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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<CAPTION>
For Quarterly Period Ended Commission File Number:
<S> <C>
September 30, 2000 0-24133
</TABLE>
FRANKLIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Tennessee 62-1376024
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Public Square, Franklin, Tennessee 37064
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615)790-2265
</TABLE>
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:
<TABLE>
<S> <C>
Common Stock, No Par Value 7,799,404
-------------------------- ---------
Class Outstanding at September 14, 2000
</TABLE>
<PAGE> 2
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands)
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and cash equivalents $ 13,773 12,701
Federal funds sold 282 --
Investment securities available-for-sale, at fair value 75,855 57,823
Mortgage-backed securities available-for-sale, at fair value 143,433 69,527
Investment securities held-to-maturity, fair value $2,754
at September 30, 2000 and $2,813 December 31, 1999 2,730 2,808
Mortgage-backed securities held-to-maturity, fair value
$340 at September 30, 2000 and $377 at December 31, 1999 342 380
Federal Home Loan and Federal Reserve Bank stock 3,145 1,608
Loans held for sale 9,144 11,147
Loans 302,705 259,764
Allowance for loan losses (2,860) (2,480)
--------- -------
Loans, net 299,845 257,284
--------- -------
Premises and equipment, net 10,852 8,564
Accrued interest receivable 4,190 2,814
Mortgage servicing rights 1,496 1,585
Other assets 3,657 4,159
--------- -------
$ 568,744 430,400
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 34,771 37,099
Interest-bearing 416,724 346,758
--------- -------
Total deposits 451,495 383,857
Repurchase agreements 1,521 2,421
Other borrowings 85,621 19,052
Accrued interest payable 2,258 1,322
Other liabilities 717 889
--------- -------
Total liabilities 541,612 407,541
--------- -------
Stockholders' equity:
Common stock, No par value, Authorized
500,000,000 shares; issued 7,799,439 and 7,763,171
at September 30, 2000 and December 31, 1999,
respectively 11,453 11,345
Accumulated other comprehensive income, net of tax (2,171) (3,988)
Retained earnings 17,850 15,502
--------- -------
Total stockholders' equity 27,132 22,859
--------- -------
$ 568,744 430,400
--------- -------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 3
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Interest income: 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest and fees on loans $ 8,017 6,394 22,644 18,464
Taxable securities 2,969 1,175 7,184 3,078
Tax-exempt securities 293 171 722 519
Federal funds sold 12 47 46 148
-------- ------- ------- -------
Total interest income 11,291 7,787 30,596 22,209
-------- ------- ------- -------
Interest expense:
Certificates of deposit over $100,000 2,229 1,301 6,263 4,080
Other deposits 3,745 2,333 9,565 6,260
Federal Home Loan Bank advances 440 15 677 252
Other borrowed funds 640 161 1,266 318
-------- ------- ------- -------
Total interest expense 7,054 3,810 17,771 10,910
-------- ------- ------- -------
Net interest income 4,237 3,977 12,825 11,299
Provision for loan losses 190 10 520 230
-------- ------- ------- -------
Net interest income after
provision for loan losses 4,047 3,967 12,305 11,069
Other income:
Service charges on deposit accounts 520 452 1,443 1,276
Mortgage banking activities 366 196 925 1,608
Other service charges, commissions and fees 179 126 493 389
Commissions on sale of annuities and brokerage activity 170 108 407 313
Gain on sale of investment securities 49 -- 67 104
-------- ------- ------- -------
Total other income 1,284 882 3,335 3,690
-------- ------- ------- -------
Other expenses:
Salaries and employee benefits 2,058 1,714 5,837 5,094
Occupancy expense 452 404 1,236 934
Mortgage banking 123 218 388 744
Furniture and equipment 397 171 902 716
Communications and supplies 143 120 397 368
Advertising and marketing 99 75 276 193
FDIC and regulatory assessments 44 37 143 97
(Gain) loss on sale of mortgage loans (39) 240 56 544
Other 356 382 1,150 1,059
-------- ------- ------- -------
Total other expenses 3,633 3,361 10,385 9,749
-------- ------- ------- -------
Income before income taxes 1,698 1,488 5,255 5,010
Income taxes 553 487 1,739 1,719
-------- ------- ------- -------
Net income $ 1,145 1,001 3,516 3,291
-------- ------- ------- -------
Net income per share - basic $ 0.15 0.13 0.45 0.43
-------- ------- ------- -------
Net income per share - diluted $ 0.14 0.12 0.42 0.39
-------- ------- ------- -------
Dividends declared per share 0.05 0.04 0.15 0.12
Weighted average shares outstanding:
Basic 7,799 7,664 7,787 7,640
Diluted 8,370 8,393 8,366 8,375
</TABLE>
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,516 3,291
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion (216) 804
Provision for loan losses 520 230
Loans originated for sale (29,876) (69,179)
Proceeds from sale of loans 31,879 82,340
Gain on sale of investment securities (67) (104)
Loss on sale of loans 50 422
Gain on sale of other real estate owned (7) --
Increase in accrued interest receivable (1,376) (362)
Increase in accrued interest payable 936 37
Increase in other assets (1,014) (1,445)
Decrease in other liabilities (172) (147)
--------- -------
Net cash provided by operating activities 4,173 15,887
--------- -------
Cash flows from investing activities:
Increase (decrease) in federal funds sold (282) 8,229
Proceeds from maturities of securities available-for-sale 12,102 9,299
Proceeds from sale of securities available-for-sale 25,488 8,545
Proceeds from maturities of securities held-to-maturity 122 1,525
Purchases of securities available-for-sale (125,084) (37,907)
Purchase of Federal Home Loan and Federal Reserve stock (1,537) (209)
Net increase in loans (43,131) (37,260)
Purchases of premises and equipment, net (3,026) (1,298)
--------- -------
Net cash used in investing activities (135,348) (49,076)
--------- -------
Cash flows from financing activities
Net proceeds from issuance of common stock 108 116
Dividend paid (1,168) (917)
Increase in deposits 67,638 23,815
Decrease in repurchase agreements (900) (1,000)
(Decrease) increase in other borrowings 66,569 8,958
--------- -------
Net cash provided by financing activities 132,247 30,972
--------- -------
Net increase (decrease) in cash 1,072 (2,217)
Cash and cash equivalents at beginning of period 12,701 13,089
--------- -------
Cash and cash equivalents at end of period $ 13,773 10,872
--------- -------
Cash payments for interest $ 16,835 10,873
Cash payments for income taxes $ 2,386 1,313
--------- -------
</TABLE>
See Notes to Consolidated Financial Statements
4
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FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Franklin
Financial Corporation and Subsidiaries (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
nine month period ended September 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 nine months
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------ ------------------
(in thousands)
<S> <C> <C>
Total comprehensive income $4,601 $1,662
Net unrealized gain (loss) on securities available for sale $1,817 $(2,524)
</TABLE>
NOTE C - DIVIDENDS
In September 2000, the Company's Board of Directors declared a $.0125 per share
cash dividend payable on October 4, 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
insurance and securities 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 and amortizes these rights
into income over the estimated lives of the associated loans. Its primary
revenue is noninterest income, but it also reports interest income earned on
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warehouse balances waiting for funding. The Mortgage Banking 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 the Company's insurance and
securities subsidiaries, Franklin Capital Trust I 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>
NINE MONTHS ENDED SEPTEMBER 30, 2000
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Total interest income $ 30,036 $ 653 $ 1,085 $ (1,178) $ 30,596
Total interest expense 17,132 385 792 (538) 17,771
--------- --------- --------- --------- ---------
Net interest income 12,904 268 293 (640) 12,825
Provision for loan losses 520 -- -- -- 520
--------- --------- --------- --------- ---------
Net interest income
after provision 12,384 268 293 (640) 12,305
--------- --------- --------- --------- ---------
Total noninterest income 1,749 897 4,180 (3,491) 3,335
Total noninterest expense 8,193 1,633 1,156 (597) 10,385
--------- --------- --------- --------- ---------
Income before taxes 5,940 (468) 3,317 (3,534) 5,255
Provision for income taxes 2,118 (159) (220) -- 1,739
--------- --------- --------- --------- ---------
Net income (loss) $ 3,822 $ (309) $ 3,537 $ (3,534) $ 3,516
========= ========= ========= ========= =========
Other significant items
Total assets $ 553,168 $ 12,706 $ 67,552 $ (64,682) $ 568,744
Depreciation, amortization
and accretion (561) 306 39 -- (216)
Revenues from external customers
Total interest income 29,943 653 -- -- 30,596
Total noninterest income 1,749 897 689 -- 3,335
--------- --------- --------- --------- ---------
Total income $ 31,692 $ 1,550 $ 689 -- $ 33,931
========= ========= ========= ========= =========
Revenues from affiliates
Total interest income 93 -- 1,085 (1,178) --
Total noninterest income -- -- 3,491 (3,491) --
--------- --------- --------- --------- ---------
Total income $ 93 -- $ 4,576 $ (4,669) --
========= ========= ========= ========= =========
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Total interest income $ 21,088 $ 1,162 $ 801 $ (842) $ 22,209
Total interest expense 10,784 739 168 (781) 10,910
-------- -------- -------- -------- --------
Net interest income 10,304 423 633 (61) 11,299
Provision for loan losses 250 -- (20) -- 230
-------- -------- -------- -------- --------
Net interest income
after provision 10,054 423 653 (61) 11,069
-------- -------- -------- -------- --------
Total noninterest income 2,126 1,063 3,399 (2,898) 3,690
Total noninterest expense 6,871 2,150 959 (231) 9,749
-------- -------- -------- -------- --------
Income before taxes 5,309 (664) 3,093 (2,728) 5,010
Provision for income taxes 2,092 (226) (147) -- 1,719
-------- -------- -------- -------- --------
Net income (loss) $ 3,217 $ (438) $ 3,240 $ (2,728) $ 3,291
======== ======== ======== ======== ========
Other significant items
Total assets $365,674 $ 14,946 $ 28,916 $(28,138) $381,398
Depreciation, amortization
and accretion 523 252 29 -- 804
Revenues from external customers
Total interest income 21,047 1,162 -- -- 22,209
Total noninterest income 2,126 1,063 501 -- 3,690
-------- -------- -------- -------- --------
Total income $ 23,173 $ 2,225 $ 501 -- $ 25,899
======== ======== ======== ======== ========
Revenues from affiliates
Total interest income 41 -- 801 (842) --
Total noninterest income -- -- 2,898 (2,898) --
-------- -------- -------- -------- --------
Total income $ 41 -- $ 3,699 $ (3,740) --
======== ======== ======== ======== ========
</TABLE>
NOTE E - TRUST PREFERRED SECURITIES
On June 6, 2000, the Company filed a Form S-2 Registration Statement, Reg. No.
333-38674, 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 $15.2 million from the offering, which it used to repay
approximately $5.0 million of indebtedness under its line of credit, purchase
investments as part of a leverage program to offset the interest expense
associated with the Trust Preferred Securities and for general corporate
purposes, including capital investments in the Bank. Subject to certain
limitations, the Trust Preferred Securities qualify as Tier I capital and are
carried in Other Borrowings on the Company's Balance Sheet.
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NOTE F - SUBSEQUENT EVENTS
On October 3, 2000 the Company held a Special Meeting of Shareholders at which
the Company's shareholders approved an Amendment to the Company's Restated
Charter, as amended, to effect a 1-for-4 reverse split of the Company's Common
Stock. The reverse stock split was effective on October 18, 2000. All share data
and per share data has been restated to reflect the reverse stock split.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Bank represents virtually all of 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. In July 2000, the Company formed
Franklin Capital Trust I, a Delaware business trust and wholly owned subsidiary
of the Company, for the purpose of issuing Trust Preferred Securities to the
public.
FINANCIAL CONDITION
Total assets have grown $138.3 million, or 32.1%, since December 31, 1999, to a
total of $568.7 million at September 30, 2000. The growth has been funded by a
$67.6 million increase in deposits, net income of $3.5 million, and an increase
in other borrowings of $66.6 million. Total deposits were $451.5 million at
September 30, 2000. As a result of the Trust Preferred Securities offering,
which was completed in August 2000, the Company initiated a leverage program to
enhance margins and offset the interest expense associated with the Trust
Preferred Securities. During the third quarter of 2000, the company purchased
approximately $81.3 million in securities as part of the leverage program. The
leverage program was funded by $52.0 million in Federal Home Loan Bank advances,
$10.5 million received in the Trust Preferred Securities offering and $18.8
million in deposit growth. The Company plans to utilize cashflow from the
securities to assist with future loan growth.
The Bank continues to experience excellent loan demand as demonstrated by the
growth in net loans of $42.6 million, or 16.5%, since December 31, 1999. The
allowance for loan losses increased $380,000, or 15.3%, since December 31, 1999,
to a total of $2.9 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 September 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 of allowance for loan losses is primarily due to the fact
that the Bank has no loans accounted for on a nonaccrual basis at September 30,
2000 and the Bank's past due loans, at 0.6% of total loans, are substantially
below the peer group average. At September 30, 2000, the Bank had loans that
were specifically classified as
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impaired of approximately $202,000. The allowance for loan losses related to
impaired loans was $72,000 at September 30, 2000.
At September 30, 2000 the cost of securities classified as available-for-sale
exceeded the fair value of the securities by $3.5 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
$2.2 million and $4.0 million at September 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 nine months ended September 30, 2000.
Securities available-for-sale increased $91.9 million, or 72.2%, during the nine
months ended September 30, 2000 due to the leverage program and overall Bank
growth. Premises and equipment increased by $2.3 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 interest receivable increased $1.4 million, or 48.9%,
since December 31, 1999. This increase is due to the combined increase of $132.7
million in loans and securities since December 31, 1999, increases in the Bank's
prime lending rate and the leverage program. Stockholders' equity increased $4.3
million, or 18.7%, from December 31, 1999 to September 30, 2000. The increase is
primarily attributable to $3.5 million in net income and a $1.8 million decrease
in other comprehensive loss offset by $1.2 million 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, 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 $13.8 million at September 30, 2000. Loans and securities
scheduled to mature within one year exceeded $182.2 million at September 30,
2000, which should provide further liquidity. In addition, approximately $219.3
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 through overnight advances and
$35.0 million in federal funds lines to assist with capital and liquidity needs.
The Company has $2.6 million in borrowings against its line of credit and the
Bank has $8.3 million federal funds purchased at September 30, 2000. In February
and August, 1998 the 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. As part of the leverage
program, during the third quarter of 2000 the Bank entered into three long term
convertible Federal Home Loan Bank advances. One advance of $25.0 million has a
10 year maturity with a 3 year call option. The other two advances totaling
$27.0 million have a 5 year maturity with a one year call option. The Bank has
$1.5 million outstanding in repurchase
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agreements to further develop its relationship with a customer. The Bank has
approximately $82.7 million in brokered deposits at September 30, 2000 to help
fund strong loan demand and the leverage program. 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 $26.4 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $42.3 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
The Bank has received approval to open two 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 to the Consolidated Financial Statements included herein,
in August 2000, the Company completed the sale of $16.0 million of Trust
Preferred Securities. The Company received net proceeds of $15.2 million which
it used to repay approximately $5.0 million of indebtedness on its line of
credit purchase investments as part of a leverage program to offset the
interest expense associated with the Trust Preferred Securities, and for general
corporate purposes.
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
September 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 $4.2 million for the first
nine months of 2000 compared to $15.9 million during the same period in 1999, a
decrease of $11.7 million. The decrease in cash flow between periods is due to
the sale of loans exceeding loans originated for sale by $2.0 million for the
nine months ended September 30, 2000 as compared to $13.2 million for the nine
months ended September 30, 1999. The majority of this change is due to the
increased sale of loans as compared to originations in the mortgage banking
segment during the nine months ended September 30, 2000. The decrease in cash
flow is offset partially by an increase in other assets of $1.0 million in the
first nine months of 2000 as compared to an increase of $1.4 million for the
same period in 1999, as well as a decrease in other liabilities of $172,000 in
the first nine months of 2000 compared to a decrease of $147,000 for the same
period in 1999. The decrease in cash flow is also attributed to accretion
exceeding depreciation and amortization for the nine months ended September 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.
Net cash used in investing activities was $135.3 million for the nine months
ended September 30, 2000 compared to $49.1 million for the nine months ended
September 30, 1999, representing a $86.3 million increase, which was largely due
to the banking segment. The increase in the change in net loans was $43.1
million for the first nine months of 2000 compared to $37.3 million in the first
nine months of 1999. The change in the net investment portfolio also increased
from $18.5 million for the nine months ended September 30, 1999 to $87.4 million
for the nine months ended September 30, 2000 primarily due to the leverage
program. Federal funds sold increased $282,000 for the nine months ended
September 30, 2000 compared to a decrease of $8.2 million for the same period in
1999. Purchases of premises and equipment increased $3.0 million for the first
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nine months of 2000 compared to $1.3 million for the same period in 1999. The
increase is primarily due to the construction costs related to the Cool Springs
and Fieldstone Farms branch locations.
Net cash provided by financing activities was $132.2 million for the first nine
months of 2000 compared to $31.0 million for the same period in 1999, a $101.3
million increase. The increase is primarily due to an increase in deposits of
$67.6 million in the first nine months of 2000 compared to $23.8 million for the
same period in 1999. The increase is also due to an increase of $66.6 million in
other borrowings for the nine months ended September 30, 2000 compared to an
increase of $9.0 million for the same period in the preceding year. The increase
in other borrowings is primarily due to $52.0 million in Federal Home Loan Bank
advances to help fund the leverage program and $16.0 million of the Trust
Preferred Securities offering.
Equity capital exceeded regulatory requirements at September 30, 2000, at 7.3%
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% 7.3% 4.0% 11.3% 8.0% 14.0%
Bank 3.0% 7.8% 4.0% 12.0% 8.0% 13.4%
</TABLE>
RESULTS OF OPERATIONS
The Company had net income of $1.1 million in the third quarter of 2000 and $3.5
million for the first nine months of 2000 compared to net income of $1.0 million
and $3.3 million for the same periods in 1999. Net income for the third quarter
and nine months ending September 30, 2000 increased $144,000 and $225,000,
respectively.
Total interest income increased $3.5 million, or 45.0%, in the three months
ended September 30, 2000 and $8.4 million, or 37.8%, in the nine months ended
September 30, 2000 compared to the same periods in 1999. Total interest expense
increased $3.2 million, or 85.1%, for the three months ended September 30, 2000
and $6.9 million, or 62.9%, for the nine months ended September 30, 2000
compared to the same periods in 1999. The increase in total interest income is
primarily attributable to the increase in earning assets of $181.4 million, or
50.9%, for the first nine 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 $181.8 million, or 56.5%, at
September 30, 2000 as compared to the same period in 1999. The banking segment
continues to experience strong deposit rate competition.
The provision for loan losses was $190,000 and $10,000 for the three months
ended September 30, 2000 and 1999, respectively. The year-to-date provision is
$520,000 for the nine months ended September 30, 2000 as compared to $230,000
for the same period in 1999. While the Bank's asset quality remains good,
provisions for loan losses continue to be needed as a result of growth in the
Bank's loan portfolio. Net charge-offs were
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<PAGE> 12
$139,000, or .04%, of loans outstanding at September 30, 2000 compared to net
charge-offs of $30,000, or .01%, of loans outstanding at September 30, 1999.
Total other income of $1.3 million in the third quarter of 2000 increased
$402,000, or 45.6%, from $900,000 for the same period in 1999. The increase was
largely attributable to an increase of $170,000, or 86.7%, in loan origination
fees related to the mortgage banking segment and an increase of $68,000, or
15.0%, in service charges on deposit accounts in the banking segment. Total
other income of $3.3 million for the nine months ended September 30, 2000
decreased $355,000, or 9.6%, from $3.7 million for the nine months ended
September 30, 1999. The decrease is primarily due to loan origination fees
related to the mortgage banking segment decreasing $683,000, or 42.5%. These
decreases were slightly offset by an increase of $167,000, or 13.1%, in service
charges on deposit accounts in the banking segment. Mortgage servicing rights
income contributed $164,000 and $570,000 for the nine months ended September 30,
2000 and 1999, respectively, to the mortgage banking segment. Other service
charges and fees increased $104,000, or 26.7% during the first nine months of
2000 compared to the first nine months of 1999, primarily due to income from the
Bank's insurance subsidiary increasing from $175,000 for the first nine months
of 1999 to $273,000 for the first nine months of 2000. Income from the Bank's
securities subsidiary increased $94,000, or 30.0%, to $407,000 during the nine
months ended September 30, 2000 compared to $313,000 during the same period in
1999.
Total other expenses increased $272,000, or 8.1%, during the third quarter of
2000 as compared to the same period in 1999. Total other expenses increased
$636,000, or 6.5%, for the nine months ended September 30, 2000 as compared to
the same period in 1999. Salaries and employee benefits increased $743,000, or
14.6%, primarily due to additional personnel for the two new branch locations in
the banking segment. Salaries and employee benefits expense for the mortgage
banking segment was $861,000 for the nine months ended September 30, 2000
compared to $1.1 million for the same period in 1999. The decrease is
attributable to a decrease in commission expense from $249,000 in 1999 to
$120,000 in 2000 due to the decrease in mortgage loan originations. Occupancy
expense increased $302,000, or 32.3%, for the nine months ended September 30,
2000 compared to the same period in 1999. 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 expenses decreased $356,000, or 47.8%,
from the first nine months of 1999 to the first nine 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 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 completed its assessment of the impact the adoption of this Standard will
have on the Company's financial statements.
SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements", released in December 1999 provides guidance for applying generally
accepted accounting principles to selected revenue recognition issues. The
implementation of SAB 101 is required no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. Management does not believe the
adoption of this bulletin will have a material impact on the Company's financial
statements.
12
<PAGE> 13
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 RISK
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
September 30, 2000, the Company had a gap ratio of .7 for the one-year period
ending September 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
$509,000 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 $509,000 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S.
District Court for the Middle District of Tennessee, against Franklin National
Bank and Gordon E. Inman, Chairman of the Board of the Company and the Bank,
alleging breach of contract, tortious interference with contract, fraud and
civil conspiracy in connection with the denial of a loan to a potential borrower
involved in a real estate transaction. The Bank and Mr. Inman filed their
answers in this matter on September 18, 2000 and a motion for Summary Judgment
on October 10, 2000. Mr. Pressman seeks compensatory damages in an amount not to
exceed $12 million and punitive damages in an amount not to exceed $24 million
from each defendant. The Bank and Mr. Inman deny all of the allegations and will
vigorously defend the action. Management further believes that the claims
alleged by Mr. Pressman are frivolous and without merit and the chances for
recovery by Mr. Pressman are remote.
On September 1, 2000, Highland Capital, Inc. filed a complaint in the
U.S. District Court for the Middle District of Tennessee, against Franklin
National Bank alleging that the Bank required Highland Capital, Inc. to purchase
stock in Franklin Financial Corporation, the Bank's parent holding company, in
conjunction with Highland Capital, Inc.'s efforts to obtain a loan from the Bank
in violation of 12 U.S.C. ss. 1972, which prohibits certain tying arrangements.
Highland Capital, Inc. is seeking an unspecified amount of damages in an amount
not to exceed $2 million, plus attorney's fees and costs. The Bank filed an
answer in the matter on September 19, 2000. The Bank has denied all allegations
under the complaint and believes the claims alleged by Highland Capital, Inc.
are without merit. The Bank intends to vigorously defend against the action.
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
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
14
<PAGE> 15
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.
<TABLE>
<CAPTION>
FRANKLIN FINANCIAL CORPORATION
<S> <C>
Dated: November 14, 2000 By: /s/ Richard E. Herrington
------------------ -------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive officer)
Dated: November 14, 2000 By: /s/ Lisa L. Musgrove
----------------- --------------------
Lisa L. Musgrove, Senior Vice President and
Chief Financial Officer (principal financial
officer)
</TABLE>
15
