<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 2000 0-24133
FRANKLIN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 62-1376024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Public Square, Franklin, Tennessee 37064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615)790-2265
------------------------------
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, No Par Value 31,197,757
-------------------------- ------------------------------
Class Outstanding at August 11, 2000
<PAGE> 2
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands)
June 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and cash equivalents $ 16,487 12,701
Federal funds sold 541 --
Investment securities available-for-sale, at fair value 62,575 57,823
Mortgage-backed securities available-for-sale, at fair value 75,026 69,527
Investment securities held-to-maturity, fair value $ 2,722
at June 30, 2000 and $2,813 December 31, 1999 2,727 2,808
Mortgage-backed securities held-to-maturity, fair value
$351 at June 30, 2000 and $377 at December 31, 1999 355 380
Federal Home Loan and Federal Reserve Bank stock 2,026 1,608
Loans held for sale 8,557 11,147
Loans 287,155 259,764
Allowance for loan losses (2,704) (2,480)
------------------------------------------------------------------------------------------------------------------------
Loans, net 284,451 257,284
------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 10,570 8,564
Accrued interest receivable 3,170 2,814
Mortgage servicing rights 1,518 1,585
Other assets 4,178 4,159
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$ 472,181 430,400
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 37,830 37,099
Interest-bearing 377,706 346,758
------------------------------------------------------------------------------------------------------------------------
Total deposits 415,536 383,857
Repurchase agreements 1,421 2,421
Other borrowings 28,684 19,052
Accrued interest payable 1,409 1,322
Other liabilities 331 889
------------------------------------------------------------------------------------------------------------------------
Total liabilities 447,381 407,541
------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, No par value. Authorized
500,000,000 shares; issued 31,197,717
and 31,052,683 at June 30, 2000 and December 31, 1999,
respectively 11,453 11,345
Accumulated other comprehensive income, net of tax (3,748) (3,988)
Retained earnings 17,095 15,502
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Total stockholders' equity 24,800 22,859
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$ 472,181 430,400
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 3
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Interest income: 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,591 6,236 14,627 12,070
Taxable securities 2,139 1,007 4,215 1,903
Tax-exempt securities 219 168 429 348
Federal funds sold 18 23 34 101
----------------------------------------------------------------------------------------------------------
Total interest income 9,967 7,434 19,305 14,422
----------------------------------------------------------------------------------------------------------
Interest expense:
Certificates of deposit over $100,000 2,186 1,366 4,034 2,779
Other deposits 3,022 2,004 5,820 3,927
Federal Home Loan Bank advances 97 100 237 175
Other borrowed funds 314 130 626 219
----------------------------------------------------------------------------------------------------------
Total interest expense 5,619 3,600 10,717 7,100
----------------------------------------------------------------------------------------------------------
Net interest income 4,348 3,834 8,588 7,322
Provision for loan losses 150 150 330 220
----------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,198 3,684 8,258 7,102
Other income:
Service charges on deposit accounts 511 442 923 824
Mortgage banking activities 301 619 559 1,412
Other service charges, commissions and fees 168 138 314 263
Commissions on sale of annuities and brokerage activity 120 113 237 205
Gain on sale of investment securities 18 32 18 104
----------------------------------------------------------------------------------------------------------
Total other income 1,118 1,344 2,051 2,808
----------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 1,931 1,703 3,779 3,380
Occupancy expense 409 230 784 530
Mortgage banking 127 467 265 830
Furniture and equipment 267 320 505 545
Communications and supplies 133 124 254 248
Advertising and marketing 88 56 177 118
FDIC and regulatory assessments 51 30 99 60
Loss on sale of mortgage loans 22 228 95 304
Other 420 132 794 375
----------------------------------------------------------------------------------------------------------
Total other expenses 3,448 3,290 6,752 6,390
----------------------------------------------------------------------------------------------------------
Income before income taxes 1,868 1,738 3,557 3,520
Income taxes 627 610 1,186 1,232
----------------------------------------------------------------------------------------------------------
NET INCOME $ 1,241 1,128 2,371 2,288
----------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $ 0.04 0.04 0.08 0.07
----------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - DILUTED $ 0.04 0.03 0.07 0.07
----------------------------------------------------------------------------------------------------------
Dividends declared per share 0.0125 0.01 0.025 0.02
Weighted average shares outstanding:
Basic 31,187 30,544 31,120 30,508
Diluted 34,178 34,665 34,260 34,799
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended
June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,371 2,288
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion (203) 584
Provision for loan losses 330 220
Loans originated for sale (18,577) (54,655)
Proceeds from sale of loans 21,167 54,783
Gain on sale of investment securities 18 (104)
Loss on sale of loans 89 207
Gain on sale of other real estate owned (7) --
Increase in accrued interest receivable (356) (259)
Increase in accrued interest payable 87 212
Increase in other assets (494) (670)
Decrease in other liabilities (558) (266)
----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,831 2,340
----------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in federal funds sold (541) 8,229
Proceeds from maturities of securities available-for-sale 7,089 7,918
Proceeds from sale of securities available-for-sale 1,712 8,545
Proceeds from maturities of securities held-to-maturity 109 1,448
Purchases of securities available-for-sale (17,579) (24,718)
Purchase of Federal Home Loan and Federal Reserve stock (418) (187)
Net increase in loans (27,586) (23,659)
Purchases of premises and equipment, net (2,472) (302)
----------------------------------------------------------------------------------------------
Net cash used in investing activities (39,686) (22,726)
----------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from issuance of common stock 108 113
Dividend paid (778) (611)
Increase in deposits 31,679 18,314
Decrease in repurchase agreements (1,000) (1,000)
Increase in other borrowings 9,632 1,163
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Net cash provided by financing activities 39,641 17,979
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Net increase (decrease) in cash 3,786 (2,407)
Cash and cash equivalents at beginning of period 12,701 13,089
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,487 10,682
----------------------------------------------------------------------------------------------
Cash payments for interest $ 10,630 6,888
Cash payments for income taxes $ 1,686 931
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</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and with the instructions to Form 10-Q. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
Certain reclassifications have been made to the 1999 amounts to conform to the
2000 presentation.
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 six months
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
(in thousands)
<S> <C> <C>
Total comprehensive income $2,509 $ 928
Net unrealized gain (loss) on securities available for sale $ 240 $(2,091)
</TABLE>
NOTE C - DIVIDENDS
In May, 2000, the Company's Board of Directors declared a $.0125 per share cash
dividend payable on July 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
5
<PAGE> 6
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 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.
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
---------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 18,924 $ 429 $ 651 $ (699) $ 19,305
Total interest expense 10,417 245 349 (294) 10,717
---------- --------- ---------- ------------ ------------
Net interest income 8,507 184 302 (405) 8,588
Provision for loan losses 330 -- -- -- 330
---------- --------- ---------- ------------ ------------
Net interest income
after provision 8,177 184 302 (405) 8,258
---------- --------- ---------- ------------ ------------
Total noninterest income 1,064 559 2,703 (2,275) 2,051
Total noninterest expense 5,235 1,195 720 (398) 6,752
---------- --------- ---------- ------------ ------------
Income before taxes 4,006 (452) 2,285 (2,282) 3,557
Provision for income taxes 1,437 (153) (98) -- 1,186
---------- --------- ---------- ------------ ------------
Net income (loss) $ 2,569 $ (299) $ 2,383 $ (2,282) $ 2,371
========== ========= ========== ============ ============
Other significant items
Total assets $ 459,382 $ 11,977 $ 35,298 $ (34,476) $ 472,181
Depreciation, amortization
and accretion (423) 200 20 -- (203)
Revenues from external customers
Total interest income 18,876 429 -- -- 19,305
Total noninterest income 1,064 559 428 -- 2,051
---------- --------- ---------- ------------ ------------
Total income $ 19,940 $ 988 $ 428 $ -- $ 21,356
========== ========= ========== ============ ============
Revenues from affiliates
Total interest income 48 -- 651 (699) --
Total noninterest income -- -- 2,275 (2,275) --
---------- --------- ---------- ------------ ------------
Total income $ 48 $ -- $ 2,926 $ (2,974) $ --
========== ========= ========== ============ ============
</TABLE>
6
<PAGE> 7
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 13,588 $ 855 $ 500 $ (521) $ 14,422
Total interest expense 7,021 545 100 (566) 7,100
-------- ---------- ---------- ------------ ------------
Net interest income 6,567 310 400 45 7,322
Provision for loan losses 230 -- (10) -- 220
-------- ---------- ---------- ------------ ------------
Net interest income
after provision 6,337 310 410 45 7,102
-------- ---------- ---------- ------------ ------------
Total noninterest income 1,061 1,412 2,382 (2,047) 2,808
Total noninterest expense 4,144 1,806 594 (154) 6,390
-------- ---------- ---------- ------------ ------------
Income before taxes 3,254 (84) 2,198 (1,848) 3,520
Provision for income taxes 1,327 (29) (66) -- 1,232
-------- ---------- ---------- ------------ ------------
Net income (loss) $ 1,927 $ (55) $ 2,264 $ (1,848) $ 2,288
======== ========== ========== ============ ============
Other significant items
Total assets $339,408 $ 27,883 $ 27,722 $ (27,023) $ 367,990
Depreciation, amortization
and accretion 404 162 18 -- 584
Revenues from external customers
Total interest income 13,567 855 -- -- 14,422
Total noninterest income 1,061 1,412 335 -- 2,808
-------- ---------- ---------- ------------ ------------
Total income $ 14,628 $ 2,267 $ 335 $ -- $ 17,230
======== ========== ========== ============ ============
Revenues from affiliates
Total interest income 21 -- 500 (521) --
Total noninterest income -- -- 2,047 (2,047) --
-------- ---------- ---------- ------------ ------------
Total income $ 21 $ -- $ 2,547 $ (2,568) $ --
======== ========== ========== ============ ============
</TABLE>
SUBSEQUENT EVENTS
On June 6, 2000, the Company filed a Registration Statement on Form S-2 with
the Securities and Exchange Commission to register up to $16 million in
aggregate principal amount of floating rate trust preferred securities (the
"Trust Preferred Securities"). The Trust Preferred Securities were offered and
sold through Franklin Capital Trust I, a Delaware business trust and wholly
owned subsidiary of the Company, on a best efforts basis with a minimum of
$10.0 million and a maximum of $16.0 million to be sold in the offering. The
Trust Preferred Securities will pay 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 a quarterly basis
beginning October 15, 2000. The Trust Preferred Securities have a thirty year
maturity and may be redeemed by the Company upon the earlier of five years or
the occurrence of certain other conditions. On July 17, 2000 and August 11,
2000 the Company completed the sale of $11.0 million and $5.0 million,
respectively, of the Trust Preferred Securities. The Company received net
proceeds of approximately $15.5 million from the offering, which it intends to
use to repay indebtedness under its line of credit and for general corporate
purposes, including capital investments in the Bank.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Bank represents virtually all the assets of the Company. The Bank, located
in Franklin, Tennessee, was opened in December of 1989 and continues to
experience substantial growth. The Bank has seven full service branches. In
August 1996, the Bank opened an insurance subsidiary, Franklin Financial
Insurance. In October 1997, the 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, the 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 wholesale and retail mortgage loans.
7
<PAGE> 8
FINANCIAL CONDITION
Total assets have grown $41.8 million, or 9.7%, since December 31, 1999, for a
total of $472.2 million at June 30, 2000. The growth has been funded by a $31.7
million increase in deposits, net income of $2.4 million, and an increase in
other borrowings of $9.6 million. Total deposits were $415.5 million at June 30,
2000.
The Bank continues to experience excellent loan demand as demonstrated by the
growth in net loans of $27.2 million, or 10.6%, since December 31, 1999. The
allowance for loan losses increased $224,000, or 9.0%, since December 31, 1999,
for a total of $2.7 million or approximately 0.9% of total loans. The increase
is primarily the result of loan growth in the loan portfolio and not because of
a decline in asset quality. The Company has seen significant growth in
construction and commercial real estate loans which carry a higher reserve
factor. Management believes that the level in the allowance for loan losses is
adequate at June 30, 2000. Management reviews in detail the level of the
allowance for loan losses on a quarterly basis. In addition, Professional
Bankers Services, Inc., an external bank consulting firm, performs an annual
review of the loan portfolio to provide management with an independent third
party opinion regarding the adequacy of the allowance for loan losses. The
allowance is below the Bank's peer group average as a percentage of loans.
However, the level for loan losses is primarily due to the fact that the Bank
has no loans accounted for on a nonaccrual basis at June 30, 2000 and the Bank's
past due loans, at 0.9% of total loans, are substantially below the peer group
average. At June 30, 2000, the Bank had loans that were specifically classified
as impaired of approximately $786,000. The allowance for loan losses related to
impaired loans was $93,000 at June 30, 2000.
At June 30, 2000 the cost of securities classified as available-for-sale
exceeded the fair value of the securities by $6.0 million. At December 31, 1999
the cost of securities classified as available-for-sale exceeded the 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 June 30, 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 six months ended June 30, 2000.
Securities available-for-sale increased $10.3 million, or 8.0%, during the six
months ended June 30, 2000 due to overall Bank growth. Premises and equipment
increased by $2.0 million since December 31, 1999 primarily due to costs related
to the relocation of the Bank's Brentwood branch location during the first
quarter of 2000 and construction costs related to the Cool Springs and
Fieldstone Farms branch facilities which opened in the second quarter of 2000.
Accrued income receivable increased $356,000, or 12.7%, since December 31, 1999.
This increase is due to the combined increase of $35.4 million in loans and
securities since December 31, 1999 and increases in the Bank's prime lending
rate. Stockholders' equity increased $1.9 million, or 8.5%, from December 31,
1999 to June 30, 2000. The increase is primarily attributable to $2.4 million in
net income and a $240,000 decrease in other comprehensive loss offset by
$778,000 in dividends declared.
LIQUIDITY AND CAPITAL RESOURCES
Management continuously monitors the Bank's liquidity, but strives to maintain
an asset/liability mix that provides the highest possible net interest margin
without taking undue risk with regard to asset quality or liquidity. Liquidity
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
of liquidity are provided by the investment portfolio, federal funds purchased,
Federal Home Loan Bank advances, sales of loan participations,
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<PAGE> 9
loan payments, brokered and public funds deposits and the Company's 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 $16.5 million at June 30, 2000. Loans and securities scheduled to
mature within one year exceeded $177.7 million at June 30, 2000, which should
provide further liquidity. In addition, approximately $137.6 million of
securities are classified as available-for-sale to help meet liquidity needs
should they arise. The Company has lines of credit of $10.0 million with lending
institutions and the Bank is approved to borrow up to $10.0 million in funds
from the Federal Home Loan Bank and $35.0 million in federal funds lines to
assist with capital and liquidity needs. The Company has $7.6 million in
borrowings against its line of credit and the Bank has $14.4 million federal
funds purchased at June 30, 2000. In February and August, 1998 the Bank entered
into long term convertible Federal Home Loan Bank advances with a ten 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. The Bank has $1.4 million outstanding in
repurchase agreements to further develop its relationship with a customer. The
Bank has approximately $52.2 million in brokered deposits at June 30, 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 the
Bank's core deposit base.
Approximately $21.3 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $50.0 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
The Bank is beginning the application process for two additional full service
branch locations in Davidson County, Tennessee. The Company plans to lease
facilities in Green Hills and Nashville with annual lease payments of $112,000
and $169,000 respectively. Expenditures related to the facilities are expected
to be approximately $50,000. Both locations are expected to open in the first
quarter of 2001.
As discussed in Note E, the Company has completed the sale of $16.0 million of
Trust Preferred Securities. The Company received net proceeds of $15.5 million
which it intends to use to repay indebtedness on its line of credit and for
corporate expenses.
Management monitors the Company's 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. Management believes that the Company's liquidity is adequate at
June 30, 2000. Other than as set forth above, there are no known trends,
commitments, events or uncertainties that will result in or are reasonably
likely to result in the Company's liquidity increasing or decreasing in any
material way. The Company is not aware of any current recommendations by the
regulatory authorities, which if they were to be implemented, would have a
material adverse effect on the Company's liquidity, capital resources or results
of operations.
Net cash flow provided by operating activities was $3.8 million for the first
six months of 2000 compared to $2.3 million during the same period in 1999, an
increase of $1.5 million. The increase in cash flow is due to the sale of loans
exceeding loans originated for sale by $2.6 million for the six months ended
June 30, 2000 as compared to $128,000 for the six months ended June 30, 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 $494,000 in the first six
months of 2000 as compared to an increase of $670,000 for the same period in
1999, as well as, a decrease in other liabilities of $558,000 in the first six
months of 2000 compared to a decrease of $266,000 for the same period in 1999.
The increase in cash flow is also slightly offset by accretion exceeding
depreciation and amortization for the six months ended June 30, 2000 as compared
to depreciation and amortization exceeding accretion in the same period in 1999
resulting from an increase in the purchase of zero coupon agency securities.
9
<PAGE> 10
Net cash used in investing activities was $39.7 million for the six months ended
June 30, 2000 compared to $22.7 million for the six months ended June 30, 1999,
representing a $17.0 million increase, which was largely due to the banking
segment. The increase in the change in net loans was $27.6 million for the first
six months of 2000 compared to $23.7 million in the first six months of 1999.
The change in the net investment portfolio also increased from $6.8 million for
the six months ended June 30, 1999 to $8.7 million for the six months ended June
30, 2000. Federal funds sold increased $541,000 for the six months ended June
30, 2000 compared to a decrease of $8.2 million for the same period in 1999.
Purchases of premises and equipment increased $2.5 million for the first six
months of 2000 compared to $300,000 for the same period in 1999. The increase is
primarily due to the construction cost related to the Cool Springs and
Fieldstone Farms branch locations.
Net cash provided by financing activities was $39.6 million for the first six
months of 2000 compared to $18.0 million for the same period in 1999, a $21.6
million increase. The increase is primarily due to an increase in deposits of
$31.7 million in the first six months of 2000 compared to $18.3 million for the
same period in 1999. The increase is also due to an increase of $9.6 million in
other borrowings for the six months ended June 30, 2000 compared to an increase
of $1.2 million for the same period in the preceding year. The increase in other
borrowings is due to more federal funds purchased at June 30, 2000.
Equity capital exceeded regulatory requirements at June 30, 2000, at 6.0% of
average assets. The Company and Bank's minimum capital requirements and
compliance with the same are shown in the following table.
<TABLE>
<CAPTION>
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL RISK-BASED CAPITAL
------------------- ------------------- -------------------------
REGULATORY REGULATORY REGULATORY
MINIMUM ACTUAL MINIMUM ACTUAL MINIMUM ACTUAL
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Company 3.0% 6.0% 4.0% 9.1% 8.0% 10.0%
Bank 3.0% 7.4% 4.0% 11.2% 8.0% 12.1%
</TABLE>
RESULTS OF OPERATIONS
The Company had net income of $1.2 million in the second quarter and $2.4
million for the first six months of 2000 compared to net income of $1.1 million
and $2.3 million for the same periods in 1999. Net income for the second quarter
and six months ending June 30, 2000 increased $113,000 and $83,000,
respectively.
Total interest income increased $2.5 million, or 34.1%, in the three months
ended June 30, 2000 and $4.9 million, or 33.9%, compared to the same period in
1999. Total interest expense increased $2.0 million, or 56.1%, for the three
months ended June 30, 2000 and $3.6 million, or 50.9%, compared to the same
periods in 1999. The increase in total interest income is primarily attributable
to the increase in earning assets of $93.7 million, or 25.9%, for the first six
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 $96.7 million, or 31.1%, at June 30, 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 $150,000 for the three months ended June 30,
2000 and 1999. The year-to-date provision is $330,000 for the six months ended
June 30, 2000 as compared to $220,000 for the same period in 1999. While the
Bank's asset quality remains good, provisions for loan losses continue to be
needed as a
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result of growth in the Bank's loan portfolio. Net charge-offs were $105,000,
or.04%, of loans outstanding at June 30, 2000 compared to net charge-offs of
$16,000, or .01%, of loans outstanding at June 30, 1999.
Total other income of $1.1 million in the second quarter of 2000 decreased
$226,000, or 16.8%, from $1.3 million for the same period in 1999. The decrease
was largely attributable to a decrease of $318,000, or 51.4%, in loan
origination fees related to the mortgage banking segment offset slightly by an
increase of $69,000, or 15.6%, in service charges on deposit accounts in the
banking segment. Total other income of $2.1 million for the six months ended
June 30, 2000 decreased $757,000, or 27.0%, from $2.8 million for the six months
ended June 30, 1999. The decrease is primarily due to loan origination fees
related to the mortgage banking segment decreasing $853,000, or 60.4%, and a
decrease of $86,000, or 82.7%, in the gain on sale of investment securities in
the banking segment. These decreases were slightly offset by an increase of
$99,000, or 12.0%, in service charges on deposit accounts in the banking
segment. Mortgage servicing rights income contributed $101,000 and $664,000 for
the six months ended June 30, 2000 and 1999, respectively, to the mortgage
banking segment. Other service charges and fees increased $51,000, or 19.4%
during the first half of 2000 compared to the first half of 1999, primarily due
to income from the Bank's insurance subsidiary increasing from $117,000 for the
first six months of 1999 to $185,000 for the first six months of 2000. Income
from the Bank's securities subsidiary increased $32,000, or 15.6%, to $237,000
during the six months ended June 30, 2000 compared to $205,000 during the same
period in 1999.
Total other expenses increased $158,000, or 4.8%, during the second quarter of
2000 as compared to the same period in 1999. Total other expenses increased
$362,000, or 5.7%, for the six months ended June 30, 2000 as compared to the
same period in 1999. Salaries and employee benefits increased $399,000, or
11.8%, primarily due to additional personnel for the two new branch locations in
the banking segment. Salaries and employee benefits for the mortgage banking
segment was $579,000 for the six months ended June 30, 2000 compared to $781,000
for the same period in 1999. The decrease is attributable to a decrease in
commission expense from $198,000 in 1999 to $68,000 in 2000 due to the decrease
in mortgage loan originations. Occupancy expense increased $254,000, or 47.9%,
from the six months ended June 30, 1999 compared to the same period in 2000. The
increases are attributable to the costs associated with the relocation of the
Bank's Brentwood branch facility, the opening of the Cool Springs and Fieldstone
Farms branch facilities and overall Bank growth. Mortgage banking segment
expenses decreased $565,000, or 68.1%, from the first half of 1999 to the first
half 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.
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
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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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Form 10-Q contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "estimate," "anticipate,"
believe," "target," "plan," "project," or "continue" or the negatives thereof or
other variations thereon or similar terminology, and are made on the basis of
management's plans and current analyses of the Company, its business and the
industry as a whole. These forward looking statements are subject to risk and
uncertainties, including, but not limited to, economic conditions, competition,
interest rate sensitivity and exposure to regulatory and legislative changes.
The above factors, in some cases, have affected, and in the future could affect,
the Company's financial performance and could cause actual results for fiscal
2000 and beyond to differ materially from those expressed or implied in such
forward-looking statements. The Company does not undertake to publicly update or
revise its forward-looking statements even if experience or future changes make
it clear that any projected results expressed or implied therein will not be
realized.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. The liquidity and maturity structure of the Company's
assets and liabilities are important to the maintenance of acceptable net
interest income levels. An increasing interest rate environment negatively
impacts earnings as the Company's rate sensitive liabilities generally reprice
faster than its rate sensitive assets. Conversely, in a decreasing interest rate
environment, earnings are positively impacted. This potential asset/liability
mismatch in pricing is referred to as "gap" and is measured as rate sensitive
assets divided by rate sensitive liabilities for a defined time period. A gap of
1.0 means that assets and liabilities are perfectly matched as to repricing
within a specific time period and interest rate movements will not affect net
interest margin, assuming all other factors hold constant. Management has
specified gap guidelines for a one-year time horizon between .7 and 1.3. At June
30, 2000, the Company had a gap ratio of .7 for the one-year period ending June
30, 2001. Thus, over the next twelve months, slightly more rate sensitive
liabilities will reprice than rate sensitive assets.
A 200 basis point decrease in interest rates spread evenly during the next
twelve months is estimated to cause an increase in net interest income of
$482,000 as compared to net interest income if interest rates were unchanged
during the next twelve months. In comparison, a 200 basis point increase in
interest rates spread evenly during the next twelve months is estimated to cause
a decrease in net interest income of $482,000 as compared to net interest income
if rates were unchanged during the next twelve months. This level of variation
is within the Company's acceptable limits. This simulation analysis assumed that
savings and checking interest rates had a low correlation to changes in market
rates of interest and that certain asset prepayments changed as refinancing
incentives evolved. Further, in the event of a change in such magnitude in
interest rates, the Company's asset and liability management committee would
likely take actions to further mitigage its exposure to the change. However,
given the uncertainty of specific conditions and corresponding actions which
would be required, the analysis assumed no change in the Company's
asset/liability composition.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 16, 2000 the Company held its 2000 Annual Meeting of Shareholders. At the
meeting, the following persons were elected to serve on the company's Board of
Directors for a term of one year and until their successors are elected and have
qualified: Richard E. Herrington, Gordon E. Inman, Charles R. Lanier, D. Wilson
Overton, Edward M. Richey, Edward P. Silva, Melody J. Smiley and James W. Cross,
IV. The number of votes cast for and against the election of each nominee for
director was as follows:
<TABLE>
<CAPTION>
Director For Against
-------- --- -------
<S> <C> <C>
Richard E. Herrington 27,153,684 0
Gordon E. Inman 27,153,684 0
Charles R. Lanier 27,153,684 0
D. Wilson Overton 27,153,684 0
Edward M. Richey 27,153,684 0
Edward P. Silva 27,153,684 0
Melody J. Smiley 27,149,084 0
James W. Cross, IV 27,147,712 0
</TABLE>
In addition, the shareholders approved the adoption of the Company's 2000 Stock
Option Plan. The number of votes cast for the Plan was 21,110,536 with 761,266
against.
No other matters were presented or voted upon at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
27.1 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN FINANCIAL CORPORATION
Dated: August 14, 2000 By: /s/ Richard E. Herrington
------------------- --------------------------------------
Richard E. Herrington, President and
Chief Executive Officer (principal
executive officer)
Dated: August 14, 2000 By: /s/ Lisa L. Musgrove
-------------------- --------------------------------------
Lisa L. Musgrove, Senior Vice
President and Chief Financial
Officer (principal financial officer)
14
