to
the liquidation amount of each preferred share outstanding at the beginning
of the distribution period;
2. multiplying each such amount by the actual number of days in the
distribution period (which actual number of days shall include the first
day but exclude the last day of such distribution period); and
3. dividing by 360, and rounding the resulting figure to the nearest
cent.
The determination of the distribution amount by the property trustee will (in
the absence of willful default, bad faith or manifest error) be final,
conclusive and binding on all concerned.
SOURCE OF DISTRIBUTIONS. The funds of the Trust available for distribution
to you will be limited to payments of principal and interest by us to the Trust
under the subordinated debentures. See "Description of Subordinated Debentures."
Distributions will be paid through the paying agent or co-paying agent appointed
pursuant to the trust agreement, which will initially be the property trustee.
The paying agent will hold amounts received under the subordinated debentures in
the payment account for your benefit. The payment account will be a segregated
non-interest bearing corporate trust account maintained by the property trustee
with its separate corporate bank in its trust department for your benefit. All
amounts paid on the subordinated debentures will be held in this account. The
property trustee will make payments from this account.
Distributions on the preferred securities will be paid to the holders of
record of the preferred securities on the fifteenth calendar day of the month in
which the relevant distribution dates occur. Subject to any applicable laws and
regulations and the provisions of the trust agreement, each payment will be made
as described above under "-- Distributions -- Payment of Distributions."
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EXTENDED INTEREST PAYMENT PERIOD. We have the right under the Indenture
(as defined below) relating to the subordinated debentures to defer payments of
interest on the subordinated debentures for one or more extension periods. This
is called an extended interest payment period. However, we may not defer
interest if an event of default (as defined below) has occurred and is
continuing. No extended interest payment period may continue for more than 20
consecutive quarters or extend beyond the maturity date of the subordinated
debentures. To the extent we defer interest payments on the subordinated
debentures, the Trust will defer distribution payments to you. Deferred
distributions to which you are entitled will accumulate additional distributions
at the distribution rate (to the extent permitted by applicable law).
"Distributions," as used herein, include any additional distributions. During
any extended interest payment period, we may not:
1. declare or pay any dividends on, or make any distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of our capital stock;
2. make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Franklin Financial that
rank equal with or junior to the subordinated debentures (other than
payments under the guarantee); or
3. redeem, purchase or acquire less than all of the subordinated
debentures or any of the preferred securities.
Prior to the termination of any extended interest payment period, we may further
defer the payment of interest. However, such extended interest payment period
may not exceed 20 consecutive quarters, or extend beyond the stated maturity of
the subordinated debentures. Upon the termination of any such extended interest
payment period and the payment of all deferred interest then due, we may elect
to begin a new extended interest payment period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that we may begin an extended interest payment period. We may also prepay
at any time all or any portion of the interest accrued during an extended
interest payment period.
We currently do not intend to exercise our right to defer payments of
interest by extending the interest payment period on the subordinated
debentures.
REDEMPTION OF PREFERRED SECURITIES
The Trust may redeem your preferred securities in whole or in part, upon
repayment of the subordinated debentures at maturity or their earlier
redemption. The Trust will redeem your preferred securities upon the same terms
on which the subordinated debentures are redeemed. We will have the right to
redeem the subordinated debentures:
1. on or after October 15, 2005, in whole or in part, at any time; and
2. at any time, in whole but not in part, within 180 days following
the occurrence of a Capital Event, an Investment Company Event or a Tax
Event (each as defined below).
The redemption price will be the aggregate principal amount of the subordinated
debentures, together with any accrued but unpaid interest to the date fixed for
redemption. A redemption or repayment at the stated maturity of the subordinated
debentures will cause a mandatory redemption of a like amount of the preferred
securities and common securities at the redemption price. If less than all of
the subordinated debentures are repaid or redeemed on a redemption date, then
the proceeds from such repayment or redemption will be allocated to the
redemption of the common and preferred securities pro rata. See "Description of
Subordinated Debentures -- Redemption or Exchange."
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"Like amount" means:
1. for a redemption of common and preferred securities, those
securities having a liquidation amount equal to that portion of the
principal amount of subordinated debentures redeemed in accordance with the
Indenture and the proceeds of which will be used to pay the redemption
price of the common and preferred securities; and
2. for a distribution of subordinated debentures to holders of common
and preferred securities in connection with a dissolution or liquidation of
the Trust, subordinated debentures having a principal amount equal to the
liquidation amount of the securities of the holder to whom such
subordinated debentures are distributed. Each subordinated debenture
distributed will carry with it accumulated interest in an amount equal to
the accumulated and unpaid interest then due on such subordinated
debenture.
"Redemption price" means, with respect to any trust security, the
liquidation amount of such trust security, plus accumulated and unpaid
distributions up to the redemption date as fixed by the trust agreement,
allocated on a pro rata basis (based on liquidation amounts) among the common
and preferred securities.
CAPITAL EVENT, INVESTMENT COMPANY EVENT OR TAX EVENT REDEMPTION. We have
the right to redeem the subordinated debentures in whole (but not in part) and
cause a mandatory redemption of the common and preferred securities in whole
(but not in part) at the redemption price within 180 days following the
occurrence of a Capital Event, Investment Company Event or Tax Event. In the
event a Capital Event, an Investment Company Event or a Tax Event occurs and we
do not redeem the subordinated debentures or liquidate the Trust as described
below under "-- Liquidation Distribution Upon Termination," your preferred
securities will remain outstanding and additional distributions may be payable
on the subordinated debentures.
"Capital event" means the receipt by the Trust of an opinion of counsel
experienced in such matters that we cannot, or within 90 days after the date of
the opinion of such counsel will not, be permitted to account for the preferred
securities as Tier 1 capital under the capital guidelines of the applicable
regulatory authorities, due to:
1. an amendment to or change in any law, regulation, policy, guideline
or interpretation, or
2. application of any law, regulation, policy, guideline or
interpretation, or
3. any administrative interpretation or judicial decision interpreting
or applying such law, regulation, policy, guideline or interpretation,
which amendment or change is effective or which interpretation or decision is
announced on or after issuance of the preferred securities under the trust
agreement.
"Investment company event" means the receipt by the Trust of an opinion of
counsel, experienced in such matters, that because of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority, the
Trust is or will be considered an "investment company" that is required to be
registered under the Investment Company Act of 1940, as amended, which change in
the law becomes effective on or after the date the preferred securities were
originally issued under the trust agreement.
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"Tax event" means the receipt by the Trust of an opinion of counsel,
rendered by a law firm experienced in such matters, that because of:
1. any amendment to or change in any law, regulation, policy,
guideline or interpretation; or
2. the application of any law, regulation, policy, guideline or
interpretation of the United States or any political subdivision or taxing
authority thereof or therein; or
3. any administrative interpretation or judicial decision interpreting
or applying such law, regulation, policy, guideline or interpretation;
which amendment or change is effective or which interpretation or decision is
announced on or after the date of issuance of the preferred securities under the
trust agreement, there is more than an insubstantial risk that:
1. the Trust is, or will be within 90 days after the date of such
opinion of counsel, subject to United States federal income tax on income
received or accrued on the subordinated debentures;
2. interest payable by Franklin Financial on the subordinated
debentures is not, or within 90 days after the date of such opinion of
counsel, will not be, deductible by Franklin Financial, in whole or in
part, for United States federal income tax purposes; or
3. the Trust is, or will be within 90 days after the date of such
opinion of counsel, subject to more than a de minimis amount of other
taxes, duties, assessments or other governmental charges.
The Trust or Franklin Financial will request and receive an opinion of counsel
with regard to such matters within a reasonable period of time after the Trust
or Franklin Financial becomes aware of the possible occurrence of any of the
events described in clauses (1) through (3) above.
REDEMPTION PROCEDURES
We will redeem your preferred securities at the redemption price with the
applicable proceeds from the redemption of the subordinated debentures. We will
redeem preferred securities and pay the redemption price only to the extent that
the Trust has funds on hand available for the payment of such redemption price.
See "-- Subordination of Common Securities."
If the Trust gives a notice of redemption of the preferred securities, then
the property trustee, to the extent funds are available, will, for preferred
securities held in book-entry form:
1. deposit with The Depository Trust Company ("DTC") funds sufficient
to pay the redemption price; and
2. give DTC irrevocable instructions and authority to pay the
redemption price to the holders of the preferred securities.
If the preferred securities do not remain in book-entry form (see
" -- Book-Entry Issuance -- The Depository Trust Company"), the property trustee
will:
1. deposit with the paying agent for the preferred securities funds
sufficient to pay the redemption price; and
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2. give the paying agent irrevocable instructions and authority to pay
the redemption price to the holders of preferred securities upon surrender
of their certificates evidencing the preferred securities.
Distributions payable on or prior to the redemption date for any preferred
securities called for redemption will be payable to you on the relevant record
dates for the related distribution dates. If notice of redemption is given and
funds are deposited as required, then upon the date of the deposit, all of your
rights with respect to your preferred securities called for redemption will
cease. However, you will have the right to receive the redemption price and any
distribution payable on or prior to the redemption date, excluding interest. The
preferred securities that are redeemed will cease to be outstanding.
If any date fixed for redemption of preferred securities is not a business
day, then payment of the redemption price payable on that date will be made on
the next succeeding day that is a business day (without any additional
distribution, interest or other payment for the delay) with the same force and
effect as if made on the date fixed for redemption. However, if such business
day falls in the next calendar year, the payment will be made on the immediately
preceding business day. In the event that payment of the redemption price for
the preferred securities called for redemption is improperly withheld or refused
and not paid either by the Trust, or by us pursuant to the guarantee,
distributions on the preferred securities will continue to accrue at the then
applicable rate, from the redemption date originally established by the Trust
for such preferred securities to the date such redemption price is actually
paid. In that case the actual payment date will be the date fixed for redemption
for purposes of calculating the redemption price. See "Description of the
Guarantee."
Subject to applicable law (including United States federal securities law)
and provided that we have not and are not continuing to exercise our right to
defer interest payments, we or our subsidiaries may at any time and from time to
time purchase outstanding preferred securities by tender offer or by private
agreement.
Payment of the redemption price on the preferred securities and any
distribution of subordinated debentures to holders of preferred securities will
be made to the applicable record holders thereof as they appear on the register
for the preferred securities on the redemption date.
If less than all of the common and preferred securities are to be redeemed
on a redemption date, then the aggregate liquidation amount of such common and
preferred securities to be redeemed will be allocated pro rata to the common
securities and preferred securities based upon the relative liquidation amounts
of the two classes. The particular preferred securities to be redeemed will be
selected by the property trustee from the outstanding preferred securities not
previously called for redemption, by such method as the property trustee deems
fair and appropriate and which may provide for the selection for redemption of
portions of the liquidation amount of preferred securities of a denomination
larger than $10,000. The property trustee will promptly notify the registrar for
the preferred securities in writing of the preferred securities selected for
redemption and, in the case of any preferred securities selected for partial
redemption, the liquidation amount to be redeemed. For all purposes of the trust
agreement, unless the context otherwise requires, all provisions relating to the
redemption of preferred securities will relate to the portion of the aggregate
liquidation amount of preferred securities which has been or is to be redeemed.
Notice of any redemption will be mailed to you between 30 and 60 days
before the redemption date. Unless we default in payment of the redemption price
on the subordinated debentures, on and after the redemption date interest will
no longer accrue on the subordinated debentures (and distributions will no
longer accrue on the related preferred securities) called for redemption.
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SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the redemption price of, the preferred
securities and common securities, will be made pro rata based on the liquidation
amount of the preferred securities and common securities. However, if on any
distribution date or redemption date a debenture event of default (as defined
below) has occurred and is continuing, no payment of any distribution on, or
redemption price of, any of the common securities, and no other payment on
account of the redemption, liquidation or other acquisition of the common
securities, will be made unless:
1. payment in full in cash of all accumulated and unpaid distributions
on all of the outstanding preferred securities for all distribution periods
terminating on or prior thereto, will have been made or provided for; or
2. in the case of payment of the redemption price, the full amount of
such redemption price on all of the outstanding preferred securities then
called for redemption, will have been made or provided for; and
3. all funds available to the property trustee will first be applied
to the payment in full in cash of all distributions on, or redemption price
of, the preferred securities then due and payable.
In the case of any event of default (as defined below) resulting from a
debenture event of default, we will be deemed to have waived any right to act
with respect to any such event of default under the trust agreement until the
effect of all such events of default concerning the preferred securities has
been cured, waived or otherwise eliminated. Until any events of default under
the trust agreement concerning the preferred securities have been so cured,
waived or otherwise eliminated, the property trustee will act solely on your
behalf and not on our behalf, as holder of the common securities, and only the
holders of the preferred securities will have the right to direct the property
trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
We will have the right at any time to dissolve, wind-up or terminate the
Trust and cause the subordinated debentures to be distributed to the holders of
the common and preferred securities.
The dissolution of the Trust by us may be subject to the prior approval of
the regulatory authorities if Franklin Financial, while a holder of common
securities, dissolves the Trust prior to the stated maturity of the subordinated
debentures and the dissolution of the Trust is deemed to constitute the
redemption of capital instruments by the Federal Reserve or other regulatory
authority under their risk-based capital guidelines or policies. Moreover, any
changes in applicable law or changes in the regulatory authorities' risk-based
capital guidelines or policies could impose a requirement on Franklin Financial
that it obtain the prior approval of the applicable regulatory authorities to
dissolve the Trust.
Pursuant to the trust agreement, the Trust will automatically terminate
upon expiration of its term and will terminate earlier on the first to occur of:
1. certain events of bankruptcy, dissolution or liquidation of
Franklin Financial;
2. the distribution of a like amount of the subordinated debentures to
the holders of its common and preferred securities, if Franklin Financial,
as depositor, has given written direction to the property trustee to
dissolve the Trust (which direction is optional and wholly within our
discretion);
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3. the entry of an order for the dissolution of the Trust by a court
of competent jurisdiction; or
4. redemption of all of the preferred securities as described under
"Description of Preferred Securities -- Redemption of Preferred
Securities."
Upon expiration or early termination as described in any of the
circumstances described in 1-3 above or upon the end of its term, the Trust will
be liquidated by the trustees as quickly as the trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of the
Trust, to you and us as the holders of such preferred and common securities a
like amount of the subordinated debentures.
However, if distribution is not practical, you and the other holders of
common and preferred securities will be entitled to receive out of the assets of
the Trust available for distribution to holders, after satisfaction of
liabilities to creditors of the Trust, an amount equal to the aggregate
liquidation amount plus accumulated and unpaid distributions to the date of
payment. If such liquidation distribution can be paid only in part because the
Trust has insufficient assets available to pay in full the aggregate liquidation
distribution, then the amounts payable directly by the Trust on the common and
preferred securities will be paid on a pro rata basis. However, if a debenture
event of default has occurred and is continuing, the preferred securities will
have a priority over the common securities. See "Subordination of Common
Securities."
After the liquidation date fixed for any distribution of subordinated
debentures for preferred securities:
1. such preferred securities will no longer be outstanding; and
2. any certificates representing preferred securities will represent
the subordinated debentures having a principal amount equal to the
liquidation amount of the preferred securities, and bearing accrued and
unpaid interest in an amount equal to the accrued and unpaid distributions
on the preferred securities, until the certificates are presented to the
administrative trustees or their agent for exchange.
DISTRIBUTION OF SUBORDINATED DEBENTURES. We will have the right at any
time to dissolve, wind-up or terminate the Trust and, after satisfaction of the
liabilities of creditors of the Trust, cause the subordinated debentures to be
distributed to the holders of common and preferred securities. See
"-- Liquidation Distribution Upon Termination."
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the subordinated debentures should not be a taxable event to
you. Should there be a change in law, a change in legal interpretation, a Tax
Event or other circumstances, however, the distribution could be a taxable event
to you. See "Material United States Federal Income Tax Consequences -- Receipt
of Subordinated Debentures or Cash Upon Liquidation of the Trust."
If we elect to liquidate the Trust and thereby cause the subordinated
debentures to be distributed to you in liquidation of the Trust, we will
continue to have the right to shorten or extend the maturity of such
subordinated debentures, subject to certain conditions. See "Description of
Subordinated Debentures -- General."
LIQUIDATION VALUE
The amount of the liquidation distribution payable to you on your preferred
securities in the event of any liquidation of the Trust is $1,000 per preferred
security plus accumulated and unpaid
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distributions thereon to the date of payment. The liquidation distribution
payable to you may be in the form of subordinated debentures, subject to certain
exceptions. See "-- Liquidation Distribution Upon Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
trust agreement with respect to the preferred securities:
1. the occurrence of a debenture event of default (see "Description of
Subordinated Debentures -- Debenture Events of Default");
2. default by the Trust in the payment of any distribution when it
becomes due and payable, and continuation of the default for a period of 30
days;
3. default by the Trust in the payment of any redemption price of any
common or preferred security when it becomes due and payable;
4. default in the performance, or breach, in any material respect, of
any covenant or warranty of the trustees in the trust agreement (other than
a covenant or warranty, a default in the performance of which or the breach
of which is dealt with in either the second or third clause above), and
continuation of such default or breach for a period of 60 days after there
has been given, by registered or certified mail, to the defaulting
trustee(s) by the holders of at least 25% in aggregate liquidation amount
of the outstanding preferred securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the trust agreement; or
5. the occurrence of certain events of bankruptcy or insolvency with
respect to the property trustee and our failure to appoint a successor
property trustee within 60 days.
Within five business days after receipt by the property trustee of notice
of the occurrence of any event of default, the property trustee will transmit
notice of such event of default to you as a holder of preferred securities, the
administrative trustees and us, as depositor, unless such event of default has
been cured or waived. Franklin Financial and the administrative trustees are
required to file annually with the property trustee a certificate stating
whether or not we are in compliance with all the conditions and covenants
applicable to us under the trust agreement.
If a debenture event of default has occurred and is continuing, the
preferred securities will have a preference over the common securities upon
termination of the Trust. See "-- Liquidation Distribution Upon Termination."
The existence of a debenture event of default entitles the holders of preferred
securities to accelerate the maturity of the preferred securities if at least
25% in liquidation amount of the outstanding preferred securities provide
written notice to the depositor and the debenture trustee and the debenture
trustee or the holders of the subordinated debentures have failed to take any
action. Also, upon a debenture event of default, you will have the right to
directly institute proceedings for enforcement of payment of principal or
interest on the subordinated debentures having a principal amount equal to the
liquidation amount of the preferred securities held by you.
REMOVAL OF THE TRUSTEES
Unless a debenture event of default has occurred and is continuing, we may
remove any trustee at any time. If a debenture event of default has occurred and
is continuing, the property trustee and the Delaware trustee may be removed at
such time by the holders of a majority in liquidation amount
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of the outstanding preferred securities. In no event, however, will you have the
right to vote to appoint, remove or replace the administrative trustees. No
resignation or removal of a trustee and no appointment of a successor trustee
will be effective until the acceptance of appointment by the successor trustee
in accordance with the provisions of the trust agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an event of default has occurred and is continuing, Franklin
Financial has the right to appoint one or more entities either to act as a
co-trustee or to act as separate trustee. Franklin Financial may appoint these
additional trustees in order to meet the requirements of applicable law. Our
appointment of any additional trustees will be subject to provisions of the
trust agreement. More specifically, upon the written request of the property
trustee, Franklin Financial must join with the property trustee to execute the
necessary instruments to appoint a co-trustee. If Franklin Financial does not
join in such an appointment within 15 days after being requested to do so, or in
case a debenture event of default has occurred and is continuing, the property
trustee alone will have the power to make such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any entity into which the property trustee, the Delaware trustee or any
administrative trustee that is not a natural person may be merged or converted
or with which it may be consolidated or any entity resulting from any merger,
conversion or consolidation to which such trustee is a party, or any entity
succeeding to all or substantially all the corporate trust business of such
trustee, will be the successor of such trustee under the trust agreement,
provided such entity is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity, except as
described below. The Trust may, at our request, with the consent of the
administrative trustees and without your consent or the consent of the property
trustee or the Delaware trustee, merge with or into, consolidate, amalgamate, or
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to a trust organized as such under the laws of any
state, so long as:
1. such successor entity either:
(a) expressly assumes all of the obligations of the Trust with
respect to the preferred securities, or
(b) substitutes for the preferred securities other securities
having substantially the same terms as the preferred securities so long
as such successor securities rank the same as the preferred securities
in priority with respect to distributions and payments upon liquidation,
redemption and otherwise;
2. Franklin Financial expressly appoints a trustee of such successor
entity possessing the same powers and duties as the property trustee in its
capacity as the holder of the subordinated debentures;
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3. the successor securities are listed or traded, or any successor
securities shall be listed or traded upon notification of issuance, on any
national securities exchange or other organization on which the preferred
securities are then listed, if any;
4. such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the preferred securities (including any
successor securities) in any material respect;
5. prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from counsel to
the effect that:
(a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the preferred securities
(including any successor securities) in any material respect, and
(b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such
successor entity will be required to register as an "investment company"
under the Investment Company Act; and
6. we own all of the common securities of such successor entity and
guarantee the obligations of such successor entity under the successor
securities at least to the extent provided by the original guarantee.
The Trust will not:
1. consolidate, amalgamate, merge with or into, or be replaced by any
other entity, or
2. convey, transfer or lease its properties and assets substantially
as an entirety to any other entity, or
3. permit any other entity to consolidate, amalgamate, merge with or
into, or replace it,
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause the Trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "-- Removal of the Trustees" and
"Description of the Guarantee -- Amendments and Assignment" and as otherwise
required by the Delaware Business Trust Act and the trust agreement, you will
have no voting rights.
The trust agreement may be amended from time to time by Franklin Financial,
the property trustee, the Delaware trustee and the administrative trustees,
without your consent:
1. with respect to acceptance of appointment by a successor Trustee;
2. to cure any ambiguity, correct or supplement any provisions in the
trust agreement that may be inconsistent with any other provision, or to
make any other provisions with respect to matters or questions arising
under the trust agreement (provided such amendment is not inconsistent with
the other provisions of the trust agreement and that such amendment does
not adversely affect in any material respect the interests of any holder of
common and preferred securities); or
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3. to modify, eliminate or add to any provisions of the trust
agreement to such extent as is necessary to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust
at all times that any common and preferred securities are outstanding or to
ensure that the Trust will not be required to register as an "investment
company" under the Investment Company Act.
Any such amendments of the trust agreement will become effective when notice is
given to the holders of common and preferred securities.
The trust agreement may be amended by the Trustees and Franklin Financial
with:
1. the consent of holders representing not less than a majority in
aggregate liquidation amount of the outstanding common and preferred
securities; and
2. receipt by the Trustees of an opinion of counsel to the effect that
such amendment or the exercise of any power granted to the Trustees in
accordance with such amendment will not affect the Trust's status as a
grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment
Company Act.
The approval of holders of at least 66 2/3% in liquidation amount of the
preferred securities is required to:
1. adopt any action that would adversely affect in any material
respect the powers or preferences of the preferred securities; or
2. dissolve the Trust, other than pursuant to the terms of the trust
agreement.
Without the consent of each affected holder of common and preferred
securities, the trust agreement may not be amended to:
1. change the amount or timing of any distribution on the common and
preferred securities or otherwise adversely affect the amount of any
distribution required to be made in respect of the common and preferred
securities as of a specified date; or
2. restrict the right of a holder of common or preferred securities to
institute suit for the enforcement of any such payment on or after such
date.
The trustees may not, so long as any subordinated debentures are held by
the property trustee:
1. direct the time, method and place of conducting any proceeding for
any remedy available to the debenture trustee, or executing any trust or
power conferred on the property trustee with respect to the subordinated
debentures;
2. waive any past default that is waivable under the indenture;
3. exercise any right to rescind or annul a declaration that the
principal of all the subordinated debentures will be due and payable; or
4. consent to any amendment, modification or termination of the
indenture or the subordinated debentures, where such consent is required
without, in each case, obtaining the prior approval of the holders of a majority
in aggregate liquidation amount of all outstanding preferred securities except
in the case where a consent under the indenture requires the consent of each
holder of subordinated debentures affected by the indenture, in which case no
such consent will be given by the property trustee without the prior consent of
each holder of the preferred securities.
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The trustees may not revoke any action previously authorized or approved by
a vote of the holders of the preferred securities except by subsequent vote of
the holders of the preferred securities. The property trustee will notify you of
any notice of default with respect to the subordinated debentures. In addition
to obtaining the foregoing approvals of the holders of the preferred securities,
prior to taking any of the foregoing actions, the trustees must obtain an
opinion of counsel experienced in such matters to the effect that the Trust will
continue to be classified as a grantor trust and will not be classified as an
association taxable as a corporation for United States federal income tax
purposes because of such action.
Any approval required by you may be given at a meeting of holders of
preferred securities convened for such purpose or pursuant to written consent.
The property trustee will send you notice, as described in the trust agreement,
of any meeting at which you are entitled to vote, or of any matter on which
action by written consent of holders of the preferred securities is to be taken.
Your vote will not be required for the Trust to redeem and cancel your
preferred securities in accordance with the trust agreement.
Notwithstanding the fact that you are entitled to vote or consent under any
of the circumstances described above, any of the preferred securities that are
owned by Franklin Financial, the trustees or any affiliate of Franklin Financial
or any trustee, will, for purposes of such vote or consent, be treated as if
they were not outstanding.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the preferred securities. The
Trust will issue one or more fully registered global preferred securities
certificates in the name of Cede & Co. (DTC's nominee). These certificates will
represent the total aggregate number of preferred securities. The Trust will
deposit these securities with DTC or a custodian appointed by DTC. The Trust
will not issue certificates to represent the preferred securities, unless DTC's
services are discontinued. For a description of DTC and the specific terms of
the depositary arrangements, see "Book-Entry Issuance."
CERTIFICATED SECURITIES
If the preferred securities do not remain in book-entry only form as
described above, the following provisions will apply:
1. The property trustee will act as paying agent and may designate an
additional or substitute paying agent at any time.
2. Registration of transfers of preferred securities will be effected
without charge by or on behalf of the Trust, but the registration will
require payment, without the giving of such indemnity as the Trust or
Franklin Financial may require, for any tax or other governmental charges
that may be imposed.
3. The Trust will not be required to register or cause to be
registered the transfer of preferred securities after they have been called
for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, other than upon the occurrence and during the
continuance of an event of default, will perform only those duties specifically
set forth in the trust agreement and, after such
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event of default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs.
MISCELLANEOUS
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the:
1. Trust will not be deemed to be an "investment company" required to
be registered under the Investment Company Act;
2. Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes; and
3. subordinated debentures will be treated as indebtedness of Franklin
Financial for United States federal income tax purposes.
Franklin Financial and the administrative trustees are authorized to take any
action, consistent with applicable law, the certificate of trust of the Trust or
the trust agreement, that Franklin Financial and the administrative trustees
determine in our discretion to be necessary or desirable for such purposes.
You have no preemptive or similar rights. The trust agreement and the
preferred securities will be governed by, and construed in accordance with, the
internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
The subordinated debentures will be issued under the indenture between
Franklin Financial and SunTrust Bank, the debenture trustee (the "Indenture").
The Indenture will be qualified as an indenture under the Trust Indenture Act.
The Trust will invest the proceeds from the issuance of the preferred
securities and the common securities in the subordinated debentures issued by
Franklin Financial. The subordinated debentures are subordinated, unsecured debt
under the Indenture.
The following summary of the material terms and provisions of the
subordinated debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to the Indenture. You
should also read the Indenture for the complete terms of the subordinated
debentures. The Indenture has been filed as an exhibit to the Registration
Statement, of which this prospectus forms a part.
GENERAL
The subordinated debentures will be limited in aggregate principal amount
to the sum of the liquidation amount of the preferred securities and the amount
of capital that Franklin Financial contributed to the Trust in exchange for the
common securities. We anticipate that, until the liquidation, if any, of the
Trust, the subordinated debentures will be held in the name of the property
trustee in trust for the benefit of the holders of the trust securities.
The subordinated debentures will mature on October 15, 2030.
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INTEREST
The subordinated debentures will bear interest at a floating rate equal to
the distribution rate (that is, the three-month LIBOR, determined as of the
determination date, plus 3.50%), adjusted quarterly. Interest is payable
quarterly in arrears on January 15, April 15, July 15, and October 15, in each
year, beginning October 15, 2000.
The interest payment provisions for the subordinated debentures correspond
to the distribution provisions for the preferred securities. See "Description of
Preferred Securities -- Distributions."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no event of default has occurred and is continuing, Franklin
Financial may defer the payment of interest at any time, or from time to time,
during the term of the subordinated debentures, for a period, in each instance,
not exceeding 20 consecutive quarters. This is called an "extended interest
payment period." No extended interest payment period may extend beyond the
maturity of the subordinated debentures. At the end of each extended interest
payment period, Franklin Financial must pay all interest then accrued and unpaid
(together with interest on that amount, compounded quarterly).
During an extended interest payment period, interest will continue to
accrue and holders of subordinated debentures (or the holders of preferred
securities if such securities are then outstanding) will be required to accrue
and recognize income for United States federal income tax purposes. See
"Material United States Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
During any extended interest payment period, Franklin Financial may not:
1. declare or pay any dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment with respect to, any of
Franklin Financial's capital stock,
2. make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of Franklin Financial that
rank equal with or junior in interest to the subordinated debentures (other
than payments under the guarantee as described below),
3. redeem, purchase or acquire less than all of the subordinated
debentures or any of the preferred securities.
Prior to the termination of any such extended interest payment period,
Franklin Financial may further defer the payment of interest. However, no
extended interest payment period may exceed 20 consecutive quarters or extend
beyond the maturity of the subordinated debentures. Upon the termination of any
such extended interest payment period and the payment of all amounts then due,
Franklin Financial may elect to begin a new extended interest payment period.
No interest will be due and payable during an extended interest payment
period, except at the end of the period. However, Franklin Financial may prepay
at any time all or any portion of the interest accrued during an extended
interest payment period.
If the property trustee is then the only registered holder of subordinated
debentures, Franklin Financial must give the property trustee, the
administrative trustees and the debenture trustee notice of its election of such
extended interest payment period not less than one business day prior to the
next succeeding date on which distributions on the trust securities would have
been payable except for the election to begin such extended interest payment
period. If the property trustee is not the only registered holder of
subordinated debentures, Franklin Financial must give the debenture trustee and
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the holders of subordinated debentures notice of its election of such extended
interest payment period at least one business day before the next interest
payment date.
Subject to the requirements described above, there is no limitation on the
number of times that Franklin Financial may elect to begin an extended interest
payment period. Franklin Financial has no current intention of exercising its
rights to defer payments of interest on the subordinated debentures.
ADDITIONAL INTEREST
If the Trust or the property trustee is required to pay any additional
taxes, duties, assessments or other governmental charges (other than withholding
taxes) imposed by any other taxing authority, Franklin Financial will pay as
additional interest such additional amounts required so that the distributions
paid by the Trust will not be reduced as a result of such charges.
SUBORDINATION
The subordinated debentures will rank junior and be subordinate in right of
payment to all Franklin Financial's Senior Debt, Subordinated Debt and
Additional Senior Obligations (each as defined below). The Indenture places no
limitation on the amount of additional Senior Debt, Subordinated Debt or
Additional Senior Obligations that may be incurred by Franklin Financial. We
expect from time to time to incur indebtedness constituting Senior Debt,
Subordinated Debt and Additional Senior Obligations.
In the event of the acceleration of the maturity of any subordinated
debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of Franklin Financial outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration) before the holders of
the subordinated debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the subordinated debentures.
Franklin Financial may not make payment of principal, including redemption
payments, or interest on the subordinated debentures if there has occurred and
is continuing a default in any payment with respect to Senior Debt, Subordinated
Debt or Additional Senior Obligations of Franklin Financial or an event of
default with respect to any Senior Debt, Subordinated Debt or Additional Senior
Obligations of Franklin Financial resulting in the acceleration of the maturity
of such debt.
Because Franklin Financial is a holding company, the subordinated
debentures are effectively subordinated to all existing and future liabilities
of its subsidiaries, including obligations to depositors of Franklin National
Bank. The right of Franklin Financial to participate in any distribution of
assets of any subsidiary, including Franklin National Bank, upon any such
subsidiary's liquidation or reorganization (and thus the ability of holders of
the subordinated debentures to benefit indirectly from such distribution), is
subject to the prior claim of creditors of such subsidiary, except to the extent
that Franklin Financial may itself be recognized as a creditor of such
subsidiary. Holders of subordinated debentures should look only to the assets of
Franklin Financial for payments on the subordinated debentures. Franklin
Financial and its subsidiaries had total liabilities (excluding liabilities owed
by the subsidiaries to Franklin Financial) of approximately $438 million at
March 31, 2000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Since Franklin Financial is a holding company, almost all of its operating
assets are owned by its subsidiaries. Franklin Financial relies primarily on
dividends from such subsidiaries to meet its
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obligations for payment of principal and interest on its outstanding debt
obligations, if any, and corporate expenses.
The Indenture does not contain provisions that afford holders of the
subordinated debentures protection in the event of a highly leveraged
transaction or other similar transaction involving Franklin Financial that may
adversely affect such holders.
SELECTED DEFINITIONS
"Debt" means, with respect to any person, whether recourse as to all or a
portion of the assets of such person and whether or not contingent:
1. every obligation of such person for money borrowed,
2. every obligation of such person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses,
3. every reimbursement obligation of such person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such person,
4. every obligation of such person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business),
5. every capital lease obligation of such person, and
6. every obligation of the type referred to in 1-5 above of another
person and all dividends of another person the payment of which, in either
case, such person has guaranteed or is responsible for or liable, directly
or indirectly, as obligor or otherwise.
"Senior Debt" means the principal amount, premium (if any) and interest (if
any) (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Franklin Financial whether or not
such claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on, prior to or after the date of the Indenture, unless, in the
instrument creating or evidencing the Debt, it is provided that such obligations
are not superior in right of payment to the subordinated debentures or to other
Debt which ranks equal with, or subordinated to, the subordinated debentures.
However, Senior Debt will not include:
1. any Debt of Franklin Financial which when incurred (and without
respect to any election under Section 1111(b) of the United States
Bankruptcy Code of 1978, as amended), was without recourse to the Company,
2. any Debt of Franklin Financial to any of its subsidiaries,
3. any Debt to any employee of Franklin Financial,
4. any Debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of business
to the extent that payments made to the holders of such Debt by the holders
of the subordinated debentures as a result of the subordination provisions
of the Indenture would be greater than they otherwise would have been as a
result of any obligation of such holders to pay amounts over to the
obligees on such trade accounts payable or accrued liabilities arising in
the ordinary course of business a result of subordination provisions to
which such Debt is subject, and
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5. any Subordinated Debt.
"Subordinated Debt" means the principal amount, premium (if any) and
interest (if any) (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Franklin Financial
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on, prior to, or after the date of the
Indenture, which is by its terms expressly provided to be junior and subordinate
to other Debt of Franklin Financial (other than the subordinated debentures).
"Additional Senior Obligations" means all indebtedness, whether incurred
on, prior to, or after the date of the Indenture, for claims in respect of
derivative products such as interest and foreign exchange rate contracts,
commodity contracts and similar arrangements. However, Additional Senior
Obligations do not include claims in respect of Senior Debt or Subordinated Debt
or obligations which, by their terms, are expressly stated to be not superior in
right of payment to the subordinated debentures or to ranks equal with the
subordinated debentures. For purposes of this definition, "claim" has the
meaning assigned thereto in Section 101(5) of the United States Bankruptcy Code
of 1978, as amended.
REDEMPTION OR EXCHANGE
Franklin Financial has the right to redeem the subordinated debentures
prior to maturity, upon approval of the applicable regulatory authorities (if
such approval is required):
1. on or after October 15, 2005 in whole or in part, at any time and
2. at any time, in whole (but not in part) within 180 days after the
occurrence of a Capital Event, an Investment Company Event or a Tax Event.
In either case, the redemption price will be equal to 100% of the aggregate
principal amount of the subordinated debentures, together with any accrued but
unpaid interest to the date fixed for redemption. See "Description of
Subordinated Debentures -- Redemption or Exchange" and "Risk
Factors -- Preferred Securities Risk Factors." The Company may redeem the
subordinated debentures (1) at any time on or after October 15, 2005; and (2)
within 180 days following the occurrence of a Capital Event, Investment Company
Event or Tax Event."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of subordinated debentures to
be redeemed at its registered address. On and after the redemption date interest
ceases to accrue on such subordinated debentures or portions thereof called for
redemption, unless Franklin Financial defaults in payment of the redemption
price for the subordinated debentures.
The subordinated debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of Preferred Securities -- Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of the Trust, the subordinated debentures may be distributed to the
holders of the preferred securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law.
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RESTRICTION ON CERTAIN PAYMENTS
During any debenture event of default or any extended interest payment
period, Franklin Financial will not:
1. declare or pay any dividends on, make any distributions with
respect to, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of Franklin Financial's capital stock
2. make any payment of principal, interest or premium, if any, on or
repay or repurchase or redeem any debt securities of Franklin Financial
that rank equal with or junior in interest to the subordinated debentures
(other than payments under the Guarantee), or
3. redeem, purchase or acquire less than all of the subordinated
debentures or any of the preferred securities.
BOOK-ENTRY AND SETTLEMENT; DEPOSITARY
If we distribute the subordinated debentures to holders of preferred
securities in connection with the involuntary or voluntary dissolution,
winding-up or liquidation of the Trust, they will be issued in the form of one
or more global certificates registered in the name of a depositary or its
nominee. Except under the limited circumstances described immediately below
under "-- Discontinuance of the Depositary's Services," subordinated debentures
represented by a global security will not be exchangeable for, and will not
otherwise be issuable as, certificated securities.
If subordinated debentures are distributed to holders of preferred
securities upon termination of the Trust, DTC will act as securities depositary
for the subordinated debentures. For a description of DTC and the specific terms
of the depositary arrangements, see "Book-Entry Issuance."
As of the date of this prospectus, the description of DTC's book-entry
system and DTC's practices as they relate to purchases of, transfers of, notices
concerning and payments on the preferred securities apply in all material
respects to any debt obligations represented by one or more global securities
held by DTC.
Franklin Financial may appoint a successor to DTC or any successor
depositary if the current depositary is unable or unwilling to continue as a
depositary for the global securities.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A global security will be exchangeable for subordinated debentures
registered in the names of persons other than the depositary or its nominee only
if:
1. the depositary notifies Franklin Financial that it is unwilling or
unable to continue as a depositary for the global security and no successor
depositary has been appointed;
2. the depositary ceases to be a clearing agency registered under the
Securities Exchange Act of 1934 at a time the depositary is required to be
so registered to act as depositary, and no successor depositary has been
appointed;
3. Franklin Financial, in its sole discretion, determines that the
global security shall be exchangeable for definitive certificates; or
4. there shall have occurred a debenture event of default.
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Any global security that is exchangeable as described above will be
exchangeable for subordinated debentures registered in the names the depositary
directs. Franklin Financial expects that the instructions will be based upon
directions received by the depositary from its participants with respect to
ownership of beneficial interests in the global security.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the subordinated debentures
will be made initially at the office of the debenture trustee in Nashville,
Tennessee. At our option, payment of any interest may be made:
1. by check mailed to the address of the person entitled thereto as
such address appears in the register of holders of the subordinated
debentures, or
2. by wire transfer to an account maintained by the person entitled
thereto as specified in the register of holders of the subordinated
debentures, provided that proper transfer instructions have been received
by the regular record date.
However, Franklin Financial may not exercise these options if the
subordinated debentures are represented by a global subordinated debenture.
Payment of any interest on subordinated debentures will be made to the person in
whose name such subordinated debenture is registered at the close of business on
the regular record date for such interest, except in the case of defaulted
interest. Franklin Financial may at any time designate additional paying agents
for the subordinated debentures or rescind the designation of any paying agent
for the subordinated debentures. However, Franklin Financial will at all times
be required to maintain a paying agent, and each place of payment for the
subordinated debentures.
So long as the holder of any subordinated debentures is the property
trustee, the payment of the principal of and interest (including compounded
interest and Additional Interest, if any) on such subordinated debentures held
by the property trustee may be made at such place and to such account as may be
designated by the property trustee.
Any moneys deposited with the debenture trustee or any paying agent for the
subordinated debentures, or then held by Franklin Financial in trust, for the
payment of the principal of or interest on the subordinated debentures and
remaining unclaimed for two years after such principal or interest has become
due and payable will be repaid to Franklin Financial or (if then held in trust
by Franklin Financial) will be discharged from such trust and the holder of such
subordinated debenture will thereafter look, as a general unsecured creditor,
only to Franklin Financial for payment.
TRANSFER, REGISTRAR AND TRANSFER AGENT
The debenture trustee initially will act as the registrar and the transfer
agent for the subordinated debentures. Subordinated debentures may be presented
for registration or transfer at the office of the registrar. The form of
transfer must be endorsed, or a satisfactory executed written instrument of
transfer must be presented. So long as we maintain a transfer agent, we may at
any time rescind the designation of a particular transfer agent or approve a
change in the location through which any such transfer agent acts. Franklin
Financial may at any time designate additional transfer agents with respect to
the subordinated debentures.
In the event of any redemption, Franklin Financial will not be required to:
1. issue, register the transfer of or exchange subordinated debentures
during a period beginning at the opening of business 15 days before the day
of selection for redemption of
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subordinated debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption, or
2. register the transfer of or exchange any subordinated debentures or
portions of subordinated debentures so selected for redemption.
MODIFICATION OF INDENTURE
Franklin Financial and the debenture trustee may, from time to time without
the consent of the holders of the subordinated debentures, amend, waive or
supplement the Indenture for certain specified purposes. These purposes include:
1. curing ambiguities, defects or inconsistencies and
2. making any other change that does not materially adversely affect
the rights of any holder of subordinated debentures.
The Indenture contains provisions permitting Franklin Financial and the
debenture trustee, with the consent of the holders of not less than a majority
in principal amount of the outstanding subordinated debentures, to modify the
Indenture. However, no such modification may, without the consent of the holder
of each outstanding subordinated debenture affected by such proposed
modification:
1. extend the fixed maturity of the subordinated debentures,
2. reduce the principal amount of the subordinated debentures,
3. reduce the rate or extend the time of payment of interest of the
subordinated debentures, or
4. reduce the percentage of principal amount of subordinated
debentures.
However, so long as any of the preferred securities remain outstanding, no
such modification may be made that requires the consent of the holders of the
subordinated debentures, and no termination of the Indenture may occur, and no
waiver of any debenture event of default may be effective, without the prior
consent of the holders of at least a majority, and in certain cases all, of the
preferred securities.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the subordinated debentures that has occurred and is
continuing constitutes an event of default (each, a "debenture event of
default") with respect to the subordinated debentures:
1. failure for 30 days to pay any interest on the subordinated
debentures when due (not including the deferral of any due date in the case
of an extended interest payment period);
2. failure to pay any principal on the subordinated debentures when
due whether at maturity, upon redemption, by declaration or otherwise;
3. failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
Franklin Financial from the debenture trustee or the holders of at least
25% in aggregate outstanding principal amount of the subordinated
debentures; or
4. certain events in bankruptcy, insolvency or reorganization of
Franklin Financial.
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As described in "Description of Preferred Securities -- Events of Default;
Notice," the occurrence of a debenture event of default will also constitute an
event of default in respect of the preferred securities.
The holders of a majority in aggregate outstanding principal amount of the
subordinated debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the debenture trustee. The
debenture trustee, or the holders of not less than 25% in aggregate outstanding
principal amount of the subordinated debentures, may declare the principal due
and payable immediately upon a debenture event of default.
However, the holders of a majority in aggregate outstanding principal
amount of the subordinated debentures may annul such declaration and waive the
default if the default (other than the non-payment of the principal of the
subordinated debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
debenture trustee. Should the holders of the subordinated debentures fail to
annul such declaration and waive such default, the holders of a majority in
aggregate liquidation amount of the preferred securities will have such right.
In case a debenture event of default occurs, the property trustee may
declare the principal of and the interest on such subordinated debentures, and
any other amounts payable under the Indenture, to be due and payable and enforce
its other rights as a creditor with respect to the subordinated debentures.
The debenture trustee may withhold notice of a debenture event of default
from the holders of the subordinated debentures if the debenture trustee
considers it in the interest of such holders to do so. However, the debenture
trustee may not withhold notice with respect to a debenture event of default in
payment of principal of, or of interest on, the subordinated debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a debenture event of default for failure to pay interest or principal on
the subordinated debentures has occurred and is continuing, a holder of
preferred securities may institute a legal action directly against Franklin
Financial (a "Direct Action") for enforcement of payment to such holder of the
principal of or interest on such subordinated debentures having a principal
amount equal to the aggregate liquidation amount of the preferred securities of
such holder. In connection with such Direct Action, Franklin Financial will have
a right of set-off under the Indenture to the extent of any payment made by
Franklin Financial to such holder of preferred securities in the Direct Action.
Franklin Financial may not amend the Trust Agreement to remove this right to
bring a Direct Action without the prior written consent of the holders of all of
the preferred securities.
The holders of the preferred securities will not be able to exercise
directly any remedies, other than in the circumstances as those remedies listed
above, available to the holders of the subordinated debentures. See "Description
of Preferred Securities -- Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
Franklin Financial may not consolidate with or merge into any other person
or convey or transfer its properties and assets substantially as an entirety to
any person. No person may consolidate with or merge into Franklin Financial or
sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to Franklin Financial.
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However, these restrictions do not apply if:
1. Franklin Financial consolidates with or merges into another person
or conveys or transfers its properties and assets substantially as an
entirety to any person,
2. the successor person is organized under the laws of the United
States or any state or the District of Columbia,
3. such successor person expressly assumes by supplemental indenture
Franklin Financial's obligations on the subordinated debentures issued
under the Indenture, and
4. immediately after giving effect to the merger or sale of assets, no
debenture event of default, and no event which, after notice or lapse of
time, or both, would become a debenture event of default, has occurred and
is continuing.
SATISFACTION AND DISCHARGE
When certain conditions are met, including all subordinated debentures not
previously delivered to the debenture trustee for cancellation have (1) become
due and payable, (2) will become due and payable at their maturity within one
year or (3) are to be called for redemption, and Franklin Financial deposits
with the debenture trustee funds, in trust, for the purpose and in an amount
sufficient to pay and discharge the entire indebtedness on the subordinated
debentures, then the Indenture will cease to be of further effect. However,
Franklin Financial will remain obligated to pay certain sums due pursuant to the
Indenture and to provide certain officers' certificates and opinions of counsel.
Under these conditions, Franklin Financial will have satisfied and discharged
the Indenture.
GOVERNING LAW
The Indenture and the subordinated debentures will be governed by and
construed in accordance with the laws of the State of Tennessee.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The debenture trustee is under no obligation to exercise any of the powers
vested in it by the Indenture at the request of any holder of subordinated
debentures, unless offered reasonable indemnity by such holder against the
costs, expenses and liabilities which might be incurred thereby. The debenture
trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the debenture
trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
SunTrust Bank, the debenture trustee, may serve from time to time as
trustee under other indentures or trust agreements with Franklin Financial or
its subsidiaries relating to other issues of their securities. In addition,
Franklin Financial and certain of its affiliates may have other banking
relationships with SunTrust Bank and its affiliates.
COVENANTS OF FRANKLIN FINANCIAL
Franklin Financial has agreed, pursuant to the Indenture, for so long as
trust securities remain outstanding:
1. to maintain directly or indirectly 100% ownership of the common
securities of the Trust (provided that certain successors which are
permitted pursuant to the Indenture may succeed to Franklin Financial's
ownership of the common securities),
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2. to use reasonable efforts to cause the Trust to remain a business
trust, except in connection with (A) a distribution of subordinated
debentures to the holders of the preferred securities in liquidation of the
Trust, (B) the redemption of all the trust securities, or (C) certain
mergers, consolidations or amalgamations permitted by the Trust Agreement,
3. to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Trust to remain classified
as a grantor trust and not as an association taxable as a corporation for
United States federal income tax purposes, and
4. to use reasonable efforts to cause each holder of trust securities
to be treated as owning a beneficial interest in the subordinated
debentures.
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for all of the preferred securities
and, if there is a dissolution of the Trust, the subordinated debentures. The
preferred securities and the subordinated debentures will be issued only as
fully-registered securities registered in the name of Cede & Co. (the DTC's
nominee). One or more fully-registered global certificates will be issued for
the preferred securities and the subordinated debentures and will be deposited
with DTC or its custodian.
DTC may discontinue providing its services as securities depositary with
respect to any of the preferred securities or the subordinated debentures at any
time by giving reasonable notice to the relevant trustee and Franklin Financial.
In the event that a successor securities depositary is not obtained, definitive
preferred securities or subordinated debenture certificates representing such
preferred securities or subordinated debentures are required to be printed and
delivered. At Franklin Financial's option, it may decide to discontinue use of
the system of book-entry transfers through DTC (or a successor depositary).
After a Debenture Event of Default, the holders of a majority in liquidation
amount of preferred securities or aggregate principal amount of subordinated
debentures may determine to discontinue the system of book-entry transfers
through DTC. In any such event, definitive certificates for such preferred
securities or subordinated debentures will be printed and delivered.
DTC has provided the Trust and Franklin Financial with the following
information: DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations ("Direct Participants").
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to DTC system is also available
to others, such as securities brokers and dealers, banks and trust companies,
that clear transactions through or maintain a direct or indirect custodial
relationship with a Direct Participant ("Indirect Participants"). The rules
applicable to DTC and its participants are on file with the SEC.
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When a purchase of preferred securities is made within the DTC system, it
must be made by or through a Direct Participant. The Direct Participant will
receive a credit for the preferred securities on DTC's records. The actual owner
of the preferred securities is the "beneficial owner." Beneficial ownership
interests will be recorded on the Direct and Indirect Participants' records, but
DTC will have no knowledge of any underlying beneficial ownership. DTC's records
reflect only the identity of the Direct Participants to whose accounts preferred
securities are credited.
DTC will not provide written confirmation of purchases. The Direct or
Indirect Participant through whom purchases of the preferred securities are made
should send written confirmations to purchasers providing details of their
transactions, as well as periodic statements of their holdings. The participants
are responsible for keeping accurate account of the holdings of their customers.
Transfers of ownership interests in the preferred securities will be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
impair the ability to transfer beneficial interests in the global certificate
representing the preferred securities.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to beneficial owners will be governed by
arrangements among them, and any statutory or regulatory requirements that may
be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the
preferred securities are being redeemed, DTC will reduce each Direct
Participant's holdings of preferred securities in accordance with its
procedures.
In those cases where a vote by the holders of the preferred securities is
required, neither DTC nor Cede & Co. will itself consent or vote. Under its
usual procedures, DTC would mail an omnibus proxy to the Trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
preferred securities are credited on the record date, which are identified in a
listing attached to the omnibus proxy.
The Trust will make distribution payments on the preferred securities
directly to DTC. DTC's practice is to credit Direct Participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records, unless DTC has reason to believe that it will not receive payment
on such payment date.
Payments by participants (whether Direct Participants or Indirect
Participants) to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name." These payments will be
the responsibility of the participant and not of DTC, the Trust or Franklin
Financial.
Except as previously provided in "Description of the Subordinated
Debentures -- Discontinuance of the Depositary's Services," a beneficial owner
in a global preferred securities certificate will not be entitled to receive
physical delivery of preferred securities. Accordingly, each beneficial owner
must rely on the procedures of DTC to exercise any rights under the preferred
securities.
DTC may discontinue providing its services as securities depositary with
respect to the preferred securities at any time by giving reasonable notice to
the Trust. In the event that a successor securities depositary is not obtained,
the Trust will print and deliver preferred securities certificates.
Additionally, the administrative trustees, with our consent, may decide to
discontinue the book-entry
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only system of transfers with respect to the preferred securities. In that
event, the Trust will print and deliver certificates for the preferred
securities to its holders.
Franklin Financial and the Trust have obtained the information in this
section concerning DTC and DTC's book-entry system from sources that Franklin
Financial and the Trust believe to be reliable, but neither take responsibility
for the accuracy of the information.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry participants for informational purposes only and is not
intended to serve as representation, warranty or contract modification of any
kind.
DESCRIPTION OF THE GUARANTEE
Franklin Financial will execute and deliver the Guarantee Agreement (the
"Guarantee") at the time the preferred securities are issued for the benefit of
the holders of the preferred securities. The Guarantee will be qualified as an
indenture under the Trust Indenture Act.
The guarantee trustee will act as indenture trustee under the Guarantee.
The guarantee trustee, SunTrust Bank, will hold the Guarantee for the benefit of
the holders of the preferred securities.
The following summary of the material terms and provisions of the Guarantee
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all of the provisions of the Guarantee. The form of Guarantee
has been filed as an exhibit to the Registration Statement, of which this
prospectus forms a part. You should also read the Guarantee.
GENERAL
The Guarantee requires Franklin Financial to irrevocably and
unconditionally agree to pay in full on a subordinated basis, to the extent set
forth in the Guarantee, Guarantee Payments (as defined below) to the holders of
the preferred securities. The Guarantee Payments shall be payable as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert other than the defense of payment.
The "Guarantee Payments" are defined as the following payments with respect
to the preferred securities, to the extent not paid by or on behalf of the
Trust:
1. any accrued and unpaid distributions required to be paid on the
preferred securities, to the extent that the Trust has funds available
therefor at such time,
2. the redemption price with respect to any preferred securities
called for redemption to the extent that the Trust has funds available
therefor at such time, and
3. upon a voluntary or involuntary dissolution, winding up or
termination of the Trust (other than in connection with the distribution of
subordinated debentures to the holders of preferred securities or a
redemption of all of the preferred securities), the lesser of
(a) the amount of the liquidation distribution, to the extent the
Trust has funds available at such time, and
(b) the amount of assets of the Trust remaining available for
distribution to holders of preferred securities in liquidation of the
Trust.
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The obligation of Franklin Financial to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by Franklin Financial to the
holders of the preferred securities or by causing the Trust to pay such amounts
to such holders.
Franklin Financial and the Trust believe that the obligations of Franklin
Financial under the Guarantee, the Trust Agreement, the subordinated debentures,
the Expense Agreement (as described below) and the Indenture, taken together,
fully, irrevocably and unconditionally guarantee all of the Trust's obligations
under the preferred securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the preferred securities. See "Relationship Among the
Preferred Securities, the Subordinated Debentures and the Guarantee."
The Guarantee will not apply to any payment of distributions except to the
extent the Trust has funds available. If Franklin Financial does not make
interest payments on the subordinated debentures held by the Trust, the Trust
will not have funds legally available to pay distributions on the preferred
securities.
STATUS OF GUARANTEE
The Guarantee is unsecured and will rank:
1. subordinate and junior in right of payment to all other liabilities
of Franklin Financial,
2. equal with the most senior preferred securities or preference stock
now or hereafter issued by Franklin Financial and with any guarantee now or
hereafter entered into by Franklin Financial in respect of any preferred
securities or preference stock of any "Affiliate", as defined in Rule 405
of the Securities Act or any successor rule, of Franklin Financial, and
3. senior to Franklin Financial's common stock.
The Guarantee does not place a limit on the amount of additional Senior
Debt, Subordinated Debt or Additional Senior Obligations that we may incur. We
expect from time to time to incur additional indebtedness constituting Senior
Debt, Subordinated Debt and Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection.
The holder of preferred securities may institute a legal proceeding directly
against Franklin Financial to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, Guarantee Trustee or any
other Person. The Guarantee will not be discharged except by full payment of the
redemption price of all preferred securities upon full payment of the amounts
payable in accordance with the Trust Agreement upon liquidation of the Trust or
upon distribution of the subordinated debentures to the holders of the preferred
securities.
Because Franklin Financial is a holding company, the right of Franklin
Financial to participate in any distribution of assets of any subsidiary,
including the Bank, upon such subsidiaries' liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary, except
to the extent Franklin Financial may itself be recognized as a creditor of that
subsidiary. Franklin Financial's obligations under the Guarantee, therefor, will
be effectively subordinated to all existing and future liabilities of Franklin
Financial's subsidiaries, and you should look only to the assets of Franklin
Financial for payments under the Guarantee.
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AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the preferred securities (in which case no consent of
holders will be required), the Guarantee may only be amended with the prior
approval of the holders of not less than a majority of the aggregate liquidation
amount of the outstanding preferred securities. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee will bind the successors, assigns,
receivers, trustees and representatives of Franklin Financial and are for the
benefit of the holders of the preferred securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
Franklin Financial to perform any of its payment or other obligations under the
Guarantee. The holders of a majority in aggregate liquidation amount of the
preferred securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee
under the Guarantee. Such holders also have the right to direct the exercise of
any trust or power conferred upon the guarantee trustee under the Guarantee.
Any registered holder of preferred securities may institute a legal
proceeding directly against Franklin Financial to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Trust, the
guarantee trustee or any other person.
Franklin Financial, as guarantor, is required to file annually with the
guarantee trustee a certificate as to whether or not Franklin Financial is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The guarantee trustee, before the occurrence of any event of default and
after the curing of all events of default that may have occurred, undertakes to
perform only such duties as are specifically set forth in the Guarantee. After
default with respect to the Guarantee, the guarantee trustee will exercise its
rights and powers under the Guarantee using the same degree of care and skill as
a prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to such provisions, the guarantee trustee is
under no obligation to exercise any of the powers vested in it by the Guarantee
at the request of any holder of any preferred securities, unless it is offered
such security and indemnity, reasonably satisfactory to the guarantee trustee,
against the costs, expenses and liabilities that it might incur.
For information concerning the relationship between SunTrust Bank, the
guarantee trustee, and Franklin Financial, see "Description of Subordinated
Debentures -- Information Concerning the Debenture Trustee."
TERMINATION OF THE GUARANTEE
The Guarantee will remain in effect as long as the preferred securities are
outstanding.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Tennessee.
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EXPENSES AND LIABILITIES AGREEMENT
Franklin Financial will enter into an agreement with the Trust as to the
expenses and liabilities of the Trust (the "Expense Agreement"). Franklin
Financial will irrevocably and unconditionally guarantee to each person or
entity to whom the Trust is now or hereafter becomes indebted or liable, the
full payment when and as due of any and all costs, expenses or liabilities of
the Trust other than obligations of the Trust to pay to the holders of the
preferred securities or other similar interests in the Trust. Third-party
creditors of the Trust may proceed directly against Franklin Financial under the
Expense Agreement, regardless of whether such creditors had notice of the
Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE SUBORDINATED
DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of distributions and other amounts due on the preferred securities
(to the extent the Trust has funds available for the payment of such
distributions) are irrevocably guaranteed by Franklin Financial as and to the
extent set forth under "Description of the Guarantee." Franklin Financial and
the Trust believe that, taken together, the obligations of Franklin Financial
under the subordinated debentures, the Indenture, the Trust Agreement, the
Expense Agreement, and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of payment of
distributions and other amounts due on the preferred securities. No single
document standing alone or operating in conjunction with fewer than all of the
other documents constitutes such a guarantee. It is only the combined operation
of these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the obligations of the Trust under the preferred
securities.
If and to the extent that Franklin Financial does not make payments on the
subordinated debentures, the Trust will not pay distributions or other amounts
due on the preferred securities. The Guarantee does not cover payment of
distributions when the Trust does not have sufficient funds to pay such
distributions. In such event, the remedy of a holder of preferred securities
would be to institute a legal proceeding directly against Franklin Financial for
enforcement of payment of such distributions to such holder. The obligations of
Franklin Financial under the Guarantee are subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations
of Franklin Financial.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
subordinated debentures, such payments will be sufficient to cover distributions
and other payments due on the preferred securities, primarily because:
1. the aggregate principal amount of the subordinated debentures will
be equal to the sum of the aggregate stated liquidation amount of the trust
securities,
2. the interest rate and interest and other payment dates on the
subordinated debentures will match the distribution rate and distribution
date and other payment dates for the preferred securities,
3. Franklin Financial will pay for all and any costs, expenses and
liabilities of the Trust except the obligations of the Trust to holders of
the preferred securities, and
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4. the Trust Agreement further provides that the Trust will not engage
in any activity that is not consistent with the limited purposes of the
Trust.
Franklin Financial Corporation has the right to set off any payment it is
otherwise required to make under the Indenture with and to the extent Franklin
Financial has made, or is concurrently making on the date of such payment, a
payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any preferred security may institute a legal proceeding
directly against Franklin Financial to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person.
A default or event of default under any Senior Debt, Subordinated Debt or
Additional Senior Obligations of Franklin Financial would not constitute a
default or event of default under the Indenture, the Trust Agreement or the
Guarantee. In the event, however, of payment defaults under, or acceleration of,
Senior Debt, Subordinated Debt or Additional Senior Obligations of Franklin
Financial, the subordination provisions of the Indenture provide that no
payments may be made in respect of the subordinated debentures until such Senior
Debt, Subordinated Debt or Additional Senior Obligations have been paid in full
or any payment default has been cured or waived. Failure to make required
payments on the subordinated debentures will constitute an event of default.
LIMITED PURPOSE OF THE TRUST
The preferred securities evidence preferred undivided beneficial interests
in the assets of the Trust. The Trust exists for the sole purpose of issuing the
trust securities and investing the proceeds of such issuance in subordinated
debentures. A principal difference between the rights of a holder of a preferred
security and the rights of a holder of a subordinated debenture is that a holder
of a subordinated debenture is entitled to receive from Franklin Financial the
principal amount of and interest accrued on subordinated debentures held, while
a holder of preferred securities is entitled to receive distributions from the
Trust (or from Franklin Financial under the Guarantee) if and to the extent the
Trust has funds available for the payment of such distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the subordinated debentures, the holders
of the preferred securities will be entitled to receive, out of assets held by
the Trust after satisfaction of liabilities to creditors as required by
applicable law, the liquidation distribution in cash. See "Description of
Preferred Securities -- Liquidation Distribution Upon Termination."
Upon any voluntary or involuntary liquidation or bankruptcy of Franklin
Financial, the property trustee, as holder of the subordinated debentures, would
be a subordinated creditor of Franklin Financial, subordinated in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations
of Franklin Financial, but entitled to receive payment in full of principal and
interest before any shareholders of Franklin Financial receive payments or
distributions. Since Franklin Financial is the guarantor under the Guarantee and
has agreed to pay for all costs, expenses and liabilities of the Trust (other
than the obligations of the Trust to the holders of its preferred securities),
the positions of a holder of the preferred securities and a holder of the
subordinated debentures relative to other creditors and to shareholders of
Franklin Financial in the event of liquidation or bankruptcy of Franklin
Financial are expected to be substantially the same.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of the preferred
securities. Unless otherwise stated, this summary deals only with preferred
securities held as capital assets by United States holders who purchase the
preferred securities upon original issuance. As used herein, a "United States
holder" means (i) a citizen or a resident of the United States, (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate,
if United States federal income taxation is applicable to the income of such
estate regardless of its source, or (iv) a trust if a United States court is
able to exercise primary supervision over the trust's administration and one or
more United States persons have the authority to control all of the trust's
substantial decisions.
This summary does not apply to special classes of holders such as banks,
thrifts, real estate investment trusts, regulated investment companies, common
trust funds, insurance companies, dealers in securities or currencies,
tax-exempt investors, persons that have a functional currency other than the
United States Dollar or persons that will hold the preferred securities as a
position in a "straddle," as part of a "synthetic security" or "hedge," as part
of a "conversion transaction" or other integrated investment, or as other than a
capital asset. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the preferred securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), final and temporary Treasury regulations promulgated thereunder and
published administrative and reported judicial interpretations thereof, as of
the date hereof, all of which could change, possibly with retroactive effect.
Legislation has been introduced in the United States Congress in the past that,
if enacted, would have denied an interest deduction to issuers of instruments,
such as the subordinated debentures, that were issued after the date such
legislation was proposed. Franklin Financial cannot assure you that similar
legislation will not ultimately be enacted into law, possibly with retroactive
effect. Loss of the interest deduction would permit Franklin Financial to cause
a mandatory redemption of the subordinated debentures and therefore cause a
redemption of the preferred securities. Alternatively, Franklin Financial could,
in its discretion, dissolve the Trust and cause the subordinated debentures to
be distributed to the holders of the preferred securities. The authorities on
which this summary is based are subject to various interpretations, and it is
therefore possible that the federal income tax treatment of the ownership and
disposition of the preferred securities may differ from the treatment described
below.
EACH PROSPECTIVE PURCHASER OF PREFERRED SECURITIES SHOULD CONSULT, AND
SHOULD RELY EXCLUSIVELY ON, SUCH PURCHASER'S OWN TAX ADVISORS IN ANALYZING THE
FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES, AND THE TAX CONSEQUENCES UNDER ANY
FOREIGN JURISDICTION, OF PURCHASING, OWNING OR DISPOSING OF PREFERRED SECURITIES
AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
Franklin Financial intends to take the position that the subordinated
debentures held by the Trust will be classified for all United States federal
income tax purposes as indebtedness of Franklin
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Financial under current law, and, by acceptance of a preferred security, each
holder covenants to treat the subordinated debentures as indebtedness for all
United States federal income tax purposes and the preferred securities as
evidence of an indirect beneficial ownership interest in the subordinated
debentures.
Franklin Financial is aware of several actions by the Internal Revenue
Service ("IRS") concerning obligations that are similar to the subordinated
debentures. In 1994, the IRS issued Notice 94-47. In this Notice, the IRS stated
that it was concerned with a series of transactions in which instruments had
been issued that were "designed to be treated as debt for federal income tax
purposes but as equity for regulatory, rating agency, or financial accounting
purposes." The Notice further stated that "[u]pon examination, the Service will
scrutinize instruments of this type to determine if their purported status as
debt for federal income tax purposes is appropriate."
In 1998, in a case involving Enron Corporation now pending before the
United States Tax Court, the IRS initially sought to disallow the deduction for
interest expense on obligations that are similar to, although different in a
number of respects from, the subordinated debentures. Those obligations were
issued in 1993 and 1994 to partnerships which, in turn, issued "monthly income
preferred securities" to investors. In a stipulation filed in the United States
Tax Court, the IRS has conceded that Enron was entitled to deduct its interest
expense on the obligations. However, Franklin Financial can not assure you that
the IRS will not challenge the interest deductions of other taxpayers (such as
Franklin Financial Corporation) that engage in similar arrangements.
The IRS also issued a Technical Advice Memorandum (TAM 199910046) that
addresses whether obligations that are similar to, although different in a
number of respects from, the subordinated debentures constituted debt or equity
for federal income tax purposes. The IRS concluded that the instruments
constituted debt. A Technical Advice Memorandum is not binding on the IRS, but
it does provide some indication of the views of the IRS National Office on the
issues addressed in the Technical Advice Memorandum.
A successful IRS challenge to the classification of the subordinated
debentures as debt would prevent Franklin Financial from deducting the interest
paid or accrued on the subordinated debentures for United States federal income
tax purposes and would be a Tax Event which would permit Franklin Financial to
cause a mandatory redemption of the subordinated debentures (which shall cause a
redemption of the preferred securities) before the stated maturity at the
Redemption Price. The remainder of this discussion assumes that the subordinated
debentures will be classified for United States federal income tax purposes as
indebtedness of Franklin Financial.
CLASSIFICATION OF THE TRUST
With respect to the preferred securities, Smith, Gambrell, Russell, LLP has
issued its opinion that, under then current law, based on the representations,
facts and assumptions provided in this prospectus and assuming full compliance
with the terms of the trust agreement, Indenture and other relevant documents,
and based on certain assumptions and qualifications referred to in the opinion,
the Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States federal income tax purposes, each holder of preferred
securities generally should be treated as owning an undivided beneficial
interest in the subordinated debentures, and each holder should be required to
include in its gross income each item of income or gain with respect to its
allocable share of the subordinated debentures.
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INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Franklin Financial's option to extend the interest payment period on the
subordinated debentures may cause indebtedness to be issued with original issue
discount ("OID"). Under applicable Treasury regulations (the "Regulations"), a
contingency that stated interest will not be timely paid that is "remote" will
be ignored in determining whether such debt instrument is issued with OID. As a
result of the terms and conditions of the subordinated debentures that prohibit
certain payments with respect to Franklin Financial's capital stock and
indebtedness if Franklin Financial elects to extend interest payments periods,
Franklin Financial believes that the likelihood of its exercising its option to
defer payments is remote within the meaning of the Regulations. Based on the
foregoing, Franklin Financial intends to take the position that, although the
matter is not free from doubt, the subordinated debentures will not be
considered to be issued with OID at the time of their original issuance, and
accordingly, a holder of preferred securities should include in gross income
such holder's allocable share of interest on the subordinated debentures in
accordance with its own method of tax accounting.
No published rulings or other interpretations have been issued by the IRS
which have addressed the meaning of the term "remote" as used in the
Regulations, and it is possible that the IRS could take a position contrary to
the interpretation described herein. If the possibility of Franklin Financial
exercising its option to defer payments of interest is not remote, the
subordinated debentures would be treated as initially issued with OID in an
amount equal to the aggregate stated interest (plus any de minimis OID) over the
term of the subordinated debentures. A holder of preferred securities would
include that OID in such holder's taxable income, over the term of the
subordinated debentures, on an economic accrual basis.
If Franklin Financial exercises its option to defer payments of interest,
the subordinated debentures would be treated as redeemed and reissued for OID
purposes. The sum of the remaining interest payments (and any de minimis OID) on
the subordinated debentures would thereafter be treated as OID. The OID would
accrue, and be includible in the holder's taxable income, on an economic accrual
basis (regardless of such holder's method of accounting for income tax purposes)
over the remaining term of the subordinated debentures (including any period of
interest deferral), without regard to the timing of payments under the
subordinated debentures. Subsequent distributions of interest on the
subordinated debentures generally would not be taxable. The amount of OID that
would accrue in any period would generally equal the amount of interest that
accrued on the subordinated debentures in that period at the stated interest
rate. Consequently, during any period of interest deferral, a holder of
preferred securities will be required to include OID in gross income in advance
of the receipt of cash, and if the holder disposes of a Preferred Security prior
to the record date for payment of distributions on the subordinated debentures
following that period, such holder will be subject to income tax on OID accrued
through the date of disposition (and not previously included in income), but
will not receive cash from the Trust with respect to the OID.
Because income on the preferred securities will constitute interest or OID,
corporate holders of preferred securities will not be entitled to a
dividends-received deduction relating to any income recognized relating to the
preferred securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described under "Description of Preferred
Securities -- Redemption of Preferred Securities" and "-- Liquidation
Distribution Upon Termination," the subordinated debentures may be distributed
to holders of preferred securities upon a liquidation of the Trust. Under
current United States federal income tax law, such a distribution would be
treated as a nontaxable event to each such holder and would result in such
holder having an aggregate tax basis in
91
<PAGE> 94
the subordinated debentures received in the liquidation equal to such holder's
aggregate tax basis in the preferred securities immediately before the
liquidation. A holder's holding period in the subordinated debentures so
received in liquidation of the Trust would include the period for which such
holder held the preferred securities.
If, however, a Tax Event were to occur because the Trust is subject to
United States federal income tax with respect to income accrued or received on
the subordinated debentures, the distribution of the subordinated debentures to
holders would likely constitute a taxable event to the Trust and to holders of
the preferred securities. A holder would recognize gain or loss as if the holder
had exchanged its preferred securities for the subordinated debentures it
received upon liquidation of the Trust. Moreover, a holder's holding period in
the subordinated debentures would begin on the date such subordinated debentures
were received.
Under certain circumstances described herein, the subordinated debentures
may be redeemed for cash and the proceeds of such redemption distributed to
holders in redemption of their preferred securities. It is Franklin Financial's
belief that under current law, such a redemption would, for United State federal
income tax purposes, constitute a taxable disposition of the redeemed preferred
securities, and a holder would recognize gain or loss as if the holder sold such
preferred securities for cash. See "Description of Preferred
Securities -- Redemption of Preferred Securities" and "Description of Preferred
Securities -- Liquidation Distribution Upon Termination."
DISPOSITION OF PREFERRED SECURITIES
Upon a sale, exchange or other disposition of the preferred securities
(including a distribution of cash in redemption of a holder's preferred
securities upon redemption or repayment of the underlying subordinated
debentures, but excluding the distribution of subordinated debentures), a holder
will recognize gain or loss equal to the difference between the amount realized
on the sale of such preferred securities and the holder's adjusted tax basis in
the preferred securities. The amount realized will equal the cash received, less
the amount of accrued and unpaid interest with respect to the holder's pro rata
share of the subordinated debentures. The holder will be required to include
such accrued and unpaid interest in the holder's ordinary income. Assuming that
Franklin Financial does not exercise its option to defer payment of interest on
the subordinated debentures, a holder's adjusted tax basis in the preferred
securities generally will be the holder's initial purchase price. If the
subordinated debentures are deemed to be issued with OID as a result of Franklin
Financial's deferral of any interest payment or otherwise, a holder's tax basis
in the preferred securities generally will be the holder's initial purchase
price, increased by OID previously includible in the holder's gross income to
the date of disposition and decreased by Distributions or other payments
received on the preferred securities since and including the date of the first
Extension Period. Such gain or loss generally will be a capital gain or loss and
generally will be a long-term capital gain or loss if the preferred securities
have been held for more than one year.
Should Franklin Financial exercise its option to defer payment of interest
on the subordinated debentures, the preferred securities may trade at a price
that does not accurately reflect the value of accrued but unpaid interest with
respect to the underlying subordinated debentures. In the event of such a
deferral, a holder that disposes of its preferred securities between record
dates for payments of distributions thereon will be required to include in
income as ordinary income accrued but unpaid interest on the subordinated
debentures through the date of disposition, and to add such amount to its
adjusted tax basis in the preferred securities disposed of. To the extent the
selling price is less than the holder's adjusted tax basis (which basis will
include, in the form of OID, all accrued but unpaid interest), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes.
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<PAGE> 95
NON-U.S. HOLDERS
Payments to a Non-U.S. Holder (a holder of preferred securities that is not
a United States holder as defined above) will generally not be subject to United
States federal withholding tax, provided the holder:
- does not own (directly or indirectly, actually or constructively) 10% or
more of the total combined voting power of all classes of stock of
Franklin Financial entitled to vote; and
- is not a controlled foreign corporation that is related to Franklin
Financial actually or constructively through stock ownership.
To qualify for this exemption from withholding, the last United States
payer in the chain of payment prior to payment to a Non-U.S. Holder (the
"Withholding Agent") must have received a statement that:
- is signed by the holder of the preferred securities under penalties of
perjury;
- certifies that such holder is not a United States Holder; and
- provides the name and address of the holder.
The statement may be made on an appropriate IRS Form W-8, W-8BEN or a
substantially similar form. If the preferred securities are held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a signed statement to the Withholding
Agent along with a copy of the form provided by the holder.
A Non-U.S. Holder will generally not be subject to United States federal
withholding or income tax on any gain realized upon the sale or other
disposition of the preferred securities. However, if a Non-U.S. Holder holds the
preferred securities in connection with a trade or business conducted in the
United States, or is present in the United States in certain circumstances, the
holder may be subject to income tax on income and gains recognized. Non-U.S.
Holders who may be described in the prior sentence should refer to the
discussion applicable to U.S. Holders, above, and should consult their own tax
advisors.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, income on the preferred securities will be reported to holders
on Forms 1099, which forms should be mailed to holders of preferred securities
by January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the preferred securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the holder's United States federal income
tax liability provided the required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF PREFERRED SECURITIES. HOLDERS OF PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER FEDERAL, STATE, LOCAL, FOREIGN,
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS.
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<PAGE> 96
ERISA CONSIDERATIONS
Each fiduciary of a pension, profitsharing or other employee benefit plan
(a "Plan") subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the preferred securities. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (collectively with the Plans, "Benefit Plan Investors"), from engaging in
certain transactions involving "plan assets" with persons who are "parties in
interest" under ERISA or "disqualified persons" under the Code ("Parties in
Interest") with respect to such Plan. A violation of these "prohibited
transaction" rules may result in an excise tax or other liabilities under ERISA
and/or Section 4975 of the Code for such persons, unless exemptive relief is
available under an applicable statutory or administrative exemption. Employee
benefit plans that are governmental plans (as defined in Section 3(32) of
ERISA), certain church plans (as defined in Section 3(33) of ERISA) and foreign
plans (as described in Section 4(b)(4) of ERISA) are not subject to the
requirements of ERISA or Section 4975 of the Code.
Under the "Plan Assets Regulation" issued by the U.S. Department of Labor
(the "DOL"), the assets of the Trust (i.e., the subordinated debentures) will be
deemed to be assets of a Plan that acquires preferred securities for purposes of
ERISA and Section 4975 of the Code. However, pursuant to an exception contained
in the Plan Assets Regulation, the assets of the Trust would not be deemed to be
assets of Plans investing in preferred securities if, immediately after the most
recent acquisition of preferred securities, less than 25% of the value of the
preferred securities were held by Benefit Plan Investors. No assurance can be
given that the value of the preferred securities held by Benefit Plan Investors
will be less than 25% of the total value of such preferred securities at the
completion of the initial offering or thereafter, and no monitoring or other
measures will be taken with respect to the satisfaction of the conditions to
this exception.
If an exception to the Plan Asset Regulation does not apply, certain
transactions involving the Trust could be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code with
respect to a Plan. For example, if Franklin Financial is a Party in Interest
with respect to an investing Plan (either directly or by reason of its ownership
of the Trust or of any of Franklin Financial's other subsidiaries), extensions
of credit between Franklin Financial and the Trust (as represented by the
subordinated debentures and the guarantee) would likely be prohibited by Section
406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive
relief were available under an applicable administrative exemption (see below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief for direct or indirect prohibited transactions
resulting from the purchase or holding of the preferred securities, assuming
that assets of the Trust were deemed to be "plan assets" of Plans investing in
the Trust (see above). Those class exemptions are PTCE 96-23 (for certain
transactions determined by in-house asset managers), PTCE 95-60 (for certain
transactions involving insurance company general accounts), PTCE 91-38 (for
certain transactions involving bank collective investment funds), PTCE 90-1 (for
certain transactions involving insurance company pooled separate accounts) and
PTCE 84-14 (for certain transactions determined by independent qualified
professional asset managers).
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<PAGE> 97
Because the preferred securities may be deemed to be equity interests in
the Trust for purposes of applying ERISA and Section 4975 of the Code, the
preferred securities may not be purchased or held by any Plan for which Franklin
Financial or its affiliate is a "Party in Interest," unless such purchaser or
holder is eligible for the exemptive relief available under PTCE 96-23, 95-60,
91-38, 90-1 or 84-14. Any purchaser or holder of the preferred securities or any
interest therein will be deemed to have represented by its purchase and holding
thereof that it either (a) is not in a "Party in Interest" relationship with
Franklin Financial or its affiliates or (b) is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such
purchase or holding. Furthermore, each investing Plan, by purchasing the
preferred securities, will be deemed to have directed the Trust to invest in the
subordinated debentures and to have appointed the property trustee as a
co-trustee under the Plan.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the preferred
securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the potential consequences if the assets of the Trust were
deemed to be "plan assets" and the availability of exemptive relief under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14.
PLAN OF DISTRIBUTION
The preferred securities are being sold on a "best efforts" basis on behalf
of Franklin Financial by Morgan Keegan & Company, Inc. We have agreed to
indemnify Morgan Keegan against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. The offering will be made in compliance
with NASD Rule 2810.
We have executed a selling agency agreement with Morgan Keegan. While
Morgan Keegan will use its best efforts to sell the securities, it will be under
no obligation to sell any or all of the preferred securities and will not be
obligated to purchase any of the preferred securities. In view of the fact that
the proceeds of the sale of the preferred securities will be used to purchase
the subordinated debentures of Franklin Financial, the selling agency agreement
provides that Franklin Financial will pay as compensation to Morgan Keegan a
selling commission equal to 3.0% of the total Liquidation Amount of the
preferred securities sold in this offering as a placement fee, or an aggregate
of $480,000 if all of the preferred securities being offered are sold.
The preferred securities are being offered subject to prior sale,
withdrawal, cancellation or modification of the offer, including its structure,
terms and conditions, without notice. We reserve the right, in our sole
discretion, to reject, in whole or in part, any offer to purchase the preferred
securities.
The preferred securities are new securities with no established trading
market. We intend to sell the preferred securities only in the states in which
the offering is qualified. An offer to purchase may only be made and the
purchase of the preferred securities may only be negotiated and consummated in
such states. The subscription agreement for the preferred securities must be
executed, and the preferred securities may only be delivered in, such states.
Morgan Keegan has agreed in accordance with the provisions of SEC Rule
15c2-4 to cause all funds received for sale of a preferred security to be
promptly deposited in an escrow account maintained by First Tennessee Bank
National Association as escrow agent for the investors in the offering upon the
receipt of an executed subscription agreement and related funds by Morgan Keegan
by or before noon of the next business day following the sale of the preferred
securities.
95
<PAGE> 98
The closing of the offering is expected to occur on or before August 9,
2000 (unless we elect to extend the offering, in our sole discretion, for an
additional period or periods of not more than 30 days in the aggregate, which we
may elect to do without notice to subscribers). If we have not received
subscriptions for at least 10,000 preferred securities by August 9, 2000 (or by
the end of the extension period), we will return to the subscribers all funds
placed in the escrow account with interest earned. Once the minimum offering is
attained, one or more closings will be held and the escrow agent will release
all funds to the Trust.
TRANSFER AGENT
SunTrust Bank will act as registrar and transfer agent for the preferred
securities.
LEGAL MATTERS
The validity of the subordinated debentures and the Guarantee will be
passed upon by George J. Regg, Jr., General Counsel to Franklin Financial
Corporation. Smith, Gambrell & Russell, LLP, Atlanta, Georgia, will pass upon
certain other matters on behalf of the Company and the Trust as well as certain
matters relating to United States federal income tax consequences of the
offering. Richards, Layton & Finger, P.A., Wilmington, Delaware will pass upon
the validity of the preferred securities and certain other matters relating to
Delaware law as special Delaware counsel for the Trust. Certain legal matters
will be passed upon for the placement agent by Baker, Donelson, Bearman &
Caldwell, P.C., Memphis, Tennessee.
EXPERTS
The consolidated financial statements at December 31, 1998 and 1999 and for
each of the three years in the period ended December 31, 1999 included and
incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report which is included
and incorporated by reference herein and have been so included and incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-2 filed by
Franklin Financial and the Trust with the SEC relating to the preferred
securities registered under this prospectus. As permitted by SEC rules, this
prospectus does not contain all of the information contained in the registration
statement and accompanying exhibits and schedules filed by Franklin Financial
and the Trust with the SEC. The registration statement, the exhibits and
schedules provide additional information about the Company, the Trust and the
preferred securities. The registration statement, exhibits and schedules are
also available at the SEC's public reference rooms or through its EDGAR database
on the internet.
The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. These documents are available for inspection
and copying, upon payment of a fee set by the SEC, at the public reference rooms
of the SEC in Washington, D.C. (450 Fifth Street, N.W., 20549), New York, New
York (Seven World Trade Center, Suite 1300, 10048) and Chicago, Illinois
(Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400, 60661). The
SEC may be contacted at 1-800-732-0330 for more information on the public
reference rooms. The Company's
96
<PAGE> 99
filings are also available to the public on the internet through the SEC's EDGAR
database at the SEC's web site at http://www.sec.gov.
There are not separate financial statements of the Trust in the prospectus
because:
- The trust is a subsidiary of the Company and the Company files
consolidated financial information under the Securities Exchange Act of
1934.
- The Trust does not have any independent operations other than issuing the
preferred and common securities and purchasing the subordinated
debentures of the Company.
- The Trust's only material assets will be the subordinated debentures of
the Company when issued.
- The combined obligations of the Company under the subordinated
debentures, the guarantee, the trust agreement and the indenture have the
effect of providing a full and unconditional guarantee of the Trust's
obligation under its preferred securities. See "Description of
Subordinated Debentures," "Description of Preferred Securities,"
"Description of the Guarantee" and "Relationship Among Preferred
Securities, the Subordinated Debentures and the Guarantee."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1999, and
the Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, which
have been filed with the Commission by the Company, are incorporated in this
prospectus by reference and made a part of this prospectus. Any statement
contained in a document incorporated by reference in this prospectus shall be
deemed to be modified or superseded for all purposes of this prospectus to the
extent that a statement contained in this prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
Franklin Financial hereby undertakes to provide, without charge, to each person
to whom a copy of this prospectus is delivered, upon written or oral request of
such person, a copy of any or all of the information that has been incorporated
by reference in this prospectus (other than exhibits thereto, unless such
exhibits are specifically incorporated by reference into the information that
this prospectus incorporates). Written requests for copies should be directed to
the Company, 230 Public Square, Franklin, Tennessee 37064, Attention: Secretary.
Telephone requests should be directed to (615) 790-2265. See "Where You Can Find
More Information."
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<PAGE> 100
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Report of Deloitte & Touche LLP, Independent Auditors..... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997...................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998, and
1997................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997...................... F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1999, 1998, and 1997................ F-7
UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 2000
(Unaudited)............................................ F-31
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 (Unaudited).............. F-32
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (Unaudited).............. F-33
Notes to Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 (Unaudited)....... F-34
</TABLE>
F-1
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
We have audited the consolidated balance sheets of Franklin Financial
Corporation and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Franklin Financial Corporation
and Subsidiary as of December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 6, 2000
F-2
<PAGE> 102
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Notes 1 and 2)................... $ 12,700,739 $ 13,089,168
Federal funds sold.......................................... -- 8,229,000
Investment securities available-for-sale, at fair value
(Notes 1 and 3)........................................... 57,823,391 40,134,912
Mortgage-backed securities available-for-sale, at fair value
(Notes 1 and 3)........................................... 69,526,329 32,405,889
Investment securities held-to-maturity, fair value
$2,813,070 in 1999 and $4,395,168 in 1998 (Notes 1 and
3)........................................................ 2,808,453 4,170,665
Mortgage-backed securities held-to-maturity, fair value
$377,507 in 1999 and $602,166 in 1998 (Notes 1 and 3)..... 380,146 591,450
Federal Home Loan and Federal Reserve Bank stock............ 1,608,000 1,370,500
Loans held for sale (Notes 1 and 4)......................... 11,147,305 23,642,590
Loans (Notes 1 and 4)....................................... 259,763,411 215,927,533
Allowance for loan losses (Notes 1 and 5)................... (2,479,619) (2,193,614)
------------ ------------
Net loans............................................ 257,283,792 213,733,919
Premises and equipment, net (Notes 1 and 8)................. 8,563,746 7,532,362
Accrued interest receivable................................. 2,814,174 2,126,364
Mortgage servicing rights, net (Notes 1 and 6).............. 1,584,578 1,256,593
Other assets (Notes 7 and 12)............................... 4,159,290 1,584,032
------------ ------------
TOTAL............................................. $430,399,943 $349,867,444
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing....................................... $ 37,098,767 $ 33,317,410
Interest-bearing.......................................... 346,758,272 279,079,559
------------ ------------
Total deposits (Note 9)........................... 383,857,039 312,396,969
Repurchase agreements (Note 1).............................. 2,420,936 3,420,936
Other borrowings (Note 10).................................. 19,051,613 8,423,840
Accrued interest payable.................................... 1,321,829 1,086,859
Other liabilities........................................... 889,168 950,064
------------ ------------
Total liabilities................................. 407,540,585 326,278,668
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11) STOCKHOLDERS'
EQUITY:
Common stock, no par value -- authorized, 500,000,000
shares; issued 31,052,683 and 30,470,803 shares at
December 31, 1999 and 1998, respectively............... 11,344,844 11,091,517
Retained earnings......................................... 15,502,311 12,338,051
Accumulated other comprehensive (loss) income, net of
tax.................................................... (3,987,797) 159,208
------------ ------------
Total stockholders' equity (Note 14).............. 22,859,358 23,588,776
------------ ------------
TOTAL............................................. $430,399,943 $349,867,444
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 103
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.............................. $25,184,997 $22,140,914 $18,871,966
Taxable securities...................................... 4,612,768 3,655,304 3,193,657
Tax-exempt securities................................... 698,134 445,284 294,770
Federal funds sold...................................... 195,290 196,169 160,896
----------- ----------- -----------
Total interest income.............................. 30,691,189 26,437,671 22,521,289
INTEREST EXPENSE:
Certificates of deposit over $100,000................... 5,601,123 5,268,052 4,442,619
Other deposits.......................................... 8,722,758 7,134,683 5,962,588
Federal Home Loan Bank advances......................... 334,507 197,019 25,680
Other borrowed funds.................................... 526,791 541,916 465,249
----------- ----------- -----------
Total interest expense............................. 15,185,179 13,141,670 10,896,136
----------- ----------- -----------
NET INTEREST INCOME......................................... 15,506,010 13,296,001 11,625,153
PROVISION FOR LOAN LOSSES (Note 5).......................... 350,498 515,000 420,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 15,155,512 12,781,001 11,205,153
OTHER INCOME:
Service charges on deposit accounts..................... 1,715,541 1,391,672 1,096,323
Mortgage banking activities............................. 1,945,402 2,229,942 1,132,835
Gain on sale of investment securities................... 103,650 301,840 121,089
Other service charges, commissions and fees............. 507,972 927,242 412,089
Commissions on sale of annuities and brokerage
activity.............................................. 392,140 273,301 11,965
----------- ----------- -----------
Total other income................................. 4,664,705 5,123,997 2,774,301
OTHER EXPENSES:
Salaries and employee benefits (Note 15)................ 6,842,369 5,766,239 4,401,976
Occupancy (Note 11)..................................... 1,279,074 1,148,688 901,174
Mortgage banking........................................ 1,060,295 450,195 76,584
Furniture and equipment................................. 947,828 805,067 673,752
Communications and supplies............................. 491,675 434,189 343,093
Advertising and marketing............................... 276,246 282,028 282,562
FDIC and regulatory assessments......................... 133,729 105,828 90,167
Loss (gain) on sale of mortgage loans................... 447,077 (102,971) --
Other................................................... 1,527,908 1,362,236 1,071,611
----------- ----------- -----------
Total other expenses............................... 13,006,201 10,251,499 7,840,919
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................................. 6,814,016 7,653,499 6,138,535
INCOME TAXES (Note 12)...................................... 2,343,569 2,767,001 2,250,064
----------- ----------- -----------
NET INCOME.................................................. $ 4,470,447 $ 4,886,498 $ 3,888,471
=========== =========== ===========
NET INCOME PER SHARE:
Basic................................................... $ 0.15 $ 0.17 $ 0.14
=========== =========== ===========
Diluted................................................. $ 0.13 $ 0.15 $ 0.12
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................... 30,628,640 28,401,805 27,850,072
=========== =========== ===========
Diluted................................................. 34,392,719 33,181,868 32,612,828
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 104
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL COMPRE- OTHER
------------------------ PAID-IN HENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME EARNINGS INCOME (LOSS) TOTAL
---------- ----------- ---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996....... 1,732,547 $ 4,331,368 $5,253,987 $ 3,867,790 $ 51,070 $13,504,215
Comprehensive income:
Net income..................... $3,888,471 3,888,471 3,888,471
Other comprehensive income, net
of tax:
Unrealized holding gains on
securities arising during
the year (net of tax of
$88,652)................... 252,316
Less: Reclassification
adjustment for gains
included in net income (net
of tax of $31,483)......... (89,606)
----------
Other comprehensive income..... 162,710 162,710 162,710
----------
Comprehensive income............. $4,051,181
==========
Change in par value of common
stock from $2.50 to no par..... -- 5,253,987 (5,253,987) --
Two-for-one stock split.......... 1,732,547
Issuance of common stock......... 30,087 234,276 234,276
Subsequent two-for-one stock
split.......................... 3,495,181
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997....... 6,990,362 9,819,631 -- 7,756,261 213,780 17,789,672
Comprehensive income:
Net income..................... $4,886,498 4,886,498 4,886,498
Other comprehensive income, net
of tax:
Unrealized holding gains on
securities arising during
the year (net of tax of
$59,305)................... 168,790
Less: Reclassification
adjustment for gains
included in net income (net
of tax of $78,478)......... (223,362)
----------
Other comprehensive loss....... (54,572) (54,572) (54,572)
----------
Comprehensive income............. $4,831,926
==========
Four-for-one stock split......... 20,971,086
Issuance of common stock......... 2,509,355 1,144,150 1,144,150
Tax benefit of stock options
exercised...................... 127,736 127,736
Cash dividend declared; $0.01 per
share.......................... (304,708) (304,708)
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998....... 30,470,803 11,091,517 -- 12,338,051 159,208 23,588,776
Comprehensive income:
Net income..................... 4,470,447 4,470,447 4,470,447
Other comprehensive income, net
of tax:
Unrealized holding losses on
securities arising during
the year (net of tax of
($2,791,350)).............. (4,215,414)
Less: Reclassification
adjustment for gains
included in net income (net
of tax of $35,241)......... (68,409)
----------
Other comprehensive loss......... (4,147,005) (4,147,005) (4,147,005)
----------
Comprehensive income............. $ 323,442
==========
Exercise of stock options and
warrants....................... 581,880 236,988 236,988
Tax benefit of stock options
exercised...................... 16,339 16,339
Cash dividend declared; $0.01 per
share.......................... (917,899) (917,899)
Cash dividend declared; $0.0125
per share...................... -- -- -- (388,288) -- (388,288)
---------- ----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999....... 31,052,683 $11,344,844 $ -- $15,502,311 $(3,987,797) $22,859,358
========== =========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 105
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,470,447 $ 4,886,498 $ 3,888,471
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation, amortization and accretion.............. 934,473 1,023,785 679,716
Provision for loan losses............................. 350,498 515,000 420,000
Deferred income taxes................................. 30,331 309,895 (36,181)
Loans originated for sale............................. (79,450,194) (96,949,473) (39,056,678)
Proceeds from sale of loans........................... 93,132,239 89,010,999 46,632,305
Gain on sale of investment securities................. (103,650) (301,840) (121,089)
Loss (gain) on sale of loans.......................... 447,077 (141,109) (92,202)
Gain on sale of fixed assets.......................... -- (445) (234)
Increase in accrued interest receivable............... (687,810) (236,738) (340,762)
Increase in accrued interest payable.................. 234,970 30,001 321,917
Increase (decrease) in other liabilities.............. 47,056 (111,764) 96,695
Increase in other assets.............................. (704,520) (1,949,604) (553,422)
------------ ------------- ------------
Net cash provided by (used in) operating
activities....................................... 18,700,917 (3,914,795) 11,838,536
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in federal funds sold................. 8,229,000 (8,229,000) 233,000
Proceeds from sales of securities available-for-sale...... 10,529,143 80,045,418 34,646,948
Proceeds from maturities of securities
available-for-sale...................................... 13,744,394 16,342,143 8,875,201
Proceeds from maturities of securities held-to-maturity... 1,570,736 1,185,289 859,409
Purchases of securities held-to-maturity.................. -- -- (1,638,384)
Purchases of securities available-for-sale................ (85,635,662) (113,774,407) (60,138,871)
Purchases of Federal Home Loan and Federal Reserve Bank
stock................................................... (237,500) (241,400) (191,400)
Net increase in loans..................................... (45,534,208) (37,558,317) (44,174,735)
Purchases of premises and equipment, net.................. (1,873,812) (1,953,685) (2,180,409)
------------ ------------- ------------
Net cash used in investing activities.............. (99,207,909) (64,183,959) (63,709,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits...................................... 71,460,070 64,825,260 47,660,883
(Decrease) increase in repurchase agreements.............. (1,000,000) (1,000,000) 4,420,936
Increase in other borrowings.............................. 10,627,773 5,394,299 1,979,541
Dividends paid............................................ (1,222,607) -- --
Net proceeds from issuance of common stock................ 236,988 1,144,150 234,276
Tax benefit of stock options exercised.................... 16,339 127,736 --
------------ ------------- ------------
Net cash provided by financing activities.......... 80,118,563 70,491,445 54,295,636
------------ ------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (388,429) 2,392,691 2,424,931
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 13,089,168 10,696,477 8,271,546
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 12,700,739 $ 13,089,168 $ 10,696,477
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................ $ 1,844,453 $ 2,986,285 $ 2,311,486
============ ============= ============
Cash paid during the year for interest.................... $ 14,950,209 $ 13,111,669 $ 10,574,219
============ ============= ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 106
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Franklin Financial Corporation and Subsidiary
(the "Company") conform to generally accepted accounting principles and to
general practices within the banking industry. The Company was incorporated on
December 27, 1988 for the purpose of becoming a bank holding company. The
Company's subsidiary bank opened for business on December 1, 1989.
CONSOLIDATED SUBSIDIARY - The consolidated financial statements include the
accounts of the Company's wholly-owned subsidiary, Franklin National Bank,
Franklin, Tennessee (the "Bank") and its subsidiaries, Hometown Loan Company,
Franklin Financial Insurance, Franklin Financial Mortgage and Franklin Financial
Securities. Material intercompany transactions and balances have been
eliminated.
OPERATING SEGMENTS - The Company manages its business in two primary
operating segments, the Bank and Franklin Financial Mortgage ("FFM").
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS include cash on hand and amounts due from banks.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Securities are classified into
three categories: held-to-maturity, available-for-sale, and trading.
Securities classified as held-to-maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company has the
positive intent and ability to hold these securities to maturity. Securities
classified as available-for-sale may be sold in response to changes in interest
rates, liquidity needs and for other purposes. Available-for-sale securities are
carried at fair value and include all debt and equity securities not classified
as held-to-maturity or trading. Trading securities are those held principally
for the purpose of selling in the near future and are carried at fair value. The
Company does not currently maintain a trading portfolio.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, in
accumulated other comprehensive income. Realized gains and losses for securities
classified as either available-for-sale or held-to-maturity are reported in
earnings based on the adjusted cost of the specific security sold.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS - Loans are stated at the principal amount outstanding. Deferred loan
fees and the allowance for loan losses are recorded as reductions of loans. Loan
origination and commitment fees in excess of certain related costs are deferred
and amortized as an adjustment of the related loan's yield over the contractual
life of the loan. Interest income on loans is computed based on the outstanding
loan balance.
F-7
<PAGE> 107
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
Loans are generally placed on nonaccrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. A loan is considered impaired when management has determined it is
probable that all amounts due according to the contractual terms of the loan
agreement will not be collected. The allowance is increased by a provision for
loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries.
FINANCIAL INSTRUMENTS - All derivative financial instruments held or issued
by the Company are for purposes other than trading. Such instruments are entered
into by the Company as hedges against exposure to interest rate risk. Such
instruments are recorded at market value while the contracts are open with fees
received recognized into income in the period the contract closes. The maximum
term of such contracts used by the Company is 30 days.
MORTGAGE BANKING ACTIVITIES - The Company originates and sells residential
mortgage loans. Generally, such loans are sold at origination. Any loans held
for sale are carried at the lower of cost or market value in the aggregate with
respect to the entire portfolio.
Servicing assets on loans sold are measured by allocating the previous
carrying amount between the assets sold and the retained interests based on
their relative fair values at the date of transfer. The Company's mortgage
servicing rights are related to in-house origination serviced for others. The
initial amount recorded as mortgage servicing rights is essentially the
difference between the amount that can be realized when loans are sold,
servicing released, as compared to loans sold, servicing retained.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation has been computed on
straight-line and accelerated methods, based on the estimated useful lives of
the respective assets. Leasehold improvements are being amortized over the lease
term on a straight-line basis.
INCOME TAXES - The Company files a consolidated tax return with its
subsidiary. Income taxes are allocated to members of the consolidated group on a
separate return basis. Income taxes have been provided using the asset and
liability method.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
agreements to repurchase are treated as collateralized financing transactions
and are recorded at the amounts at
F-8
<PAGE> 108
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
which the securities will subsequently be repurchased. It is the Company's
policy to maintain collateral with a market value equal to or in excess of the
principal amount borrowed under repurchase agreements. The Company monitors the
market value of the underlying securities which collateralize the related
liability on repurchase agreements, including accrued interest, and provides
additional collateral when deemed appropriate.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
year. Diluted earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding during the year plus
additional potentially dilutive common shares calculated for stock options and
warrants using the treasury stock method.
COMPREHENSIVE INCOME - Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that is not recognized in the calculation of net income, such as unrealized
gains and losses on available-for-sale securities. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities was issued. In June
1999, SFAS No. 133 was amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 delays the effective date of SFAS No. 133 until
fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133
effective January 1, 2001. Management has not yet assessed the impact the
adoption of this Standard will have on the Company's financial statements.
CERTAIN RECLASSIFICATIONS have been made to the 1997 and 1998 amounts to
conform to the 1999 presentation.
2. RESTRICTED CASH BALANCES
The Bank is required to maintain reserves, in the form of cash and
deposits, with the Federal Reserve Bank against its deposit liabilities.
Aggregate reserves of approximately $3,024,000 and $1,893,000 were maintained to
satisfy federal regulatory requirements at December 31, 1999 and 1998,
respectively.
3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following tables reflect the amortized cost and estimated fair values
of debt, equity and mortgage-backed securities held at December 31, 1999 and
1998. In addition, gross unrealized gains and losses are disclosed as of
December 31, 1999 and 1998.
F-9
<PAGE> 109
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury obligations.............. $ 24,571,107 $ -- $(1,689,474) $ 22,881,633
Obligations of U.S government
agencies............................. 21,966,656 4,483 (1,364,628) 20,606,511
Obligations of state and political
subdivisions......................... 15,519,401 427 (1,371,114) 14,148,714
Corporate.............................. 289,317 -- (102,784) 186,533
------------ -------- ----------- ------------
Investment securities.................. 62,346,481 4,910 (4,528,000) 57,823,391
Mortgage-backed securities............. 71,649,569 920 (2,124,160) 69,526,329
------------ -------- ----------- ------------
Total available-for-sale..... $133,996,050 $ 5,830 $(6,652,160) $127,349,720
============ ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury obligations.............. $ -- $ -- $ -- $ --
Obligations of U.S government
agencies............................. -- -- -- --
Obligations of state and political
subdivisions......................... 2,808,453 22,416 (17,799) 2,813,070
Corporate.............................. -- -- -- --
------------ -------- ----------- ------------
Investment securities.................. 2,808,453 22,416 (17,799) 2,813,070
Mortgage-backed securities............. 380,146 172 (2,811) 377,507
------------ -------- ----------- ------------
Total held-to-maturity....... $ 3,188,599 $ 22,588 $ (20,610) $ 3,190,577
============ ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury obligations.............. $ 16,001,994 $ 3,878 $ (325,045) $ 15,680,827
Obligations of U.S government
agencies............................. 10,201,424 20,765 (21,752) 10,200,437
Obligations of state and political
subdivisions......................... 13,679,961 583,172 (9,485) 14,253,648
------------ -------- ----------- ------------
Investment securities.................. 39,883,379 607,815 (356,282) 40,134,912
Mortgage-backed securities............. 32,400,638 63,537 (58,286) 32,405,889
------------ -------- ----------- ------------
Total available-for-sale..... $ 72,284,017 $671,352 $ (414,568) $ 72,540,801
============ ======== =========== ============
</TABLE>
F-10
<PAGE> 110
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
U.S. Treasury obligations.............. $ 502,152 $ 2,179 $ -- $ 504,331
Obligations of U.S government
agencies............................. 851,178 2,969 -- 854,147
Obligations of state and political
subdivisions......................... 2,817,335 219,355 -- 3,036,690
------------ -------- ----------- ------------
Investment securities.................. 4,170,665 224,503 -- 4,395,168
Mortgage-backed securities............. 591,450 10,885 (169) 602,166
------------ -------- ----------- ------------
Total held-to-maturity....... $ 4,762,115 $235,388 $ (169) $ 4,997,334
============ ======== =========== ============
</TABLE>
Gross gains of $105,444, $319,254, and $148,280 and gross losses of $1,794,
$17,414, and $27,191 were realized on sales of securities available for sale in
1999, 1998 and 1997, respectively.
The amortized cost and fair value of debt securities at December 31, 1999,
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less................ $ 5,255,523 $ 5,227,073 $ 75,000 $ 75,036
Due after 1-5 years.................... 16,871,629 16,206,293 370,134 381,061
Due after 5-10 years................... 11,907,810 10,761,399 2,086,544 2,087,038
Due after ten years.................... 28,311,519 25,628,626 276,775 269,935
------------ ------------ ---------- ----------
62,346,481 57,823,391 2,808,453 2,813,070
Mortgage-backed securities............. 71,649,569 69,526,329 380,146 377,507
------------ ------------ ---------- ----------
$133,996,050 $127,349,720 $3,188,599 $3,190,577
============ ============ ========== ==========
</TABLE>
Fair value of securities is established by an independent pricing service
as of the approximate dates indicated. Securities carried at $106,120,106 and
$51,859,206 at December 31, 1999 and 1998 respectively, were pledged to secure
deposits and for other purposes.
At December 31, 1999 and 1998, the Company did not hold investment
securities of any single issuer, other than obligations of the U.S. Treasury and
other U.S. government agencies, whose aggregate book value exceeded ten percent
of stockholders' equity.
F-11
<PAGE> 111
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
4. LOANS
Loans at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural................... $ 82,287,934 $ 60,417,742
Real estate -- construction.............................. 38,982,437 29,334,725
Real estate -- mortgage.................................. 130,482,480 132,326,776
Consumer................................................. 19,670,090 18,006,502
------------ ------------
271,422,941 240,085,745
Deferred loan fees....................................... (512,225) (515,622)
Allowance for probable loan losses....................... (2,479,619) (2,193,614)
------------ ------------
Total loans.................................... $268,431,097 $237,376,509
============ ============
</TABLE>
Direct and indirect loans to officers and directors during 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of year................................ $2,122,107 $1,621,265
New loan disbursements.................................... 1,630,370 1,885,494
Repayments................................................ (899,389) (1,384,652)
---------- ----------
Balance at end of year...................................... $2,853,088 $2,122,107
========== ==========
</TABLE>
In addition, there were approximately $343,000 and $240,000 of undisbursed
loan commitments to such parties at December 31, 1999 and 1998, respectively.
During 1998, the Company began capitalization of servicing rights on
certain commercial loans originated and sold with servicing retained. The total
amount capitalized for these servicing rights was $215,145 and $186,820 in 1999
and 1998, respectively. Amortization of the servicing rights amounted to $38,677
and $11,748 during 1999 and 1998 respectively.
5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year...................... $2,193,614 $1,827,956 $1,471,904
Provisions charged to operating expense........... 350,498 515,000 420,000
Loans charged off................................. (91,694) (158,983) (76,419)
Recoveries on previously charged off loans........ 27,201 9,641 12,471
---------- ---------- ----------
Balance at end of year............................ $2,479,619 $2,193,614 $1,827,956
========== ========== ==========
</TABLE>
At December 31, 1999 and 1998, the Bank had loans that were specifically
classified as impaired in the amount of approximately $298,000 and $131,000,
respectively. The allowance for loan losses related to these impaired loans was
approximately $74,000 and $33,000 at December 31, 1999 and
F-12
<PAGE> 112
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
1998, respectively. The average carrying value of impaired loans was
approximately $367,000, $303,000 and $72,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Interest income of approximately $29,000,
$13,000 and $12,000 was recognized on these impaired loans during the year ended
December 31, 1999, 1998 and 1997, respectively.
6. MORTGAGE BANKING
The unpaid principal balances of mortgage loans serviced for others was
approximately $124,112,688 and $76,866,500 at December 31, 1999 and 1998,
respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $2,089,000 and
$2,726,500 at December 31, 1999 and 1998, respectively.
Mortgage servicing rights, net of amortization, totaled $1,584,578 and
$1,256,593 in 1999 and 1998, respectively. Amortization of servicing rights
amount to $296,846, $158,034 and $69,224 during 1999, 1998 and 1997,
respectively.
For purposes of measuring impairment, the rights are stratified based on
the predominant risk characteristics of loan type and loan term. The amount of
impairment recognized, if any, is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
7. OTHER FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuation in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
mortgage loans sold subject to repurchase provisions and futures contracts.
Those instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in those particular financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and loans sold subject to certain repurchase
provisions is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. For futures
contracts, the contract or notional amounts do not represent exposure to credit
loss. The Company controls the risk of its futures contracts through credit
approvals, limits, and monitoring procedures.
F-13
<PAGE> 113
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
---------------
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.............................. $66,540,337
Credit card commitments................................... 456,551
Standby letters of credit................................. 6,909,047
Commitments to originate mortgages........................ 2,300,515
Commitments to sell mortgages............................. 8,100,616
Mortgage loans sold subject to repurchase provisions...... 13,511,886
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments will expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness individually. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank enters into various commitments to originate mortgage loans. These
commitment obligations are considered in conjunction with the lower of cost or
market valuation of loans held for sale.
The Bank sells essentially all of its originated mortgage loans to
governmental agencies and private investors. The Bank has entered into various
commitments to sell mortgage loans as of December 31, 1999.
The Company has, on occasion, written covered call options on U.S. Treasury
Securities, which are contracts for delayed delivery of securities in which the
seller agrees to make delivery at a specified future date of a specified
instrument at a specified price or yield. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in securities values and interest rates. The Company uses such
contracts in connection with its asset/liability management program in improving
yield and managing interest rate exposure arising out of non-trading assets and
liabilities. There were no outstanding positions held in U.S. Treasury note
contracts at December 31, 1999 and 1998.
The Bank primarily serves customers located in the Tennessee counties of
Williamson, Maury and Davidson. As such, the Bank's loans, commitments and
stand-by letters of credit have been granted to customers in that area.
Concentration of credit by type of loan is presented in Note 4.
F-14
<PAGE> 114
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
In the normal course of business, the Company is involved in various legal
proceedings. Management has concluded, based upon advice of counsel, that the
result of these proceedings will not have a material effect on the Company's
financial condition or results of operations.
8. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land....................................................... $ 1,822,249 $ 1,086,122
Buildings.................................................. 2,855,658 2,187,930
Leasehold improvements -- buildings........................ 3,631,482 3,586,441
Furniture and equipment.................................... 3,786,435 3,361,520
----------- -----------
12,095,824 10,222,013
Less accumulated depreciation and amortization............. (3,532,078) (2,689,651)
----------- -----------
$ 8,563,746 $ 7,532,362
=========== ===========
</TABLE>
9. DEPOSITS
A summary of deposits at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Non-interest bearing demand.............................. $ 37,098,767 $ 33,317,410
Interest-bearing demand.................................. 97,196,420 74,847,304
Savings.................................................. 12,222,039 10,319,273
Certificates of deposit of $100,000 or more.............. 155,781,273 112,977,781
Other time............................................... 81,558,540 80,935,201
------------ ------------
$383,857,039 $312,396,969
============ ============
</TABLE>
At December 31, 1999, the scheduled maturities of certificates of deposits
and other time deposits are as follows:
<TABLE>
<S> <C>
2000........................................................ $227,221,807
2001........................................................ 5,879,952
2002........................................................ 2,236,448
2003........................................................ 627,628
Thereafter.................................................. 1,373,978
------------
$237,339,813
============
</TABLE>
10. OTHER BORROWINGS
The Company has a $10,000,000 line of credit established with a lending
institution secured by all of the outstanding capital stock of the Bank. The
balance outstanding on the line at December 31,
F-15
<PAGE> 115
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
1999 was $7,330,000. Interest floats at a rate equal to three-month LIBOR plus
1.20%, 7.315% at December 31, 1999, and is payable quarterly. Principal payments
are required annually on January 31 based on the outstanding principal balance.
The Bank also has federal funds lines (or the equivalent thereof) with
correspondent banks totaling approximately $33,500,000 at December 31, 1999.
Federal funds lines of $5,000,000 were outstanding as of December 31, 1999.
During 1997, the Company entered into a note payable with a lending
institution in the amount of $753,639. Interest floats at the lending bank's
base rate, 6.713% at December 31, 1999, and is payable monthly. The note is
secured by the Williamson Square branch building. The amount outstanding at
December 31, 1999 is $721,613.
The Bank has a $10,000,000 line of credit with the Federal Home Loan Bank
(FHLB) secured by a blanket pledge of 1-4 family residential mortgage loans. The
arrangement is structured so that the carrying value of the loans pledged
amounts to 150% of the principal balance of advances from the FHLB. At December
31, 1999, the bank had $6,000,000 outstanding in variable rate advances.
The aggregate annual maturities of other borrowings during the five years
ending December 31, 2004 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $12,378,000
2001........................................................ 50,400
2002........................................................ 623,213
2003........................................................ --
2004........................................................ --
2005 and thereafter......................................... 6,000,000
-----------
Total............................................. $19,051,613
===========
</TABLE>
11. RELATED PARTY AND OTHER LEASES
The Company has entered into agreements with the chairman of the board of
the Company to lease certain banking facilities. Increases are made annually on
property leased from the chairman based on the increase in the Consumer Price
Index during the previous year. All but one of the leases provides for a term of
twenty years with three, five year renewal options. The remaining lease provides
for a term of six and one half years with four, five year renewal options. All
leases are accounted for as operating leases. Net rent expense paid to the
chairman amounted to $548,771 in 1999, $489,255 in 1998, and $390,206 in 1997.
Rent expense paid to unrelated parties amounted to $234,731 in 1999, $192,646 in
1998, and $148,806 in 1997.
F-16
<PAGE> 116
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
Future minimum lease payments, exclusive of any increases related to the
Consumer Price Index, under these leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
2000.............................................. $ 609,562 $ 367,338 $ 976,900
2001.............................................. 609,562 331,612 941,174
2002.............................................. 609,562 263,882 873,444
2003.............................................. 609,562 246,230 855,792
2004.............................................. 609,562 220,355 829,917
Future years...................................... 2,717,631 660,288 3,377,919
---------- ---------- ----------
Total................................... $5,765,441 $2,089,705 $7,855,146
========== ========== ==========
</TABLE>
12. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal......................................... $1,882,211 $1,984,528 $1,911,915
State........................................... 431,027 472,578 374,330
---------- ---------- ----------
Total current expense................... 2,313,238 2,457,106 2,286,245
Deferred:
Federal......................................... 29,518 263,356 (30,754)
State........................................... 813 46,539 (5,427)
---------- ---------- ----------
Total deferred expense (benefit)........ 30,331 309,895 (36,181)
---------- ---------- ----------
Total income taxes................................ $2,343,569 $2,767,001 $2,250,064
========== ========== ==========
</TABLE>
F-17
<PAGE> 117
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
Net deferred income tax assets and liabilities are included in other assets
and other liabilities, respectively, on the balance sheet. Significant temporary
differences between tax and financial reporting that give rise to net deferred
tax assets (liabilities) at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................ $ 961,527 $ 844,341
Unrealized loss on securities available-for-sale......... 2,658,533 --
----------- -----------
Total deferred tax assets........................ 3,620,060 844,341
Deferred tax liabilities:
Mortgage servicing rights................................ (699,719) (572,666)
Accumulated depreciation................................. (274,526) (280,303)
FHLB stock dividends..................................... (111,569) (85,328)
Unrealized gain on securities available-for-sale......... -- (97,576)
----------- -----------
Total deferred tax liabilities................... (1,085,814) (1,035,873)
----------- -----------
Net deferred tax asset (liability)......................... $ 2,534,246 $ (191,532)
=========== ===========
</TABLE>
Management believes that a valuation allowance against the deferred tax
asset at December 31, 1999 is not considered necessary because it is more likely
than not the deferred tax asset will be fully realized.
A reconciliation of income taxes with the amount of income taxes computed
by applying the federal statutory rate (34%) to pretax income follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax expense at statutory rate..................... $2,316,765 $2,602,190 $2,087,102
Increase (decrease) in taxes resulting from:
Tax-exempt income............................... (237,366) (151,397) (100,222)
State income taxes, net of federal tax
benefit...................................... 220,950 290,425 247,058
Disallowed interest expense..................... 39,883 21,555 13,538
Other, net...................................... 3,337 4,228 2,588
---------- ---------- ----------
Total income taxes...................... $2,343,569 $2,767,001 $2,250,064
========== ========== ==========
</TABLE>
13. STOCK BASED COMPENSATION PLANS
Organizers of the Company received warrants in connection with the
Company's initial public offering granting the holders thereof the option to
purchase 2,354,304 shares of common stock at $0.31 per share. In addition, the
Company has an Incentive Stock Option Plan (the "Plan") which was adopted on
April 19, 1990, by the Company's shareholders authorizing up to 200,000 shares
for employees who are contributing significantly to the management or operation
of the business of the Company as determined by the Company's Board of Directors
or the committee administering the Plan. The Plan provides for the grant of
options at the discretion of the Board of Directors of the Company or a
committee designated by the Board of Directors to administer the Plan. The
option
F-18
<PAGE> 118
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
exercise price must be at least 100% (110% in the case of a holder of 10% or
more of the common stock) of the fair market value of the stock on the date the
option is granted and the options are exercisable by the holder thereof in full
at any time prior to their expiration in accordance with the terms of the Plan.
Stock options granted pursuant to the Plan will expire on or before (1) the date
which is the tenth anniversary of the date of the option is granted, or (2) the
date which is the fifth anniversary of the date the option is granted in the
event that the option is granted to a key employee who owns more than 10% of the
total combined voting power of all classes of stock of the Company. All options
granted prior to 1998 were immediately vested. In January 1998, certain options
were granted and will vest evenly over five years. In 1996, an amendment to the
plan increased the number of shares available for grant to 750,000 shares and
provided for the granting of non-qualified options to eligible employees and
directors. The Plan provides for stock splits which would adjust the options
outstanding, the option prices and the number of shares authorized by the Plan
according to the terms of the stock split. As more fully discussed in Note 14,
the Company declared a two-for-one stock split in 1997 and another two-for-one
stock split in January 1998. Also, in May 1998, the Company declared a
four-for-one stock split. Based on these stock splits, the number of shares
authorized under the Plan is currently 12,000,000.
All options expire within ten years from the date of grant except for
120,000 options issued in 1995 which expire in five years and 200,000, 800,000
and 904,000 options issued in 1999, 1998 and 1997, respectively, which expire in
15 years. The Company has continued to apply APB Opinion No. 25 and related
interpretations in accounting for its plans. Had compensation cost for the plans
been determined based on the fair value at the grant date for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported..................................... $4,470,447 $4,886,498 $3,888,471
Pro forma....................................... 3,750,051 3,699,872 2,922,662
Net income per share
As reported:
Basic........................................ $ 0.15 $ 0.17 $ 0.14
Diluted...................................... 0.13 0.15 0.12
Pro forma:
Basic........................................ 0.12 0.13 0.11
Diluted...................................... 0.11 0.11 0.10
</TABLE>
F-19
<PAGE> 119
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
In calculating the pro forma disclosures, the fair value of the options
granted is estimated as of the date granted using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ------------
<S> <C> <C> <C>
Dividend yield................................... 0.9% 0.6% N/A
Expected volatility.............................. 56% 46% 29%
Risk-free interest rate range.................... 6.2% 5.5% 5.8% to 6.5%
Expected life.................................... 5-10 years 5-10 years 7 years
</TABLE>
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1999, 1998 and 1997 is $3.59,
$1.56, and $0.59 per share, respectively.
A summary of the status of the Company's stock option plans and warrants
for each of the three years in the period ended December 31, 1999, and the
changes during those years is presented below.
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS/ AVERAGE
WARRANTS EXERCISE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
Options and warrants outstanding at January 1, 1997......... 5,373,808 $0.63
Options granted........................................ 2,030,800 1.17
Options exercised...................................... (224,400) 0.84
Options expired........................................ (3,424) 0.35
----------
Options and warrants outstanding at December 31, 1997....... 7,176,784 0.67
Options granted........................................ 1,228,640 2.75
Options and warrants exercised......................... (2,478,872) 0.35
----------
Options and warrants outstanding at December 31, 1998....... 5,926,552 1.24
Options granted........................................ 323,475 5.75
Options and warrants exercised......................... (580,060) 0.39
Options expired........................................ (7,316) 2.96
----------
Options outstanding at December 31, 1999.................... 5,662,651 1.66
==========
</TABLE>
The following table summarizes information about the stock options and
warrants outstanding under the Company's plans at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING NUMBER
PRICE OUTSTANDING PRICE LIFE EXERCISABLE
-------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C>
$0.31-$0.75 2,143,156 $0.68 5.73 2,143,156
$0.76-$1.13 1,928,400 $1.13 9.31 1,928,400
$1.14-$2.75 1,268,120 $2.75 11.12 1,149,624
$5.75 322,975 $5.75 8.59 279,000
--------- ---------
5,662,651 5,500,180
========= =========
</TABLE>
F-20
<PAGE> 120
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
14. CAPITAL
During 1997, the shareholders approved a change in the Company's par value
of common stock from $2.50 to no par. The change in par value did not affect any
of the existing rights of shareholders and has been recorded as adjustments to
additional paid in capital and common stock.
Substantial restrictions are placed on the Company's subsidiary with
respect to payment of dividends without prior regulatory approval. The extent of
dividends which may be paid by a national bank is generally limited to net
profits for any given year combined with the retained net profits of the two
preceding years. Retained earnings totaling $13,906,447 and $12,089,114 at
December 31, 1999 and December 31, 1998, respectively, were subject to these
restrictions with respect to payment of dividends. Cash dividends are also
restricted, under the Company's line of credit, if the Bank's leverage capital
ratio is less than 7%.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, specific capital guidelines must be met that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that the Company and the Bank maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to total average assets (as defined). Management believes, as of
December 31, 1999 and 1998, that the Company and the Bank are in compliance with
all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios must be
maintained as set forth in the table. There are no conditions or events since
that notification that management believes have changed the Bank's category.
F-21
<PAGE> 121
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
Actual capital amounts and ratios at December 31, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS ACTUAL
-------------------------- -------------------------- --------------------------
FRANKLIN FRANKLIN FRANKLIN
NATIONAL NATIONAL NATIONAL
DECEMBER 31, 1999 BANK CONSOLIDATED BANK CONSOLIDATED BANK CONSOLIDATED
----------------- ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier 1 to average
assets............. $16,225,400 $16,320,280 $20,281,750 N/A $33,020,124 $26,672,225
Tier 1 to
risk-weighted
assets............. 11,564,172 11,600,812 17,346,258 N/A 33,020,124 26,672,225
Total capital
to
risk-weighted
assets...... 23,128,344 23,201,624 28,910,430 N/A 35,519,245 29,151,844
Ratios:
Tier 1 to average
assets............. 4.0% 4.0% 5.0% N/A 8.1% 6.5%
Tier 1 to
risk-weighted
assets............. 4.0% 4.0% 6.0% N/A 11.4% 9.2%
Total capital
to
risk-weighted
assets...... 8.0% 8.0% 10.0% N/A 12.3% 10.1%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ADEQUACY PURPOSES ACTION PROVISIONS ACTUAL
-------------------------- -------------------------- --------------------------
FRANKLIN FRANKLIN FRANKLIN
NATIONAL NATIONAL NATIONAL
DECEMBER 31, 1998 BANK CONSOLIDATED BANK CONSOLIDATED BANK CONSOLIDATED
----------------- ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Amount:
Tier 1 to average
assets............. $13,222,960 $13,196,880 $16,528,700 N/A $24,295,613 $23,286,405
Tier 1 to
risk-weighted
assets............. 9,584,440 9,617,444 14,376,660 N/A 24,295,613 23,286,405
Total capital
to
risk-weighted
assets...... 19,168,880 19,234,888 23,961,100 N/A 26,489,227 25,480,019
Ratios:
Tier 1 to average
assets............. 4.00% 4.00% 5.00% N/A 7.34% 7.00%
Tier 1 to
risk-weighted
assets............. 4.00% 4.00% 6.00% N/A 10.13% 9.68%
Total capital
to
risk-weighted
assets...... 8.00% 8.00% 10.00% N/A 11.05% 10.59%
</TABLE>
F-22
<PAGE> 122
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
In the calculation of basic and diluted earnings per share, net income is
identical. Below is a reconciliation for the three years in the period ended
December 31, 1999, of the difference between basic weighted average common
shares outstanding and diluted weighted average common shares outstanding.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares - basic................ 30,628,640 28,401,805 27,850,072
Effect of dilutive securities:
Stock options....................................... 3,764,079 4,300,750 2,775,852
Warrants............................................ -- 479,313 1,986,904
---------- ---------- ----------
Weighted average common shares - diluted.............. 34,392,719 33,181,868 32,612,828
========== ========== ==========
</TABLE>
During March 1997, the Company declared a two-for-one common stock split
which was payable on May 21, 1997, to shareholders of record on May 1, 1997.
During January 1998, the Company declared a two-for-one common stock split
payable on February 19, 1998 to shareholders of record on February 2, 1998.
On March 25, 1998, the Company declared a four-for-one common stock split
payable on June 3, 1998, to shareholders of record on April 20, 1998. All
references to per share and weighted average share information in the
consolidated financial statements reflect the stock splits.
15. EMPLOYEE BENEFITS
The Company has a 401(k) savings plan for all employees who have completed
ninety days of service and are twenty-one years of age or more. The Company
generally matches fifty percent of employee contributions to the plan up to a
maximum of six percent of gross wages. The Company's contributions to the plan
are included in salaries and employee benefits on the consolidated statements of
income and amounted to $102,668, $78,658, and $56,815, in 1999, 1998 and 1997,
respectively.
F-23
<PAGE> 123
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........ $ 12,700,739 $ 12,700,739 $ 13,089,168 $ 13,089,168
Federal funds sold............... -- -- 8,229,000 8,229,000
Securities available-for-sale.... 127,349,720 127,349,720 72,540,801 72,540,801
Securities held-to-maturity...... 3,188,599 3,190,577 4,762,115 4,997,334
Federal Home Loan and Federal
Reserve Bank Stock............ 1,608,000 1,608,000 1,370,500 1,370,500
Loans............................ 259,763,411 258,913,743 215,927,533 217,727,790
Loans held for sale.............. 11,147,305 11,147,305 23,642,590 23,633,860
Servicing rights................. 1,749,298 2,219,578 1,431,665 1,431,665
Accrued interest receivable...... 2,814,174 2,814,174 2,126,364 2,126,364
Financial liabilities:
Deposits with defined
maturities.................... 237,339,814 237,217,165 193,912,983 194,650,266
Deposits with undefined
maturities.................... 146,517,225 146,517,225 118,483,986 118,483,986
Other borrowings and repurchase
agreements.................... 21,472,549 21,472,549 11,844,776 11,844,776
Accrued interest payable......... 1,321,829 1,321,829 1,086,859 1,086,859
Off-balance sheet instruments.... -- 125,514 -- 473,354
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. These fair values are provided for disclosure purposes only and do
not impact carrying values of financial statement amounts.
Cash and Cash Equivalents -- The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values, which
includes cash and due from banks.
Federal Funds Sold -- The carrying amount for federal funds sold
approximates those assets' fair value.
Investment Securities (including mortgage-backed securities) -- Fair values
for securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments.
Federal Home Loan and Federal Reserve Bank Stock -- The carrying amount for
these securities approximates fair value.
Loans -- For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans are estimated using discounted cash flow analyses,
using interest rates currently offered for loans with similar terms to borrowers
of similar credit quality.
F-24
<PAGE> 124
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
Loans Held for Sale -- Fair values for loans held for sale are based on
quoted market prices in the secondary market.
Servicing Rights -- The fair values of mortgage servicing rights and
commercial servicing rights are estimated using discounted cash flows based on a
current market interest rate.
Accrued Interest -- The carrying amounts of accrued interest approximate
their fair values.
Defined Maturity Deposits -- The fair value for defined maturity deposits,
primarily certificates of deposit, is calculated by discounting future cash
flows to their present value. Future cash flows, consisting of principal and
interest payments, are discounted using rates offered on similar instruments
based on the remaining maturity.
Undefined Maturity Deposits -- The fair value of undefined maturity
deposits is equal to the carrying value and includes demand deposits, savings
accounts, NOW accounts and money market deposit accounts.
Other Borrowings and Repurchase Agreements -- The carrying amounts of other
borrowings and repurchase agreements approximate their fair values.
Off-Balance Sheet Instruments -- Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standings. The fees charged for financial futures
contracts are also representative of the fair value of such contracts.
17. PARENT COMPANY ONLY FINANCIAL INFORMATION
Financial information for Franklin Financial Corporation (parent company)
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998
CONDENSED BALANCE SHEETS ----------- -----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 146,532 $ 87,187
Investment in subsidiary.................................... 29,108,492 24,847,999
Other....................................................... 3,345,729 2,385,118
----------- -----------
TOTAL............................................. $32,600,753 $27,320,304
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities................................................. $10,140,176 $ 3,731,528
Stockholders' equity........................................ 22,460,577 23,588,776
----------- -----------
TOTAL............................................. $32,600,753 $27,320,304
=========== ===========
</TABLE>
F-25
<PAGE> 125
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
CONDENSED STATEMENTS OF INCOME ---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Management fees and rental income................... $ 442,868 $ 305,015 $ 164,248
Interest income..................................... 1,827 1,918 2,016
---------- ---------- ----------
444,695 306,933 166,264
EXPENSES:
Interest expense.................................... 258,267 232,861 218,336
Salaries and employee benefits...................... 280,744 177,585 23,336
Other............................................... 293,307 246,503 147,039
---------- ---------- ----------
832,318 656,949 388,711
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY.............................. (387,623) (350,016) (222,447)
INCOME TAX BENEFIT.................................... 151,791 118,999 75,631
---------- ---------- ----------
LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY.......................................... (235,832) (231,017) (146,816)
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY........ 4,706,279 5,117,515 4,035,287
---------- ---------- ----------
NET INCOME............................................ $4,470,447 $4,886,498 $3,888,471
========== ========== ==========
</TABLE>
F-26
<PAGE> 126
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
CONDENSED STATEMENTS OF CASH FLOWS: ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $4,470,447 $4,886,498 $3,888,471
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation................................... 25,245 25,245 23,141
Equity in undistributed earnings of
subsidiary.................................. (4,706,279) (5,117,515) (4,035,287)
Decrease (increase) in other assets............ (249,729) (374,223) (72,997)
Increase in other liabilities.................. 65,213 117,632 15,167
---------- ---------- ----------
Net cash used in operating activities....... (395,103) (462,363) (181,505)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of premises and equipment............... (736,127) (656,894) (984,540)
---------- ---------- ----------
Net cash used in investing activities....... (736,127) (656,894) (984,540)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid................................... (1,222,607) -- --
Dividends paid from subsidiary................... 1,100,000 -- --
Net proceeds from issuance of common stock....... 253,327 1,271,886 234,276
Purchase of subsidiary stock..................... (5,200,000) -- (1,100,000)
Proceeds from (repayments) of borrowings, net.... 6,259,855 (85,701) 1,979,541
---------- ---------- ----------
Net cash provided by financing activities... 1,190,575 1,186,185 1,113,817
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH....................... 59,345 66,928 (52,228)
CASH AT BEGINNING OF YEAR............................. 87,187 20,259 72,487
---------- ---------- ----------
CASH AT END OF YEAR................................... $ 146,532 $ 87,187 $ 20,259
========== ========== ==========
</TABLE>
18. SEGMENT REPORTING
The Company's reportable segments are determined based on management's
internal reporting approach, which is by operating subsidiaries. The reportable
segments of the Company are comprised of the Bank, excluding its subsidiaries,
and the Mortgage Banking segment, Franklin Financial Mortgage. 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 deposit, and
its primary lending products are commercial business, construction, real estate
mortgage, and consumer loans. The Bank primarily earns interest income from
loans and investments in securities. It earns noninterest income primarily from
deposit and loan fees. The Mortgage Banking segment originates and sells
residential mortgage loans. It sells loan originations into the secondary
market, but retains much of the applicable servicing. As a result of the
retained servicing, the Mortgage Banking segment capitalizes mortgage servicing
rights into income and amortizes these rights over the estimated lives of the
associated loans. Its primary revenue is noninterest income, but it also reports
interest income earned on warehouse balances waiting for funding. The segment
originates retail mortgage loans in the Franklin and Chattanooga areas of
Tennessee. It also originates wholesale mortgage loans through correspondent
relationships with other banks. The All Other segment consists of insurance and
securities subsidiaries and the bank holding company operations which do not
meet the quantitative
F-27
<PAGE> 127
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
threshold for separate disclosure. The revenue earned by the insurance and
securities subsidiaries is reported in noninterest income in the consolidated
financial statements. No transactions with a single customer contributed 10% or
more of the Company's total revenue. The accounting policies for each segment
are the same as those used by the Company. The segments include overhead
allocations and intercompany transactions that were recorded at estimated market
prices. All intercompany transactions have been eliminated to determine the
consolidated balances. The results of the two reportable segments and all other
segments of the Company are included in the following table.
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
MORTGAGE
BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income............. $ 29,348,735 $ 1,408,262 $ 1,101,827 $ (1,167,635) $ 30,691,189
Total interest expense............ 14,994,547 876,803 258,267 (944,438) 15,185,179
------------ ----------- ----------- ------------ ------------
Net interest income............... 14,354,188 531,459 843,560 (223,197) 15,506,010
Provision for loan losses......... 370,000 -- (19,502) -- 350,498
------------ ----------- ----------- ------------ ------------
Net interest income after
provision....................... 13,984,188 531,459 863,062 (223,197) 15,155,512
------------ ----------- ----------- ------------ ------------
Total noninterest income.......... 2,077,235 1,945,402 4,677,563 (4,035,495) 4,664,705
Total noninterest expense......... 8,769,030 3,313,033 1,353,355 (429,217) 13,006,201
------------ ----------- ----------- ------------ ------------
Income before taxes............... 7,292,393 (836,172) 4,187,270 (3,829,475) 6,814,016
Provision for income taxes........ 2,824,309 (284,277) (196,463) -- 2,343,569
------------ ----------- ----------- ------------ ------------
Net income........................ $ 4,468,084 $ (551,895) $ 4,383,733 $ (3,829,475) $ 4,470,447
============ =========== =========== ============ ============
OTHER SIGNIFICANT ITEMS
Total assets...................... $415,805,650 $13,891,259 $33,074,400 $(32,371,366) $430,399,943
Depreciation, amortization and
accretion....................... 548,410 345,821 40,242 -- 934,473
Revenues from external customers
Total interest income........... 29,282,927 1,408,262 -- -- 30,691,189
Total noninterest income........ 2,077,235 1,945,402 642,068 -- 4,664,705
------------ ----------- ----------- ------------ ------------
Total income............. $ 31,360,162 $ 3,353,664 $ 642,068 $ -- $ 35,355,894
============ =========== =========== ============ ============
Revenues from affiliates
Total interest income........... $ 65,808 $ -- $ 1,101,827 $ (1,167,635) $ --
Total noninterest income........ -- -- 4,035,495 (4,035,495) --
------------ ----------- ----------- ------------ ------------
Total income............. $ 65,808 $ -- $ 5,137,322 $ (5,203,130) $ --
============ =========== =========== ============ ============
</TABLE>
F-28
<PAGE> 128
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
MORTGAGE
BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income............. $ 25,566,737 $ 879,138 $ 1,918 $ (10,122) $ 26,437,671
Total interest expense............ 12,918,931 619,653 232,861 (629,775) 13,141,670
------------ ----------- ----------- ------------ ------------
Net interest income............... 12,647,806 259,485 (230,943) 619,653 13,296,001
Provision for loan losses......... 515,000 -- -- -- 515,000
------------ ----------- ----------- ------------ ------------
Net interest income after
provision....................... 12,132,806 259,485 (230,943) 619,653 12,781,001
------------ ----------- ----------- ------------ ------------
Total noninterest income.......... 2,489,877 2,229,942 5,826,706 (5,422,528) 5,123,997
Total noninterest expense......... 7,824,860 1,810,205 921,449 (305,015) 10,251,499
------------ ----------- ----------- ------------ ------------
Income before taxes............... 6,797,823 679,222 4,674,314 (4,497,860) 7,653,499
Provision for income taxes........ 2,687,196 230,935 (151,130) -- 2,767,001
------------ ----------- ----------- ------------ ------------
Net income........................ $ 4,110,627 $ 448,287 $ 4,825,444 $ (4,497,860) $ 4,886,498
============ =========== =========== ============ ============
OTHER SIGNIFICANT ITEMS
Total assets...................... $324,907,020 $24,333,526 $27,123,876 $(26,496,978) $349,867,444
Depreciation, amortization and
accretion....................... 804,040 188,273 31,472 -- 1,023,785
Revenues from external customers
Total interest income........... 25,558,533 879,138 -- -- 26,437,671
Total noninterest income........ 2,489,877 2,229,942 404,178 -- 5,123,997
------------ ----------- ----------- ------------ ------------
Total income............. $ 28,048,410 $ 3,109,080 $ 404,178 $ -- $ 31,561,668
============ =========== =========== ============ ============
Revenues from affiliates
Total interest income........... $ 8,204 $ -- $ 1,918 $ (10,122) $ --
Total noninterest income........ -- -- 5,422,528 (5,422,528) --
------------ ----------- ----------- ------------ ------------
Total income............. $ 8,204 $ -- $ 5,424,446 $ (5,432,650) $ --
============ =========== =========== ============ ============
</TABLE>
F-29
<PAGE> 129
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
MORTGAGE
BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income.............. $ 22,258,361 $ 292,728 $ 2,016 $ (31,816) $ 22,521,289
Total interest expense............. 10,709,616 115,983 218,336 (147,799) 10,896,136
------------ ---------- ----------- ------------ ------------
Net interest income................ 11,548,745 176,745 (216,320) 115,983 11,625,153
Provision for loan losses.......... 420,000 -- -- -- 420,000
------------ ---------- ----------- ------------ ------------
Net interest income after
provision........................ 11,128,745 176,745 (216,320) 115,983 11,205,153
------------ ---------- ----------- ------------ ------------
Total noninterest income........... 1,576,849 1,132,835 4,264,152 (4,199,535) 2,774,301
Total noninterest expense.......... 6,783,471 890,672 331,644 (164,868) 7,840,919
------------ ---------- ----------- ------------ ------------
Income before taxes................ 5,922,123 418,908 3,716,188 (3,918,684) 6,138,535
Provision for income taxes......... 2,216,128 142,429 (108,493) -- 2,250,064
------------ ---------- ----------- ------------ ------------
Net income......................... $ 3,705,995 $ 276,479 $ 3,824,681 $ (3,918,684) $ 3,888,471
============ ========== =========== ============ ============
OTHER SIGNIFICANT ITEMS
Total assets....................... $270,909,663 $2,702,081 $21,330,849 $(20,509,790) $274,432,803
Depreciation, amortization and
accretion........................ 569,713 86,162 23,841 -- 679,716
Revenues from external customers
Total interest income............ 22,228,561 292,728 -- -- 22,521,289
Total noninterest income......... 1,576,849 1,132,835 64,617 -- 2,774,301
------------ ---------- ----------- ------------ ------------
Total income.............. $ 23,805,410 $1,425,563 $ 64,617 $ -- $ 25,295,590
============ ========== =========== ============ ============
Revenues from affiliates
Total interest income............ $ 29,799 $ -- $ 2,016 $ (31,815) $ --
Total noninterest income......... -- -- 4,199,535 (4,199,535) --
------------ ---------- ----------- ------------ ------------
Total income.............. $ 29,799 $ -- $ 4,201,551 $ (4,231,350) $ --
============ ========== =========== ============ ============
</TABLE>
F-30
<PAGE> 130
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2000 (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 13,439
Federal funds sold.......................................... 2,000
Investment securities available-for-sale, at fair value..... 61,660
Mortgage-backed securities available-for-sale, at fair
value..................................................... 73,244
Investment securities held-to-maturity, fair value $2,727... 2,736
Mortgage-backed securities held-to-maturity, fair value
$362...................................................... 366
Federal Home Loan and Federal Reserve Bank stock............ 1,630
Loans held for sale......................................... 9,243
Loans....................................................... 281,075
Allowance for loan losses................................... (2,649)
--------
Net loans............................................ 278,426
Premises and equipment, net................................. 9,101
Accrued interest receivable................................. 3,093
Mortgage servicing rights, net.............................. 1,535
Other assets................................................ 5,835
--------
TOTAL............................................. $462,308
========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing....................................... $ 35,728
Interest-bearing.......................................... 383,922
--------
Total deposits.................................... 419,650
Repurchase agreements....................................... 1,421
Other borrowings............................................ 14,113
Accrued interest payable.................................... 1,801
Other liabilities........................................... 1,396
--------
Total liabilities................................. 438,381
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value -- authorized, 500,000,000
shares; issued 31,054,187 shares at March 31, 2000..... 11,346
Retained earnings......................................... 16,245
Accumulated other comprehensive loss, net of tax.......... (3,664)
--------
Total stockholders' equity........................ 23,927
--------
TOTAL....................................................... $462,308
========
</TABLE>
See notes to unaudited consolidated financial statements.
F-31
<PAGE> 131
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
------ ------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................ $7,036 $5,834
Taxable securities........................................ 2,076 896
Tax-exempt securities..................................... 210 180
Federal funds sold........................................ 16 78
------ ------
Total interest income............................. 9,338 6,988
INTEREST EXPENSE:
Certificates of deposit over $100,000..................... 1,848 1,413
Other deposits............................................ 2,798 1,923
Federal Home Loan Bank advances........................... 140 75
Other borrowed funds...................................... 312 89
------ ------
Total interest expense............................ 5,098 3,500
------ ------
NET INTEREST INCOME......................................... 4,240 3,488
PROVISION FOR LOAN LOSSES................................... 180 70
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 4,060 3,418
OTHER INCOME:
Service charges on deposit accounts....................... 412 382
Mortgage banking activities............................... 258 793
Gain on sale of investment securities..................... 0 72
Other service charges, commissions and fees............... 146 125
Commissions on sale of annuities and brokerage activity... 117 92
------ ------
Total other income................................ 933 1,464
OTHER EXPENSES:
Salaries and employee benefits............................ 1,848 1,677
Occupancy................................................. 375 300
Mortgage banking.......................................... 138 295
Furniture and equipment................................... 238 225
Communications and supplies............................... 121 124
Advertising and marketing................................. 89 62
FDIC and regulatory assessments........................... 48 30
Loss on sale of mortgage loans............................ 73 76
Other..................................................... 374 311
------ ------
Total other expenses.............................. 3,304 3,100
------ ------
INCOME BEFORE INCOME TAXES.................................. 1,689 1,782
INCOME TAXES................................................ 559 622
------ ------
NET INCOME.................................................. $1,130 $1,160
====== ======
NET INCOME PER SHARE:
Basic..................................................... $ 0.04 $ 0.04
====== ======
Diluted................................................... $ 0.03 $ 0.03
====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 31,054 30,471
====== ======
Diluted................................................... 34,442 35,006
====== ======
</TABLE>
See notes to unaudited consolidated financial statements.
F-32
<PAGE> 132
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,130 $ 1,160
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion............. (201) 313
Provision for loan losses............................ 180 70
Loans originated for sale............................ (8,293) (30,496)
Proceeds from sale of loans.......................... 10,546 30,119
Gain on sale of investment securities................ -- (72)
Loss on sale of loans................................ 73 76
Gain on sale of other real estate owned.............. (7) --
Increase in accrued interest receivable.............. (279) (161)
Increase in accrued interest payable................. 479 207
Increase (decrease) in other liabilities............. 508 (244)
Increase in other assets............................. (2,123) (190)
-------- --------
Net cash provided by operating activities......... 2,013 782
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in federal funds sold............................ (2,000) (1,356)
Proceeds from sales of securities available-for-sale...... -- 4,372
Proceeds from maturities of securities
available-for-sale..................................... 3,392 4,672
Proceeds from maturities of securities held-to-maturity... 88 36
Purchases of securities available-for-sale................ (9,697) (14,493)
Purchases of Federal Home Loan and Federal Reserve Bank
stock.................................................. (22) (17)
Net increase in loans..................................... (21,744) (10,929)
Purchases of premises and equipment, net.................. (758) (189)
-------- --------
Net cash used in investing activities............. (30,741) (17,904)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits...................................... 35,792 14,788
Decrease in repurchase agreements......................... (1,000) (1,000)
(Decrease) increase in other borrowings................... (4,939) 93
Dividends paid............................................ (388) (305)
Net proceeds from issuance of common stock................ 1 14
-------- --------
Net cash provided by financing activities......... 29,466 13,590
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 738 (3,532)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 12,701 13,089
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 13,439 $ 9,557
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................ $ 177 $ 92
======== ========
Cash paid during the year for interest.................... $ 4,619 $ 3,293
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
F-33
<PAGE> 133
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Franklin
Financial Corporation and Subsidiary (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. 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 three month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
NOTE B -- COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
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 the amounts in
thousands of other comprehensive income included in equity for the three months
ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total comprehensive income.................................. $1,331 $610
Net unrealized gain (loss) on securities available for
sale...................................................... 324 (761)
</TABLE>
NOTE C -- DIVIDENDS
In February, 2000, the Company's Board of Directors declared a $.0125 per
share cash dividend payable on April 5, 2000.
NOTE D -- SEGMENTS
The Company's reportable segments are determined based on management's
internal reporting approach, which is by operating subsidiaries. The reportable
segments of the Company are comprised of Franklin National Bank (the "Bank"),
excluding its subsidiaries, and the Mortgage Banking segment, Franklin Financial
Mortgage. 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 deposit, and its primary lending products are
commercial business, construction, real estate mortgage and consumer loans. The
Bank primarily earns interest income from loans and investments in securities.
It earns noninterest income primarily from deposit and loan fees. The Mortgage
Banking segment originates and sells residential mortgage loans. It sells loan
originations into the secondary market, but retains much of the applicable
servicing. As a result of the retained servicing, the Mortgage Banking segment
capitalizes mortgage servicing rights into income and amortizes these rights
over the estimated lives of the associated loans. Its primary revenue is
noninterest income, but it also reports interest income earned on warehouse
balances waiting for funding. The segment originates retail mortgage loans in
F-34
<PAGE> 134
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the Franklin and Chattanooga areas of Tennessee. It also originates wholesale
mortgage loans through correspondent relationships with other banks. The All
Other segment consists of insurance and securities subsidiaries and the bank
holding company operations which do not meet the quantitative threshold for
separate disclosure. The revenue earned by the insurance and securities
subsidiaries is reported in noninterest income in the consolidated financial
statements. No transactions with a single customer contributed 10% or more of
the Company's total revenue. The accounting policies for each segment are the
same as those used by the Company. The segments include overhead allocations and
intercompany transactions that were recorded at estimated market prices. All
intercompany transactions have been eliminated to determine the consolidated
balances. The results of the two reportable segments and all other segments of
the Company are included in the following table.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------------------------
MORTGAGE
BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
-------- -------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total interest income................ $ 9,141 $ 222 $ 301 $ (326) $ 9,338
Total interest expense............... 4,948 120 176 (146) 5,098
-------- ------- ------- -------- --------
Net interest income.................. 4,193 102 125 (180) 4,240
Provision for loan losses............ 180 -- -- -- 180
-------- ------- ------- -------- --------
Net interest income after
provision.......................... 4,013 102 125 (180) 4,060
-------- ------- ------- -------- --------
Total noninterest income............. 475 258 1,288 (1,088) 933
Total noninterest expense............ 2,534 633 336 (199) 3,304
-------- ------- ------- -------- --------
Income before taxes.................. 1,954 (273) 1,077 (1,069) 1,689
Provision for income taxes........... 705 (93) (53) -- 559
-------- ------- ------- -------- --------
Net income........................... $ 1,249 $ (180) $ 1,130 $ (1,069) $ 1,130
======== ======= ======= ======== ========
Other significant items
Total assets......................... $448,053 $12,543 $35,042 $(33,330) $462,308
Depreciation, amortization and
accretion.......................... (306) 95 10 -- (201)
Revenues from external customers
Total interest income................ 9,116 222 -- -- 9,338
Total noninterest income............. 475 258 200 -- 933
-------- ------- ------- -------- --------
Total income............... $ 9,591 $ 480 $ 200 $ -- $ 10,271
======== ======= ======= ======== ========
Revenues from affiliates
Total interest income................ $ 25 $ -- $ 301 $ (326) $ --
Total noninterest income............. -- -- 1,088 (1,088) --
-------- ------- ------- -------- --------
Total income............... $ 25 $ -- $ 1,389 $ (1,414) $ --
======== ======= ======= ======== ========
</TABLE>
F-35
<PAGE> 135
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------
MORTGAGE
BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
-------- -------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total interest income................ $ 6,601 $ 397 $ 250 $ (260) $ 6,988
Total interest expense............... 3,460 253 50 (263) 3,500
-------- ------- ------- -------- --------
Net interest income.................. 3,141 144 200 3 3,488
Provision for loan losses............ 80 -- (10) -- 70
-------- ------- ------- -------- --------
Net interest income after
provision.......................... 3,061 144 210 3 3,418
-------- ------- ------- -------- --------
Total noninterest income............. 522 793 1,426 (1,277) 1,464
Total noninterest expense............ 2,034 873 270 (77) 3,100
-------- ------- ------- -------- --------
Income before taxes.................. 1,549 64 1,366 (1,197) 1,782
Provision for income taxes........... 628 22 (28) -- 622
-------- ------- ------- -------- --------
Net income........................... $ 921 $ 42 $ 1,394 $ (1,197) $ 1,160
======== ======= ======= ======== ========
Other significant items
Total assets......................... $335,697 $27,450 $28,280 $(27,607) $363,820
Depreciation, amortization and
accretion.......................... 229 75 9 -- 313
Revenues from external customers
Total interest income................ 6,591 397 -- -- 6,988
Total noninterest income............. 522 793 149 -- 1,464
-------- ------- ------- -------- --------
Total income............... $ 7,113 $ 1,190 $ 149 $ -- $ 8,452
======== ======= ======= ======== ========
Revenues from affiliates
Total interest income................ $ 10 $ -- $ 250 $ (260) $ --
Total noninterest income............. -- -- 1,277 (1,277) --
-------- ------- ------- -------- --------
Total income............... $ 10 $ -- $ 1,527 $ (1,537) $ --
======== ======= ======= ======== ========
</TABLE>
F-36
<PAGE> 136
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16,000 Preferred Securities
FRANKLIN CAPITAL TRUST I
Floating Rate Trust Preferred Securities
(Liquidation Amount $1,000
Per Preferred Security)
Guaranteed by
FRANKLIN FINANCIAL CORPORATION
------------------------
PROSPECTUS
------------------------
MORGAN KEEGAN & COMPANY, INC.
July 10, 2000
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