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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission file number 0-20880
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FRANKLIN BANCORPORATION, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1632361
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1722 I (Eye) Street, N.W., Washington, D.C. 20006
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 429-9888
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common stock, par value $0.10
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value as of March 5, 1998 of voting stock held
by non-affiliates of the registrant was $140,842,268. The number of shares
outstanding of the registrant's common stock, par value $0.10, was 6,746,935
shares as of March 5, 1998.
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TABLE OF CONTENTS
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Page
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PART I
Item 1 - Business 3
Item 2 - Properties 10
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 11
Item 6 - Selected Consolidated Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7a- Quantitative and Qualitative Disclosures about Market Risk 29
Item 8 - Financial Statements and Supplementary Data 30
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 60
PART III
Item 10 - Directors and Executive Officers of the Registrant 60
Item 11 - Executive Compensation 63
Item 12 - Security Ownership of Certain Beneficial Owners and Management 71
Item 13 - Certain Relationships and Related Transactions 72
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72
Signatures 75
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PART I
ITEM 1 - BUSINESS
Franklin Bancorporation, Inc. ("Franklin") is a Delaware corporation
incorporated on October 31, 1988 and registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"). At December 31, 1997, Franklin had consolidated total assets of
approximately $647 million, total deposits of approximately $428 million and
total stockholders' equity of approximately $39 million. Franklin is
headquartered in Washington, D.C. and owns all of the outstanding stock of its
two subsidiaries, Franklin National Bank of Washington, D.C. (the "Bank") and
Franklin Community Development Corporation (the "CDC").
The Bank is a national banking association chartered under the laws
of the United States. It was incorporated in 1983 as National Enterprise Bank,
became First Interstate Bank of Washington, D.C. in 1987 under a franchise
agreement and was acquired by Franklin in 1989, changing its name to Franklin
National Bank of Washington, D.C. at that time.
The CDC is a non-banking subsidiary, incorporated in 1997 to provide
economic development opportunities through loans or equity investments for
low-to-moderate income neighborhoods within the metropolitan Washington area.
In April 1995, Franklin acquired The George Washington Banking
Corporation ("GWBC"), the holding company of The George Washington National Bank
of Alexandria, Virginia, which was renamed Franklin National Bank of Virginia.
In August 1996, Franklin National Bank of Virginia was merged with and into the
Bank.
In December 1997, Franklin announced it had entered into an Agreement
and Plan of Reorganization with BB&T Financial Corporation of Virginia ("BB&T
Virginia") and BB&T Corporation ("BB&T"), which provides that BB&T will acquire
Franklin in a tax-free merger. BB&T is a multi-bank holding company
headquartered in Winston-Salem, North Carolina with approximately $29 billion in
assets and operations throughout the Carolinas and Virginia. The transaction is
valued at approximately $165 million, or $22.45 per share of Franklin common
stock, based on BB&T's closing stock price on the last trading day before the
date of the announcement and is expected to be completed on or about the end of
the second quarter of 1998. Franklin shareholders are to receive a minimum of
0.35 shares to a maximum of 0.3743 of BB&T common stock for each share of
Franklin common stock held, based on BB&T's average stock price for a period
prior to closing.
Market Area
The Bank was formed to service the financial needs of the small to
medium sized businesses and professionals in the metropolitan Washington, D. C.
community while providing a limited array of quality services to consumers
within its primary service area.
The Bank's primary service area includes the District of Columbia and
suburban Virginia and Maryland, with a focus on the cities of Arlington and
Alexandria and portions of Fairfax and Montgomery Counties.
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The Bank operates nine full service branch offices; six in the
District of Columbia, two in Northern Virginia and one in Bethesda, Maryland.
The Bank offers eight 24-hour automated teller machines ("ATMs") which are
linked with other automated teller machines regionally through MOST and
nationally through PLUS and CIRRUS. The Bank also offers 24-hour telephone
banking, with inquiry and transfer capabilities, and PC banking with bill paying
capabilities.
BANKING SERVICES
The Bank provides a wide variety of commercial banking services to
its commercial customers. In the commercial lending area, the Bank offers short
and medium term loans, including lines of credit, inventory and accounts
receivable financing and real estate loans. The Bank also provides Small
Business Administration ("SBA") loans when applicable. In addition, the Bank
makes loans designed to assist in the development of economically disadvantaged
and under-served neighborhoods in the District of Columbia, Northern Virginia
and portions of southern Maryland. In the commercial depository area, the Bank
offers business checking accounts, tiered money market accounts, certificates of
deposit and customer repurchase agreements. Cash management services are
offered; these include sweep accounts, balance reporting, account
reconciliation, wire transfers, payroll processing, credit card depository and
Automated Clearing House origination.
The Bank also offers a range of consumer banking services as an
accommodation to its existing customers, including checking accounts, savings
and certificates of deposit programs, Individual Retirement Accounts, VISA (R)
check cards, lending services including auto and other installment and term
loans, overdraft lines of credit, sales of travelers' checks, safe deposit box
rentals, night depository and ATM services. Deposits with the Bank are insured
by the Federal Deposit Insurance Corporation (the "FDIC") up to prescribed
limits and the Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank of Atlanta.
In 1996, the Bank opened an International Banking department, which
provides products and services to support the needs of individuals from foreign
countries and those in the metropolitan Washington area who frequently travel
internationally. Products offered include depository accounts, direct loans and
letters of credit. In conjunction with this department, the Bank offers foreign
currency exchange services facilitating the buying and selling of foreign
currencies and drafts and negotiating foreign transfers to and from most
countries. In 1997, the Bank expanded the department to include embassy banking
to provide Franklin's personalized service to the diplomatic community in the
Washington area.
LENDING ACTIVITIES
The Bank's loan portfolio is distributed into several categories,
each with different risk factors and underwriting criteria. As of December 31,
1996, the portfolio distribution was real estate loans, 34%; commercial loans,
61%; and consumer loans, 5% (including home equity loans). The following
discussion briefly outlines the risk and underwriting criteria that the Bank
uses to evaluate the individual portfolios.
Real Estate Loans: The Bank's underwriting criteria is such that very
few speculative properties have been underwritten. Also, because of the Bank's
size, real estate loans involve smaller properties, with loan size generally
between $300 thousand and $3 million. Tenants and rent rolls are analyzed, and
loan amortizations range from 7 years to 20 years. These loans generally carry
personal guarantees of individuals whose ability to support the loan, if needed,
has been evaluated. The types of real estate in this portfolio are small office
buildings, retail shopping centers, multi-family residential properties and a
limited number of
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warehouse/industrial properties and hotels. The Bank also finances a limited
number of residential construction projects. Only a few projects are funded at
any one time, starts ahead of sales are restricted, and in some cases pre-sold
units are required. The borrowers generally are well-known and experienced, and
these loans generally carry low loan-to-value ratios.
Commercial Loans: This category comprises the bulk of the Bank's loan
portfolio, reflecting its market niche among small businesses and professionals.
The loans are to a variety of firms operating in the metropolitan area.
Collateral typically consists of accounts receivable, inventory and equipment;
in many instances it is supplemented by junior liens on residences of the
principals. In nearly all cases, these loans carry the personal guarantees of
the owners.
The Bank's underwriting criteria generally require: full amortization
in the 3 to 7 year range; adequate business and personal collateral to support
the credit; minimal lending to start-up operations; lending primarily to
established and experienced business people, many of whom have a long and
satisfactory banking history; lending only to companies within the metropolitan
Washington area where borrowers can be monitored; and personal guarantees and
secondary sources of repayment. Unsecured lending is controlled and limited to
the most creditworthy borrowers.
Consumer Loans: Home equity loans constitute a small percentage of
the Bank's loan portfolio. These loans are secured by first or second trusts on
the borrower's primary residence. Home equity loans are offered to existing
customers, but since the Bank does not specialize in consumer lending, this is
not likely to be a major product segment. Similarly, since the Bank is not a
long-term residential mortgage lender, there are a limited number of first trust
mortgages. These tend to be short amortization and balloon maturity loans to
customers wishing to fully retire the debt in a shorter time frame. There also
are a number of mortgages generated as part of the Bank's Community Reinvestment
Act ("CRA") initiatives. Consumer loans are a small segment of the lending
activities and include auto loans, debt consolidation, and overdraft protection.
Risk of Non-Payment: The risk of non-payment (or deferred payment) of
loans is inherent in commercial banking. The Bank's marketing focus on
professionals, small to medium-sized businesses, trade associations, and
nonprofit organizations theoretically could result in the assumption by the Bank
of certain risks that are somewhat greater than those associated with loans to
larger business entities which may have more resources or assets available and
whose liquidity may be greater. However, management believes that the
theoretical possibility of such risks is more than offset by the greater
diversity of borrowers resulting from a lower average loan amount per borrower
and the Bank's loan underwriting procedures. While management attempts to
minimize the credit risk exposure through loan application evaluation and
approval and monitoring procedures, there can be no assurance that such
procedures can significantly reduce such lending risks. Franklin's gross loans
outstanding increased from approximately $233 million at December 31, 1996 to
approximately $301 million at December 31, 1997, an increase of approximately
$68 million, or 29%. Management believes that the risks associated with the
small business segment of the market are offset by a higher asset quality
resulting from the underwriting, approval, and monitoring procedures put into
place over the past seven years. Management believes that, based on existing
information, the allowance for possible loan losses of approximately $4.2
million as of December 31, 1997, is sufficient to provide for losses which may
be sustained on the current loan portfolio. Management believes that, through
its specific reserves and its general portfolio allocations, the current loan
portfolio has adequate reserves.
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COMPETITION
The market for banking and bank-related services, particularly within
Franklin's service area of greater metropolitan Washington, D.C., is highly
competitive. The Bank competes for deposits and loans with other providers of
financial services such as commercial and savings banks, credit unions, money
market and other mutual fund providers and other financial institutions.
Numerous mergers and acquisitions involving Washington, D.C., Virginia and
Maryland banks have recently occurred, intensifying competition in Franklin's
geographic market. Many of the Bank's competitors possess greater financial
resources or have significantly higher lending limits.
Interstate banking laws enacted in 1994 added to the competitive
pressure. Federal law provides that: (1) bank holding companies are permitted,
subject to certain conditions, to acquire banks and bank holding companies
across state lines without regard to whether such acquisition is prohibited by
state law; and (2) effective June 1, 1997, sooner if both states opt-in to
interstate branching, banks are permitted to merge across state lines provided
neither state has opted-out of interstate branching. Maryland, Virginia and the
District of Columbia opted-in to allow mergers across state lines.
The Bank competes by focusing on a defined segment of the market,
small to mid-size local businesses, and providing high quality service that
endeavors to meet or exceed our customers' expectations.
SUPERVISION AND REGULATION
The information contained in this section summarizes portions of the
applicable laws and regulations governing the supervision and regulation of
Franklin and the Bank. These summaries do not purport to be complete, and they
are qualified in their entirety by reference to the particular statues and
regulations described.
Bank Holding Company Regulations
Franklin, as a bank holding company registered under the Bank Holding
Company Act (the "BHCA"), is required to file with the Federal Reserve Board
("FRB") quarterly and annual reports, and such additional information as the FRB
may require, and is subject to regular examinations by the staff of the FRB of
Richmond.
The BHCA requires that a bank holding company obtain the prior
approval of the FRB before it may merge or consolidate with any other bank
holding company, or acquire substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such
acquisition, it will own or control, directly or indirectly, more than 5% of the
voting shares of such bank.
The BHCA also generally prohibits a bank holding company from
engaging in, or from acquiring direct or indirect control of voting shares of
any company engaged in, activities other than banking and the management of
banking organizations, and any non-banking activities which the FRB may find, by
order or regulation, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The approval of the FRB is
generally required prior to engaging in permissible non-banking activities.
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The Bank
As a national bank chartered under the laws of the United States, the
Bank is a member of the Federal Reserve System and is subject to certain
provisions of the Federal Reserve Act and regulations issued by the Board of
Governors. The Bank is subject to regulation, supervision and regular
examination by its primary regulator, the Office of the Comptroller of the
Currency (the "OCC"). Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, mergers and
consolidations, electronic funds transfers, management practices and other
aspects of the Bank's operations are subject to regulation. The approval of the
appropriate bank regulatory agency is required for the establishment of
additional branch offices by the Bank.
The deposits of the Bank are insured by the FDIC. Some of the aspects
of the lending and deposit business of the Bank which are subject to regulation
by the FRB or the FDIC include disclosure requirements in connection with
personal and mortgage loans, interest on deposits and reserve requirements. In
addition, the Bank is subject to numerous federal, state and local laws which
set forth specific restrictions and requirements with respect to extensions of
credit, credit practices, disclosure of credit terms and discrimination in
credit transactions.
As a consequence of the extensive regulation of the commercial
banking industry, the business of the Bank is particularly susceptible to
changes in Federal and state legislation and regulations which may increase the
cost of doing business.
FDIC Improvement Act
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. Among other things, FDICIA
provides increased funding for the Bank Insurance Fund ("BIF") of the FDIC and
provides for expanded regulation of depository institutions and their
affiliates, including parent holding companies. The following is a brief summary
of certain provisions of FDICIA.
Pursuant to FDICIA, the FRB, the OCC and the FDIC have adopted
regulations, setting forth a five-tier scheme for measuring the capital adequacy
of the financial institutions they supervise. Under the regulations, an
institution is placed in one of the following capital categories: (1) well
capitalized (an institution that has a total risk-based capital ratio of at
least 10%, a Tier 1 risk-based capital ratio of at least 6% and a leverage ratio
of at least 5%); (2) adequately capitalized (a total risk-based capital ratio of
at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage
ratio of at least 4%); (3) undercapitalized (a total risk-based capital ratio of
under 8% or a Tier 1 risk-based capital ratio under 4% or a leverage ratio under
4%); (4) significantly undercapitalized (a total risk-based capital ratio of
under 6% or a Tier 1 risk-based capital ratio under 3% or a leverage ratio under
3%); and (5) critically undercapitalized (a ratio of tangible equity to total
assets of 2% or less). The regulations permit the appropriate Federal banking
regulator to downgrade an institution to the next lower category if the
regulator determines: (1) after notice and opportunity for hearing or response,
that the institution is in an unsafe or unsound condition or (2) that the
institution has received (and not corrected) a less-than-satisfactory rating for
any of the categories of asset quality, management, earnings, liquidity or
sensitivity to market risks in its most recent exam. All institutions are
generally prohibited from declaring a dividend, making any other capital
distribution or paying a management fee to a controlling person, if such payment
would cause the institution to become undercapitalized. As of December 31, 1997,
the Bank met the requirements of a "well-capitalized" institution.
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The FDIC issued a rule regarding the ability of depository
institutions to accept brokered deposits. Under the rule, (1) an
undercapitalized institution is prohibited from accepting, renewing or rolling
over brokered deposits, (2) an adequately capitalized institution must obtain a
waiver from the FDIC before accepting, renewing or rolling over brokered
deposits and (3) a well capitalized institution may accept, renew or roll over
brokered deposits without restrictions. In addition, both undercapitalized and
adequately capitalized institutions are subject to restrictions on the rates of
interest they may pay on any deposits.
The FDIC has also issued regulations implementing a system of
risk-based FDIC insurance premiums. Under this system, each depository
institution is assigned to one of nine risk classifications based upon certain
capital and supervisory measures and, depending upon its classification is
assessed premiums per $100 of domestic deposits. The deposits of the Bank are
subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF")
of the FDIC. The FDIC originally set premiums ranging from 23 basis points to 31
basis points per $100 of domestic deposits and lowered the range to 4 basis
points to 23 basis points effective June 30, 1995. Effective January 1, 1996,
the FDIC further reduced premiums to 0 basis points to 27 basis points per $100
of deposits with a minimum assessment payment for a 6 month period of $1,000 per
institution. The Bank carries the lowest risk rating and therefore benefitted
from the reduced premium assessments in 1996.
For 1997 and the first six months of 1998, the FDIC maintained the
premium ranges in effect during 1996 and eliminated the minimum assessment
payment. The Deposit Insurance Funds Act of 1996 authorized the Financing
Corporation ("FIC0") to levy assessments on BIF-insured deposits to pay a
pro-rata portion of the interest due on the obligations issued by FICO. The FICO
premium assessment is not based on the FDIC risk classification. Accordingly,
the FDIC is currently assessing BIF-insured deposits an additional 1.26 basis
points per $100 of deposits, on an annualized basis, to cover those
obligations. This additional assessment will not have a material effect on
Franklin's results of operations.
Distributions
Although Franklin's funds for any cash distributions to its
shareholders could be derived from a variety of sources, the primary source of
funds would be dividends received from the Bank. The Bank is subject to various
statutory requirements and general regulatory policies and regulations relating
to the payment of dividends, including requirements to maintain capital above
regulatory minimums and that income and retained income meet certain thresholds.
Under certain circumstances, the Bank could not pay dividends without regulatory
approval, or the regulators could prohibit payment of dividends.
In addition, the ability of the Bank to pay dividends may be affected
by the various minimum capital requirements and the capital and non-capital
standards established by FDICIA, as described above.
The FRB and OCC have issued guidelines that require bank holding
companies and national banks to evaluate continuously the level of cash
dividends in relation to the organization's net income, capital needs, asset
quality and overall financial condition. The Bank could pay dividends to
Franklin as of December 31, 1997; however, to date, no dividends have been paid
to or by Franklin to ensure the availability of adequate capital for future
expansion.
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MONETARY POLICY
The Bank and therefore Franklin is affected by monetary policies of
regulatory authorities, including the FRB, which regulate the national money
supply in order to mitigate recessionary and inflationary pressures. Among the
techniques available to the FRB are engaging in open market transactions in U.S.
Government securities, changing the discount rate on bank borrowings, and
changing reserve requirements against bank deposits. These techniques are used
in varying combinations to influence the overall growth and distribution of bank
loans, investments, and deposits. Their use may also affect interest rates
charged on loans or paid on deposits. The effect of governmental monetary
policies on the earnings of Franklin cannot be predicted.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements in this Annual Report on Form 10-K that are not
historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "estimate," "project," "intend,"
"expect," "believe," "plan" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve known and
unknown risks and uncertainties. Many factors could cause the actual results,
performance or achievements of Franklin to be materially different from those
expressed or implied in any forward-looking statements. Such factors include the
following.
There can be no assurance that the planned merger with BB&T will be
approved by Franklin's shareholders and consummated, or that thereafter BB&T
will be able to successfully integrate Franklin's management and information
systems so as to provide the anticipated benefits of the merger.
The business and profitability of a financial services organization
such as Franklin is influenced by prevailing economic conditions and
governmental policies. The actions and policy directives of the Federal Reserve
Board determine to a significant degree the cost and availability of funds
obtained from money market sources for lending and investing. Federal Reserve
Board policies and regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their interest-bearing deposits
and may also impact the value of financial instruments held by Franklin. The
nature and impact on Franklin of future changes in economic and market
conditions and monetary and fiscal policies, are not predictable and are beyond
Franklin's control. In addition, these conditions and policies can impact
Franklin's customers and counterparties, which may increase the risk of default
on their obligations to Franklin.
As part of its ongoing business, Franklin assumes financial exposures
to interest rates, currencies, equities and other financial products. In doing
so, Franklin is subject to unforeseen events which may not have been anticipated
or which may have effects which exceed those assumed within its risk management
processes.
As with any financial institution, Franklin is also subject to the
risk of litigation and to an unexpected or adverse outcome in such litigation.
Competitive pressures in the marketplace and unfavorable or adverse publicity
and news coverage can have the effect of lessening customer demand for
Franklin's services. Ultimately, Franklin's business and its success is
dependent on Franklin's ability to attract and retain high quality employees.
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EMPLOYEES
As of December 31, 1997, Franklin employed 140 full-time equivalent
employees through its subsidiaries. Management of Franklin considers relations
with its employees to be satisfactory.
ITEM 2 - PROPERTIES
The principal office of Franklin and its subsidiaries is located at
1722 I (Eye) Street, N.W., Washington, D.C. The Bank leases the space occupied
at this location, as well as the space for the Bank's administrative offices and
five additional branches located in the District of Columbia. The Bank also
leases the space for the branches located in Alexandria and Tysons Corner,
Virginia and Bethesda, Maryland. The Bank's internal Operations, Accounting,
Credit Administration and International Banking departments are housed at
Franklin's principal office in the District of Columbia. Additional information
regarding the Bank's operating leases can be found in Note 13 to the
consolidated financial statements.
ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings pending against Franklin or
its subsidiaries.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
fourth quarter of 1997.
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Franklin's common stock, par value $0.10 per share ("Common Stock"),
trades on The Nasdaq SmallCap Market Tier of The Nasdaq Stock Market under the
symbol FNBC. As of March 5, 1998, there were approximately 470 registered
holders of Common Stock.
The high and low sales prices for Common Stock for each quarter
during the last two years were as follows:
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Sales Prices - 1997 High Low
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Fourth Quarter $21.875 $13.250
Third Quarter 16.000 12.125
Second Quarter 12.750 10.250
First Quarter 12.250 10.000
Sales Prices - 1996 High Low
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Fourth Quarter $10.750 $7.750
Third Quarter 8.125 7.125
Second Quarter 8.375 7.500
First Quarter 8.250 7.500
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Franklin has not paid any dividends to date. The current policy of
management and the Board of Directors is to retain earnings to finance future
growth. Any future payment of dividends will depend upon Franklin's earnings,
operating and financial condition, growth and capital needs and regulatory
requirements and general business conditions.
While Franklin has never declared a dividend and has no current plans
to declare a dividend in the near term, it is Franklin's policy to review this
matter on an ongoing basis.
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is derived from
the audited financial statements of Franklin. It should be read in conjunction
with the detailed information and financial statements of Franklin included
elsewhere herein.
SELECTED FINANCIAL DATA
(Dollars in thousands - except per share data)
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YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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CONDENSED INCOME STATEMENT
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Interest income $ 35,867 $ 29,340 $ 22,464 $ 15,652 $ 12,525
Interest expense 14,335 11,050 8,181 5,168 4,245
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Net interest income 21,532 18,290 14,283 10,484 8,280
Provision for loan losses 484 27 181 365 1,081
Non-interest income 2,447 1,770 1,461 1,050 771
Non-interest expense 13,915 12,652 9,856 7,682 6,910
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Income before income tax expense 9,580 7,381 5,707 3,487 1,060
Income tax expense (benefit) 3,612 2,858 2,324 1,056 (166)
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Net income $ 5,968 $ 4,523 $ 3,383 $ 2,431 $ 1,226
PER SHARE OF COMMON STOCK
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Net income $ 0.91 $ 0.71 $ 0.56 $ 0.43 $ 0.28
Net income, assuming dilution 0.86 0.68 0.54 0.43 0.28
Book value 5.92 4.92 4.20 3.52 3.34
SELECTED BALANCES
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Total assets $ 647,448 $ 497,817 $ 367,031 $ 263,995 $ 231,126
Loans, net of unearned income 300,441 232,581 181,650 125,695 91,801
Securities 179,388 164,116 109,140 106,602 95,673
Non-interest bearing deposits 139,913 123,197 90,454 69,415 47,585
Total deposits 427,798 363,427 302,435 212,533 167,333
Interest bearing liabilities 463,593 339,323 247,850 174,094 163,926
Stockholders' equity 39,283 31,893 26,385 19,745 18,743
SELECTED RATIOS
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Return on average assets 1.23% 1.12% 1.16% 1.01% 0.60%
Return on average equity 17.11% 16.03% 14.36% 12.53% 9.22%
Average equity to average assets 7.17% 7.00% 8.11% 8.09% 6.47%
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of Franklin's financial condition and results
of operations as of and for the years ended December 31, 1997, 1996 and 1995
should be read in conjunction with the Consolidated Financial Statements of
Franklin and statistical data presented elsewhere in this report.
OVERVIEW
Franklin, a bank holding company headquartered in Washington, D.C.,
currently operates one banking subsidiary, the Bank, which conducts business
from nine banking offices in the District of Columbia, Northern Virginia and
suburban Maryland. Through the Bank, Franklin offers a full range of commercial
banking services to its business and professional customers, as well as a
limited array of customary consumer banking services within the greater
metropolitan Washington, D.C. community. Services include various types of
deposit accounts and instruments; commercial, commercial real estate, SBA and
consumer loans; cash management; payroll services; and access to ATM networks.
In 1997, Franklin introduced imaged bank statements and PC banking
for both commercial and retail customers, taking advantage of technology to
improve information delivery to Franklin's customers. Franklin expanded its
International Banking Division to add embassy banking to its international
private banking and foreign exchange products. Franklin also operates one
non-banking subsidiary, the CDC, which was organized in 1997 to provide economic
development opportunities through loans or equity investments for
low-to-moderate income neighborhoods within the Washington metropolitan area.
MERGER ACTIVITY
On December 16, 1997, Franklin announced plans to be acquired in a
tax-free merger, with a wholly-owned subsidiary of BB&T. BB&T is a multi-bank
holding company with approximately $29 billion in assets operating throughout
the Carolinas and Virginia. Based upon BB&T's closing stock price of $63.75 on
December 15, 1997, the transaction is valued at approximately $165.1 million, or
$22.45 per share of Franklin common stock. Franklin shareholders would receive
0.3522 shares of BB&T common stock based on that December 15, 1997 stock price.
The exchange ratio will fluctuate between BB&T stock prices of $54.50 and
$65.00. Below $54.50 and above $65.00, the exchange ratio is fixed at 0.3743 and
0.35 shares, respectively. Any adjustment to the exchange ratio will be based on
the average BB&T stock price for a specified twenty day period prior to closing.
The acquisition, which will be accounted for as a pooling of interests, is
expected to be completed on or about the end of the second quarter of 1998.
This transaction will give BB&T its first entry into the metropolitan
Washington area and is expected to provide expanded products and services to
Franklin's existing customer base. BB&T, the leading business lender in the
Carolinas, expects to capitalize on Franklin's growing commercial base by
providing substantially higher levels of credit and resources in the
metropolitan Washington market. Under the merger agreement, Franklin will become
part of BB&T Financial Corporation of Virginia, one of BB&T's regional bank
holding companies that emphasize autonomy and local decision-making.
Accordingly, Franklin's current management team will represent BB&T in the
metropolitan Washington area.
13
<PAGE> 14
FINANCIAL SUMMARY
Franklin recorded net income of $6.0 million for the year ended
December 31, 1997, compared to $4.5 million for the year ended December 31,
1996. This 32% increase represents Franklin's sixth consecutive year of record
earnings. Earnings per share increased 28% to $0.91 per share for 1997, compared
to $0.71 per share in 1996. Earnings per share, assuming dilution, increased 26%
to $0.86 per share for 1997, compared to $0.68 per share in 1996. Franklin's
return on average assets and return on average equity for 1997 were 1.23% and
17.11%, respectively, compared to 1.12% and 16.03% for 1996. The increase in
earnings from 1996 to 1997 is primarily the result of significant loan growth,
which Franklin was able to fund internally through substantial growth in
customer deposits and customer repurchase agreements. During 1997, Franklin also
increased net interest income and service charge and fee income. The improvement
in earnings was partially offset by increases in the provision for loan losses,
employee related expenses, other overhead costs and income tax expenses.
Total assets at December 31, 1997 were $647 million, an increase of
$149 million, or 30%, from 1996 year end assets of $498 million. Loans, net of
unearned income, increased $67 million, or 29%, to $300 million at December 31,
1997 from $233 million one year ago. Securities increased $15 million, or 9%, to
$179 million at December 31, 1997 from $164 million one year ago. The balance of
the asset increase was cash and short-term investments, which grew $66 million,
or 70%, from $94 million at December 31, 1996 to $160 million at December 31,
1997.
This significant increase in total assets was funded through the
outstanding growth in deposits and customer repurchase agreements which
increased $141 million, or 30%, to $604 million at December 31, 1997 from $463
million one year ago. Non-interest bearing demand deposits grew $17 million to
$140 million at December 31, 1997, a 14% increase over year end 1996. As of
December 31, 1997, non-interest bearing deposits represented 23% of total
deposits and customer repurchase agreements.
EARNING ASSETS
Over the last six fiscal years, Franklin has experienced significant
growth in average earning assets. During 1997, Franklin's average earning assets
grew $80.9 million, or 21%, to $458.5 million for the year ended December 31,
1997. This compares to average balances of $377.6 million and $275 million and
growth rates of 37% and 22%, respectively, for the years ended December 31, 1996
and 1995. Average Statements of Condition, along with interest income and
expense and related yields and rates, for each of the last three fiscal years
are set forth in Table 1.
The 1997 growth in earning assets occurred primarily in loans,
Franklin's highest yielding asset. Average loans grew $54.1 million, or 28%,
from $196.1 million during 1996 to $250.2 million in 1997. Average securities
increased $37.6 million, or 27%, from $137.2 million during 1996 to $174.8
million for 1997. Only average short-term investments, such as Federal funds
sold and securities purchased under resale agreements, decreased during 1997,
from $44.3 million during 1996 to $33.5 million, a decrease of $10.8 million, or
24%. This activity is in keeping with management's intent to increase the
percentage of loans in the total asset mix while maintaining strong credit
quality standards.
14
<PAGE> 15
TABLE 1
CONSOLIDATED AVERAGE STATEMENTS OF CONDITION
INTEREST INCOME/EXPENSE AND YIELDS /RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FULLY TAXABLE EQUIVALENT YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
ASSETS BALANCES EXPENSE RATE BALANCES EXPENSE RATE BALANCES EXPENSE RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Commercial loans $146,341 $13,412 9.17% $120,031 $11,328 9.44% $ 92,620 $ 9,615 10.38%
Real estate loans 88,341 8,728 9.88% 63,285 6,300 9.96% 45,580 4,840 10.62%
Consumer loans 15,558 1,499 9.64% 12,736 1,210 9.50% 12,163 853 7.01%
Securities available-for-sale (1) (2) 95,885 6,162 6.43% 73,722 4,716 6.40% 41,599 2,657 6.39%
Securities held-to-maturity (2) 78,907 4,625 5.86% 63,508 3,397 5.35% 66,208 3,525 5.32%
Federal funds sold and securities
with resale agreements 33,501 1,860 5.55% 44,339 2,389 5.39% 16,799 974 5.80%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS 458,533 $36,286 7.91% 377,621 $29,340 7.77% 274,969 $22,464 8.17%
Cash and due from banks 19,903 19,232 12,924
Other assets (1) 12,381 10,893 8,065
Allowance for loan losses (3,975) (3,847) (3,218)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE ASSETS $486,842 $403,899 $292,740
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
DEPOSITS
Money manager accounts $ 26,190 $ 522 1.99% $ 28,161 $ 614 2.18% $ 22,446 $ 524 2.33%
Money market accounts 110,533 4,019 3.64% 108,674 3,966 3.65% 81,719 3,016 3.69%
Savings accounts 3,429 91 2.66% 3,658 98 2.69% 3,952 114 2.88%
Certificates less than $100,000 14,575 681 4.67% 15,605 785 5.03% 15,031 798 5.31%
Certificates of $100,000 and over 95,242 4,950 5.20% 60,961 3,133 5.14% 45,394 2,511 5.53%
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 249,969 10,263 4.11% 217,059 8,596 3.96% 168,542 6,963 4.13%
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase
agreements 94,891 4,072 4.29% 58,040 2,454 4.23% 31,682 1,218 3.85%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 344,860 14,335 4.16% 275,099 11,050 4.02% 200,224 8,181 4.09%
Non-interest bearing deposits 102,508 97,045 66,941
Other liabilities 4,418 3,258 1,839
Stockholders' equity (1) 35,056 28,497 23,736
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY $486,842 $403,899 $292,740
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/SPREAD $21,951 3.75% $18,290 3.75% $14,283 4.08%
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN ON EARNING ASSETS 4.79% 4.84% 5.19%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes adjustments for unrealized gains (losses) on securities
available-for-sale
(2) Yields stated on a tax equivalent basis
15
<PAGE> 16
LOANS
Management monitors the mix of earning assets on a continuous basis
in an effort to react to interest rate movements and to maximize return on
earning assets. As noted, management's focus in 1997 was to achieve growth in
Franklin's loan portfolio and maintain or improve the credit quality of the
portfolio while meeting the credit needs of the local business community.
Franklin's loan origination volume increased significantly in 1997; it not only
offset loan repayment activity, but also increased average loan balances so that
average loans for 1997 improved to 55% of total average earning assets as
compared to 52% in 1996.
The commercial loan portfolio increased $43.8 million, or 31%, from
$140.5 million on December 31, 1996 to $184.4 million on December 31, 1997 and
represents the largest component of total gross loans at 61%. The real estate
loan portfolio experienced almost the same rate of growth at 29%, increasing $23
million from $78.1 million on December 31, 1996 to $101.1 million on December
31, 1997. The commercial real estate portion of the real estate portfolio
experienced the largest volume increase from 1996 levels, $15.1 million, or 34%,
while residential mortgages increased $11.8 million, or 63%. Only the
construction and development loan portfolio decreased during 1997 from $15.2
million to $11.3 million, a decline of 26%. The real estate loan portfolio,
representing 34% of total gross loans, was Franklin's highest yielding asset at
9.88% for 1997. Franklin's consumer loan portfolio increased $1 million during
1997 from $14.3 million to $15.3 million, an increase of 7%. Table 2 details
Franklin's loan portfolio distribution at the end of each of the last five
years.
TABLE 2
LOANS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REAL ESTATE
Commercial $ 59,278 $ 44,136 $ 26,818 $ 24,255 $ 8,166
Construction and development 11,336 15,243 9,394 4,799 4,142
Residential mortgage 30,571 18,768 20,638 3,025 1,622
- -----------------------------------------------------------------------------------------------------
TOTAL 101,185 78,147 56,850 32,079 13,930
COMMERCIAL AND INDUSTRIAL 184,360 140,544 111,110 88,759 71,841
CONSUMER 15,372 14,326 14,083 5,074 6,131
- -----------------------------------------------------------------------------------------------------
300,917 233,017 182,043 125,912 91,902
Unearned income (476) (436) (393) (217) (101)
- -----------------------------------------------------------------------------------------------------
LOANS, NET OF UNEARNED INCOME $300,441 $232,581 $181,650 $125,695 $ 91,801
- -----------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
In an effort to mitigate the impact of changes in interest rates on
earnings, management's strategic plan focuses on funding adjustable rate loans.
However, due to 1997's declining interest rate environment, competitive market
pressures and an increase in the demand for fixed rate loans, Franklin's
adjustable rate loans increased $32 million, from $175 million at December 31,
1996 to $207 million at December 31, 1997, while fixed rate loans increased $36
million, from $58 million at December 31, 1996 to $94 million at December 31,
1997. Franklin's adjustable rate loan portfolio is still at a high level,
comprising 70% of Franklin's total average loan portfolio in 1997 as compared to
74% in 1996. Management intends to continue to seek adjustable rate loan
opportunities to protect the Bank from being adversely impacted by fluctuating
interest rate environments, but will also continue to seek fixed rate loans of
moderate duration that meet Franklin's credit quality standards.
1996 was also a year of significant loan growth for Franklin. Loans
outstanding at December 31, 1996 were $232.6 million, an increase of $51
million, or 28%, over year end 1995 loan balances of $181.6 million. Average
loans increased $45.7 million, or 30%, compared to 1995 levels, with the largest
rate of increase occurring in the real estate portfolio. Management's focus in
1996 was to achieve asset growth through the loan portfolio while meeting the
credit needs of Franklin's expanding community.
The internal controls, systems and procedures put in place in an
effort to insure support for growth are continuously monitored and strengthened
where necessary. It is on this foundation that management achieved its loan
growth in 1996 and 1997. Management intends to continue to enhance and
strengthen this foundation to provide the support for future expansion and
growth.
ASSET QUALITY
While total loans increased significantly in 1997, overall credit
quality ratios continue to be strong. Non-performing loans are 0.35% of total
loans and Franklin holds no foreclosed property. This compares to non-performing
loans at December 31, 1996 of 0.39% of total loans. Management believes that
efforts to strengthen credit administration policies, procedures and controls
have been productive and have permitted Franklin to grow its loan portfolio
significantly without impairing credit quality.
Non-performing loans increased slightly to $1 million at December 31,
1997, as compared to $908 thousand one year ago. Table 3 details non-performing
loans as of the end of each of the last five years. All non-performing loans at
December 31, 1997 are considered impaired. Additional information regarding the
accounting for impaired loans can be found in Note 5 of the consolidated
financial statements. Loans 90 days or more past due and still accruing interest
remained low at $149 thousand at December 31, 1997 as compared to $128 thousand
as of December 31, 1996. Loans past due over 30 days, including non-performing
loans, were $4.7 million, which represents 1.56% of total loans at December 31,
1997, as compared to $2.8 million or 1.23% of total loans at December 31, 1996.
17
<PAGE> 18
TABLE 3
NON-PERFORMING LOAN ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans $1,047 $ 908 $1,594 $521 $1,129
Accruing loans 90 days past due 149 128 44 ---- ------
- ---------------------------------------------------------------------------------------
TOTAL $1,196 $1,036 $1,638 $521 $1,129
- ---------------------------------------------------------------------------------------
Income that would have been
recorded in accordance with
original terms $ 79 $ 80 $ 75 $ 55 $ 153
Income actually recorded 22 15 46 5 4
- ---------------------------------------------------------------------------------------
LOSS OF INCOME $ 57 $ 65 $ 29 $ 50 $ 149
=======================================================================================
</TABLE>
Franklin experienced net loan charge-offs of $134 thousand in 1997 as
compared to net recoveries of $372 thousand and $279 thousand in 1996 and 1995,
respectively. Total loans charged-off in 1997 declined to $382 thousand as
compared to $509 thousand and $370 thousand in 1996 and 1995, respectively.
Total recoveries for 1997 were $248 thousand, representing collections on loans
charged-off in prior years. This compares to recoveries of $881 thousand and
$649 thousand in 1996 and 1995, respectively. Recoveries have slowed as
successful efforts have been realized where possible on loans that were
previously charged-off, while current year charge-offs have remained at low
levels. Table 4 summarizes Franklin's loan loss experience for each of the last
five years.
The allowance for loan losses of $4.2 million at December 31, 1997
represents 1.4% of total loans, compared to $3.8 million, or 1.7% of total
loans, at December 31, 1996. Franklin's loan loss allowance to non-performing
loans ratio remains strong at 400% on December 31, 1997 down slightly from 423%
at December 31, 1996. As of December 31, 1997, the allowance for loan losses is
deemed to be more than adequate based on management's analysis and overall
methodology for measuring the adequacy of the allowance. Management believes it
has the processes in place to sustain this high level of credit quality as
Franklin continues to expand.
18
<PAGE> 19
Table 4 presents an allocation of the allowance for loan losses to
significant loan categories as of the end of each of the last five years.
TABLE 4
ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1 $3,842 $3,443 $2,404 $2,110 $2,653
Allowance of acquired bank ------ ------ 579 ------ ------
Charge-offs:
Real Estate ------ (54) (145) ------ (50)
Commercial (345) (274) (198) (268) (1,428)
Consumer (37) (181) (27) (23) (284)
- -------------------------------------------------------------------------------------------------------------------
Total (382) (509) (370) (291) (1,762)
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Real Estate 107 106 ------ ------ ------
Commercial 131 765 625 194 103
Consumer 10 10 24 26 35
- -------------------------------------------------------------------------------------------------------------------
Total 248 881 649 220 138
- -------------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (134) 372 279 (71) (1,624)
Provision for loan losses 484 27 181 365 1,081
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $4,192 $3,842 $3,443 $2,404 $2,110
===================================================================================================================
Net charge-offs to average loans 0.1% (0.2)% (0.2)% 0.0% 1.8%
Allowance for loan losses to period end loans 1.4% 1.7% 1.9% 1.9% 2.3%
</TABLE>
ALLOCATIONS OF THE ALLOWANCE FOR LOAN LOSSES TO MAJOR LOAN CATEGORIES AS OF
DECEMBER 31 ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate $ 932 $ 860 $ 609 $ 335 $ 368
Commercial 2,636 1,952 2,453 1,498 1,297
Consumer 376 162 102 116 130
Unallocated 248 868 279 455 315
- -------------------------------------------------------------------------------------------------------------------
TOTAL $4,192 $3,842 $3,443 $2,404 $2,110
===================================================================================================================
</TABLE>
19
<PAGE> 20
The provision for loan losses is the annual cost of providing an
allowance or reserve for anticipated future losses on loans. Management deemed
it prudent to increase the provision for loan losses during 1997 due to the
significant increase in total loans rather than to any known deterioration in
asset quality. Provisions for 1997 were $484 thousand as compared to $27
thousand and $181 thousand for 1996 and 1995, respectively.
SECURITIES
Franklin purchases securities from time to time to serve as a source
of liquidity, to assist in the management of interest rate sensitivity and to
augment net interest income. Securities, consisting of U.S. treasuries and
obligations of agencies and states and political subdivisions, were $179.4
million at December 31, 1997 compared to $164.1 million at year end 1996.
Securities of states and political subdivisions were added to the portfolio in
the latter part of 1996 and increased by $16 million during 1997 in order to
alleviate some of the impact of income tax expenses on net earnings.
Securities additions in 1997 were made primarily in the securities
held-to-maturity portfolio as management deemed the available-for sale
portfolio, at $96.9 million, more than adequate to insure liquidity for
anticipated future loan growth or deposit withdrawals. The average maturity of
the total securities portfolio decreased to 38 months at December 31, 1997 from
47 months at December 31, 1996. The total tax equivalent yield on the securities
portfolio increased to 6.17% for 1997 as compared to 5.91% for 1996 primarily
due to the addition of securities of states and political subdivisions.
During 1996, the securities portfolio grew $55 million, or 50%, from
$109.1 million at December 31, 1995 to $164.1 million at December 31, 1996. This
growth rate was due to 1996's significant deposit growth of $124 million
exceeding 1996 loan growth of $51 million, necessitating the growth of
available-for-sale securities to insure future liquidity. The average maturity
of the total securities portfolio increased slightly to 47 months at December
31, 1996 from 41 months at December 31, 1995.
Franklin maintains a securities available-for-sale portfolio,
comprising 54% of total securities as of December 31, 1997, which may be used to
meet liquidity or asset/liability management needs. These securities are carried
at fair value with unrealized gains or losses, net of tax, recorded as a
separate component of stockholders' equity. At December 31, 1997, securities
available-for-sale had an aggregate amortized cost of $96.2 million and a fair
value of $96.9 million. At December 31, 1996, securities available-for-sale had
an aggregate amortized cost of $97.6 million and a fair value of $97.2 million.
The balance of Franklin's securities have been designated securities
held-to-maturity and are recorded at amortized cost, which at December 31, 1997
was $82.5 million with a fair value of $82.1 million. At December 31, 1996,
securities held-to-maturity had an aggregate amortized cost of $67 million and a
fair value of $65.4 million. Management has the positive intent and ability to
continue to hold the securities designated held-to-maturity to their maturity
dates.
All securities have fixed maturities and exhibit no permanent
impairments. Table 6 details the maturities of Franklin's securities portfolios
as of December 31, 1997.
20
<PAGE> 21
LIQUIDITY MANAGEMENT AND FUNDING
Liquidity is a company's ability to maintain sufficient cash flows to
fund operations and meet existing and future obligations, including loan
commitments, maturing liabilities and depositors' withdrawals. The asset portion
of the balance sheet provides liquidity through Federal funds sold, securities
purchased under resale agreements and maturities and repayments of loans and
securities. Liability liquidity is provided through Franklin's ability to
attract and maintain sufficient deposits and to access available funding
markets. Franklin maintains levels of liquidity that it considers adequate to
meet its current needs and has structured loan and security maturities to cover
projected future needs. Loan and security maturities as of December 31, 1997 are
set forth in Tables 5 and 6.
TABLE 5
LOAN MATURITY ANALYSIS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 WITHIN 1 YEAR 1 - 5 YEARS AFTER 5 YEARS TOTAL
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate $ 30,018 $ 64,935 $ 6,232 $101,185
Commercial 93,845 77,576 12,939 184,360
Consumer 6,995 7,805 572 15,372
- ---------------------------------------------------------------------------------
TOTAL $130,858 $150,316 $19,743 $300,917
=================================================================================
</TABLE>
SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
LOANS DUE AFTER ONE YEAR
<TABLE>
<CAPTION>
Fixed interest rate $ 58,234 $ 5,847 $ 64,081
Adjustable interest rate 92,082 13,896 105,978
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL $150,316 $19,743 $170,059
=================================================================================
</TABLE>
21
<PAGE> 22
TABLE 6
SECURITIES MATURITY ANALYSIS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 WITHIN 1 YEAR 1 - 5 YEARS 5 - 10 YEARS OVER 10 YEARS
- ---------------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. treasury securities $------ ----- $18,773 6.46% $ 5 8.24% $------ -----
U.S. government agencies 5,101 6.29% 39,213 6.36% 12,698 6.48% ------- -----
Step-up and structured notes ------- ----- 5,950 5.63% ------- ---- ------- -----
States and political
subdivisions (2) ------- ----- 1,715 6.59% 8,398 6.63% ------- -----
Mortgage-backed securities 61 8.08% 855 5.36% ------- ----- 1,210 6.46%
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,162 6.31% $66,506 6.32% $21,101 6.52% $ 1,210 6.46%
HELD-TO-MATURITY
U.S. treasury securities $12,989 5.08% $ 2,971 6.51% $------ ----- $------ -----
U.S. government agencies 1,996 5.22% 3,481 6.88% 9,949 6.68% ------- -----
States and political
subdivisions (2) ------- ----- 10,245 6.69% 7,277 6.92% ------- -----
Mortgage-backed securities 2,044 5.00% 16,228 5.28% 2,154 5.64% 13,124 6.07%
- ---------------------------------------------------------------------------------------------------------------------------
$17,029 5.09% $32,925 6.00% $19,380 6.65% $13,124 6.07%
===========================================================================================================================
</TABLE>
(1) Yields are based on amortized cost
(2) Yields are included on a taxable-equivalent basis using a 34% tax rate
Franklin's liquidity needs have been met primarily through growth of
stable deposit relationships. Franklin's deposit base grew 30% in 1997, with
total deposits and customer repurchase agreements at $603.5 million at December
31, 1997 compared to $462.5 million one year previously. Franklin experienced a
large surge in deposits during the fourth quarter of 1997, with total customer
deposits increasing by approximately $110 million. That increase accounts for
the significant holdings of cash and cash equivalents at year-end of
approximately $160 million. Franklin has experienced this type of year-end
growth in prior years and management has deemed it prudent to assure sufficient
liquidity for withdrawals by investing these funds in short-term investments
until the stability of these funds is assured.
Average customer deposits and customer repurchase agreements have
grown steadily over the last three years; from $267.2 million during 1995, to
$372.1 million during 1996, to $446.8 million during 1997, exhibiting growth
rates of 39% and 20%, respectively. This continued rate of deposit growth has
provided the funding for Franklin's asset growth without requiring Franklin to
access its available borrowing capabilities. Franklin maintains borrowing lines
with the Federal Home Loan Bank of Atlanta and a number of larger regional
banking institutions.
Management attributes Franklin's dramatic increase in total funding
primarily to the local corporate community's desire to bank with a responsive,
locally-managed bank. With so many other investment alternatives available to
depositors, Franklin's ability to continue deposit growth during 1997's
competitive financial services environment, speaks to the Bank's
22
<PAGE> 23
ability to service customers' needs and retain core deposit relationships. With
the 29% growth in loans during 1997, totaling $67.9 million, deposit growth
lagged slightly, growing by $64.4 million, resulting in Franklin's loan to
deposit ratio, a key measure of liquidity, increasing from 64% on December 31,
1996 to 70% on December 31, 1997. In the opinion of management, nearly all of
the customer repurchase agreements represent stable deposit relationships. If
added to deposits, Franklin's liquidity ratio would be 50% as of both December
31, 1997 and 1996. In management's view, these ratios indicate that Franklin is
well positioned to fund future liquidity needs. At December 31, 1997, cash, cash
equivalents and securities available-for-sale represent 40% of total assets and
42% of total liabilities.
MARKET RISK MANAGEMENT
The effective management of market risk is essential to achieving
Franklin's financial goals. As a financial institution, Franklin's primary
market risk exposure is interest rate risk. The nature of the banking business,
which involves paying interest on deposits at varying rates and terms and
charging interest on loans at other rates and terms, creates interest rate risk.
As a result, earnings are subject to fluctuations that arise due to changes in
the level and direction of interest rates. Management's objective is to minimize
this risk.
Measuring and managing interest rate risk is a dynamic process that
is performed regularly as a component of management's analysis of the impact on
earnings of changes in asset and liability portfolios. Management does not
attempt to anticipate changes in interest rates. Its principal objective is to
maintain interest margins in periods of both rising and falling rates.
Franklin's objective is to reduce the sensitivity of its earnings to
interest rate fluctuations by diversifying its sources of funds, controlling its
mix of adjustable and fixed rate assets, improving the ratio of earning assets
to interest bearing liabilities and planning the maturities of its assets and
liabilities. Board and management asset/liability committees monitor both the
liquidity and interest rate sensitivity of the Bank on a continuing basis.
As of December 31, 1997, Franklin's interest sensitive liabilities
exceeded interest sensitive assets within a one-year period by approximately 4%
of assets. This is a relatively low percentage, indicating Franklin is almost
neutrally positioned with slightly more liabilities than assets subject to
repricing over the next twelve months. This gap represents a position at one
particular point in time and assumes that assets and liabilities with similar
re-pricing characteristics will reprice to the same degree. Such a static gap
position is not necessarily indicative of the impact on earnings of changes in
interest rates.
Such traditional interest sensitivity gap analyses alone do not
adequately measure an institution's exposure to changes in interest rates
because gap models are not sensitive to changes in the relationship between
interest rates charged or paid and do not incorporate balance sheet trends and
management actions. Each of these factors can affect an institution's earnings.
Accordingly, in addition to performing gap analysis, management also evaluates
the impact of different interest rates on net interest income using an earnings
simulation model. The model incorporates the factors not captured by gap
analysis by projecting income over a twelve-month horizon under a variety of
interest rate scenarios.
Under simulation modeling scenarios, Franklin's net interest income
would improve with rising interest rates primarily due to the magnitude of
Franklin's adjustable rate loan portfolio. Franklin's loan portfolio, 70% of
which consists of adjustable rate loans, provides
23
<PAGE> 24
significant protection during periods of rising interest rates. Management uses
the securities portfolio, which consists of only 11% floating rate securities
and is of longer duration, to provide stability during periods of falling
interest rates.
Franklin's deposit base is structured comparably to its asset base,
with significant deposits subject to fluctuations in interest rates. During
1997, management had the ability to reset the rates paid on 65% of its total
average interest bearing liabilities as required to react to changes in market
interest rates. Time deposits, issued with fixed maturity dates, represented 35%
of total average interest bearing liabilities during 1997. At December 31, 1997,
only 8% of total time deposits had maturities of over twelve months.
While financial institutions may enter into agreements that provide
interest rate risk protection, Franklin's management believes effective interest
rate sensitivity management can best be achieved through careful monitoring and
redeployment of its underlying assets and liabilities. The Bank has never
engaged in interest rate futures or options transactions or interest rate swap
agreements and has no current intent to do so in the future.
CAPITAL ADEQUACY
Management believes that a strong equity position is critical for any
financial institution to compete effectively in today's market. Stockholders'
equity provides a source of permanent funding, allows for future growth and
assists the Bank in withstanding unforeseen adverse developments. Over the last
three years, Franklin's increasing profitability has continued to contribute to
an improvement in its capital base. Franklin's stockholders' equity stood at
$39.3 million at December 31, 1997 as compared to $31.9 million and $26.4
million as of December 31, 1996 and 1995, respectively.
The growth in stockholders' equity in 1997 is the result of 1997's
strong earnings of $6 million, new shares issued through Franklin's stock option
plans, which resulted in additional equity of approximately $768 thousand, and a
change in unrealized gains and losses on securities available-for-sale from a
loss of $204 thousand at December 31, 1996 to a gain of $450 thousand at
December 31, 1997.
The growth in stockholders' equity in 1996 was attributable to $4.5
million in earnings and $1.3 million from shares issued through Franklin's stock
option plans and a limited offering of 125,000 non-registered, restricted shares
of common stock. The increase in equity was partially offset by the reduction in
unrealized gains on securities available-for-sale of $347 thousand.
Franklin is well capitalized as evidenced by its capital ratios at
December 31, 1997. Franklin maintained leverage and risk-based capital ratios of
7.73% and 11.92%, respectively, as compared to 7.62% and 13.00% as of December
31, 1996. The increase in the leverage ratio is attributable to the increase in
Franklin's Tier I capital due to the retention of earnings. The decline in the
risk-based capital ratio is due to the increase in loans outstanding as of
December 31, 1997, which carry a higher regulatory risk rating than other asset
types, such as securities or Federal funds sold.
Capital remains well above the minimum regulatory requirements of 4%
and 8%, respectively, for leverage and risk-based capital. This strong capital
base allows Franklin to take advantage of profitable business opportunities
while helping to protect it against the risks inherent in the banking industry.
24
<PAGE> 25
NET INTEREST INCOME
Net interest income is Franklin's primary source of earnings and
represents the margin or spread between interest and amortized fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and composition
changes in earning assets and interest bearing liabilities affect net interest
income.
Net interest income on a fully taxable equivalent ("FTE") basis for
1997 was $22 million, an increase of $3.7 million, or 20%, over 1996's net
interest income of $18.3 million. This growth is attributable to volume
increases in total average earning assets of $80.9 million during 1997 compared
to increases of $69.8 million in total average interest-bearing liabilities over
the same period.
Tables 1 and 7 illustrate the effects of volume and interest rate
changes on net interest income. The increase of $6.9 million in total FTE
interest income from $29.3 million in 1996 to $36.2 million in 1997 is entirely
attributable to volume increases in interest earning assets. Volume increases
occurred in every earning asset type, with the exception of Federal funds sold
and securities purchased under resale agreements. Interest rate declines in
commercial and real estate loans, caused by competitive market pressures, were
offset by rate increases in securities and Federal funds sold and other
short-term investments.
The $3.3 million increase in total interest expense from $11 million
in 1996 to $14.3 million in 1997 was also related to volume increases in
interest bearing liabilities, with significant increases in certificates of
deposit of $100,000 and over and customer repurchase agreements. These two
account types also accounted for the only rate increases among interest bearing
liabilities, again due to competitive market pressures.
Net interest income for 1996 at $18.3 million was an increase of $4
million, or 28%, over 1995's net interest income of $14.3 million. That increase
was also attributable to average earning assets increasing $102.7 million while
average interest bearing liabilities increased to a lesser extent, $74.9
million, over the same period.
Expressed as a percentage of average earning assets, Franklin's net
interest margin for 1997 decreased to 4.79% from 4.84% in 1996. The decrease in
margin is due to the growth in Franklin's highest-cost deposit types,
certificates of deposit and customer repurchase agreements, which also were at
increasing rates while the increase in earning assets occurred in loans at
declining yields.
In 1996, Franklin's net interest margin decreased to 4.84% from 5.19%
in 1995. That decrease was the result of 1996's growth in customer deposits and
repurchase agreements outpacing the growth in loans. Excess funds were invested
in lower yielding assets, such as securities and Federal funds sold, thereby
reducing the overall net interest margin.
25
<PAGE> 26
TABLE 7
A SUMMARY OF THE CHANGE IN INTEREST EARNED AND INTEREST PAID RESULTING FROM
CHANGES IN VOLUMES AND RATES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 COMPARED TO 1996 1996 COMPARED TO 1995
- ------------------------------------------------------------------------------------------------------------------------------------
FULLY TAXABLE EQUIVALENT CHANGE DUE TO CHANGE DUE TO
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME (2) VOLUME (1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial loans $2,418 $(334) $2,084 $2,648 $(935) $1,713
Real estate loans 2,477 (49) 2,428 1,779 (319) 1,460
Consumer loans 272 17 289 42 315 357
Securities available-for-sale (3) 1,424 22 1,446 2,055 4 2,059
Securities held-to-maturity (3) 954 274 1,228 (145) 17 (128)
Federal funds sold and securities with resale agreements (600) 71 (529) 1,488 (73) 1,415
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $6,945 $ 1 $6,946 $7,867 $(991) $6,876
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------------------------
DEPOSITS
Money manager accounts $ (59) $ (33) $ (92) $ 126 $ (36) $ 90
Money market accounts 68 (15) 53 984 (34) 950
Savings accounts (6) (1) (7) (8) (8) (16)
Certificates less than $100,000 (99) (5) (104) 30 (43) (13)
Certificates of $100,000 and over 1,782 35 1,817 811 (189) 622
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,686 (19) 1,667 1,943 (310) 1,633
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase agreements 1,581 37 1,618 1,104 132 1,236
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $3,267 $ 18 $3,285 $3,047 $(178) $2,869
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $3,678 $ (17) $3,661 $4,820 $(813) $4,007
====================================================================================================================================
</TABLE>
(1) Changes due to both volume and rate have been allocated to volume or rate
changes in proportion to the absolute dollar amounts of the change in each.
(2) Non-accrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(3) Yields are stated on a tax equivalent basis.
26
<PAGE> 27
NON-INTEREST INCOME
During 1997, total non-interest income increased by $677 thousand, or
38%, to $2.4 million from $1.8 million in 1996. Excluding securities gains,
non-interest income increased $659 thousand from $1.7 million in 1996 to $2.4
million in 1997, also an increase of 38%. Approximately $316 thousand, or 47%,
of that increase is due to service charges and other fees generated from the
increased volume of deposit accounts and a 33% increase in Franklin's ATM
facilities. The remaining increase of $361 thousand is the result of expanding
fee based products introduced in 1996, such as foreign exchange which increased
its annual fees generated by 222% to $221 thousand since the department's
inception in September, 1996. Fees generated from increased loan activity rose
by 30% to $395 thousand for 1997 as compared to $303 thousand for 1996.
Net securities gains were $49 thousand in 1997 compared to $31
thousand in 1996. The sales activity in 1997 and 1996 was transacted to take
advantage of changes in market interest rates and other general asset and
liability management considerations.
Non-interest income increased 21% in 1996, from $1.5 million in 1995
to $1.8 million in 1996. Excluding securities gains, non-interest income
increased $332 thousand, or 24%, from $1.4 million in 1995 to $1.7 million in
1996. This improvement was due to the increased volume of both loan and deposit
accounts as well as the introduction of new fee based products and bringing
certain fee income producing services, such as payroll processing, in-house.
NON-INTEREST EXPENSE
While achieving significant asset growth of 30%, with loans
increasing 29% and customer deposits and repurchase agreements increasing 30%,
and improving information delivery services to customers through image
processing and image statements and the introduction of PC banking, Franklin was
able to contain total non-interest expense growth to 10%. Management's focus on
the containment of overhead expenses, while significantly increasing both net
and non-interest income, accounts for the improvement in Franklin's productivity
ratio which was 63% in both 1995 and 1996 and improved to 58% in 1997.
Employee related costs, occupancy and other overhead expenses
totalled $13.9 million for 1997, as compared to $12.7 million for 1996. The
largest component of non-interest expense, compensation and employee benefits,
grew by $832 thousand, or 13%, from $6.5 million in 1996 to $7.3 million in
1997, as Franklin provided for qualified, experienced personnel necessary to
continue to provide operational support to the Bank's growing customer base and
implemented new products and services. This increase in compensation expense
accounted for 66% of the 1997 increase in non-interest expense.
Franklin's occupancy and furniture and equipment expense increased by
$406 thousand, or 16%, from $2.6 million in 1996 to $3 million in 1997. This
increase is due to the technology improvements made during 1997 to improve
Franklin's product delivery system and properly manage our transaction volume
growth. The increase in all other non-interest expense for 1997 was minimal at
only $25 thousand, or less than 1%.
Non-interest expense increased 28% to $12.7 million in 1996 from $9.9
million in 1995. Compensation and employee benefits increased $1.6 million, or
33%, to $6.5 million in 1996 from $4.9 million in 1995. The additional expense
was incurred to staff two new branches, Tysons Corner and Bethesda, and to
employ qualified, experienced personnel to continue to provide
27
<PAGE> 28
operational support to the Bank's growing customer base. This increase in
compensation expense accounted for 57% of 1996's increase in non-interest
expense. Franklin's occupancy and furniture and equipment expense increased $668
thousand, or 35%, from $1.9 million in 1995 to $2.6 million in 1996. That
increase was also due to the branch expansion and the technology improvements
made to enhance product delivery services. The increase in other non-interest
expense for 1996 was $530 thousand, or 17%, from $3.1 million in 1995 to $3.6
million in 1996. That increase was primarily due to technology and data
processing enhancements, as well as Franklin's increased commitment as sponsor
of the Franklin National Bank Classic.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue has arisen as the result of computer programs
that use two digits rather than four to define the applicable year. Any computer
programs that have data-sensitive software may recognize a date using "OO"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions in operations, including, among
other things, a temporary inability to process transactions.
Franklin currently uses a third party processor for the majority of
its data processing requirements. Franklin is working with this servicer as well
as with all of Franklin's other significant suppliers of data processing
software and hardware to identify and implement solutions for areas of concern.
Franklin currently believes that timely modifications to existing software
and/or hardware will successfully address the Year 2000 issue.
Franklin will use both internal and external resources to reprogram
or replace, where necessary, and test the software for Year 2000 modifications.
Franklin plans to complete the Year 2000 project by December 31, 1998. The total
cost of the Year 2000 project is not expected to exceed $100 thousand and is not
expected to have a material effect on the results of operations.
The costs of the project and the date on which Franklin plans to
complete Year 2000 modifications are based on management's best estimates, which
were derived using numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. The acquisition of Franklin by BB&T is not expected to materially
change Franklin's cost estimates or time frame for addressing the Year 2000
issue. However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
INCOME TAXES
Franklin's provision for income taxes includes both federal and local
income taxes. The increase in income tax expense to $3.6 million for 1997, from
$2.9 million in 1996 and $2.3 million in 1995, is attributable to the
significant increase in Franklin's net income and the annual limitations placed
on the utilization of Franklin's available tax loss carryforwards. Franklin's
effective tax rate for 1997 was 37% compared to 39% for 1996. A reconciliation
of the effective tax rate to the 1997 federal statutory rate of 34% can be found
in Note 10 of the consolidated financial statements.
28
<PAGE> 29
1998 OUTLOOK
1998 will be a year of change and increased opportunities for
Franklin. Franklin's acquisition by BB&T will provide an affiliation with a
larger financial institution that has more advanced technology and delivery
systems to provide the expanded products and services sought by our existing
customers and prospective new customers. This partnership is expected to provide
a compatibility of cultures with a strong belief in local decision-making and
the effective servicing of customer needs with local staff. Management intends
to expand Franklin's presence in the metropolitan Washington area under the BB&T
name.
BB&T hopes to accomplish its goal of expanding its presence in
Virginia and extending its market into the District of Columbia and suburban
Maryland will be accomplished by utilizing the knowledge and expertise of
Franklin's current management team, directors, advisory board members and staff.
Management intends to offer BB&T's broader array of products and services such
as mortgage lending, leasing, factoring, insurance, trust and investment
products, credit cards and enhanced international banking capabilities to both
existing and prospective Franklin customers.
Franklin expects to have the opportunity and BB&T plans to offer the
financial strength, technological support and broad array of financial service
products to truly serve the needs of local consumers and businesses within the
metropolitan Washington community.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations under Market Risk
Managment and Tables 5 and 6 is incorporated herein by reference.
29
<PAGE> 30
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Cash and due from banks $ 38,590 $ 22,468
Federal funds sold and securities purchased
under resale agreements 122,000 71,800
Securities available-for-sale 96,930 97,160
Securities held-to-maturity 82,458 66,956
-------- --------
TOTAL SECURITIES 179,388 164,116
Loans, net of unearned income 300,441 232,581
Less: allowance for loan losses (4,192) (3,842)
-------- --------
TOTAL LOANS, NET 296,249 228,739
Accrued interest receivable 4,274 3,305
Premises and equipment, net 2,628 2,504
Goodwill, net 989 1,115
Other assets 3,330 3,770
-------- --------
TOTAL ASSETS $647,448 $497,817
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
LIABILITIES
- -----------
Non-interest bearing deposits $139,913 $123,197
Interest bearing deposits 287,885 240,230
-------- --------
TOTAL DEPOSITS 427,798 363,427
Securities sold under repurchase agreements 175,708 99,093
Accrued interest payable 1,871 997
Other liabilities 2,788 2,407
-------- --------
TOTAL LIABILITIES 608,165 465,924
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
- --------------------
Common Stock, $0.10 par value, 25,000,000
shares authorized; 6,630,975 and 6,485,944
shares issued and outstanding, respectively 663 649
Capital surplus 21,714 20,960
Retained earnings 16,456 10,488
Unrealized gain (loss) on securities
available-for-sale, net 450 (204)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 39,283 31,893
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $647,448 $497,817
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE> 31
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS - EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $23,639 $18,838 $15,308
Interest and dividends on securities 10,368 8,113 6,182
Interest on federal funds sold and securities
purchased under resale agreements 1,860 2,389 974
------- ------- -------
TOTAL INTEREST INCOME $35,867 29,340 22,464
------- ------- -------
INTEREST EXPENSE
- ----------------
Interest on deposits 10,263 8,596 6,963
Interest on securities sold under
repurchase agreements 4,072 2,454 1,218
------- ------- -------
TOTAL INTEREST EXPENSE 14,335 11,050 8,181
------- ------- -------
NET INTEREST INCOME 21,532 18,290 14,283
Provision for loan losses 484 27 181
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,048 18,263 14,102
------- ------- -------
NON-INTEREST INCOME
- -------------------
Service charges on deposits 1,412 1,096 960
Other fee income 986 643 447
Gains on sales of securities, net 49 31 54
------- ------- -------
TOTAL NON-INTEREST INCOME 2,447 1,770 1,461
------- ------- -------
NON-INTEREST EXPENSE
- --------------------
Compensation and employee benefits 7,313 6,481 4,883
Occupancy 1,961 1,717 1,231
Furniture and equipment 1,007 845 663
Other 3,634 3,609 3,079
------- ------- -------
TOTAL NON-INTEREST EXPENSE 13,915 12,652 9,856
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 9,580 7,381 5,707
Income tax expense 3,612 2,858 2,324
------- ------- -------
NET INCOME $ 5,968 $ 4,523 $ 3,383
======= ======= =======
EARNINGS PER SHARE
- ------------------
NET INCOME $ 0.91 $ 0.71 $ 0.56
EARNINGS PER SHARE - ASSUMING DILUTION
- --------------------------------------
NET INCOME $ 0.86 $ 0.68 $ 0.54
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE> 32
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED UNREALIZED
SHARES STOCK SURPLUS EARNINGS GAIN(LOSS) TOTAL
------ ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 5,614,877 $562 $17,421 $ 2,582 $(820) $19,745
Common stock issued on the
merger with The George
Washington Banking Corporation 630,180 63 2,067 ------- ----- 2,130
Common stock issued under
stock option plan 38,000 3 161 ------- ----- 164
Net income --------- ---- ------- 3,383 ----- 3,383
Change in unrealized loss
on securities available-for-sale --------- ---- ------- ------- 963 963
--------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1995 6,283,057 628 19,649 5,965 143 26,385
Proceeds from issuance of common stock 125,000 13 988 ------- ----- 1,001
Common stock issued under
stock option plan 77,887 8 323 ------- ----- 331
Net income --------- ---- ------- 4,523 ----- 4,523
Change in unrealized gain
on securities available-for-sale --------- ---- ------- ------- (347) (347)
--------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1996 6,485,944 649 20,960 10,488 (204) 31,893
Common stock issued under stock
option plan 145,031 14 754 ------- ----- 768
Net income --------- ---- ------- 5,968 ----- 5,968
Change in unrealized loss on
securities available-for-sale --------- ---- ------- ------- 654 654
--------- ---- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1997 6,630,975 $663 $21,714 $16,456 $ 450 $39,283
========= ==== ======= ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE> 33
FRANKLIN BANCORPORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net income $ 5,968 $ 4,523 $ 3,383
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 484 27 181
Depreciation and amortization 809 802 779
Gains on sales of securities, net (49) (31) (54)
Change in accrued interest receivable and
other assets (983) (456) (2,449)
Change in accrued interest payable and other
liabilities 1,255 1,062 1,095
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,484 5,927 2,935
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchases of securities held-to-maturity (19,165) (18,741) --------
Proceeds from maturities/principal paydowns
of securities held-to-maturity 3,722 16,120 3,663
Purchases of securities available-for-sale (21,424) (82,763) (11,607)
Proceeds from sales of securities available-for-sale 5,477 7,049 4,430
Proceeds from maturities/principal paydowns
of securities available-for-sale 17,510 22,968 8,196
Net increase in loans receivable (68,170) (50,891) (36,983)
Proceeds from sale of other real estate owned 176 332 62
Cash provided by merger ------- ------ 2,495
Additions to premises and equipment, net (1,042) (967) (1,088)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (82,916) (106,893) (30,832)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net increase in deposits 64,371 60,992 64,481
Net increase in federal funds purchased and securities
sold under repurchase agreements 76,615 63,224 4,893
Proceeds from issuance of common stock 768 1,332 164
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 141,754 125,548 69,538
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 66,322 24,582 41,641
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 94,268 69,686 28,045
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $160,590 $ 94,268 $ 69,686
======== ======== ========
Supplemental Disclosures
Interest paid $13,461 $ 10,977 $ 7,670
Income taxes paid 3,486 2,585 2,498
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS - EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY:
The consolidated financial statements include the accounts of
Franklin and its wholly-owned subsidiaries, the Bank and the CDC. Significant
intercompany accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS:
Franklin operates nine branches in the Washington metropolitan area.
Franklin's primary source of revenue is derived from loans to customers.
BASIS OF PRESENTATION:
The accounting and reporting policies of Franklin are in accordance
with generally accepted accounting principles and conform to prevailing practice
within the commercial banking industry. Certain reclassifications have been made
to prior year financial statements to conform with current year presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, certificates of deposit held for
investment with maturity dates of three months or less, federal funds sold and
securities purchased under resale agreements. Generally, federal funds are sold
for one to seven day periods and securities purchased under resale agreements
are purchased for one to fourteen days.
SECURITIES:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, securities are classified into one of three categories:
trading, available-for-sale or held-to-maturity.
Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities classified as
held-to-maturity are purchased with the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost.
Debt securities not classified as held-to-maturity and marketable
equity securities are classified as available-for-sale. Available-for-sale
securities are stated at fair value, with unrealized gains and losses, net of
tax, reported as a separate component of stockholders' equity.
34
<PAGE> 35
The amortized cost of debt securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or call date, if applicable, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization or accretion is included in interest income on securities.
Gains and losses on disposition of securities are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
LOANS:
Loans are stated at the principal amount outstanding, net of unearned
income. Interest on loans is computed and recognized based upon the principal
amounts outstanding and their applicable rates. Loan fees, net of related direct
origination costs, are deferred and amortized as an adjustment of yield over the
life of the loan.
The accrual of interest income on loans is discontinued based on
delinquency status, an evaluation of the related collateral and the financial
strength of the borrower. Generally, loans are placed on non-accrual status when
the loans are in default in either principal or interest for 90 days or more, or
earlier if collection is uncertain based upon an evaluation of the net
realizable value of the collateral and the financial strength of the borrower.
When loans are placed on non-accrual status, interest accrued and unpaid is
charged against interest income. Loans may be reinstated to accrual status when,
in the opinion of management, collection of the remaining balance can reasonably
be expected.
ALLOWANCE FOR LOAN LOSSES:
In accordance with SFAS No. 114 and SFAS No. 118, a loan is considered
impaired, based on current information and events, if it is probable that
Franklin will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral dependent loans are measured for impairment based on
the fair value of the collateral. Interest income on impaired loans is
recognized on a cash basis.
Impaired loans do not include large groups of smaller balance
homogeneous loans that are evaluated collectively for impairment, such as
consumer installment loans. Reserves for probable future credit losses related
to these loans are included in the allowance for loan losses applicable to other
than impaired loans.
The allowance for loan losses is maintained at a level believed by
management to be adequate to absorb potential losses inherent in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on a periodic evaluation of the portfolio with consideration given to the
overall loss experience; current economic conditions; volume, growth, and
composition of the loan portfolio; financial condition of the borrowers; and
other relevant factors that, in management's judgement, warrant recognition in
providing an adequate allowance.
The allowance is increased by provisions for loan losses charged to
expense. Loan principal considered to be uncollectible by management is charged
against the allowance for loan losses.
Changes in the allowance are recorded periodically as conditions
change or as more information becomes available. Increases and decreases in the
allowance include changes in the measurement of impaired loans.
35
<PAGE> 36
PREMISES AND EQUIPMENT:
Premises and equipment, including leasehold improvements, are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets or, for leasehold improvements, the shorter of the
estimated useful life or the term of the underlying lease. These estimated lives
range from two to fifteen years. Expenditures for repairs and maintenance are
charged to other operating expenses as incurred. Expenditures for improvements
that extend the life of an asset are capitalized and amortized over the
individual asset's remaining useful life or the lease term, if shorter.
GOODWILL:
The excess of the purchase price paid over the fair value of the net
assets acquired is amortized over fifteen years using the straight-line method.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that impairment may exist. If the review indicates that goodwill will
not be recoverable, as based on the estimated undiscounted future cash flows of
the entity acquired over the remaining amortization period, Franklin's carrying
value of goodwill would be reduced to the estimated discounted future cash
flows.
INCOME TAXES:
Franklin files a consolidated Federal income tax return with its
subsidiaries. Current taxes payable represent the estimated amounts currently
payable to taxing authorities. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Substantially all of the deferred tax asset relates to the expected
utilization of net operating loss carryforwards and the temporary difference
between financial and taxable income as it relates to the provision for loan
losses.
EARNINGS PER SHARE:
Effective December 31, 1997, Franklin adopted SFAS No. 128, "Earnings
per Share." Under the new standards, earnings per share is computed by dividing
net income available to common stockholders by the weighted average number of
common shares outstanding during the period.
Earnings per share, assuming dilution, is computed by dividing net
income available to common stockholders by the weighted average common shares
outstanding and the additional common shares that would have been outstanding if
any dilutive potential common shares had been issued.
SIGNIFICANT ACCOUNTING PRONOUCEMENTS:
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," was issued in June 1996 and provides
accounting and financial reporting standards for sales, securitizations and
servicing of receivables and other financial assets, for secured borrowing and
collateral transactions, and for extinguishments of liabilities. SFAS No. 125
changes the criteria for determining whether a transfer of financial assets
represents a sale of the assets or a collateralized borrowing arrangement. The
Statement is effective for transactions occuring after December 31, 1996,
however, the effective date relative to certain provisions, including securities
lending and repurchase agreement transactions, has been deferred to 1998. The
adoption of SFAS No. 125 is not expected to have a significant effect on the
consolidated financial statements.
36
<PAGE> 37
SFAS No. 130, "Reporting Comprehensive Income" was issued in June
1997 and establishes requirements for the disclosure and presentation of
comprehensive income and its components in full sets of financial statements.
Comprehensive income is defined as transactions and other occurences which are
the result of non-owner changes in equity. Non-owner equity changes, such as
unrealized gains or losses on debt securities for example, will be accumulated
with net income in determing comprehensive income. This statement is effective
for years beginning after December 15, 1997 and reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management does not believe that the implementation of the statement will have a
material impact on the consolidated financial statements but additional
disclosures will be required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was also issued in June 1997 and provides standards for
reporting information on the operating segments of public businesses in their
annual and interim reports to shareholders. SFAS No. 131 requires that selected
financial information be provided for segments meeting specific criteria. This
statement becomes effective for all periods beginning after December 15, 1997.
Management does not believe that the implementation of the statement will have a
material impact on the consolidated financial statements but additional
disclosures may be required.
NOTE 2 - ACQUISITION ACTIVITY
On June 23, 1989, Franklin acquired 63.9% of the outstanding common
stock of the Bank by contributing approximately $3 million, excluding expenses,
in capital. During 1991, Franklin acquired an additional 20.7% of the
outstanding common stock of the Bank by contributing approximately $7 million in
capital. On July 6, 1992, the Bank's stockholders approved the Merger Agreement
Plan (the "Plan") which consisted of an offer to exchange one share of Franklin
common stock for each share of the Bank's common stock not owned by Franklin.
The Plan was approved by the stockholders and regulatory agencies, and the
merger was effective November 6, 1992. All acquisitions of common stock have
been accounted for under the purchase method of accounting. The consolidated
financial statements reflect the results of the Bank's operations beginning at
the initial acquisition in 1989. Goodwill of $663 thousand, $730 thousand and
$380 thousand which resulted from the 1992, 1991 and 1989 transactions,
respectively, is being amortized over 15 years.
On April 1, 1995, Franklin completed the acquisition of The George
Washington Banking Corporation ("GWBC"), the holding company of The George
Washington National Bank of Alexandria, Virginia. The merger was accounted for
as a purchase with the GWBC stockholders receiving a combination of $237
thousand in cash and 630,180 shares of Franklin stock for a total purchase price
of $2.9 million, of which $519 thousand represents merger related costs. The
merger resulted in the acquisition of assets of $28.8 million, including
goodwill of $941 thousand to be amortized over a period of fifteen years, and
the assumption of $25.9 million of liabilities. Upon consummation of the merger,
The George Washington National Bank was renamed Franklin National Bank of
Virginia. Unaudited pro forma combined results of operations of Franklin for the
year ended December 31, 1995 is presented below. Such pro forma presentation has
been prepared assuming the acquisition was made as of the beginning of 1995.
37
<PAGE> 38
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------
<S> <C>
Net interest income $14,664
Net income 3,292
Earnings per share:
Net income $ 0.54
Earnings per share, assuming dilution:
Net income $ 0.52
</TABLE>
The unaudited pro forma information is not necessarily indicative of
what actual results of operations of Franklin would have been assuming such
transactions had been completed as of the beginning of 1995, nor does it purport
to represent the results of operations for future periods.
On August 7, 1996, Franklin received regulatory approval to merge
Franklin National Bank of Virginia ("Franklin-VA") with and into the Bank. The
merger resulted in the immediate recognition of net operating loss carryforwards
of approximately $1 million which had been fully reserved against at the time of
the acquisition of GWBC.
On December 16, 1997, Franklin announced it had entered into an
Agreement and Plan of Reorganization with BB&T Financial Corporation of Virginia
("BB&T Virginia") and BB&T Corporation ("BB&T"), which provides that BB&T will
acquire Franklin in a stock transaction. Based upon BB&T's closing stock price
of $63.75 on December 15, 1997, the transaction is valued at $165.1 million, or
$22.45 per share of Franklin common stock. Franklin shareholders will receive a
minimum of 0.35 shares to a maximum of 0.3743 shares of BB&T common stock for
each share of Franklin common stock held, based on BB&T's average stock price
for a period prior to closing. The acquisition, which will be accounted for as a
pooling, is expected to be completed on or about the end of the second quarter
of 1998.
NOTE 3 - CASH AND DUE FROM BANKS
Under Federal Reserve Bank ("FRB") regulations, banks are required to
maintain cash reserves based upon average deposits. Assets qualified to meet
these reserve requirements consist of vault cash and balances on deposit with
the FRB. The Bank's reserve requirements for the periods ending December 31,
1997 and 1996, respectively, were $8.9 million and $8.4 million.
38
<PAGE> 39
NOTE 4 - SECURITIES
SECURITIES AVAILABLE-FOR-SALE:
The amortized cost and market value of securities available-for-sale
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $18,778 $ 392 $----- $19,170
U.S. government agencies 57,012 447 (31) 57,428
Step-up and structured notes 5,950 48 (160) 5,838
Mortgage-backed securities 2,126 2 (52) 2,076
States and political subdivisions 10,113 92 ----- 10,205
Equity securities 2,213 ---- ----- 2,213
- ----------------------------------------------------------------------------------------------------
$96,192 $ 981 $ (243) $96,930
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $19,712 $ 196 $ (1) $19,907
U.S. government agencies 67,393 241 (564) 67,070
Step-up and structured notes 5,928 51 (262) 5,717
Mortgage-backed securities 2,643 2 (57) 2,588
Equity securities 1,878 ---- ---- 1,878
- ----------------------------------------------------------------------------------------------------
$97,554 $ 490 $ (884) $97,160
====================================================================================================
</TABLE>
The remaining contractual maturity distribution of debt securities
available-for-sale at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
DUE: COST VALUE GAIN (LOSS)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Within one year $ 5,101 $ 5,102 $ 1
After 1 year through 5 years 65,651 66,181 530
After 5 years through 10 years 21,101 21,358 257
Mortgage-backed securities 2,126 2,076 (50)
- ----------------------------------------------------------------------------------------------------
$93,979 $94,717 $738
====================================================================================================
</TABLE>
The mortgage-backed securities have contractual maturities ranging
from 1 to 25 years but repayments will vary from the contractual maturities.
Securities available-for-sale with a fair value of $65.9 million and
$67.2 million at December 31, 1997 and 1996, respectively, were pledged as
collateral for securities sold under repurchase agreements and other customer
deposits. All repurchase agreements have maturity dates of less than 1 year.
39
<PAGE> 40
Proceeds from sales and calls of securities available-for-sale were
$19.5 million, $21.1 million and $11.4 million in 1997, 1996 and 1995,
respectively.
Gross gains and losses on sales of securities for the years ended
December 31 were realized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross gains $49 $31 $ 54
Gross losses --- --- ---
- ---------------------------------------------------------------------------------------
NET GAINS $49 $31 $ 54
=======================================================================================
</TABLE>
SECURITIES HELD-TO-MATURITY:
The amortized cost and market value of securities held-to-maturity
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $15,960 $ 82 $ (41) $16,001
U.S. government agencies 15,426 244 (13) 15,657
Mortgage-backed securities 33,550 71 (982) 32,639
States and political subdivisions 17,522 236 ------- 17,758
- ---------------------------------------------------------------------------------------------------------------------
$82,458 $633 $(1,036) $82,055
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $12,975 $--- $ (135) $12,840
U.S. government agencies 4,983 --- (62) 4,921
Mortgage-backed securities 37,248 63 (1,297) 36,014
States and political subdivisions 11,750 11 (89) 11,672
- ---------------------------------------------------------------------------------------------------------------------
$66,956 $ 74 $(1,583) $65,447
=====================================================================================================================
</TABLE>
The remaining contractual maturity distribution of securities
held-to-maturity on December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
DUE: COST VALUE GAIN (LOSS)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Within one year $14,984 $14,931 $ (53)
After 1 year through 5 years 16,697 16,923 226
After 5 years through 10 years 17,227 17,562 335
Mortgage-backed securities 33,550 32,639 (911)
- --------------------------------------------------------------------------------------------------------------
$82,458 $82,055 $(403)
==============================================================================================================
</TABLE>
40
<PAGE> 41
The mortgage-backed securities have contractual maturities ranging
from 1 to 29 years, but repayments will vary from the contractual maturities.
Securities held-to-maturity with an amortized cost of $62.7 million
and $52.8 million at December 31, 1997 and 1996, respectively, were pledged as
collateral for securities sold under repurchase agreements and other customer
deposits. All repurchase agreements have maturity dates of less than 90 days.
For the years ended December 31, 1997 and 1996, there were no sales
of, or transfers from, securities held-to-maturity.
NOTE 5 - LOANS
LOAN PORTFOLIO:
Major categories of loans included in the loan portfolio at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE
Commercial $ 59,278 $ 44,136
Construction and development 11,336 15,243
Residential mortgage 30,571 18,768
- -------------------------------------------------------------------------------------------------------
TOTAL 101,185 78,147
COMMERCIAL AND INDUSTRIAL 184,360 140,544
CONSUMER
Consumer 10,848 9,800
Home equity 4,524 4,526
- -------------------------------------------------------------------------------------------------------
TOTAL 15,372 14,326
300,917 233,017
Unearned income (476) (436)
- -------------------------------------------------------------------------------------------------------
LOANS, NET OF UNEARNED INCOME $300,441 $232,581
- -------------------------------------------------------------------------------------------------------
</TABLE>
Primarily all of Franklin's loan portfolio at December 31, 1997 and
1996 consists of loans made within the Washington, D.C. area. This includes real
estate loans made for acquisition, renovation or development for which a deed of
trust on the subject property is the primary collateral.
ALLOWANCE FOR LOAN LOSSES:
While management uses available information to recognize losses on
loans, future additions to the allowance for existing loans may be necessary
based on changes in economic and borrower conditions. Management believes that
adequate allowances have been established to reflect possible losses on loans as
of December 31, 1997, 1996 and 1995.
41
<PAGE> 42
Changes in the allowance for loan losses for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1 $3,842 $3,443 $2,404
- -----------------------------------------------------------------------------------
Provision for loan losses 484 27 181
Loans charged off (382) (509) (370)
Recoveries 248 881 649
Allowance applicable to loans
purchased through merger ----- ----- 579
- -----------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $4,192 $3,842 $3,443
===================================================================================
</TABLE>
Various regulatory agencies, as an integral part of the examination
process, periodically review the allowance based on their judgements about
information available to them at the time of their examination.
IMPAIRED LOANS:
Impaired loans included in the loan portfolio at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Measured using:
Present value of expected
future cash flows $ 311 $445
Fair value of underlying collateral 736 463
------ ----
Total impared loans $1,047 $908
Corresponding valuation allowance $ 407 $186
- ----------------------------------------------------------------------
</TABLE>
The loans deemed to be impaired were primarily commercial loans.
The average recorded investment in impaired loans, the interest
income due under their original terms and the interest income recorded for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average recorded investment
in impaired loans $716 $812 $1,120
Income due under original terms 79 80 75
Income recorded 22 15 46
- --------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
At December 31, 1997, Franklin had no other loans on non-accrual
other than those deemed to be impaired loans. There were two loans totalling
$149 thousand which were 90 days or more past due which were still accruing
interest and were not deemed to be impaired.
RELATED PARTY LOANS:
The Bank, in the normal course of business, makes loans to executive
officers, directors and stockholders, as well as to companies and individuals
affiliated with those officers and directors. In the opinion of management,
these loans are consistent with sound banking practices, are within regulatory
lending limits, and do not involve more than normal risk of collectibility.
Activity in such loans is summarized as follows:
1997 1996
- -----------------------------------------------------------------
BALANCE, JANUARY 1 $ 5,427 $ 9,319
- -----------------------------------------------------------------
New loans 11,378 4,415
Repayments (1,378) (8,307)
- -----------------------------------------------------------------
BALANCE, DECEMBER 31 $15,427 $ 5,427
- -----------------------------------------------------------------
There were no loans to directors, officers or other related parties
that were classified as impaired as of December 31, 1997 and 1996.
NOTE 6 - PREMISES AND EQUIPMENT
Investments in premises and equipment at December 31 are:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 2,485 $ 2,167
Furniture and equipment 4,106 3,449
- -----------------------------------------------------------------
6,591 5,616
Accumulated depreciation and
amortization (3,963) (3,112)
- -----------------------------------------------------------------
TOTAL PREMISES AND EQUIPMENT $ 2,628 $ 2,504
- -----------------------------------------------------------------
</TABLE>
Depreciation and amortization expense was $917 thousand, $797
thousand and $605 thousand for 1997, 1996 and 1995, respectively.
43
<PAGE> 44
NOTE 7 - DEPOSITS
Major classifications of deposits at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NON-INTEREST BEARING DEPOSITS $139,913 $123,197
- ------------------------------------------------------------------------------------------------------------------
INTEREST BEARING DEPOSITS
- ------------------------------------------------------------------------------------------------------------------
Savings accounts 3,364 4,121
Money manager accounts 29,194 38,822
Money market accounts 111,918 117,857
IRA certificates 1,684 1,965
Certificates less than $100,000 11,477 12,708
Certificates of $100,000 and over 130,248 64,757
- ------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING DEPOSITS 287,885 240,230
- ------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $427,798 $363,427
==================================================================================================================
</TABLE>
Interest expense on certificates of deposit of $100,000 or more for
the years ended December 31, 1997, 1996 and 1995 was approximately $5.0 million,
$3.1 million and $2.6 million, respectively. At December 31, 1997 and 1996,
there were no brokered deposits included in total deposits.
At December 31, 1997, certificates of deposit in amounts of $100,000
or more have maturities as follows:
<TABLE>
<S> <C>
Three months or less $ 85,249
Over three months to six months 17,462
Over six months to twelve months 15,961
Over twelve months 11,576
--------
$130,248
========
</TABLE>
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings with maturities of less than one year are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVERAGE FOR THE YEAR:
Securities sold under repurchase agreements $ 94,314 4.28% $58,040 4.23%
- --------------------------------------------------------------------------------------------------------------------------
AT YEAR-END:
Securities sold under repurchase agreements $175,708 4.32% $99,093 4.19%
- --------------------------------------------------------------------------------------------------------------------------
MAXIMUM MONTH-END BALANCE:
Securities sold under repurchase agreements $175,708 $99,093
==========================================================================================================================
</TABLE>
44
<PAGE> 45
Securities sold under repurchase agreements are entered into
primarily as accommodations to the Bank's large commercial deposit customers.
Several of these customer relationships in the aggregate exceed 10% of
Franklin's stockholders' equity. All of the collateral provided under these
agreements is maintained under Franklin's control.
Securities sold under repurchase agreements at December 31, 1997, by
due date, are as follows:
<TABLE>
<CAPTION>
LESS THAN 30 - 90 OVER
OVERNIGHT 30 DAYS DAYS 90 DAYS TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES:
Securities sold:
Carrying value $16,992 $1,100 $4,532 $2,672 $25,296
Market value 17,059 1,099 4,531 2,672 25,361
U.S. GOVERNMENT AGENCIES:
Securities sold:
Carrying value 55,723 5,228 1,282 770 63,003
Market value 55,910 5,268 1,282 770 63,230
MORTGAGE-BACKED SECURITIES:
Securities sold:
Carrying value 22,572 1,130 ------ ------ 23,702
Market value 21,874 1,053 ------ ------ 22,927
SECURITIES PURCHASED UNDER
RESALE AGREEMENTS:
Securities sold:
Carrying value 67,607 ------ ------ ------ 67,607
Market value 68,500 ------ ------ ------ 68,500
REPURCHASE AGREEMENTS 159,971 7,197 5,256 3,284 175,708
===================================================================================================================
</TABLE>
NOTE 9 - STOCKHOLDERS' EQUITY
LIMITED OFFERING:
During 1996, Franklin issued a limited offering pursuant to
Regulation D, Rule 505 under a stock subscription agreement. The minimum
acceptable investment from accredited investors under the offering was $1
million.
As a result of the offering, Franklin issued 125,000 non-registered,
restricted shares resulting in an increase in capital of approximately $1
million.
45
<PAGE> 46
STOCK OPTION PLANS AND AGREEMENTS:
Under various stock option plans and agreements, Franklin has
authorized the issuance of stock options to purchase 1,610,537 shares of
Franklin's common stock. Options are granted at exercise prices equal to fair
market value on the option grant date and generally expire ten years from the
date of grant.
Franklin applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for Franklin's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, Franklin's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $5,968 $4,523
Pro forma 5,066 4,075
Earnings per share As reported $ 0.91 $ 0.71
Pro forma 0.72 0.62
Earnings per share, assuming dilution As reported $ 0.86 $ 0.68
Pro forma 0.72 0.62
===================================================================================================
</TABLE>
FIXED STOCK OPTION PLANS:
At December 31, 1997, Franklin has three stock-based compensation
plans. Under the 1991 Employee Stock Option Plan, Franklin may grant options to
its employees for up to 800,000 shares of common stock. Under the 1997 Stock
Option Plan, Franklin may grant options to its executive officers and key
employees for up to 500,000 shares of common stock. Under the 1996 Directors
Stock Option Plan, Franklin may grant options to its Directors based on the
achievement of annually stipulated goals for referrals of deposits and loans for
up to 100,000 options. Under the plans, the exercise price of each option equals
the market price of Franklin's stock on the date of grant, each option vests on
date of grant and an option's maximum term is 10 years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: zero dividend yield
for all years; expected volatility of 27% for all years; risk-free interest
rates of 6.1% and 6.3%; and expected lives of 7 years for all years.
46
<PAGE> 47
The following summarizes activity relating to Franklin's fixed stock option
plans as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
(Options in thousands) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 678 $ 4.80 642 $4.12 475 $ 3.52
Granted 190 10.71 126 7.91 140 6.25
Conversion of GWBC options ---- ------ ---- ---- 66 4.18
Exercised (145) 5.30 (78) 4.26 (38) 4.33
Forfeited (1) 14.25 (12) 4.96 (1) 11.00
----- ----- -----
Outstanding, December 31 722 6.24 678 4.80 642 4.12
===== ===== =====
Options exercisable at
year-end 722 $ 6.24 678 $4.80 642 $ 4.12
Weighted-average fair value
of options granted during
the year $ 5.17 $3.56 $ 2.73
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3 to $ 5 359,534 4.6 years $ 3.54
5 to 8 167,009 7.2 7.18
8 to 11 163,776 7.8 9.88
11 to 16 31,600 9.5 13.04
----------------------------------------------------------------------------------------------------------------
$3 to $16 721,919 6.6 $ 6.24
</TABLE>
Stock appreciation rights may be granted with the employee options whereby the
employee is entitled, upon exercise of the option and approval of the Board of
Directors, to receive, in cash or other consideration, an amount equal to the
difference between the exercise price of the option and the market value of the
shares covered. During 1997, 1996 and 1995, no stock appreciation rights were
outstanding, approved or exercised.
47
<PAGE> 48
NOTE 10 - INCOME TAXES
The provision for income taxes for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CURRENT TAXES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $2,810 $2,335 $1,808
Local 746 636 429
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT TAXES 3,556 2,971 2,237
- ----------------------------------------------------------------------------------------------------------------------------
DEFERRED TAXES
- ----------------------------------------------------------------------------------------------------------------------------
Federal 45 123 83
Local 11 (3) 4
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAXES 56 120 87
- ----------------------------------------------------------------------------------------------------------------------------
Change in valuation allowance ----- (233) -----
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PROVISION $3,612 $2,858 $2,324
============================================================================================================================
</TABLE>
The following is a reconciliation of the federal statutory rate to
the consolidated effective tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATUTORY U.S. TAX RATE 34% 34% 34%
- ----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) RESULTING FROM:
- ----------------------------------------------------------------------------------------------------------------------------
Non-deductible items (2) --- ---
Local tax 6 6 5
Change in valuation allowance --- (3) ---
Other (1) 2 2
- ----------------------------------------------------------------------------------------------------------------------------
EFFECTIVE TAX RATE 37% 39% 41%
============================================================================================================================
</TABLE>
48
<PAGE> 49
Deferred tax assets and liabilities are composed of the following at
December 31:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryfowards $1,453 $1,503
Book bad debt reserves 1,701 1,559
Unearned income 193 177
Net unrealized loss on securities
available-for-sale ----- 160
Other 151 224
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 3,498 3,623
DEFERRED TAX LIABILITIES:
- ----------------------------------------------------------------------------------------------------------------------------
Tax bad debt reserves 676 731
Net unrealized gain on securities
available-for-sale 300 -----
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 976 731
- ----------------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $2,522 $2,892
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Note 2, the valuation allowance established against
the net operating loss carryforwards acquired through the purchase of GWBC was
eliminated at the time of the merger of Franklin-VA with the Bank. The benefit
derived from the elimination of the valuation allowance was applied first to the
remaining goodwill related to the GWBC acquisition in the amount of $797
thousand and then to reduce income tax expense of approximately $233 thousand.
Franklin has approximately $5.3 million of net operating loss
carryforwards at December 31, 1997 for federal income tax purposes. However,
these net operating losses are limited to $3.6 million of amounts available as a
result of ownership changes in the stock of the Bank. The amounts and expiration
dates of future carryforwards for future years are as follows:
<TABLE>
<CAPTION>
AVAILABLE
EXPIRATION DATE NET OPERATING LOSS
- -----------------------------------------------------------------
<S> <C>
2005 $ 28
2006 2,157
2007 626
2008 523
2009 122
2010 123
- -----------------------------------------------------------------
CUMULATIVE $3,579
=================================================================
</TABLE>
49
<PAGE> 50
NOTE 11 - EARNINGS PER SHARE
Effective December 31, 1997, Franklin adopted SFAS No. 128, "Earnings
per Share". The following is a reconciliation of the numerators and the
denominators of the earnings per share and the earnings per share assuming
dilution computations for net income for the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE:
Income available to
stockholders $5,968 6,533,470 $0.91 $4,523 6,337,322 $0.71
EFFECT OF DILUTIVE
SECURITIES:
Options ------ 428,877 ------ 283,948
------ --------- ----- ------ --------- -----
EARNINGS PER SHARE,
ASSUMING DILUTION:
Income available to
stockholders plus
assumed conversions $5,968 6,962,347 $0.86 $4,523 6,621,270 $0.68
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1995
- ------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------
<S> <C> <C> <C>
EARNINGS PER SHARE:
Income available to
stockholders $3,383 6,095,273 $0.56
EFFECT OF DILUTIVE
SECURITIES:
Options ------ 210,665
------ ---------
EARNINGS PER SHARE,
ASSUMING DILUTION:
Income available to
stockholders plus
assumed conversions $3,383 6,305,938 $0.54
</TABLE>
NOTE 12- BENEFIT PLANS
Franklin has a qualified 401(k) plan which allows substantially all
employees to participate in this contributory savings plan after satisfaction of
service requirements. The plan provides for an employee salary reduction feature
pursuant to section 401(k) of the Internal Revenue Code. Employee contributions
are voluntary, and the employee can elect to defer up to 15% of their
compensation, subject to certain limitations. The Bank provides a 100% matching
contribution upon the first 4% of the employee's salary. For the years ended
December 31, 1997, 1996 and 1995, Franklin contributed approximately $151
thousand, $127 thousand and $110 thousand, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments,
legal proceedings, and contingencies. In the opinion of management, based on its
review with counsel of these matters to date, disposition of all matters will
not materially effect the consolidated financial position or results of
operations of Franklin.
The Bank leases facilities under operating leases with unaffiliated
third parties which have expiration dates ranging from 1998 through 2009.
Several of the leases have one or more renewal options. The leases require
payment by the Bank of its proportionate share of real estate taxes and
insurance on the leased properties. One lease agreement requires Franklin to
pledge a certificate of deposit for $200,000 to the lessor as a security
deposit. Rental expense aggregated $1.6 million, $1.4 million and $1.0 million
in 1997, 1996 and 1995, respectively.
50
<PAGE> 51
Total future minimum annual rental payments under these agreements as
of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $1,368
1999 1,202
2000 1,246
2001 1,290
2002 844
Thereafter 3,426
- --------------------------------------------------------------
$9,376
==============================================================
</TABLE>
NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Franklin is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement Franklin has in particular classes
of financial instruments.
Franklin's exposure to credit loss in the event of non-performance by
the other parties to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. Franklin uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to lend are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose
contract amounts represent credit risk:
Commitments to extend credit $85,563 $84,776
Standby letters of credit 12,851 10,576
</TABLE>
Collateral in the form of restricted cash accounts totalling $3.3
million and $5.9 million as of December 31, 1997 and 1996, respectively, are
maintained by Franklin with respect to these letters of credit. Primarily all of
Franklin's outstanding commitments to lend have been issued at variable interest
rates.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
51
<PAGE> 52
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Different assumptions could significantly affect
these estimates of fair value. Accordingly, the net realizable value could be
materially different from the estimates presented and should not be considered
an indication of the fair value of Franklin taken as a whole.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS: The
carrying amount approximates fair value.
SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY: For U.S. treasury
securities, agencies, municipal and mortgage-backed securities, fair values are
based on quoted market prices or dealer quotes. If a quoted market price is not
readily available, as is the case for the equity securities such as Federal
Reserve Bank stock, management believes that the carrying amount approximates
fair value.
LOANS: Fair values are estimated for categories of loans with similar financial
characteristics. The fair value of loans is estimated by discounting expected
future cash flows using the current rates at which similar loans would be made
to borrowers with comparable credit ratings and for similar remaining
maturities.
ACCRUED INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount
approximates fair value.
DEPOSITS: The fair value of demand deposits is the amount payable on demand
exclusive of any value derived from retaining those deposits for an expected
future period of time. This component of fair value is commonly referred to as a
core deposit intangible and is neither considered in the fair value amounts nor
is it recorded as an intangible asset in the statement of financial condition.
NON-INTEREST BEARING DEPOSITS: The fair value of these deposits is
the amount payable on demand at the reporting date.
INTEREST BEARING DEPOSITS: The fair value of savings, money manager
and money market accounts is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is
estimated by discounting the future cash flows using the current
rates at which similar deposits would be accepted.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS: For these short-term instruments,
the carrying amount approximates fair value.
52
<PAGE> 53
OFF-BALANCE SHEET INSTRUMENTS: The fair value of commitments to extend credit
and letters of credit, both standby and commercial, is assumed to equal the
carrying value, which is immaterial. Extensions of credit under these
commitments, if exercised, would result in loans priced at market terms.
The estimated fair values of Franklin's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
FINANCIAL ASSETS: VALUE VALUE VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 38,590 $ 38,590 $ 22,468 $ 22,468
Federal funds sold and securities purchased
under resale agreements 122,000 122,000 71,800 71,800
Securities available-for-sale 96,930 96,930 97,160 97,160
Securities held-to-maturity 82,458 82,055 66,956 65,447
Loans, net of allowance 296,249 292,907 228,739 228,526
Accrued interest receivable 4,274 4,274 3,305 3,305
FINANCIAL LIABILITIES:
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits $139,913 $139,913 $123,197 $123,197
Interest bearing deposits 287,885 288,155 240,230 240,615
Securities sold under repurchase
agreements 175,708 175,708 99,093 99,093
Accrued interest payable 1,871 1,871 997 997
==================================================================================================================================
</TABLE>
NOTE 16 - REGULATORY REQUIREMENTS
Franklin and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on Franklin's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Franklin and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Franklin's and the Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Franklin and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that Franklin and the Bank meet all capital adequacy requirements to which
they are subject.
53
<PAGE> 54
As of December 31, 1997, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
Franklin's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin $42,036 11.9% greater than or equal to $28,210 greater than or equal to 8.0%
Bank 38,705 11.0% greater than or equal to 28,204 greater than or equal to 8.0%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin $37,844 10.7% greater than or equal to $14,105 greater than or equal to 4.0%
Bank 34,513 9.8% greater than or equal to 14,102 greater than or equal to 4.0%
TIER I CAPITAL (TO AVERAGE ASSETS)
Franklin $37,844 7.7% greater than or equal to $19,591 greater than or equal to 4.0%
Bank 34,513 7.1% greater than or equal to 19,589 greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin $34,286 13.0% greater than or equal to $21,104 greater than or equal to 8.0%
Bank 31,634 12.0% greater than or equal to 21,104 greater than or equal to 8.0%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin $30,982 11.7% greater than or equal to $10,552 greater than or equal to 4.0%
Bank 28,329 10.7% greater than or equal to 10,552 greater than or equal to 4.0%
TIER I CAPITAL (TO AVERAGE ASSETS)
Franklin $30,982 7.6% greater than or equal to $16,270 greater than or equal to 4.0%
Bank 28,329 7.0% greater than or equal to 16,270 greater than or equal to 4.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
- ----------------------------------------------------------------------------------------------------------------
AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AS OF DECEMBER 31, 1997
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin n/a n/a
Bank greater than or equal to $35,255 greater than or equal to 10.0%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin n/a n/a
Bank greater than or equal to $21,153 greater than or equal to 6.0%
TIER I CAPITAL (TO AVERAGE ASSETS)
Franklin n/a n/a
Bank greater than or equal to $24,487 greater than or equal to 5.0%
- ----------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin n/a n/a
Bank greater than or equal to $26,381 greater than or equal to 10.0%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS)
Franklin n/a n/a
Bank greater than or equal to $15,828 greater than or equal to 6.0%
TIER I CAPITAL (TO AVERAGE ASSETS)
Franklin n/a n/a
Bank greater than or equal to $20,337 greater than or equal to 5.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Franklin may not declare or pay any cash dividends except as directed
by policies of the Federal Reserve System. Certain restrictions exist regarding
the ability of the Bank to transfer funds to Franklin in the form of dividends,
advances and loans. No such dividends, advances or loans have been made to
Franklin.
54
<PAGE> 55
NOTE 17 - FRANKLIN BANCORPORATION, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Presented below are the parent company only condensed financial statements.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 3,105 $ 2,703
Investment in subsidiaries 35,214 28,126
Goodwill, net 989 1,115
Other assets 1 ------
- ----------------------------------------------------------------------------------
TOTAL ASSETS $39,309 $31,944
==================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------
LIABILITIES $ 26 $ 51
- ----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------
Common stock 663 649
Capital surplus 21,714 20,960
Retained earnings 16,456 10,488
Unrealized gain (loss) in subsidiaries
securities available-for-sale, net 450 (204)
- ----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 39,283 31,893
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,309 $31,944
==================================================================================
</TABLE>
55
<PAGE> 56
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME $----- $----- $-----
- ---------------------------------------------------------------------------------------------------------------------
Amortization of goodwill 126 126 126
Other expenses 122 251 149
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSE 248 377 275
- ---------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit and
equity in net income of subsidiaries (248) (377) (275)
Income tax benefit 31 64 42
Equity in net income of
subsidiaries 6,185 4,836 3,616
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $5,968 $4,523 $3,383
=====================================================================================================================
</TABLE>
56
<PAGE> 57
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 5,968 $ 4,523 $ 3,383
Adjustments to reconcile net income
to net cash used in operating
activities:
Amortization 126 126 126
Net income of subsidiaries (6,185) (4,836) (3,616)
Change in other assets (1) 1 65
Change in liabilities (24) 40 4
- ---------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (116) (146) (38)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------
Investment in Franklin Community
Development Corporation (250) ------ -------
- ---------------------------------------------------------------------------------------------
Acquisition of The George Washington
Banking Corporation ------- ------ (756)
- ---------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (250) ------ (756)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 768 1,332 164
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 768 1,332 164
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 402 1,186 (630)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,703 1,517 2,147
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 3,105 $ 2,703 $ 1,517
=============================================================================================
</TABLE>
57
<PAGE> 58
NOTE -18 QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly financial results for Franklin are as follows:
<TABLE>
<CAPTION>
1997 - THREE MONTHS ENDED,
- -----------------------------------------------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $9,916 $9,016 $8,641 $8,294
Interest expense 4,096 3,521 3,495 3,223
- -----------------------------------------------------------------------------------------------
NET INTEREST INCOME 5,820 5,495 5,146 5,071
- -----------------------------------------------------------------------------------------------
Provision for loan losses 199 100 55 130
Gains on sales of securities 24 25 ----- -----
Non-interest income 653 638 581 526
Non-interest expense 3,834 3,544 3,337 3,200
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,464 2,514 2,335 2,267
Income tax expense 841 973 914 884
- -----------------------------------------------------------------------------------------------
NET INCOME $1,623 $1,541 $1,421 $1,383
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.25 $ 0.24 $ 0.22 $ 0.21
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE, ASSUMING DILUTION $ 0.23 $ 0.22 $ .21 $ 0.20
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 - THREE MONTHS ENDED,
- -----------------------------------------------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $8,167 $7,957 $6,736 $6,480
Interest expense 3,144 2,939 2,520 2,447
- -----------------------------------------------------------------------------------------------
NET INTEREST INCOME 5,023 5,018 4,216 4,033
- -----------------------------------------------------------------------------------------------
Provision for loan losses ----- ----- ----- 27
Gains on sales of securities ----- ----- 31 -----
Non-interest income 554 437 394 354
Non-interest expense 3,373 3,607 2,898 2,774
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,204 1,848 1,743 1,586
Income tax expense 918 627 691 622
- -----------------------------------------------------------------------------------------------
NET INCOME $1,286 $1,221 $1,052 $ 964
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.20 $ 0.19 $ 0.17 $ 0.15
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE, ASSUMING DILUTION $ 0.19 $ 0.18 $ 0.16 $ 0.15
===============================================================================================
</TABLE>
58
<PAGE> 59
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Franklin Bancorporation
We have audited the accompanying consolidated statements of financial
condition of Franklin Bancorporation and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards required that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Franklin Bancorporation and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Washington, D. C.
February 6, 1998
59
<PAGE> 60
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning each of the
directors of Franklin during the past five years. Directors of Franklin are
elected annually and hold office until the next meeting of shareholders and the
election and qualification of their successors, or until they resign or are
removed.
<TABLE>
<CAPTION>
First Became Positions Held Principal Occupation
Name Age Director with Franklin and Business Experience
- ---- --- -------- ------------- -----------------------
<S> <C> <C> <C> <C>
Joseph R. Schuble, Sr. 58 1992 Chairman of the Mr. Schuble has been Chairman of Dreyfuss
Board Brothers, Inc. or its predecessor (real
estate management) since 1993
Robert P. Pincus 51 1991 President and Mr. Pincus became the President and Chief
Chief Executive Executive Officer of Franklin in 1992 and
Officer President and Chief Executive Officer of the
Bank in 1991. Mr. Pincus was elected to the
Board of Directors of Franklin and the Bank
in 1991.
Joseph B. Gildenhorn 68 1994 Director Mr. Gildenhorn has served as Chairman of the
Board of Directors of the Bank since February
1996. Mr. Gildenhorn has been an executive
partner of The JBG Companies (real estate
development and management) since 1958. From
1989 to 1993, Mr. Gildenhorn served as the
United States' Ambassador to Switzerland. He
also is a director of Biscayne Apparel, Inc.
(children's apparel).
George Chopivsky, Jr. 51 1993 Director Mr. Chopivsky has been director, officer and
founder of United Psychiatric Corporation,
Washington, D.C. (psychiatric hospital
management) since 1983. He was also a
director of Health Care REIT, Inc. (real
estate investment trust) through 1996.
Stephen S. Haas 58 1993 Director Dr. Haas has been a principal with McCartee,
Haas & Grossman, M.D.P.A., Washington, D.C.
and Bethesda, MD (orthopedic surgeons) since
1976.
Susan B. Hepner 46 1993 Director Ms. Hepner has been a principal with
Freidkin, Matrone & Horn, P.A., Rockville, MD
(certified public accountants) since 1979.
H. Peter Larson, III 53 1996 Director Mr. Larson has been president of Goodman
Segar Hogan Hoffler (formally Larson, Ball &
Gould, Inc.), Washington, D.C. (real estate
brokers) since 1985.
Gant Redmon 60 1995 Director Mr. Redmon has been managing partner of
Redmon, Boykin & Braswell (law firm) since
1990.
James C. Stearns 48 1995 Director Mr. Stearns has been counsel with Porter,
Wright, Morris & Arthur (law firm) since
1994. From 1991 to 1993, Mr. Stearns was
special counsel with Saul, Ewing, Remick &
Saul (law firm).
</TABLE>
60
<PAGE> 61
The following table lists certain information concerning all
executive officer of Franklin who do not also serve as directors of Franklin.
<TABLE>
<CAPTION>
Positions Held With
Name Age Franklin Business Experience
- ---- --- -------- -------------------
<S> <C> <C> <C>
Diane M. Begg 50 Executive Vice Ms. Begg has been Executive Vice President and Chief
President and Chief Financial Officer of Franklin since April 1997. From
Financial Officer January 1994 through April 1997 she served as Senior
Vice President and Chief Financial Officer of Franklin.
She also served as Senior Vice President and Chief
Financial Officer of the Bank from July 1993 through
April 1997. From March 1991 through June 1993 Ms. Begg
was Senior Vice President of Federal Capital Bank.
Albert A. D'Alessandro 54 Executive Vice Mr. D'Alessandro, has served as Executive Vice
President President of Franklin since January 1993. He also has
been Executive Vice President of the Bank since April
1991.
David G. Fleming 49 Executive Vice Mr. Fleming, has served as Executive Vice President of
President Franklin since April 1996. He also has been Executive
Vice President of the Bank since December 1995. From
1989 through 1995, Mr. Fleming was Executive Vice
President and Chief Lending Officer in charge of the
Commercial Banking Department for Columbia First Bank.
Joseph B. Head 46 Executive Vice Mr. Head has served as Executive Vice President of
President Franklin since January 1993. He also has been
Executive Vice President of the Bank since April 1991.
J. Mercedes Alvarez 38 Senior Vice Ms. Alvarez has served as Senior Vice President and
President Internal Auditor of Franklin since December 1997, Vice
and Internal President and Internal Auditor of Franklin since
Auditor January 1997, and Internal Auditor of the Bank since
September 1996. From February 1991 to December 1995,
Ms. Alvarez served as Assistant General Auditor at
Columbia First Bank FSB/First Union Bank.
Ronald P. Gudbrandsen 50 Senior Vice Mr. Gudbrandsen has served as Senior Vice President and
President Chief Credit Officer of Franklin since July 1997. He
and Chief Credit also has been Senior Vice President and Chief Credit
Officer Officer of the Bank since January 1997. During 1996
he was President of Vineyard Capital Resource, Inc.
(commercial equipment lease and loan brokerage). From
1990 to 1996, Mr. Gudbrandsen was Executive Vice
President and Senior Loan Officer for The Citizens
National Bank.
Linda B. Johnson 50 Senior Vice Ms. Johnson is Senior Vice President and Secretary of
President Franklin; she was appointed Secretary in November 1991
and Corporate and Senior Vice President in January 1993. Ms. Johnson
Secretary also has been Senior Vice President for Administration
and Secretary of the Bank since April 1991.
Kim Ray 42 Senior Vice President Mr. Ray has served as Senior Vice President and Chief
and Chief Operations Operations Officer of Franklin since September 1996.
Officer Mr. Ray served as Senior Vice President and Internal
Auditor of Franklin from July 1994 to September 1996.
Mr. Ray also is Senior Vice President and Chief
Operations Officer of the Bank. He had been Internal
Auditor since November 1992 and a Senior Vice President
since July 1994.
</TABLE>
61
<PAGE> 62
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange
Act of 1934, as amended, with respect to the Company's most recent fiscal year,
to the best of the Company's knowledge and information: (1) George Chopivsky Jr.
and Joseph R. Schuble, Sr. each did not report one change in Common Stock
holdings by timely filing one Form 4 each, but those reports have been completed
and (2) Ronald P. Gudbrandsen did not timely report his election as Executive
Officer of Franklin on Form 3, but that report has been completed.
62
<PAGE> 63
ITEM 11 - EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid or accrued by Franklin or the Bank to or on behalf of the
Chief Executive Officer and the four other executive officers of Franklin
(determined at the end of the last fiscal year) whose annual salary and bonus
for the last completed fiscal year was at least $100,000 (such officers, the
"Named Executive Officers") for the fiscal years ended December 31, 1997, 1996
and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Awards
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (g) (i)
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary(1) Bonus Compensation(2) Options (#) Compensation(3)
------------------ ---- --------- ----- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Pincus 1997 $320,000 $252,493(4) - 30,000 $7,456 (5)
President and 1996 300,000 60,000(4) - 30,000 10,208
Chief Executive 1995 260,082 75,000 - 10,000 8,790
Officer
Diane M. Begg 1997 $91,454 $19,110 - 8,500 $3,672
Executive Vice 1996 77,975 14,300 - 3,500 3,131
President 1995 73,234 12,150 - 15,000 1,409
Albert A. D'Alessandro 1997 $150,000 $27,000 - 15,000 $7,651 (6)
Executive Vice 1996 140,000 26,300 - 15,000 7,152
President 1995 130,032 19,500 - 10,000 6,399
David G. Fleming 1997 $123,500 $23,465 - 15,000 $4,924
Executive Vice 1996 115,000 22,000 - 5,000 2,123
President 1995 N/A N/A - 20,000 N/A
Joseph B. Head 1997 $150,000 $28,500 15,000 $7,371 (7)
Executive Vice 1996 140,000 25,000 - 15,000 9,127
President 1995 130,032 19,050 - 10,000 6,239
</TABLE>
- -------------------------------
(1) Includes amounts deferred under the Bank's 401(k) plan.
(2) None of the named individuals received perquisites or other benefits
in excess of lesser of $50,000 or 10% of total salary and bonus as
reported in columns (c) and (d) of this table.
(3) Includes the Bank's contributions made under the Bank's 401(k) plan
and other amounts accrued thereunder.
(4) Mr. Pincus and the Bank have entered into a Deferred Compensation
Agreement (the "Deferred Compensation Agreement") whereby the payment
of a portion of his compensation is deferred each year. The Bank is
obligated to pay Mr. Pincus either (i) an annual sum set forth in the
Deferred Compensation Agreement up through December 20, 2002, which
will not exceed $50,000 per year, or (ii) $50,000 for each such
period in the event of the death of Mr. Pincus (see "Employment
Contracts" herein). The amount payable under the Deferred
Compensation Agreement for the 12 month period ending December 20,
1996 was $0, and for the 12 month period ending December 20, 1997 was
$12,493. For convenience, such amounts are reported in the above
table as though paid for fiscal years 1996 and 1997.
(5) Includes $1,245.00 of insurance premiums for the term life insurance
element of a whole life insurance policy for Mr. Pincus. Life
insurance premiums paid for fiscal years 1996 and 1995 were $1,407.00
and $166.00, respectively.
(6) Includes $2,092.00 of insurance premiums for the term life insurance
element of a whole life insurance policy for Mr. D'Alessandro. Life
insurance premiums paid for fiscal years 1996 and 1995 were $1,552.00
and $1,368.00, respectively.
(7) Includes $1,275.46 of insurance premiums for the term life insurance
element of a whole life insurance policy for Mr. Head. Life insurance
premiums paid for fiscal years 1996 and 1995 were $1,275.46 and
$1,216.00, respectively.
63
<PAGE> 64
STOCK OPTIONS
The following table provides certain information concerning the grant
of stock options under the Franklin Stock Option Plans to the Named Executive
Officers during the fiscal year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Rates of Stock Price
Appreciation(2)
Individual Grants for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Number of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/sh) Date (1) 5% ($) 10% ($)
---- --------- -------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Pincus 30,000 18.3% $10.125 01/02/07 $191,030 $484,100
Diane M. Begg 8,500 5.2% 10.125 01/02/07 54,124 137,161
Albert A. D'Alessandro 15,000 9.2% 10.125 01/02/07 95,510 242,050
David G. Fleming 15,000 9.2% 10.125 01/02/07 95,510 242,050
Joseph B. Head 15,000 9.2% 10.125 01/02/07 95,510 242,050
</TABLE>
- -------------------------------
(1) The options are effective from the date of grant until the earliest
of (a) the date all of the shares are purchased by the grantee; (b)
the grantee makes written request to the Board to surrender the
granted options in exchange for a cash payment equal to the
difference obtained by subtracting the exercise price of the shares
which relate to the surrendered options from the fair market value of
the shares which relate to the options on the date of surrender; (c)
the date of the termination of full-time employment, or (d) the
cancellation of the option by agreement of the grantee and Franklin.
(2) In order to calculate the potential realizable values in columns (f)
and (g), assumes that the price per share of Common Stock would be
approximately $16.49 and $26.26, respectively, for Mr. Pincus, Ms.
Begg, Mr. D'Alessandro, Mr. Fleming and Mr. Head for the options
granted at the end of the ten-year option term. Amounts represent
hypothetical gains that could be achieved for the respective options
at the end of the ten year option term. The assumed 5% and 10% rates
of stock appreciation are mandated by the rules of the Securities and
Exchange Commission and may not accurately reflect the appreciation
of the price of the Common Stock from the date of grant until the end
of the option term. These assumptions are not intended to forecast
future price appreciation of the Common Stock.
64
<PAGE> 65
OPTION EXERCISES AND HOLDINGS
The following table provides certain information concerning exercises
of options by the Named Executive Officers during, and unexercised stock options
held by the Named Executive Officers at the end of the fiscal year ended
December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
FY-End Option Values
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Value of
Securities Securities
Underlying Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired FY-End (#) FY-End ($)
on Value Exercisable/ Exercisable/
Exercise (#) Realized ($)(1) Unexercisable Unexercisable(2)
------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Robert P. Pincus 106,790 $909,403 93,210/- 0 - $1,540,716/- 0 -
Diane M. Begg 2,000 11,312 30,000/- 0 - $402,422/- 0 -
Albert A. D'Alessandro - - 120,000/- 0 - 1,967,055/- 0 -
David G. Fleming 17,391 217,388 17,609/- 0 - 273,095/- 0 -
Joseph B. Head - - 120,000/- 0 - 1,967,055/- 0 -
</TABLE>
- -------------------------------
(1) Value realized is based on the closing price for Common Stock on the
date of exercise, minus the exercise price. Reporting in this format
is required by the rules of the Securities and Exchange Commission
and does not necessarily indicate that the optionee sold such stock.
(2) The closing price on December 31, 1997 for Common Stock was $21.25
and is used in calculating the value of unexercised options. The
total value of the unexercised in-the-money options is based on this
closing price less the exercise price of the options.
DIRECTORS' COMPENSATION
For fiscal year 1998, non-employee directors of Franklin are
compensated for their services at the rate of $150.00 per board or committee
meeting attended and $200.00 per board or committee meeting chaired. The
chairmen of both Franklin and the Bank receive a $5,000.00 annual retainer;
Board members receive a $4,000.00 annual retainer. During fiscal year 1997
non-employee directors of Franklin were compensated on the same basis.
A Nondiscretionary Stock Option Plan also has been adopted by
Franklin. The Nondiscretionary Stock Option Plan provides that non-employee
directors of Franklin and the Bank who secure business for the Bank will be
awarded options to purchase shares of Common Stock, the number of such options
and their terms to be determined by reference to the following nondiscretionary
formula: each such participant who secures business for Franklin and/or the Bank
in an amount of at least $750,000 in average deposits and/or loans during 1997
will receive options to purchase 500 shares of Common Stock; each such
participant who secures business for Franklin and/or the Bank in an amount of at
least $1,500,000 in average deposits and/or loans during 1997 will receive
options to purchase an additional 500 shares of Common Stock; each such
participant who secures business for Franklin and/or the Bank in an amount of at
least $3,000,000 in average deposits and/or loans during 1997 will receive
options to purchase an additional 1,000 shares of Common Stock; and each such
participant who secures business for Franklin and/or the Bank in an amount of at
least $5,000,000 in average deposits and/or loans during 1997 will receive
options to purchase an additional 2,000 shares of Common Stock. For fiscal year
1997, the following directors were granted options in January 1998 to purchase
the following numbers of shares of Common Stock thereunder: George Chopivsky,
1,000; Joseph B.
65
<PAGE> 66
Gildenhorn, 4,000; Susan B. Hepner, 4,000; H. Peter Larson, III, 4,000; Joseph
R. Schuble, Sr., 1,000; and James C. Stearns, 1,000.
EMPLOYMENT CONTRACTS
On April 17, 1991, Robert P. Pincus entered into an employment
agreement for a term of three years, subject generally to automatic extension
every 18 months thereafter. The agreement automatically renewed for additional
18 month terms on April 17, 1994, October 17, 1995 and April 17, 1997. Mr.
Pincus' salary is subject to review and adjustment on a yearly basis. Under the
terms of his employment agreement, Mr. Pincus received vested stock options for
100,000 shares of Common Stock exercisable at $3.00 per share and, so long as he
continues employment with the Bank, a right to receive options for an additional
50,000 shares of Common Stock. The latter options were granted at a rate of
10,000 per year beginning in the second year of employment, continuing through
the sixth year of employment, and are exercisable at the market price of Common
Stock at the time of grant. For fiscal year 1997, Mr. Pincus' base salary was
increased from $300,000 to $320,000.
Mr. Pincus' employment agreement provides that, if his employment is
terminated, he will receive the following payments in addition to salary and
benefits accrued to the date of termination. If he is terminated without cause
or as a result of (or within 90 days of) a change in control of Franklin or the
Bank, he will receive (a) if the termination occurs during the first thirty-six
months of employment, an amount equal to (i) his total aggregate base salary for
a full eighteen month period and (ii) his base salary for the remainder of the
then-current eighteen month period, or (b) if the termination occurs after the
first thirty-six months of employment, an amount equal to his base salary for
the remainder of the then-current eighteen month period. Further, if his
employment is terminated during the first thirty-six months of employment due to
the receivership of the Bank, he will receive an amount equal to his base salary
for the remainder of the then-current eighteen month period. All such payments
are to be made at the time when they would have been due had his employment not
been terminated. Finally, if his employment is terminated due to death or
disability, he (or his estate) will receive an amount equal to his base salary
for the remainder of the then-current twelve month period.
As of December 20, 1996, Mr. Pincus and the Bank entered into a
Deferred Compensation Agreement (the "Deferred Compensation Agreement") whereby
the payment of a portion of his compensation is deferred each year. The Bank
agreed to pay Mr. Pincus or a beneficiary of Mr. Pincus (in the event of his
death) certain compensation for every 12 month period (commencing on December
20, 1995) that Mr. Pincus remains employed by the Bank. The compensation payable
under the Deferred Compensation Agreement is either (i) an annual sum set forth
in the Deferred Compensation Agreement (as described in footnote 4 of the
Summary Compensation Table) or (ii) $50,000 per year in the event of the death
of Mr. Pincus. Under the terms of the Deferred Compensation Agreement, the
deferred compensation will be payable in installments upon the termination of
Mr. Pincus' employment with the Bank or the termination of the Deferred
Compensation Agreement or as a lump sum payment in the event of the death of Mr.
Pincus. The Deferred Compensation Agreement shall terminate on December 20,
2002.
Concurrently therewith, as of December 20, 1996, Mr. Pincus, the Bank
and a trust established by Mr. Pincus (the "Trust") entered into a Split-Dollar
Life Insurance Agreement (the "Insurance Agreement") whereby the Trust purchased
a whole life insurance policy (the "Policy") insuring the life of Mr. Pincus.
The Bank has agreed to pay the annual premium payments under the Policy. Under
the terms of the Insurance Agreement, upon the death of Mr. Pincus the death
benefit payable on the Policy will be paid to the Trust less the aggregate
amount of all of the premiums paid over the life of the Policy, which will be
paid over to the Bank. The Trust has no interest in the cash surrender value of
the Policy. The Insurance Agreement shall terminate on December 20, 2002.
Additionally, if the Insurance Agreement is terminated prior to the death of Mr.
Pincus, for any number of reasons, the Bank will cease to make payments on the
Policy and the lesser of the cash surrender value of the Policy or the aggregate
amount of the premiums paid on the Policy by the bank shall be paid from the
Policy to the Bank. These payment rights are secured by a collateral assignment
of the Policy to the Bank.
On April 22, 1991, Albert A. D'Alessandro and Joseph B. Head each
entered into employment agreements for terms of two years, subject generally to
automatic extension every year
66
<PAGE> 67
thereafter; the agreements renewed for additional one year terms on April 22,
1993, April 22, 1994, April 22, 1995, April 22, 1996 and April 22, 1997. Mr.
D'Alessandro and Mr. Head's salaries are subject to review and adjustment on a
yearly basis. Under the terms of their respective employment agreements, Mr.
D'Alessandro and Mr. Head each received vested options for 50,000 shares of
Common Stock exercisable at $3.00 per share and, so long as he continues
employment with the Bank, the right to receive options for an additional 50,000
shares of Common Stock. The latter options were granted at a rate of 10,000 per
year beginning in the second year of employment, continuing through the sixth
year of employment and are exercisable at the market price of Common Stock at
the time of grant. For fiscal year 1997, Mr. D'Alessandro's and Mr. Head's base
salaries were increased from $140,000 to $150,000.
Each of Mr. Head's and Mr. D'Alessandro's employment agreements
provides that, if his employment is terminated, he will receive the following
additional payments in addition to salary and benefits accrued during the first
two years of employment, (a) an amount equal to (i) his total aggregate base
salary for a full twelve month period and (ii) his base salary for the remainder
of the then-current twelve month period, or (b) if the termination occurs after
the first two years of employment, an amount equal to his base salary for the
remainder of the then-current twelve month period. If his employment is
terminated during the initial two year period due to the receivership of the
Bank, he will receive an amount equal to his base salary for the remainder of
the then-current twelve month period. If his employment is terminated as a
result of (or within 90 days of) a change in control of the Bank or Franklin, he
will receive his base salary for the remainder of the then-current eighteen
month period. All such payments are to be made at the time when they would have
been due had his employment not been terminated. Finally, if his employment is
terminated due to death or disability, he (or his estate) will receive an amount
equal to his base salary for the remainder of the then-current twelve month
period.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The Board of Directors of Franklin has no compensation committee.
James C. Stearns, Joseph B. Gildenhorn, Susan B. Hepner, Victor S. Kamber,
Robert P. Pincus and Joseph R. Schuble, Sr. serve as the Bank's Compensation
Committee.
Of the members of the Bank's Compensation Committee, Mr. Pincus is
the President and Chief Executive Officer of the Bank and Franklin (although, as
further described in the report of the Compensation Committee set forth below,
he did not participate in decisions relating to his own compensation during
fiscal year 1997). Further, Mr. Schuble is the Chairman of the Board of
Franklin.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Generally, decisions on compensation of the Bank's executives
currently are made by a six-member Compensation Committee of the Bank's Board.
Five of the members are non-employee directors of the Bank, four of whom also
are also non-employee directors of Franklin, and one is the Chief Executive
Officer of Franklin and the Bank (the "CEO"). Decisions regarding compensation
of the CEO are made by all non-employee members of the Committee. All decisions
by the Compensation Committee relating to the compensation of the Bank's
executive officers are reviewed and approved by the full Board of Directors of
the Bank. Set forth below is a report prepared by Messrs. Stearns, Gildenhorn,
Kamber, Schuble and Pincus, and Ms. Hepner in their capacity as the Bank Board's
Compensation Committee addressing the Bank's compensation philosophy and
executive compensation for 1997.
Philosophy Regarding Compensation
of Executive Officers
Regulations of the SEC require the Compensation Committee to disclose
the Committee's bases for executive compensation. The Compensation Committee's
executive compensation philosophy is as follows: compensation packages should be
designed to provide competitive levels of compensation that align pay with the
Bank's annual and long-term performance goals, motivate key executive officers
to achieve strategic business initiatives and reward them for their
achievements, and provide compensation opportunities which are comparable to
those offered by
67
<PAGE> 68
other financial institutions. This should allow the Bank to compete for and
retain talented executives who are critical to the Bank's long-term success,
align the interest of executives with the long-term interests of stockholders
through award opportunities that can result in ownership of Common Stock, and
recognize individual initiative and achievements. The Compensation Committee
also endorses the position that stock ownership by management is beneficial in
aligning management's and shareholders' interests in the enhancement of
shareholder value.
Relationship of Performance Under
Compensation Plans
The compensation paid the Named Executive Officers in 1997 comprised
salary, long-term incentive opportunities in the form of stock options, bonuses
and other benefits typically offered to executives by competing financial
institutions.
Salaries. The original base salaries paid to Messrs. Pincus, Head and
D'Alessandro pursuant to their respective employment agreements were set in
1991, when those agreements were entered into. Since Messrs. Pincus, Head and
D'Alessandro were newly employed at that time, their salaries did not reflect
corporate performance of the Bank or Franklin. Instead, these salaries were
primarily based upon what Messrs. Pincus, Head and D'Alessandro would accept to
agree to be employed by the Bank and Franklin, bearing in mind their
compensation packages received in prior employment. Messrs. Pincus, Head and
D'Alessandro's employment agreements provide for an annual review of salary. The
first annual review of salary pursuant to Messrs. Pincus, Head and
D'Alessandro's employment agreements related to compensation for 1993 and
subsequent annual reviews were undertaken in 1994, 1995, 1996 and 1997. Messrs.
Pincus, Head and D'Alessandro's base salaries for 1997 (which increased from
1996) were based on the Compensation Committee's subjective evaluation of the
following performance-related factors: leadership; the Bank's financial
performance; managerial effectiveness; and supervisory ability.
Ms. Begg's and Mr. Fleming's employment is not subject to employment
agreements; Ms. Begg and Mr. Fleming's salaries, long-term incentive
opportunities in the form of stock options, bonuses and other benefits are
reviewed by the Compensation Committee on an annual basis. Ms. Begg and Mr.
Fleming's base salaries for 1997 were based on the Compensation Committee's
subjective evaluation of the following performance-related factors: leadership;
the Bank's financial performance; managerial effectiveness; and supervisory
ability.
Annual Bonuses. Annual bonuses were awarded to the Named Executive
Officers during 1997 as indicated in the Summary Compensation Table. The bonuses
were based on the achievement of specific bank and division goals. The Executive
Committee of the Bank set eight bank-wide benchmarks for: net loan growth,
average deposit growth, net earnings, return on average assets, return on
average equity, average net interest margin, productivity ratio and non-interest
income excluding security gains. The bank-wide benchmarks were based on
financial results from the previous year as well as projected growth. The
Executive Committee also set objective and subjective divisional benchmarks
based on historical performance. In 1997, eight of the eight bank-wide
benchmarks were met (three were met at greater than 110% of the benchmark and
five were met at 100% of the benchmark) and substantially all of the divisional
benchmarks were met. None of the benchmarks were assigned a specific weight in
determining bonuses; the Compensation Committee of the Bank subjectively
determined that, in light of their performance in meeting and exceeding
bank-wide and divisional goals, 100% of the bonus pool that they were eligible
to receive would be awarded to the Named Executive Officers.
Stock Option Plans. Franklin has a Stock Option Plan which was
approved by its sole shareholder in 1991, amended and restated in 1993 and
amended and restated again in 1997 ("the Second Amended and Restated Stock
Option Plan"). Furthermore, Franklin shareholders approved Franklin's 1997 Stock
Option Plan in 1997. The five Named Executive Officers are eligible to receive
grants under both such plans. Grants under these plans to the Named Executive
Officers are for a period of 10 years, are priced at market value on the date of
grant, and are intended to provide incentives for future performance, and to
help attract and retain qualified individuals and to provide equity incentives
for their active participation to increase the growth and profitability of
Franklin, the Bank, and any future subsidiaries of Franklin. In 1997, the
options indicated in the "Option Grants in Last Fiscal Year" table were granted
to the Named Executive Officers by the Board of Directors in accordance with the
terms of the 1997 Stock Option Plan. These grants were based on Stock Option
Administration Committees subjective
68
<PAGE> 69
evaluation of the following performance related factors: leadership; managerial
effectiveness; supervisory ability; and the Bank's financial performance
Other Compensation Plans. The Bank has adopted certain broad-based
employee benefit plans in which the Named Executive Officers are permitted to
participate on the same terms as non-executive employees who meet applicable
eligibility criteria, subject to any legal limitations on the amounts that may
be contributed or the benefits that may be payable thereunder, including but not
limited to the Bank's Employee 401(k) Plan. Benefits under these plans are not
tied to the Bank's or Franklin's performance.
Mr. Pincus' 1997 Compensation
Regulations of the SEC require the Compensation Committee to disclose
the Committee's bases for compensation reported for Mr. Pincus in 1997 and to
discuss the relationship between Franklin's performance during the last fiscal
year and Mr. Pincus' compensation.
Mr. Pincus' salary was increased to $320,000 in 1997 from $300,000 in
1996. Mr. Pincus' salary is based on the Compensation Committee's subjective
evaluation of certain performance-related factors (i.e., leadership, the Bank's
financial performance, managerial effectiveness and supervisory ability). For
1997 the Committee, having noted the Bank's overall financial performance and
continued growth for 1997, adjusted Mr. Pincus' salary upward accordingly. In
addition, Mr. Pincus earned an annual bonus in 1997 based on the achievement of
substantially all objective bank-wide benchmarks and objective and subjective
divisional benchmarks set by the Compensation Committee and the Compensation
Committee's evaluation of those achievements described above.
Compensation Committee
James C. Stearns, Chairman
Joseph B. Gildenhorn
Susan B. Hepner
Victor S. Kamber
Robert P. Pincus
Joseph R. Schuble, Sr.
PERFORMANCE GRAPH [See page 70.]
69
<PAGE> 70
Comparison of Five Year-Cumulative Total Returns
Performance Graph for
FRANKLIN BANCORPORATION, INC.
Prepared by the Center for Research in Security Prices
Produced on 02/11/98 including data to 12/31/97
[GRAPH]
<TABLE>
<CAPTION>
CRSP Total Returns Index For: 12/31/92 12/31/93 12/30/94 12/29/95 12/31/96 12/31/97
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN BANCORPORATION, INC. 100.0 82.4 108.8 188.2 244.1 500.0
Nasdaq Stock Market (US Companies) 100.0 114.8 112.2 158.7 195.2 239.5
Nasdaq Bank Stocks 100.0 114.0 113.6 169.2 223.4 377.4
SIC 6020-6029, 6710-6719 US & Foreign
</TABLE>
NOTES:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 12/31/92.
70
<PAGE> 71
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of Common Stock
as of March 5, 1998 by all directors, the Chief Executive Officer and the Named
Executive Officers of Franklin, and all directors and executive officers of
Franklin as a group. To management's knowledge, no person or group beneficially
owns more than five percent of the issued and outstanding shares of common
stock. Unless otherwise indicated and subject to applicable community property
and similar statutes, all persons listed below have sole voting and investment
power over all shares of Common Stock beneficially owned. Share ownership has
been computed in accordance with the Securities and Exchange Commission ("SEC")
rules and does not necessarily indicate beneficial ownership for any other
purpose.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------ -------------------- ----------------
<S> <C> <C>
Diane M. Begg (1) 48,500 0.65
George Chopivsky, Jr. (2) 214,575 2.86
Albert A. D'Alessandro (3) 153,750 2.05
David G. Fleming(4) 55,000 0.73
Joseph B. Gildenhorn (5) 248,932 3.31
Stephen S. Haas (6) 51,790 0.69
Joseph B. Head (7) 154,750 2.06
Susan B. Hepner (8) 217,391 2.89
H. Peter Larson, III (9) 44,533 0.59
Robert P. Pincus (10) 273,411 3.64
Gant Redmon (11) 5,780 0.08
Joseph R. Schuble, Sr. (12) 302,518 4.03
James C. Stearns (13) 6,761 0.09
All directors and officers 1,897,491 25.26
as a group (17 persons) (14)
</TABLE>
(1) Includes vested options to purchase 42,000 shares of Common Stock and
500 shares owned through her retirement account.
(2) Includes 10,000 shares held by the Chopivsky Family Partnership of
which Mr. Chopivsky is a general partner, 29,000 shares held by the
Chopivsky Family Foundation, of which Mr. Chopivsky is president and
vested options to purchase 5,000 shares of Common Stock.
(3) Includes vested options to purchase 135,000 shares of Common Stock
and 18,750 shares owned through his retirement account.
(4) Includes vested options to purchase 37,609 shares of Common Stock.
(5) Includes vested options to purchase 8,000 shares of Common Stock.
(6) Includes vested options to purchase 7,500 shares of Common Stock.
(7) Includes vested options to purchase 135,000 shares of Common Stock.
(8) Includes 203,391 shares held by Professional Associates of which Ms.
Hepner is a general partner, and vested options to purchase 14,000
shares of Common Stock.
(9) Includes 2,000 shares owned by his spouse, 2,100 shares owned by his
children, 14,088 shares owned through various retirement accounts and
vested options to purchase 15,500 shares of Common Stock.
(10) Includes 1,111 shares owned by his son and vested options to purchase
30,000 shares of Common Stock.
(11) Includes 2,640 shares owned by his spouse and vested options to
purchase 500 shares of Common Stock.
(12) Includes 130,532 shares held by of Essex Investments Limited
Partnership of which Mr. Schuble is a general partner, 157,986 shares
held by Schuble Family Investment Limited Partnership of which Mr.
Schuble is a general partner, and vested options to purchase 11,500
shares of Common Stock.
(13) Includes vested options to purchase 1,000 shares of Common Stock.
(14) Includes vested options to purchase 647,819 shares of Common Stock.
71
<PAGE> 72
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the beginning of fiscal year 1997, none of Franklin's directors
or executive officers, or any member of their immediate families, has or had any
material interest in any transaction to which Franklin or the Bank is or was a
party outside of the ordinary course of the Bank's business.
The directors and executive officers of Franklin, members of their
immediate families, and companies, firms or partnerships with which they are
associated, engage in normal banking transactions with the Bank from time to
time in the ordinary course of business. All loans or loan commitments included
among such transactions have been made on substantially the same terms,
including interest rates charged and collateral required, as those prevailing at
the time for comparable transactions with unrelated persons of similar
creditworthiness, and do not involve more than a normal risk of collectibility
or present other unfavorable features.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: None
3. Exhibits:
2.1 Agreement and Plan of Merger dated July 13, 1994 between
Franklin and GWBC. (4)
2.2 Agreement and Plan of Reorganization dated December 16, 1997
among Franklin, BB&T Virginia and BB&T. (8)
3.1 Certificate of Incorporation (as amended) and Bylaws of
Franklin. (1)
10.1 Employment Agreement dated April 17, 1991 between Franklin,
the Bank and Robert P. Pincus. (1)
10.2 Employment Agreement dated April 22, 1991 between Franklin,
the Bank and Albert A. D'Alessandro. (1)
10.3 Employment Agreement dated April 22, 1991 between Franklin,
the Bank and Joseph B. Head. (1)
10.4 Lease dated September 22, 1982 between Sidley & Austin and
the Bank re: 1722 I (Eye) Street, N.W. (2)
10.5 Letter agreement dated April 22, 1993 between Sidley & Austin
and the Bank amending lease re: 1722 I (Eye) Street, N.W. (2)
10.6 First Amendment to Lease dated December 27, 1984 between
Sidley & Austin and the Bank re: 1722 I (Eye) Street,
N.W. (2)
10.7 Second Amendment to Lease dated September 15, 1992 between
Sidley & Austin and the Bank re: 1722 I (Eye) Street,
N.W. (2)
10.8 Lease dated March 20, 1989 between Second National Federal
Savings Bank and Rhode Island & M Associates re: 1730 Rhode
Island Avenue, N.W. (2)
10.9 Agreement dated June 12, 1992 between Second National Federal
Savings Bank and Rhode Island & M Associates re: 1730 Rhode
Island Avenue, N.W. (2)
10.10 Lease Assignment and Assumption Agreement dated June 12, 1992
among Second National Federal Savings Bank, the Bank, and
Rhode Island & M Associates re: 1730 Rhode Island Avenue,
N.W. (2)
10.11 Note dated June 12, 1992 from the Bank to Second National
Federal Savings Bank re: 1730 Rhode Island Avenue, N.W. (2)
72
<PAGE> 73
10.12 Bill of Sale dated June 12, 1992 from Second National Federal
Savings Bank to the Bank re: 1730 Rhode Island Avenue, N.W.
(2)
10.13 Supplement to Lease dated June 13, 1992 between the Bank and
Rhode Island & M Associates re: 1730 Rhode Island Avenue,
N.W. (2)
10.14 Lease Agreement dated as of November 30, 1992 between GLN
Associates and the Bank re: 1300 Wisconsin Avenue, N.W., with
Unconditional Guarantee by Franklin. (2)
10.15 Lease Agreement dated November 2, 1994 between Northend
Associated Limited Partnership and the Bank re: 1316 and
U Street, N.W. (3)
10.16 Computer Service Agreement dated February 22, 1995 between
M&I Data Services, Inc. and the Bank re: Data Processing. (3)
10.17 Release, Assumption, Assignment and Amendment Agreement dated
March 6, 1995 between NationsBank, N.A., the Bank and 601
Thirteenth Street, N.W. Associates Limited Partnership re:
601 13th Street, N.W. (6)
10.18 Lease Agreement dated August 30, 1995 between 5301 Wisconsin
Avenue Associates Limited Partnership and the Bank re: 5301
Wisconsin Avenue, N. W. (6)
10.19 Lease Agreement dated November 17, 1995 between Tysons II
Development Co. Limited Partnership and the Bank re: 1650
Tysons Boulevard. (6)
10.20 Nondiscretionary Stock Option Plan. (7)
10.21 Stock Subscription Agreement dated December 27, 1996 by
and among Franklin, Rock Creek Corporation and Elias F.
Aburdene. (7)
10.22 Lease Agreement dated May 28, 1996 between Bay Limited
Partnership and the Bank re: 7200 Wisconsin Avenue. (7)
10.23 Agreement of Sublease dated March 29, 1996 between Thomas
Cook Currency Services, Inc. and the Bank re: 1800 K Street,
N.W., Suite 929. (7)
10.24 Letter Agreement dated September 15, 1995 between Franklin
and William J. Ridenour re: GWBC options. (5)
10.25 Letter Agreement dated September 27, 1995 between Franklin
and Leslie T. Proctor re: GWBC options. (5)
10.26 1997 Stock Option Plan. (9)
10.27 Deferred Compensation Agreement dated July 1, 1997 between
the Bank and Robert P. Pincus. (10)
10.28 Split-Dollar Life Insurance Agreement dated December 20, 1996
between the Bank and The Robert P. Pincus Family Trust. (10)
10.29 Third Amendment to Lease dated March 19, 1997 between Sidley
& Austin and the Bank re: 1722 I Street, N.W.
10.30 Fourth Amendment to Lease dated December 22, 1997 between
Sidley & Austin and the Bank re: 1722 I Street, N. W.
10.31 Lease Assignment, Assumption and Modification Agreement dated
January 13, 1998 between 1800 K Investors, L.P., Thomas Cook
Currency Services, Inc. and the Bank re: 1800 K Street, N.W.,
Suite 929.
10.32 Second Amended and Restated Stock Option Plan.
21.1 Subsidiaries of the Registrant.
73
<PAGE> 74
(b) Reports on Form 8-K: Franklin filed one current report on Form 8-K
during the quarter ended December 31, 1997.
The report, filed on December 23, 1997, reported that BB&T and BB&T
Virginia had entered into a contract to acquire Franklin in a stock
transaction.
- ---------------------------------------------------------------
(1) Incorporated by reference from Form S-4 Registration Statement,
Registration No. 33-46835, filed on March 30, 1992.
(2) Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, filed on April 15, 1993.
(3) Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, filed on March 30, 1995.
(4) Incorporated by reference from Form S-4 Registration Statement,
Registration No. 33-83220, filed on August 24, 1994.
(5) Incorporated by reference from Form S-8 Registration Statement,
Registration No. 33-03711, filed on May 14, 1996.
(6) Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, filed on March 29, 1996.
(7) Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, filed on March 31, 1997.
(8) Incorporated by reference from current report on Form 8-K, filed on
December 23, 1997.
(9) Incorporated by reference from Proxy Statement for 1997 annual
meeting of stockholders, filed on May 5, 1997 and re-filed on
December 17, 1997.
(10) Incorporated by reference from Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997, filed on November 14,
1997.
74
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 1998.
FRANKLIN BANCORPORATION, INC.
By: /s/ Robert P. Pincus
----------------------------
Robert P. Pincus
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert P. Pincus President, Chief March 27, 1998
- ---------------------------- Executive Officer,
Robert P. Pincus and Director
(Principal Executive Officer)
/s/ Joseph R. Schuble, Sr. Chairman of the Board March 27, 1998
- ---------------------------- and Director
Joseph R. Schuble, Sr.
/s/ Diane M. Begg Executive Vice President and March 27, 1998
- ---------------------------- Chief Financial Officer
Diane M. Begg (Principal Financial and
Accounting Officer)
/s/ George Chopivsky, Jr. Director March 27, 1998
- ----------------------------
George Chopivsky, Jr.
/s/ Joseph B. Gildenhorn Director March 27, 1998
- ----------------------------
Joseph B. Gildenhorn
/s/ Stephen S. Haas Director March 27, 1998
- ----------------------------
Stephen S. Haas
/s/ Susan B. Hepner Director March 27, 1998
- ----------------------------
Susan B. Hepner
/s/ H. Peter Larson, III Director March 27, 1998
- ----------------------------
H. Peter Larson, III
/s/ Gant Redmon Director March 27, 1998
- ----------------------------
Gant Redmon
/s/ James C. Stearns Director March 27, 1998
- ----------------------------
James C. Stearns
</TABLE>
75
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE NUMBER
- -------------- -----------
<S> <C> <C>
10.29 Third Amendment to Lease dated March 19, 1997 77
between Sidley & Austin and the Bank re: 1722 I
Street, N.W.
10.30 Fourth Amendment to Lease dated December 22, 1997 79
between Sidley & Austin and the Bank re: 1722 I
Street, N.W.
10.31 Lease Assignment, Assumption and Modification Agreement 81
dated January 13, 1998 between 1800 K Investors, L.P.,
Thomas Cook Currency Services, Inc. and the Bank re: 1800
K Street, N.W., Suite 929
10.32 Second Amended and Restated Stock Option Plan 84
21.1 Subsidiaries of the Registrant 90
</TABLE>
76
<PAGE> 1
EXHIBIT 10.29
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease ("Amendment"), dated as of this 19th
day of March, 1997, by and between SIDLEY & AUSTIN, a general partnership
("Landlord"), and FRANKLIN NATIONAL BANK, a national banking association,
formerly NATIONAL ENTERPRISE BANK and ENTERPRISE BANK, NATIONAL ASSOCIATION
("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into that certain Lease dated
September 27, 1982, as amended by that certain First Amendment to Lease dated
December 27, 1984, and that certain Second Amendment to Lease dated September
15, 1992 (collectively, the "Lease"), whereby Landlord leased certain premises
to Tenant as described therein upon certain terms and conditions described
therein; and
WHEREAS, Tenant wishes to lease additional space from Landlord and
Landlord wishes to lease such space to Tenant;
NOW, THEREFORE, for and in consideration of the foregoing premises
and other good valuable consideration, the parties agree to amend the Lease as
follows:
1. Defined Terms. All capitalized terms, unless defined herein,
shall have the meaning and definition as set forth in the Lease.
2. Premises. The term "Premises" as used herein and in the Lease
shall mean and refer to that rentable area as outlined in red on Exhibits A and
A-1 of the Lease and that additional approximately 1880 square feet of rentable
area as outlined in red on Exhibit A-3 hereto. The area outlined on Exhibit A-3
hereto shall be sometimes hereinafter referred to as the "Second Expansion
Space". The Second Expansion Space does not include the contiguous mechanical
room or the room behind the mechanical room (which contains parking elevator
shafts). Exhibit A-3 shall be deemed to be attached to the Lease.
3. Term. The term of the lease of the Second Expansion Space
(the "Second Expansion Space Term") shall commence on the day following the date
of execution of this Third Amendment to Lease by both parties (the "Second
Expansion Space Commencement Date"). Base annual rental for the period from the
Second Expansion Space Commencement Date to and including March 31, 1997, shall
be charged at the rate of $148.27 per day and shall be paid by Tenant upon
execution of this Third Amendment to Lease. The Second Expansion Space Term
shall be coterminous with the term of the Lease, terminating on December 31,
2001. The "Term" as defined in the Lease shall mean and refer to the Term of the
Lease as amended therein and the Second Expansion Space Term.
4. Base Rent. Tenant, in consideration for this Third Amendment
to Lease and the leasing of the Second Expansion Space, in addition to all other
rents paid under the Lease, agrees to pay to Landlord a base annual rental
[escalated at the rate of three percent (3.0%) per year, which escalation is
included in the amounts indicated below] for the Second Expansion Space ("Second
Expansion Space Base Rent") for that part of the Second Expansion Space Term
from April 1, 1997 through February 28, 1998 of Forty Nine Thousand Eight
Hundred Twenty Dollars ($49,820.00) annually, payable in equal monthly
installments of Four Thousand One Hundred Fifty-One and 67/100 Dollars
($4,151.67) each; and, for that part of the Term from April 1, 1998 through
December 31, 1998, the sum of Fifty One Thousand Three Hundred Fourteen and
60/100 Dollars ($51,314.60) on an annual basis, payable in equal monthly
installments of Four Thousand Two Hundred Seventy-Six and 22/100 Dollars
($4,276.22) each; and, for that part of the Term from January 1, 1999 through
December 31, 1999, the sum of Fifty Two Thousand Eight Hundred Fifty-Four and
04/100 Dollars ($52,854.04) annually, payable in equal monthly installments of
Four Thousand Four Hundred Four and 50/100 Dollars ($4,404.50) each; and, for
that part of the Term
77
<PAGE> 2
from January 1, 2000 until December 31, 2000, the sum of Fifty-Four Thousand
Four Hundred Thirty-Nine and 66/100 Dollars ($54,439.66) annually, payable in
equal monthly installments of Four Thousand Five Hundred Thirty-Six 64/100
Dollars ($4,536.64) each; and, for that part of the Term from January 1, 2001
until December 31, 2001, the sum of Fifty-Six Thousand Seventy-Two and 85/100
Dollars ($56,072.85) annually, payable in equal monthly installments of Four
Thousand Six Hundred Seventy-Two and 74/100 Dollars ($4,672.74); all such
payments payable in advance and without demand, on the first day of each
calendar month during the Term. The term Base Rent in the Lease shall mean and
refer to the Base Rent defined therein and the Second Expansion Space Base Rent
as set forth in this paragraph, except that any rent escalation provided in
Paragraph 3.02 of the Lease shall not apply to the Second Expansion Space Base
Rent.
5. Operating Expenses Reimbursement. Effective upon the Second
Expansion Space Commencement Date and as long as Tenant leases the Second
Expansion Space, the Tenant Percentage as defined in Paragraph 3.03 of the Lease
shall be increased by adding thereto the amount of 1.02%, which includes
Tenant's proportional share of expenses for the Second Expansion Space. All
other terms and provisions of Paragraph 3.03 of the Lease shall remain in full
force and effect.
6. Construction. Landlord shall pay for all costs incurred in
painting the common area restrooms on the lower retail level and painting the
walls in the common area in the back hallway when such restrooms are located.
Tenant acknowledges that the Second Expansion Space is unimproved, and Tenant
agrees to lease the Second Expansion Space on an "as is" basis and to make all
necessary improvements. Tenant agrees to pay for all other costs incurred in
connection with preparing the Second Expansion Space for occupancy. All such
construction work shall be done in accordance with Section 9.04 of the Lease.
7. Parking. Landlord hereby agrees to allocate two (2) parking
spaces to Tenant, provided that Tenant or its customers or employees shall pay
the monthly contract parking rate established from time-to-time for each such
permit. All other provisions as set forth in Paragraph 17.15 of the Lease shall
apply to the parking privileges herein granted.
8. Full Force and Effect. All other terms and provisions of the
Lease as hereby amended are hereby ratified and confirmed, and shall remain in
full force and effect. All references to the Lease herein and in the Lease shall
mean and refer to the Lease as hereby amended.
IN WITNESS WHEREOF, Landlord and Tenant have set their hands the day
and year first above written.
LANDLORD:
SIDLEY & AUSTIN
By:
------------------------------
A Partner
TENANT:
FRANKLIN NATIONAL BANK
By:
------------------------------
Its President
---------------
ATTEST:
--------------------------
Its:
---------------------------
78
<PAGE> 1
EXHIBIT 10.30
FOURTH AMENDMENT TO LEASE
This Fourth Amendment to Lease ("Amendment"), dated as of this 22nd
day of December, 1997, by and between SIDLEY & AUSTIN, a general partnership
("Landlord"), and FRANKLIN NATIONAL BANK, a national banking association,
formerly NATIONAL ENTERPRISE BANK and ENTERPRISE BANK, NATIONAL ASSOCIATION
("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease dated
September 27, 1982, as amended by that certain First Amendment to Lease dated
December 27, 1984, that certain Second Amendment to Lease dated September 15,
1992, and that certain Third Amendment to Lease dated March 19, 1997
(collectively, the "Lease"), whereby Landlord leased certain premises to Tenant
as described therein upon certain terms and conditions described therein; and
WHEREAS, Tenant wishes to extend the term of its lease of certain
space from Landlord and Landlord wishes to extend the term of the lease of such
space to Tenant;
NOW, THEREFORE, for and in consideration of the foregoing premises
and other good and valuable consideration, the parties agree to amend the Lease
as follows:
1. Defined Terms. All capitalized terms, unless defined herein,
shall have the meaning and definitions set forth in the Lease.
2. Premises. The term "Premises" as used herein and in the Lease
shall mean and refer to that approximately 5,843 rentable square feet of area on
the lower retail level as identified on part of Exhibit A of the Lease and on
Exhibit A hereto, which area shall be hereinafter referred to as the "Extension
Space".
3. Term. The term of the lease of the Extension Space (the
"Extension Tenn") shall commence on January 1, 1998, and end, unless sooner
terminated pursuant to the provisions of the Lease, on December 31, 1998. The
"Term" as defined in the Lease shall mean and refer to the Term of the Lease as
amended therein and the Extension Term.
4. Base Rent. Tenant, in consideration for this Fourth Amendment
to Lease and the leasing of the Extension Space, in addition to all other rents
paid under the Lease, agrees to pay to Landlord a base annual rental for the
Extension Space ("Extension Space Base Rent") from January 1, 1998 through
December 31, 1998 of One Hundred Fifty-Nine Thousand Five Hundred Thirteen
Dollars and 90/100 ($159,513.90), payable in equal monthly installments of
Thirteen Thousand Two Hundred Ninety-two and 80/100 Dollars ($13,292.80) each;
all payments to be payable in advance and without demand, on the first day of
each calendar month during the Extension Term. The term Base Rent in the Lease
shall mean and refer to the Base Rent defined therein and the Extension Space
Base Rent as set forth in this paragraph, except that any rent escalation
provided in Paragraph 3.02 of the Lease shall not apply to the Extension Space
Base Rent.
5. Operating Expense Reimbursement. Effective on January 1,
1998, the Tenant Percentage (as defined in the Lease) shall be decreased by
subtracting therefrom the amount of three and twenty-two hundredths percent
(3.22%) (i.e., the amount equivalent to Tenant's proportionate share of
Operating Expenses for the Extension Space). Commencing on January 1, 1998, and
continuing as long as Tenant leases the Extension Space pursuant to this Fourth
Amendment or any renewal thereof, in addition to the amounts otherwise due under
Paragraph 3.03 of the Lease, Tenant shall pay Landlord an Operating Expense
Reimbursement (as defined in the Lease) for the Extension Space at a Tenant
Percentage of three and twenty-two hundredth percent (3.22%), but such payment
of the Tenant Percentage for the Extension Space shall be based on
79
<PAGE> 2
any increase of Operating Expenses (as defined in the Lease) over a Base Year of
1997. All other terms and provisions of Paragraph 3.03 of the Lease shall remain
in full force and effect.
6. Construction. Tenant agrees to lease the Extension Space on
an "as is" basis. Landlord is not obligated to make any improvements thereto.
7. Parking. Execution of this Fourth Amendment will not change
Landlord's allocation of parking spaces to Tenant under the Lease, provided that
Tenant or its customers or employees pay the monthly contract parking rate
established from time-to-time for each such space. Upon termination of this
Fourth Amendment (if such termination is earlier than the termination of the
Lease), Landlord will recapture from Tenant six (6) of the parking places now
allocated to Tenant under the Lease. All other provisions set forth in Paragraph
17.15 of the Lease shall apply to the parking privileges granted hereunder.
8. Renewal Option. Provided that Tenant is not in default under
the Lease and/or this Fourth Amendment at the time Tenant gives the notice
described herein or at any time thereafter until each renewal term commences,
Tenant shall have an annual option to renew the term of its lease of the
Extension Space for successive one-year terms until the Lease terminates on
December 31, 2001 or earlier according to its terms, subject to Landlord's right
to use the Extension Space as hereinafter provided. Tenant must exercise its
option for each annual renewal by providing Landlord written notice of its
intent to renew the term of the lease of the Extension Space for another January
1 through December 31, such notice to be delivered to Landlord no earlier than
April 1 and not later than August 1 during the year immediately preceding the
renewal year. Landlord shall have (30) days from Landlord's receipt of each such
notice to notify Tenant whether or not Landlord will permit such renewal of the
term of the lease of the Extension Space or whether Landlord intends to use the
Extension Space for Landlord's purposes such that Tenant may not renew the term
of the Lease of the Extension Space.
If Tenant is permitted to renew the term of its lease of the
Extension Space for another year or years, all terms and provisions of the Lease
and this Fourth Amendment shall remain unchanged and in full force and effect
except that the Extension Space Base Rent shall increase as follows:
<TABLE>
<CAPTION>
ANNUAL MONTHLY
EXTENSION SPACE EXTENSION SPACE
YEAR BASE RENT BASE RENT
---- --------- ---------
<S> <C> <C>
January 1 - December 1, 1999 $ 164,299.31 $ 13,691.61
January 1 - December 1, 2000 169,228.28 14,102.36
January 1 - December 1, 2001 174,305.12 14,525.47
</TABLE>
9. Full Force and Effect. All other terms and provisions of the
Lease as hereby amended are hereby ratified and confirmed, and shall remain in
full force and effect. All references to the Lease herein and in the Lease shall
mean and refer to the Lease as hereby amended.
IN WITNESS WHEREOF, Landlord and Tenant have set their hands the day
and year first above written.
LANDLORD:
SIDLEY & AUSTIN
By:
-----------------------------------
A Partner
TENANT:
ATTEST: FRANKLIN NATIONAL BANK
------------------------------ By:
Its: -----------------------------------
------------------------------- Its President
-----------------------
80
<PAGE> 1
EXHIBIT 10.31
LEASE ASSIGNMENT, ASSUMPTION AND
MODIFICATION AGREEMENT
This Lease Assignment, Assumption and Modification Agreement (this
"Agreement") is made and entered into as of the 13th day of January, 1998 by and
among 1800 INVESTORS, L.P., a District of Columbia limited partnership
("Landlord"), THOMAS COOK CURRENCY SERVICES, INC., a Delaware corporation
("Thomas Cook") and FRANKLIN NATIONAL BANK, a National Bank ("Tenant").
BACKGROUND
A. Landlord's predecessor-in-interest, The Prudential Insurance
Company of America and Thomas Cook entered into a certain Lease dated May 29,
1992, as amended on December 15, 1992 (as so amended, the "Lease"), with respect
to certain premises consisting of approximately 1,821 rentable square feet on
the 9th floor of the building known as 1800 K Street, N.W., in the District of
Columbia, all as more particularly described in the Lease.
B. Thomas Cook and Tenant entered into a certain Agreement of
Sublease dated as of March 29, 1996 (the "Sublease").
C. Thomas Cook desires to assign and Tenant desires to assume all
obligations of Thomas Cook as tenant under the Lease, subject to the agreements
set forth herein. Thomas Cook and Tenant also desire to terminate the Sublease.
D. Landlord desires to consent to the assignment and assumption of
the Lease, and to enter into certain modifications of this Lease with Tenant
after giving effect to such assignment and assumption.
E. All capitalized terms used herein and not otherwise defined shall
have the same meanings given them in the Lease.
NOW, THEREFORE, intending to be legally bound, and in consideration
of the sum of one dollar ($1.00) and for other good and valuable consideration,
the parties hereto agree as follows:
1. Effective Date. As used herein, the "Effective Date" shall mean
January 13, 1998.
2. Assignment and Assumption of Lease. Thomas Cook hereby assigns,
transfers and conveys to Tenant, as of the Effective Date, all of Thomas Cook's
rights and obligations as tenant under the Lease, arising from and after the
Effective Date and Tenant hereby assumes, as of the Effective Date, all of
Thomas Cook's rights and obligations of tenant under Lease, arising from and
after the Effective Date.
3. Release. Landlord and Thomas Cook hereby release each other from
all liability, claims or causes of action under the Lease.
4. Termination of Sublease. As of the Effective Date, the Sublease
is hereby terminated and of no further force or effect, and Thomas Cook and
Tenant hereby release each other from all liability, claims or causes under the
Sublease.
5. Adjustment for Operating Expenses. The parties agree Tenant shall
be obligated to Landlord in the event that Thomas Cook's share of Operating
Expenses pursuant to Section 5.4 of the Lease exceeds the payments actually made
by Thomas Cook under the Lease in respect of the period prior to the Effective
Date. Accordingly, Landlord shall also remain liable to Tenant in the event it
is determined in accordance with Section 5.4 that the payments actually made by
Thomas Cook under the Lease in respect of the period prior to the Effective Date
exceed Thomas Cook's Share of such Operating Expenses.
81
<PAGE> 2
6. Modification of Lease Terms. As of the Effective Date, the Lease
is hereby amended as follows:
5.1 Premises. The Premises is hereinafter defined as
approximately 1,956 rentable square feet on the ninth (9th) floor of the
Building.
5.2 Lease Term. The Lease Term is hereby extended through
January 14, 1999.
5.3 Base Rent. The Base Rent is $52,812 per year, payable in
equal monthly installments of $4,401 each.
5.4 Operating Expenses. The Base Rent payable hereunder is
for a "full service" lease. All references to Base Operating Expenses, Base Real
Estate Taxes, and Tenant's Percentage are hereby deleted.
5.5 Landlord's Services.
a. The Building hours of operation when normal heating,
ventilating and air conditioning shall be provided are Monday through Friday
from 8:00 a.m. to 7:00 p.m. and on Saturdays from 8:00 a.m. to 3:00 p.m.,
exclusive of all federal legal holidays.
b. Landlord will provide Building Standard janitorial and
cleaning services during the term of the Lease during weekdays, after Building
hours of operation, exclusive of all federal legal holidays. Said services shall
be comparable to those delivered in other first-class buildings in Washington,
D.C.
c. The Building and garage will be accessible twenty-four
(24) hours a day by means of an electric perimeter access control system. At
lease one elevator will be in service at all times after normal building
operating hours.
4.6 As-Is. Tenant agrees to accept the Premises in its "as-is"
condition, it being expressly understood that Tenant presently occupies the
Premises under the Sublease and Landlord has no obligation to perform any work
in connection with the Premises.
4.7 Brokers. Landlord and Tenant each represent to the other
that they have dealt with no brokers in connection with this transaction with
the exception of Carey Winston and Insignia/Barnes Morris, whose commissions
shall be paid by Landlord pursuant to separate agreements. Landlord and Tenant
each agree to indemnify and hold harmless the other against any claims or
damages arising out of a breach of the foregoing representation.
4.8 Insurance Certificates/Indemnification. Tenant agrees to
deliver to Landlord, on or before the Effective Date, evidence of the insurance
required to be maintained by Tenant under the Lease.
a. Release. Tenant hereby agrees that Landlord shall not
be liable for any loss or damage to any property (including the property of
Tenant, its officers, directors, employees, agents, customers, concessionaires,
vendor, contractors or invitees) or the death or injury of any persons
(including Tenant, its officers, directors, employees, agents, customers,
concessionaires, vendors, contractors or invitees) occasioned by theft, fire,
acts of God, public enemy, injunction, riot, strike, insurrection, war, or any
other action of any governmental body or authority, by other tenants of the
Building or any other matter beyond the control of Landlord, or for any injury
or damage or inconvenience which may arise through repair or alteration of any
part of the Premises or the Building, or failure to make repairs, or for any
cause whatsoever except the negligence or willful misconduct of Landlord.
b. Indemnity. Tenant hereby requests and will defend,
indemnify and hold harmless Landlord, its respective officers, directors,
employees, agents, concessionaires, vendors and contractors (the "Indemnified
Parties") from and against any and all liability, claims, penalties, fines,
causes of action, suits, liens, losses, loss of use, damages, costs and expenses
of any kind (including legal fees and litigation costs) which may be suffered
by, accrued against, charged to or recoverable from the Indemnified Parties by
reason of 1) any occurrence in, upon, or at the Premises, however caused,
including without limitation,
82
<PAGE> 3
occurrences caused, in whole or in part, buy the negligence or misconduct of
Tenant, its officers, directors, employees, agents, customers, concessionaires,
vendors, contractors or invitees; or 2) any occupancy, use or misuse or the
Premises or the service areas, parking areas, pedestrian walks or driveways in
or around the Premises, by Tenant, its officers, directors, employees, agents,
customers, concessionaires, vendors, contractors or invitees; or 3) any
occurrence elsewhere in the Premises or the Building occasioned in whole or in
part by the act or omission of Tenant; or 4) any occurrence occasioned by the
violation of any law, regulation or ordinance by Tenant or its officers,
directors, employees, agents, customers, concessionaires, vendors, contractors
or invitees.
4.9 Other Modifications to Lease. The following sections of the
Lease are hereby deleted in their entirety: 4.2, Article V, Article VI, Addendum
24 and 25.
4.10 Address for Notices. All notices to Landlord shall be
addressed to 1800 Investors, L.P., GSB Building, Suite 401, One Belmont Avenue,
Bala Cynwyd, PA 19004. All notices to Tenant shall be addressed to Franklin
National Bank, 1800 K Street, 1800 K Street, Suite 929, Washington, DC 20006.
7. Ratification of Lease. Except as modified herein, the
Lease remains unchanged and in full force and effect. In the event of any
inconsistencies between the terms of the Lease and this Agreement, this
Agreement shall control.
IN WITNESS WHEREOF, Landlord, Tenant and Thomas Cook have caused
this Agreement to be executed under seal as of the day and year first above
written.
LANDLORD
1800 INVESTORS, L.P.
Attest: By: Bergen of 1800, Inc.
By:
- ---------------------------------- -------------------------------------
TENANT
FRANKLIN NATIONAL BANK
Attest:
By:
- ---------------------------------- -------------------------------------
THOMAS COOK CURRENCY SERVICES,
INC.
Attest:
By:
- ---------------------------------- -------------------------------------
83
<PAGE> 1
EXHIBIT 10.32
FRANKLIN BANCORPORATION, INC.
SECOND AMENDED AND RESTATED
STOCK OPTION PLAN
1. Purpose.
This Second Amended and Restated Stock Option Plan (hereinafter
referred to as this "Plan") is effective April 23, 1997 and is an amendment and
restatement of that certain Stock Option Plan effective April 17, 1991 (the
"Original Plan") as amended and restated by the Amended and Restated Stock
Option Plan dated November 4, 1993. This Plan is intended to promote the best
interests of the Corporation and its stockholders by (a) enabling the
Corporation and any Subsidiary to attract and retain persons of ability as
executive officers and key employees, (b) providing an incentive to such persons
by affording them an equity participation in the Corporation and (c) rewarding
those executive officers and key employees who contribute to the operating
progress and earning power of the Corporation or any Subsidiary.
1. Definitions.
The following terms shall have the following meanings when used
herein unless the context clearly otherwise requires:
A. "Board of Directors" means the Board of Directors of the
Corporation.
B. "Code" means the Internal Revenue Code of 1986, as amended,
or any successor provisions.
C. "Committee" means the Administrative Committee, or any other
committee to which the Board of Directors delegates any responsibility for the
implementation, interpretation or administration of this Plan and which is
composed solely of two or more "Non-Employee Directors" as defined under Rule
16b-3 under the Securities Exchange Act of 1934, as such rule may be amended or
superseded.
D. "Common Stock" means the Common Stock of the Corporation,
par value Ten Cents ($0.10) per share.
E. "Controlling Participant" means any Eligible Person who,
immediately before any Option is granted to that particular Eligible Person,
directly or indirectly possesses more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Subsidiary).
F. "Corporation" means Franklin Bancorporation, Inc., a
Delaware corporation.
G. "Effective Date of Original Plan" means April 17, 1991, the
effective date of the Original Plan.
H. "Eligible Person" means any executive officer or key
employee of the Corporation or any Subsidiary who is not a member of the
Committee if the Corporation then has securities registered under Section 12 of
the Exchange Act.
I. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
J. "Exercise Price" means the price at which a share of
Incentive Stock may be purchased by a particular Participant pursuant to the
exercise of an Option.
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<PAGE> 2
K. "Fair Market Value" means the value of each share of Common
Stock subject to the Plan determined as follows: if on the Grant Date or other
determination date the shares of Common Stock are listed on an established
national or regional stock exchange, are admitted to quotation on the National
Association of Securities Dealers Automated Quotation System, or are publicly
traded on an established securities market, the Fair Market Value of the shares
of Common Stock shall be equal to the average of the bid and asked prices for
the Common Stock on the Grant Date, as correctly reported in any stock quotation
report provided by the NASDAQ System or the National Association of Securities
Dealers, Inc. or, if the Common Stock is quoted on the NASDAQ National Market
System or traded on an exchange, the closing price for the Common Stock on the
Grant Date, as correctly quoted in the Wall Street Journal. If the shares of
Common Stock are not listed on such an exchange, quoted on such System or traded
on such a market, Fair Market Value shall be determined by the Board of
Directors in good faith.
L. "Grant Date" means the later of (i) the date as of which the
Committee determines that the Participant should receive a grant and approve the
grant to the Participant and (ii) the date as of which the Participant and the
Corporation, or a Subsidiary, enter into the relationship resulting in the
Participant being eligible for grants.
M. "Incentive Stock" means shares of Common Stock issued
pursuant to this Plan.
N. "ISO" means an Option (or a portion thereof) intended to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Code, or any successor provision.
O. "NQSO" means an Option (or a portion thereof) which is not
intended to, or does not, qualify for any reason as an "incentive stock option"
within the meaning of Section 422 of the Code, or any successor provision.
P. "Option" means the right of a Participant to purchase
shares of Incentive Stock in accordance with the terms of this Plan and the
Stock Option Agreement between such Participant and the Corporation.
Q. "Participant" means any Eligible Person to whom an Option
has been granted pursuant to this Plan and who is a party to a Stock Option
Agreement.
R. "SAR" means a right granted by the Corporation to a
Participant to receive cash or other consideration equal to the difference
between the Fair Market Value of the Incentive Stock covered by all or any
unexercised portion of an Option on the date of exercise of the SAR and the Fair
Market Value of such Incentive Stock on the date of grant of the SAR.
S. "Stock Option Agreement" means an agreement by and between
a Participant and the Corporation setting forth the specific terms and
conditions of an Option as well as the specific terms and conditions under which
Incentive Stock may be purchased by such Participant pursuant to the exercise of
such Option. Such Stock Option Agreement shall be subject to the provisions of
this Plan (which shall be incorporated by reference therein) and shall contain
such provisions as the Board of Directors, in its sole discretion, may
authorize.
T. "Subsidiary" means any subsidiary of the Corporation within
the meaning of Rule 405 of Regulation C under the Securities Exchange Act of
1933, as amended (with the term "person" as used in such Rule 405 being defined
as in Section 2(2) of the Securities Exchange Act of 1933, as amended) and any
subsidiary of the Corporation within the meaning of Section 424(f) of the Code.
2. Adoption and Administration of Plan.
A. This Plan shall become effective upon its adoption by the
Board of Directors; provided, however, that if the stockholders of the
Corporation shall not approve this Plan, in accordance with applicable state
law, within twelve (12) months before or after the adoption of this Plan by the
Board of Directors, this Plan shall expire and the Original Plan shall remain in
full force and effect, in accordance with its terms, without regard to any
provision of this Plan. No Option or other award hereunder shall be exercisable
or payable in any respect prior to such approval of this Plan by the
stockholders of the Corporation.
85
<PAGE> 3
B. Any Option granted pursuant to this Plan shall be granted on
or before April 17, 2001, which date is ten (10) years from the Effective Date
of the Original Plan.
C. The Board of Directors shall implement, interpret (except as
expressly provided in this Plan) and administer this Plan. Without limiting the
powers and authority of the Board of Directors in any respect, the Board of
Directors shall have authority (i) to construe and interpret this Plan and any
Stock Option Agreement entered into hereunder; (ii) to determine the Fair Market
Value of Incentive Stock; (iii) to select Eligible Persons to whom Options may
from time to time be granted hereunder; (iv) to determine whether any Option or
any portion thereof shall be an ISO or a NQSO; (v) to determine the number of
shares of Incentive Stock to be covered by any Option and the Exercise Price
applicable to any Option; (vi) to determine the terms and conditions, not
inconsistent with the terms of this Plan, of any Option and to approve forms of
Stock Option Agreement; (vii) to determine whether, and under what
circumstances, an Option may be settled or paid in cash or other consideration;
(viii) to amend, cancel, accept the surrender of, modify or accelerate the
vesting of all or any portion of an Option, including amendments or
modifications that may cause an ISO to become a NQSO; (ix) to authorize and
implement any amendment, as required by the Code or with the consent of the
Participant, to any Stock Option Agreement and the terms of any Option evidenced
thereby; and (x) to establish policies and procedures for the exercise of
Options and the satisfaction of withholding or other obligations arising in
connection therewith.
D. To the extent not prohibited by the General Corporation Law
of the State of Delaware or the charter or bylaws of the Corporation, the Board
of Directors shall delegate all of its responsibilities hereunder with respect
to administration of this Plan to the Committee while the officers and directors
of the Corporation are subject to Section 16 of the Securities Exchange Act of
1934, and all references herein or in any Stock Option Agreement to the Board of
Directors shall, to the extent applicable, be deemed to refer to and include the
Committee.
E. Any action taken by the Board of Directors with respect to
the implementation, interpretation or administration of this Plan shall be
final, conclusive and binding.
3. Total Number of Shares of Incentive Stock.
The number of shares of Incentive Stock which may be issued in
the aggregate by the Corporation under this Plan pursuant to the exercise of
Options granted hereunder shall not be more than eight hundred thousand
(800,000) which number may be increased only by a resolution adopted by the
Board of Directors and approved within twelve (12) months after such adoption by
the stockholders of the Corporation in accordance with applicable state law.
Such shares of Incentive Stock may be issued out of the authorized and unissued
or reacquired Common Stock of the Corporation. Any shares subject to an Option
or portion thereof which expires or is terminated unexercised (unless by virtue
of the exercise of a SAR granted in tandem therewith) as to such shares may
again be subject to an Option under this Plan. To the extent there shall be any
adjustment pursuant to the provisions of Article 9 hereof, the aforesaid number
of shares shall be appropriately so adjusted.
4. Eligibility and Awards.
A. The Board of Directors shall determine, at any time and from
time to time, (i) any Eligible Person to whom the award of an Option may further
the purposes of this Plan in the view of the Board of Directors, (ii) whether
any Option to be awarded to an Eligible Person shall be intended as an ISO or as
a NQSO, the number of shares of Incentive Stock to be covered by such Option,
the Exercise Price of such Option, whether such Option contains a SAR and all
other terms and conditions of such Option, (iii) the Fair Market Value on the
date of grant of the Option and (iv) the terms and conditions of the Stock
Option Agreement to evidence such Option, including the restrictions, if any,
applicable to the shares of Incentive Stock that may be acquired upon exercise
of any portion of such Option. The Board of Directors may delegate to the
appropriate officer or officers of the Corporation the authority to prepare,
execute and deliver any Stock Option Agreement evidencing any Option granted
under this Plan; provided, however, that any such Stock Option Agreement shall
be consistent with the terms and conditions of this Plan.
86
<PAGE> 4
B. For any Option intended to qualify as an ISO, in whole or in
part, (i) the term during which such Option shall be in effect shall not be
greater than ten (10) years [provided, however, that the term shall not be
greater than five (5) years for any Option granted to a Controlling
Participant], (ii) the Exercise Price shall not be less than one hundred percent
(100%) of the Fair Market Value on the date that such Option is granted
[provided, however, that, if an ISO shall be granted to a Controlling
Participant, the Exercise Price shall not be less than one hundred ten percent
(110%) of the Fair Market Value on the date that such Option is granted] and
(iii) such Option is exercisable only by the Participant during his or her
lifetime and shall be nontransferable by the Participant unless the Stock Option
Agreement permits such Option to be transferred by will or the laws of descent
and distribution.
C. As soon as practicable after the Board of Directors
determines to award an Option pursuant to Section 5A hereof, the appropriate
officer or officers of the Corporation shall give notice (written or oral) to
such effect to each Eligible Person designated to be awarded an Option, which
notice shall be accompanied by a copy or copies of the Stock Option Agreement to
be executed by such Eligible Person.
D. Upon receipt of the notice specified in Section 5C hereof, an
Eligible Person shall have an Option, and shall thereby become and be a
Participant, only after the due execution and delivery by such Eligible Person
and the Corporation of a Stock Option Agreement (in such number as the officer
or officers of the Corporation shall direct) by such date and time as shall be
specified in such notice (unless waived by the Corporation).
E. In the event that the Corporation or any Subsidiary assumes
an option granted by another entity, which option is to be covered by this Plan
and upon the exercise of which shares of Incentive Stock are to be issued, the
terms and conditions of such option shall remain unchanged (except the exercise
price and the number and nature of shares issuable upon exercise thereof, which
shall be adjusted appropriately in accordance with the Code, and references to
such other entity, which shall be deemed to refer to the Corporation). In the
event that the Board of Directors elects to grant an Option under this Plan to
replace an option granted by another entity (rather than assume such option),
the holder of such option shall be eligible to receive such replacement Option,
which may be granted with a similarly-adjusted Exercise Price.
5. Exercise and Termination of Options.
A. An Option of a Participant may be exercised during the
period such Option is in effect and as set forth herein and in the Stock Option
Agreement, and only if compliance with all applicable Federal and state
securities laws can be effected. An Option may be exercised only by (i) the
Participant's completion, execution and delivery to the Corporation of a notice
of such Participant's exercise of such Option and an "investment letter" (if
required by the Corporation) as supplied by the Corporation and (ii) the
payment to the Corporation of the aggregate Exercise Price, in accordance with
Section 6B hereof and the Stock Option Agreement, for the shares of Incentive
Stock to be purchased pursuant to such exercise (as shall be specified
by such Participant in such notice). Except as specifically provided by a duly
executed Stock Option Agreement or unless waived by the Board of Directors, an
Option or any of the rights thereunder may be exercised by such Participant
only, and may not be transferred or assigned, voluntarily, involuntarily or by
operation of law (including, without limitation, the laws of bankruptcy,
intestacy, descent and distribution and succession). Notwithstanding the
foregoing, no officer, director or other "insider" of the Corporation subject
to Section 16 of the Exchange Act shall be permitted to sell Common Stock
(which such "insider" had received upon exercise of an Option) during the six
months immediately following the grant of such Option.
B. Payment by each Participant for the shares of Incentive
Stock purchased hereunder upon the exercise of an Option shall be made by good
check or in accordance with the terms of any Stock Option Agreement executed by
such Participant.
C. The Board of Directors at any time or from time to time may
offer to buy out for a payment in cash or Incentive Stock all or a portion of an
outstanding Option held by a Participant, based on such terms and conditions as
the Board of Directors shall establish and communicate to the Participant at the
time that such offer is made. The Board of Directors may
87
<PAGE> 5
provide for the surrender of all or any portion of an Option in satisfaction of
specified obligations of a Participant.
D. As a condition to the exercise of any Option or SAR (for
non-cash consideration), the Corporation shall have the right to require that
the Participant (or the recipient of any shares of Incentive Stock or noncash
consideration) remit to the Corporation or any Subsidiary an amount calculated
by the Corporation to be sufficient to satisfy applicable Federal, state,
foreign or local withholding tax requirements prior to the delivery of any stock
certificate evidencing shares of Incentive Stock or other form of non-cash
consideration; in lieu thereof, the Participant may satisfy applicable
withholding tax requirements by electing to have the Corporation withhold from
the Incentive Stock issuable upon exercise of an Option a number of whole shares
having a Fair Market Value (determined on the date that the amount of tax to be
withheld is to be fixed) at least equal to the aggregate amount required to be
withheld. Whenever any payments are to be made in cash (upon the exercise of a
SAR or otherwise), the Corporation shall deduct from such payment such amount
calculated by the Corporation to be sufficient to satisfy applicable Federal,
state, foreign or local withholding tax requirements thereon.
6. Costs and Expenses.
All costs and expenses with respect to the adoption,
implementation, interpretation and administration of this Plan shall be borne by
the Corporation; provided, however, that, except as otherwise specifically
provided in this Plan or the applicable Stock Option Agreement between the
Corporation and a Participant, the Corporation shall not be obligated to pay any
costs or expenses (including legal fees) incurred by any Participant in
connection with any Stock Option Agreement, this Plan or any Option or Incentive
Stock held by any Participant.
7. No Prior Right of Award.
Nothing in this Plan shall be deemed to give any director,
officer or employee of, or advisor or consultant to, the Corporation or any
Subsidiary, or such person's legal representatives or assigns, or any other
person or entity claiming under or through such person, any contract or other
right to participate in the benefits of this Plan. Nothing in this Plan shall be
construed as constituting a commitment, guarantee, agreement or understanding of
any kind or nature that the Corporation or any Subsidiary shall continue to
employ, retain or engage any individual (whether or not a Participant). This
Plan shall not affect in any way the right of the Corporation and any Subsidiary
to terminate the employment or engagement of any individual (whether or not a
Participant) at any time and for any reason whatsoever and to remove any
individual (whether or not a Participant) from any position as a director or
officer. No change of a Participant's duties as an employee of the Corporation
or any Subsidiary shall result in a modification of the terms of any rights of
such Participant under this Plan or any Stock Option Agreement executed by such
Participant.
8. Changes in Capital Structure.
Subject to any required action by the stockholders of the
Corporation and the provisions of the General Corporation Law of the State of
Delaware, the number of shares of Incentive Stock represented by the unexercised
portion of an Option and the number of shares of Incentive Stock which has been
authorized or reserved for issuance hereunder (whether such shares are unissued,
reacquired or subject to an Option that expired, was cancelled, surrendered or
terminated unexercised as to such shares), as well as the Exercise Price under
the unexercised portion of an Option, shall be proportionately adjusted for (i)
a division, combination or reclassification of any of the shares of Common Stock
of the Corporation or (ii) a dividend payable in shares of Common Stock of the
Corporation.
9. Amendment or Termination of Plan.
Except as otherwise provided herein, this Plan may be amended or
terminated in whole or in part by the Board of Directors (in its sole
discretion), but no such action shall adversely affect or alter any right or
obligation with respect to any Option or Stock Option Agreement then in effect,
except to the extent that any such action shall be required or desirable (in the
opinion of the Corporation or its counsel) so that any Option intended to
qualify as an ISO complies with the Code or any rule or regulation promulgated
or proposed thereunder.
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<PAGE> 6
10. Burden and Benefit.
The terms and provisions of this Plan shall be binding upon, and
shall inure to the benefit of, each Participant and such Participant's executors
and administrators, estate, heirs and personal and legal representatives.
11. Headings.
The headings and other captions contained in this Plan are for
convenience of reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Plan.
12. Interpretation.
Notwithstanding any provision of this Plan or any provision of
any Stock Option Agreement evidencing an Option that is intended, in whole or in
part, to qualify as an ISO: (a) this Plan and each such Stock Option Agreement
are intended to comply with all requirements for qualification under the Code
and with any rule or regulation promulgated or proposed thereunder, and shall be
interpreted and construed in a manner which is consistent with this Plan and
each such Stock Option Agreement being so qualified; and (b) for so long as any
securities of the Corporation are registered under Section 12 of the Exchange
Act, this Plan and each Stock Option Agreement evidencing an Option granted to
an Eligible Person who is then required to report transactions in the securities
of the Corporation pursuant to Section 16(a) of the Exchange Act are intended to
meet the applicable requirements for exemption under Rule 16b-3 promulgated
pursuant to the Exchange Act. This Plan shall be governed by, and construed in
accordance with, the substantive laws of the State of Delaware.
89
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Franklin National Bank of Washington, D.C.
Franklin Community Development Corporation
90
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 38,033
<INT-BEARING-DEPOSITS> 557
<FED-FUNDS-SOLD> 122,000
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<INVESTMENTS-HELD-FOR-SALE> 96,930
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<LOANS> 300,441
<ALLOWANCE> 4,192
<TOTAL-ASSETS> 647,448
<DEPOSITS> 427,798
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0
0
<COMMON> 663
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<INTEREST-INCOME-NET> 21,532
<LOAN-LOSSES> 484
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<INCOME-PRETAX> 9,580
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