<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:
March 31, 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
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(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--------- ---------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, No Par Value 31,197,717
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Class Outstanding at May 12, 2000
<PAGE> 2
PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In Thousands)
March 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and cash equivalents $ 13,439 12,701
Federal funds sold 2,000 --
Investment securities available-for-sale, at fair value 61,660 57,823
Mortgage-backed securities available-for-sale, at fair value 73,244 69,527
Investment securities held-to-maturity, fair value $2,727
at March 31, 2000 and $2,813 December 31, 1999 2,736 2,808
Mortgage-backed securities held-to-maturity, fair value
$362 at March 31, 2000 and $377 at December 31, 1999 366 380
Federal Home Loan and Federal Reserve Bank stock 1,630 1,608
Loans held for sale 9,243 11,147
Loans 281,075 259,764
Allowance for loan losses (2,649) (2,480)
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Loans, net 278,426 257,284
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Premises and equipment, net 9,101 8,564
Accrued interest receivable 3,093 2,814
Mortgage servicing rights 1,535 1,585
Other assets 5,836 4,159
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$ 462,308 430,400
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 35,728 37,099
Interest-bearing 383,922 346,758
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Total deposits 419,650 383,857
Repurchase agreements 1,421 2,421
Other borrowings 14,113 19,052
Accrued interest payable 1,801 1,322
Other liabilities 1,396 889
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Total liabilities 438,381 407,541
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Stockholders' equity:
Common stock, No par value. Authorized
500,000,000 shares; issued 31,054,187 and 31,052,683
at March 31, 2000 and December 31, 1999, respectively 11,346 11,345
Accumulated other comprehensive income, net of tax (3,664) (3,988)
Retained earnings 16,245 15,502
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Total stockholders' equity 23,927 22,859
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$ 462,308 430,400
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</TABLE>
See Notes to Consolidated Financial Statements
2
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited and in thousands except for per share data)
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
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Total interest income 9,338 6,988
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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
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Total interest expense 5,098 3,500
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Net interest income 4,240 3,488
Provision for loan losses 180 70
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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
Other service charges, commissions and fees 146 125
Commissions on sale of annuities and brokerage activity 117 92
Gain on sale of investment securities -- 72
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Total other income 933 1,464
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Other expenses:
Salaries and employee benefits 1,848 1,677
Occupancy expense 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 375 311
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Total other expenses 3,305 3,100
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Income before income taxes 1,689 1,782
Income taxes 559 622
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NET INCOME $ 1,130 1,160
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NET INCOME PER SHARE - BASIC $ 0.04 0.04
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NET INCOME PER SHARE - DILUTED $ 0.03 0.03
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Dividends declared per share 0.0125 0.01
Weighted average shares outstanding:
Basic 31,054 30,471
Diluted 34,442 35,006
</TABLE>
3
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended
March 31,
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 (used in) 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 (decrease) accrued interest payable 479 207
Increase in other assets (2,123) (190)
Increase (decrease) in other liabilities 508 (244)
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Net cash provided by operating activities 2,013 782
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Cash flows from investing activities:
Increase in federal funds sold (2,000) (1,356)
Proceeds from maturities of securities available-for-sale 3,392 4,672
Proceeds from sale of securities available-for-sale -- 4,372
Proceeds from maturities of securities held-to-maturity 88 36
Purchases of securities available-for-sale (9,697) (14,493)
Purchase of Federal Home Loan and Federal Reserve stock (22) (17)
Net increase in loans (21,744) (10,929)
Purchases of premises and equipment, net (758) (189)
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Net cash used in investing activities (30,741) (17,904)
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Cash flows from financing activities
Net proceeds from issuance of common stock 1 14
Dividend paid (388) (305)
Increase in deposits 35,792 14,788
Decrease in repurchase agreements (1,000) (1,000)
(Decrease) increase in other borrowings (4,939) 93
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Net cash provided by financing activities 29,466 13,590
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Net increase (decrease) in cash 738 (3,532)
Cash and due from banks at beginning of period 12,701 13,089
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Cash and due from banks at end of period $ 13,439 9,557
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Cash payments for interest $ 4,619 3,293
Cash payments for income taxes $ 177 92
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</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 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 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. 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 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, 2000 March 31, 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Total comprehensive income $1,522 $212
Net unrealized gain (loss) on securities available for sale $324 $(761)
</TABLE>
NOTE C - STOCK SPLITS
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
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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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
<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
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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>
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
<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>
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 five full service branches and
expects to open two additional branches in the second quarter of 2000. In
August 1996, the Bank opened an insurance subsidiary, Franklin Financial
Insurance (formerly Hometown Insurance Agency.) In October 1997, the Bank
opened a financial services subsidiary, Franklin Financial Securities. The
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 $31.9 million, or 7.4%, since December 31, 1999, for a
total of $462.3 million at March 31, 2000. The growth 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. Total deposits
were $419.6 million at March 31, 2000.
The Bank continues 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 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 March 31, 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 only one loan accounted for on a nonaccrual basis at March 31, 2000 and the
Bank's past due loans, at 0.4% of total loans, are substantially below the peer
group average. At March 31, 2000, the 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.
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 Bank's Brentwood branch location during the first quarter
of 2000 and construction costs related to the Cool Springs and Fieldstone Farms
branch facilities scheduled to open in the second quarter of 2000. Accrued
income receivable increased $279,000, or 9.9%, since December 31, 1999. This
increase is due to the combined increase of $26.8 million in loans and
securities since December 31, 1999 and increases in the 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.
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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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 $13.4 million at March 31, 2000. Loans and securities scheduled
to mature within one year exceeded $173.0 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. 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 $33.5 million in federal funds lines
to assist with capital and liquidity needs. The Company has $7.4 million in
borrowings against its line of credit and the Bank has no federal funds
purchased at March 31, 2000. In February and August, 1998 the Bank entered into
long term convertible Federal Home Loan Bank advances with a 10/1 call option
totaling $6.0 million. 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 $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 the Bank's core deposit base.
Approximately $20.8 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $54.8
million of other loan commitments, primarily unused lines and letters of
credit, which may or may not be funded.
The Bank has been approved to open a full service branch in the Cool Springs
area of Franklin. In October 1998, the Company purchased a parcel of land in
this area for $650,000. Expenditures related to the facility are expected to be
approximately $1.1 million, with completion expected in the second quarter of
2000. The Bank has been approved to open a full service branch facility in the
Fieldstone Farms area of Franklin. In July 1999, the Company purchased a parcel
of land in this area for $740,000 with additional expenditures related to this
facility expected to be approximately $1.2 million. The Company expects to
complete construction during the second quarter of 2000.
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 March 31, 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 $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
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<PAGE> 10
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 resulting from an increase in the purchase of zero coupon agency
securities.
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.
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.
Equity capital exceeds regulatory requirements at March 31, 2000, at 6.3% 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% 6.3% 4.0% 8.8% 8.0% 9.6%
Bank 3.0% 7.8% 4.0% 10.9% 8.0% 11.7%
</TABLE>
RESULTS OF OPERATIONS
The Company 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. The Company
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 $88.7 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.
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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 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 $11,000, or
.04%, of loans outstanding at March 31, 2000 compared to net recoveries of
$8,000, or .03%, 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 Bank's insurance
subsidiary increasing from $51,000 for the first quarter of 1999 to $83,000 for
the first quarter of 2000. Income from the Bank's 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
increased $171,000 or 10.2% primarily due to additional personnel in the
banking segment. Salaries and employee benefits 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
the Bank's Brentwood branch facility and overall Bank growth. Mortgage banking
segment expenses decreased $157,000 or 53.2% from the first quarter of 1999 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.
RECENT DEVELOPMENTS
As previously reported, in April 1999, the Bank entered into a memorandum of
understanding with the OCC, which obligated the Bank to take action with
respect to certain operational conditions. The Bank complied with its
obligations under the memorandum of understanding and as of April 10, 2000, the
memorandum of understanding was terminated by the OCC.
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 the
Company's financial statements.
11
<PAGE> 12
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 March 31, 2000, the Company had a gap ratio of
.7 for the one-year period ending March 31, 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
$478,000 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 $478,000 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.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this report:
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description of Exhibit
------- ----------------------
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 March 31, 2000.
13
<PAGE> 14
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: May 12, 2000 By: /s/ Richard E. Herrington
---------------- --------------------------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive officer)
Dated: May 12, 2000 By: /s/ Lisa L. Musgrove
---------------- --------------------------------------------
Lisa L. Musgrove, Senior Vice President and
Chief Financial Officer (principal financial
officer)
14
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,439
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,904
<INVESTMENTS-CARRYING> 3,102
<INVESTMENTS-MARKET> 3,089
<LOANS> 290,318
<ALLOWANCE> 2,649
<TOTAL-ASSETS> 462,308
<DEPOSITS> 419,650
<SHORT-TERM> 7,395
<LIABILITIES-OTHER> 3,197
<LONG-TERM> 6,718
0
0
<COMMON> 11,346
<OTHER-SE> 12,581
<TOTAL-LIABILITIES-AND-EQUITY> 462,308
<INTEREST-LOAN> 7,036
<INTEREST-INVEST> 2,286
<INTEREST-OTHER> 16
<INTEREST-TOTAL> 9,338
<INTEREST-DEPOSIT> 4,646
<INTEREST-EXPENSE> 5,098
<INTEREST-INCOME-NET> 4,240
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,305
<INCOME-PRETAX> 1,689
<INCOME-PRE-EXTRAORDINARY> 1,689
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,130
<EPS-BASIC> .04
<EPS-DILUTED> .03
<YIELD-ACTUAL> 4.00
<LOANS-NON> 190
<LOANS-PAST> 371
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 101
<ALLOWANCE-OPEN> 2,480
<CHARGE-OFFS> 21
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,649
<ALLOWANCE-DOMESTIC> 131
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,518
</TABLE>
