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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, 2000
Commission File No. 0-24133
FRANKLIN FINANCIAL CORPORATION
A Tennessee Corporation
(IRS Employer Identification No. 62-1376024)
230 Public Square
Franklin, Tennessee 37064
(615) 790-2265
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, no par value per share
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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and disclosure 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. [X]
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (2,959,648 shares) on March 15, 2001 was
approximately $29,596,480, based on the closing price of the registrant's common
stock as reported on the Over-the-Counter Bulletin Board on March 15, 2001. For
the purposes of this response, officers, directors and holders of 5% or more of
the registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of March
15, 2001: 7,799,931 shares of no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders scheduled to
be held on May 15, 2001 are incorporated by reference to Items 10, 11, 12 and 13
of this Report.
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PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for fiscal 2001 and beyond to differ materially from those
expressed or implied in such forward-looking statements. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
ITEM 1. BUSINESS.
GENERAL
Franklin Financial Corporation (the "Company") is a registered
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act, and owns 100% of the outstanding capital stock of Franklin
National Bank, Franklin, Tennessee (the "Bank"). The Company was incorporated
under the laws of the State of Tennessee on December 27, 1988, as a mechanism to
enhance the Bank's ability to serve its future customers' requirements for
financial services. The holding company structure provides flexibility for
expansion of the Company's banking business through the acquisition of other
financial institutions and the provision of additional banking-related services
which the traditional commercial bank may not provide under present laws.
Franklin National Bank. The Bank commenced business operations on
December 1, 1989 in a permanent facility located at 230 Public Square, Franklin,
Tennessee 37064. The approximately 12,000 square foot facility is being leased
from Gordon E. Inman, the Chairman of the Board of the Company. The Bank has
eight full service branches: one located in the Williamson Square Shopping
Center, which opened in April 1994; one located in Spring Hill, Tennessee, which
opened in January 1995; one located in Brentwood, Tennessee, which opened in
April 1995; one located in Fairview, Tennessee, which opened in May 1997; one
located in the Cool Springs area of Franklin, which opened in May 2000; one
located in the Fieldstone Farms area of Franklin, which opened in June 2000; one
in Green Hills, Tennessee, which opened in January 2001; and one in downtown
Nashville, Tennessee, which opened in February 2001. The Bank also leases 9,000,
4,000 and 3,000 square foot facilities from Mr. Inman which house its mortgage
banking subsidiary, financial services subsidiary and insurance subsidiary sales
functions.
The Bank is a full service commercial bank, without trust powers. The
Bank offers a full range of interest bearing and non-interest bearing accounts;
including commercial and retail checking accounts, negotiable orders of
withdrawal ("NOW") accounts, money market accounts, individual retirement
accounts, regular interest bearing statement savings accounts, certificates of
deposit, commercial loans, real estate loans, commercial and consumer lines of
credit, letters of credit, mortgage loans, home equity loans and
consumer/installment loans. In addition, the Bank provides such consumer
services as travelers
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checks, cashiers checks, Mastercard and Visa accounts, safe deposit boxes,
direct deposit services, wire transfer services, cash management services, debit
cards, automatic teller machines, an internet banking product and a 24-hour
telephone inquiry system.
Insurance Agency. In August 1996, the Bank opened an insurance
subsidiary, Franklin Financial Insurance. The insurance subsidiary sells
property, business and life insurance and provides products and services to both
bank and nonbank customers. A large portion of its sales are generated by
referrals from bank employees. Bank employees are trained to recognize
cross-selling opportunities for insurance products. Management of the agency has
22 years of combined experience in the insurance industry. The insurance
subsidiary has four full-time and one part-time sales agents.
Securities Company. Franklin Financial Securities commenced operations
in October 1997. The securities subsidiary offers financial planning and
securities brokerage services through Legg Mason Financial Partners. Similar to
the insurance subsidiary, the securities subsidiary receives referrals from
Franklin National Bank employees. The securities subsidiary currently has four
licensed brokers. The securities subsidiary was formed to respond to competition
from other financial service companies that offer similar services. By offering
these securities products and services, Franklin Financial believes it can gain
a greater share of the customer's business and have better opportunities for
revenue generation.
Mortgage Company. Franklin Financial Mortgage opened in December 1997
to originate and service mortgage loans. Since our inception, we have focused on
real estate lending. The mortgage subsidiary intends to capitalize on this
lending expertise. The mortgage subsidiary primarily originates conforming
residential mortgages that are then sold to certain other mortgage companies and
government entities such as Freddie Mac on a service-retained basis. The
mortgage subsidiary has offices in Williamson and Hamilton Counties in
Tennessee. There are approximately 25 employees of the mortgage subsidiary.
During January 1998, the Company's Board of Directors approved a
two-for-one stock split effective on February 17, 1998. During March 1998, the
Company's Board of Directors approved a four-for-one stock split effective June
3, 1998. During August 2000, the Company's Board of Directors approved a
one-for-four reverse stock split which became effective October 18, 2000. All
share data has been retroactively restated as if all stock splits had occurred
at the beginning of the years presented.
MARKET AREA AND COMPETITION
The primary service area for the Bank is centered around Franklin,
Tennessee and encompasses Williamson, Maury and Davidson Counties in Tennessee.
There are 55 banking offices within the primary service area of the Bank. Most
of these offices are affiliated with major bank holding companies.
The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and other
business entities which have recently been invading the traditional banking
markets. Due to the rapid growth of the Bank's market area, it is anticipated
that additional competition will continue from new entrants to the market.
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DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
The following is a presentation of the average consolidated balance
sheet of the Company for the years ended December 31, 2000, 1999 and 1998. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities.
AVERAGE CONSOLIDATED ASSETS
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- -------- --------
(In thousands)
Cash and due from banks ............................... $ 11,583 $ 10,550 $ 9,335
-------- -------- --------
Securities ............................................ 173,327 90,366 70,173
Federal funds sold and reverse repurchases ............ 3,679 3,805 3,482
Net loans ............................................. 296,251 256,206 214,792
-------- -------- --------
Total earning assets ......................... 473,257 350,377 288,447
-------- -------- --------
Other assets .......................................... 19,124 12,974 10,505
-------- -------- --------
Total assets ................................. $503,964 $373,901 $308,287
======== ======== ========
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- -------- --------
(In thousands)
Non interest-bearing deposits ......................... $ 34,053 $ 32,116 $ 29,103
NOW deposits, including MMDA .......................... 109,897 82,091 63,818
Savings deposits ...................................... 12,500 11,520 8,729
Time deposits ......................................... 271,161 208,113 172,213
Repurchase agreements ................................. 1,629 2,594 3,596
Other borrowings ...................................... 47,532 13,829 8,400
Other liabilities ..................................... 3,004 388 1,157
Total liabilities ............................ 479,776 350,651 287,016
Stockholders' equity .................................. 24,188 23,250 21,271
-------- -------- --------
Total liabilities and stockholders' equity ... $503,964 $373,901 $308,287
======== ======== ========
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INTEREST RATES AND INTEREST DIFFERENTIAL
The following is a presentation of an analysis of the net interest
earnings of the Company for the periods indicated with respect to each major
category of interest-earning asset and each major category of interest-bearing
liability:
YEAR ENDED DECEMBER 31, 2000
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
-------- -------- -------- --------
(Dollars in thousands)
Securities ............................................ $173,327 $ 11,811 6.81%
Federal funds sold and reverse repurchases ............ 3,679 246 6.69
Net loans ............................................. 296,251(1) 31,167(2) 10.52
-------- --------
Total earning assets ......................... $473,257 $ 43,224 9.13% 3.65 %
======== ========
AVERAGE INTEREST AVERAGE
LIABILITIES AMOUNT PAID RATE PAID
-------- -------- ---------
(Dollars in thousands)
NOW deposits, including MMDA .......................... $109,897 $ 5,157 4.69%
Savings deposits ...................................... 12,500 324 2.59
Time deposits ......................................... 271,161 16,927 6.24
Other borrowings ...................................... 49,161 3,519 7.16
-------- -------- ---------
Total interest-bearing liabilities ........... $442,719 $ 25,927 5.86%
======== ======== =========
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $2,399,000 in loan fees
and loan service fees.
YEAR ENDED DECEMBER 31, 1999
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
-------- -------- -------- --------
(Dollars in thousands)
Securities ............................................ $ 90,366 5,311 5.88%
Federal funds sold and reverse repurchases ............ 3,805 195 5.12
Net loans ............................................. 256,206(1) 25,185(2) 9.83
-------- --------
Total earning assets ......................... $350,377 $ 30,691 8.76 4.43%
======== ========
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AVERAGE INTEREST AVERAGE
LIABILITIES AMOUNT PAID RATE PAID
--------- --------- ---------
(Dollars in thousands)
NOW deposits, including MMDA .......................... $ 82,091 $ 2,925 3.56%
Savings deposits ...................................... 11,520 298 2.59
Other time deposits ................................... 208,113 11,100 5.33
Other borrowings ...................................... 16,423 861 5.24
--------- ---------
Total interest-bearing liabilities ........... $ 318,147 $ 15,184 4.77%
========= =========
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $2,321,000 in loan fees
and loan service fees.
YEAR ENDED DECEMBER 31, 1998
AVERAGE INTEREST AVERAGE NET
ASSETS AMOUNT EARNED YIELD YIELD
-------- -------- -------- --------
(Dollars in thousands)
Securities ............................................ 70,173 4,101 5.84%
Federal funds sold and reverse repurchases ............ 3,482 196 5.63
Net loans ............................................. 214,792(1) 22,141(2) 10.31
-------- --------
Total earning assets ......................... $288,447 $ 26,438 9.17% 4.61%
======== ========
LIABILITIES AVERAGE INTEREST AVERAGE
AMOUNT PAID RATE PAID
--------- --------- ----------
NOW deposits, including MMDA .......................... $ 63,818 $ 2,337 3.66%
Savings deposits ...................................... 8,729 226 2.59
Other time deposits ................................... 172,213 9,840 5.71
Other borrowings ...................................... 11,996 739 6.16
--------- ---------
Total interest-bearing liabilities ........... $ 256,756 $ 13,142 5.12%
========= =========
(1) Includes non-accrual loans of $ 0.
(2) Interest earned on net loans includes $2,211,000 in loan fees
and loan service fees.
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RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect on interest income, interest expense and net interest income
in the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. The effect of change in rate has been determined by applying the
average balance in the earlier period to the change in average rate in the later
period, as compared with the earlier period. Changes resulting from average
balance/rate variances have been determined by applying the change in average
balance to the change in average rate in the later period, as compared with the
earlier period. The changes attributable to the combined impact of balance and
rate have all been allocated to the changes due to volume.
YEAR ENDED DECEMBER 31, 2000
COMPARED WITH
YEAR ENDED DECEMBER 31, 1999
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
-------- -------- --------
(In thousands)
Interest earned on:
Securities ............................................ $ 5,653 $ 847 $ 6,500
Federal funds sold .................................... (8) 59 51
Net loans ............................................. 4,213 1,769 5,982
-------- -------- --------
Total earning assets .................................. 9,858 2,675 12,533
-------- -------- --------
Interest paid on:
NOW deposits, including MMDA .......................... 1,305 926 2,231
Savings deposits ...................................... 26 1 27
Time deposits ......................................... 3,936 1,892 5,828
Other borrowings ...................................... 2,343 314 2,657
-------- -------- --------
Total interest expense ................................ 7,610 3,133 10,743
-------- -------- --------
Change in net
interest income ................................... $ 2,248 $ (458) $ 1,790
======== ======== ========
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YEAR ENDED DECEMBER 31, 1999
COMPARED WITH
YEAR ENDED DECEMBER 31, 1998
INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL
-------- -------- --------
(In thousands)
Interest earned on:
Securities ............................................ $ 1,187 $ 23 $ 1,210
Federal funds sold .................................... 17 (18) (1)
Net loans ............................................. 4,071 (1,027) 3,044
-------- -------- --------
Total earning assets .................................. 5,275 (1,022) 4,253
-------- -------- --------
Interest paid on:
NOW deposits .......................................... 651 (64) 587
Savings deposits ...................................... 73 0 73
Time deposits ......................................... 1,915 (654) 1,261
Other borrowings ...................................... 232 (110) 122
-------- -------- --------
Total interest expense ................................ 2,871 (828) 2,043
-------- -------- --------
Change in net
interest income ................................... $ 2,404 $ (194) $ 2,210
======== ======== ========
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DEPOSITS
The Bank offers a full range of interest bearing and non-interest
bearing accounts, including commercial and retail checking accounts, negotiable
order of withdrawal ("NOW') accounts, money market accounts, individual
retirement accounts, regular interest bearing statement savings accounts and
certificates of deposit with fixed and variable rates and a range of maturity
date options. The sources of deposits are residents, businesses and employees of
businesses within the Bank's market area, obtained through the personal
solicitation of the Bank's officers and directors, direct mail solicitation and
advertisements published in the local media. The Bank pays competitive interest
rates on time and savings deposits up to the maximum permitted by law or
regulation. In addition, the Bank has implemented a service charge fee schedule
competitive with other financial institutions in the Bank's market area,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.
The following tables present, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:
YEAR ENDED
DECEMBER 31, 2000
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
(Dollars in thousands)
Non interest-bearing ........................................ $ 34,053 Not Applicable
demand deposits
NOW deposits, including MMDA ................................ $109,897 4.69%
Savings deposits ............................................ $ 12,500 2.59%
Time deposits ............................................... $271,161 6.24%
YEAR ENDED
DECEMBER 31, 1999
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
(Dollars in thousands)
Non interest-bearing
demand deposits ........ $ 32,116 Not Applicable
NOW deposits ................ $ 82,091 3.56%
Savings deposits ............ $ 11,520 2.59%
Time deposits ............... $208,113 5.33%
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YEAR ENDED
DECEMBER 31, 1998
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
(Dollars in thousands)
Non interest-bearing
demand deposits ........... $ 29,103 Not Applicable
NOW deposits ................... $ 63,818 3.66%
Savings deposits ............... $ 8,729 2.59%
Time deposits .................. $172,213 5.71%
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities for the year ended
December 31, 2000:
TIME
CERTIFICATES
OF DEPOSIT
-------------
(In thousands)
3 months or less........... $ 172,576
3-6 months................. 17,137
6-12 months................ 30,046
Over 12 months............. 8,326
---------
Total.................. $ 228,085
=========
LOAN PORTFOLIO
The Bank engages in a full complement of lending activities, including
commercial, consumer/installment and real estate loans.
Commercial lending is directed principally towards businesses whose
demands for funds fall within the Bank's legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers, and obtained for a
variety of business purposes. Particular emphasis is placed on loans to small
and medium-sized businesses. The Bank's real estate loans consist of residential
and commercial first and second mortgage loans, as well as real estate
construction loans and real estate acquisition and development loans.
The Bank's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including education and
automobile loans to individuals and pre-approved lines of credit.
At December 31, 2000, loans within four broad categories exceeded 10%
of total loans: single family residential real estate loans ($72,107,000 or 22%
of total loans), commercial real estate loans ($67,836,000 or 20% of total
loans), commercial and industrial loans ($61,967,000 or 19% of total loans) and
residential construction loans ($58,518,000 or 18% of total loans). Management
believes that there is
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material borrower diversification within the single family residential real
estate, commercial and commercial real estate loan categories. The vast majority
of these loans are secured by properties located in the primary services area of
the Bank (Williamson County and surrounding counties).
The following table presents various categories of loans and loans held
for sale contained in the Bank's loan portfolio for the periods indicated and
the total amount of all loans for such period:
DECEMBER 31,
-------------------------------------------------------------------------
TYPE OF LOAN 2000 1999 1998 1997 1996
------------ --------- --------- --------- --------- ---------
Domestic: (In thousands)
Commercial, financial
and agricultural $ 93,618 $ 82,288 $ 60,418 $ 44,824 $ 34,248
Real estate-construction 58,518 38,982 29,335 33,708 23,307
Real estate-mortgage 159,439 130,483 132,327 100,989 86,999
Consumer loans 20,703 19,670 18,006 15,001 13,230
--------- --------- --------- --------- ---------
Total loans 332,278 271,423 240,086 194,522 157,784
Less: deferred loan fees (549) (512) (516) (440) (362)
Allowance for possible
loan losses (3,025) (2,480) (2,194) (1,828) (1,472)
--------- --------- --------- --------- ---------
Total (net of allowance) $ 328,704 $ 268,431 $ 237,376 $ 192,254 $ 155,950
========= ========= ========= ========= =========
The following is a presentation of an analysis of maturities of loans
as of December 31, 2000:
DUE IN 1 DUE AFTER 1 TO DUE AFTER
TYPE OF LOAN YEAR OR LESS 5 YEARS 5 YEARS TOTAL
- ------------ ------------ -------------- ---------- ----------
(In thousands)
Commercial, financial .............. $ 74,383 $ 18,990 $ 245 $ 93,618
and agricultural
Real estate-construction ........... 53,804 4,714 -- 58,518
Real estate-mortgage ............... 73,135 67,577 18,727 159,439
Consumer loans ..................... 12,045 8,658 -- 20,703
------------ -------------- ---------- ----------
Total .............................. $ 213,367 $ 99,939 $ 18,972 $ 332,278
============ ============== ========== ==========
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The following is a presentation of an analysis of sensitivities of
loans to changes in interest rates as of December 31, 2000 (in thousands):
Loans due after 1 year with
predetermined interest rates..................... $ 100,131
Loans due after 1 year with
floating interest rates.......................... $ 18,780
The following table presents information regarding non-accrual, past
due and restructured loans at the dates indicated (dollars in thousands):
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Loans accounted for on a
non-accrual basis:
Number ...................... 0 0 0 0 0
Amount ...................... $ -- $ -- $ -- $ -- $ --
Accruing loans which are
contractually past due 90
days or more as to principal
and interest payments:
Number ...................... 26 4 4 0 0
Amount ...................... $1,986 $ 769 $ 195 $ -- $ --
Loans defined as "troubled
debt restructurings":
Number ...................... 0 0 0 0 0
Amount ...................... $ -- $ -- $ -- $ -- $ --
As of December 31, 2000, there were no loans classified by the
regulators as doubtful, substandard or special mention that have not been
disclosed in the above table, which (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
Accrual of interest is discontinued on a loan when management of the
Bank determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.
No additional interest income would have been recorded in any of the
years in the five year period ended December 31, 2000 if all loans accounted for
on a non-accrual basis had been current in accordance with their original terms.
No interest income has been recognized
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during the five year period ended December 31, 2000, on loans that have been
accounted for on a non-accrual basis.
Although the Bank does not have any loans classified as non-accrual at
December 31, 2000, management has identified other possible credit problems as
follows (in thousands):
Special mention......... $ 4,522
Substandard............. 3,853
Doubtful................ 37
Loss.................... --
-------
Total $ 8,412
=======
These loans are performing loans but are classified due to payment
history, decline in the borrower's financial position or decline in collateral
value. Loans categorized as "special mention" are currently protected but are
potentially weak. These loans constitute an undue and unwarranted credit risk
but not to the point of justifying a classification of substandard. Loans
classified as "substandard" are inadequately protected by the current net worth
and paying capacity of the obligor or the value of the collateral pledged, if
any. Loans so classified must have a well-defined weakness or weakness that
jeopardizes the liquidation of the debt. Loans classified as "doubtful" have all
the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Loans classified as "loss" are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. Management has provided specific allocations of the allowance
for possible loan losses of $83,000 relating to such loans. There are no other
loans which are not disclosed above, but where known information about possible
credit problems of borrowers causes management to have doubts as to the ability
of such borrowers to comply with the present loan repayment terms.
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SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following
table for the years indicated, as well as a breakdown of the allowance for
possible loan losses:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year .................. $ 2,480 $ 2,194 $ 1,828 $ 1,472 $ 1,062
Charge-offs:
Commercial, financial &
agricultural ............................... 31 25 112 36 4
Consumer loans ................................ 157 66 47 40 18
Real estate-mortgage .......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total charge-offs .......................... 188 91 159 76 22
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial &
agricultural ............................... 19 9 2 1 --
Consumer loans ................................ 27 18 8 11 12
-------- -------- -------- -------- --------
Total recoveries ........................... 46 27 10 12 12
Net charge-offs ............................... (142) (64) (149) (64) (10)
-------- -------- -------- -------- --------
Additions charged to operations ............... 687 350 515 420 420
-------- -------- -------- -------- --------
Balance at end of year ........................ $ 3,025 $ 2,480 $ 2,194 $ 1,828 $ 1,472
======== ======== ======== ======== ========
Ratio of net charge-offs during the
period to average loans outstanding
during the year ............................ .05% .02% .07% .04% .01%
======== ======== ======== ======== ========
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The allocation of the allowance for loan losses by loan category at
December 31 of the years indicated is presented below, along with percentage of
loans in each category to total loans:
2000 1999 1998 1997 1996
----------------- ---------------- ------------------ ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ -------- ------ -------- ------- ------- ------ ------- ------ --------
(Dollars in Thousands)
Commercial, financial
and agricultural ..... $ 999 28.2% $ 882 30.3% $ 686 25.2% $ 489 23.1% $ 272 21.7%
Real estate -
construction ......... 612 17.6 449 14.4 352 12.2 377 17.3 331 14.8
Real estate-mortgage .... 1,107 48.0 886 48.1 840 55.1 813 51.9 735 55.1
Consumer loans .......... 280 6.2 255 7.2 211 7.5 109 7.7 98 8.4
Unallocated ............. 27 N/A 8 N/A 105 N/A 40 N/A 36 N/A
------ ------ ------ ------ ------
Total ................... $3,025 100.0% $2,480 100.0% $2,194 100.0% $1,828 100.0% $1,472 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
LOAN LOSS RESERVE
In considering the adequacy of the Company's allowance for possible
loan losses, management has focused on the fact that as of December 31, 2000,
28% of outstanding loans are in the category of commercial loans. Commercial
loans are generally considered by management as having greater risk than other
categories of loans in the Company's loan portfolio. However, approximately 91%
of these commercial loans at December 31, 2000 were made on a secured basis.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio greatly reduces any risk of loss inherently
present in commercial loans.
The Company's consumer loan portfolio is also well secured. At December
31, 2000, the majority of the Company's consumer loans were secured by
collateral primarily consisting of automobiles, boats and other personal
property. Management believes that these loans involve less risk than other
categories of loans.
As of December 31, 2000, real estate mortgage loans constituted 48% of
outstanding loans. Approximately $72,107,000 or 45% of this category represents
first mortgage residential real estate mortgages where the amount of the
original loan generally does not exceed 80% of the appraised value of the
collateral. While the national real estate market has declined due to current
economic factors, the Company's market area has seen a softening in real estate,
but not as significant a decline. The Company does not anticipate losses in
relation to the decline in the real estate market. The remaining portion of this
category consists primarily of commercial real estate loans. Risk of loss for
these loans is generally higher than residential loans. Therefore, management
has allocated a significant portion of the allowance for loan losses to this
category.
The Company's Board of Directors monitors the loan portfolio quarterly
to enable it to evaluate the adequacy of the allowance for loan losses. The
loans are rated and the allowance established based on the assigned rating. The
provision for loan losses charged to operating expenses is based on this
established allowance. Factors considered by the Board in rating the loans
include delinquent loans, underlying collateral value, payment history and local
and general economic conditions affecting collectibility.
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INVESTMENTS
As of December 31, 2000, investment securities, including
mortgage-backed securities, comprised approximately 37% of the Bank's assets,
and loans comprised approximately 54% of the Bank's assets. The Bank invests
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States, other taxable securities and in
certain obligations of states and municipalities. The majority of the
mortgage-backed securities are instruments of U.S. Government agencies. In
addition, the Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of Federal
Funds amounts to a short-term loan from the Bank to another bank. Since the Bank
has been in a taxable position for the past several years and expects to be in a
taxable position in the future, more tax exempt securities have been purchased.
The following tables present, for the periods indicated, the carrying
amount of the Bank's investment securities, including mortgage-backed
securities, separated by those available-for-sale and those held-to-maturity.
The Bank does not currently maintain a trading portfolio.
December 31,
------------------------------------
INVESTMENT 2000 1999 1998
CATEGORY -------- -------- --------
- ----------
Available-for-sale:
Obligations of U.S. Treasury and
other U.S. Agencies.................... $ 43,622 $ 43,488 $ 25,881
Obligations of States and Political
Subdivisions........................... 23,766 14,149 14,254
Mortgage-backed securities................ 144,758 69,526 32,406
Other securities....................... 8,884 187 --
-------- -------- --------
Total............................ $221,030 $127,350 $ 72,541
======== ======== ========
December 31,
------------------------------------
INVESTMENT 2000 1999 1998
CATEGORY -------- -------- --------
- ----------
Held-to-maturity:
Obligations of U.S. Treasury and
other U.S. Agencies ................ $ -- $ -- $1,354
Obligations of States and Political
Subdivisions ....................... 2,733 2,809 2,817
Mortgage-backed securities ............ 328 380 591
Other securities ................... -- -- --
------ ------ ------
Total ........................ $3,061 $3,189 $4,762
====== ====== ======
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The following tables indicate for the year ended December 31, 2000, the
amount of investments due in (i) one year or less, (ii) one to five years, (iii)
five to ten years, and (iv) over ten years:
WEIGHTED AVERAGE
INVESTMENT AMOUNT YIELD (1)
CATEGORY -------- ----------------
- ---------- (Dollars in thousands)
Available-for-sale:
------------------
Obligations of U.S. Treasury and
other U.S. Agencies:
Less than 1 Yr ....................................... $ 5,064 6.38%
Over 1 through 5 Yrs ................................. 18,474 4.74
Over 5 through 10 Yrs ................................ 6,158 4.42
Over 10 Yrs .......................................... 13,926 7.66
Obligations of States and Political Subdivisions:
Over 1 through 5 Yrs ................................. 538 6.23
Over 5 through 10 Yrs ................................ 1,499 6.56
Over 10 Yrs .......................................... 21,729 7.49
Other Securities:
Less than 1 Yr ....................................... 240 7.71
Over 1 through 5 Yrs ................................. 4,404 8.27
Over 10 Yrs .......................................... 4,240 9.76
Mortgage-backed securities ........................... 144,758 7.29
--------
Total available-for-sale .......................... $221,030 7.07%
======== ======
(1) The Company has invested in tax exempt obligations. Yields are
presented based on adjusted cost basis of securities
available-for-sale. Yields based on carrying value would be lower since
fair value exceeds adjusted cost. Yields on tax exempt obligations have
been computed on a tax equivalent basis. Income from tax exempt
obligations is exempt from federal income tax only, therefore only the
federal statutory rate of 34% has been used to compute the tax
equivalent yield.
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WEIGHTED AVERAGE
INVESTMENT AMOUNT YIELD (1)
CATEGORY ------ ---------------
- ---------- (Dollars in thousands)
Held-to-maturity:
Obligations of U.S. Treasury and
other U.S. Agencies:
Less than 1 Yr ...................................... $ 0 0.00%
Obligations of States and Political Subdivisions:
Less than 1 Yr ...................................... 0 0.00
Over 1 through 5 Yrs ................................ 452 8.46
Over 5 through 10 Yrs ............................... 2,241 7.52
Over 10 Yrs ......................................... 40 8.03
Mortgage-backed securities .......................... 328 7.38
------ ----
Total held-to-maturity ........................... $3,061 7.65%
====== ====
(1) The Company has invested in tax exempt obligations. Yields on tax
exempt obligations have been computed on a tax equivalent basis. Income
from tax exempt obligations is exempt from federal income tax only,
therefore only the federal statutory rate of 34% has been used to
compute the tax equivalent yield.
SELECTED FINANCIAL RATIOS
Selected financial ratios for the periods indicated are as follows:
Years Ended December 31,
------------------------------
2000 1999 1998
------ ------ ------
Return on average assets ....................... .94% 1.20% 1.59%
Return on average equity ....................... 19.59% 19.23% 22.97%
Average equity to average
assets ratio .............................. 4.80% 6.22% 6.90%
Dividend payout ratio .......................... 35.53% 31.48% 6.45%
ASSET/LIABILITY MANAGEMENT
It is the objective of the Bank to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan investment, borrowing and capital policies. Certain of
the officers of the Bank are responsible for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix,
stability and leverage of all sources of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Bank seeks to invest the largest portion of the Bank's assets in commercial,
consumer and real estate loans.
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The Bank's asset/liability mix is monitored on a daily basis with a
monthly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Bank's Board of Directors. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Bank's earnings.
During the third quarter of 2000, the Company purchased approximately
$82.0 million of investment securities in a leverage program to gain immediate
income benefits and offset interest expense of the Trust Preferred Securities
offering. This leverage program was funded through proceeds from the Trust
Preferred Securities, $52.0 million of Federal Home Loan Bank advances and
brokered certificates of deposit. The objectives of the leverage program are to
realize 120 basis point spread between investment yields and borrowings, to
utilize cash flow from the investments purchased to help fund future loan demand
and to limit rate shock exposure in the up 100 rate scenario.
CORRESPONDENT BANKING
Correspondent banking involves the providing of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Bank purchases correspondent services offered by
larger banks, including check collections, purchase of Federal Funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations and sales of loans to or participations with
correspondent banks.
DATA PROCESSING
The Bank has in-house data processing which provides a full range of
data processing services including an automated general ledger, deposit
accounting, commercial, real estate and installment lending data processing and
central information file (`CIF'). The Bank has an ATM (automated teller machine)
processing agreement with Intercept Systems, Inc.
FACILITIES
The Bank subleases a two-story commercial facility (approximately
12,000 square feet) located in Franklin, Tennessee from the Company, which
houses the Bank's main office. The facility includes a main banking floor with 6
teller stations and 9 offices, and has an ATM and 2 drive-in windows. The second
floor of the facility consists of the marketing department, the call center, 4
executive offices and the compliance and internal audit offices. The Company
leases these facilities from Gordon E. Inman, the Chairman of the Board of the
Company.
The Williamson Square branch is located in a 5,000 sq. foot commercial
building located on Highway 96 West at the Williamson Square Shopping Center in
Franklin. The branch banking floor includes 5 teller stations and 6 offices, and
has an ATM and 2 drive-in windows.
The Spring Hill branch is located in a 2,700 sq. foot building in
Spring Hill, Tennessee. The branch includes 4 offices and 3 teller stations, 2
drive-in windows and an ATM.
The Brentwood branch is located in a 4,900 sq. foot leased building in
Brentwood, Tennessee. The branch has 6 offices, 4 teller stations, 4 drive-in
windows and an ATM. This branch was relocated to this new facility in February
2000.
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The Fairview branch is located in a 5,000 sq. foot building in
Fairview, Tennessee. The branch includes 4 offices, 4 teller stations, 2
drive-in windows and an ATM.
The Cool Springs branch is located in a 4,900 square foot building in
the Cool Springs area of Franklin, Tennessee. The branch includes 8 offices, 5
teller stations, 4 drive-in windows and an ATM.
The Fieldstone Farms branch is located in a 4,900 square foot building
in the Fieldstone Farms area of Franklin, Tennessee. The branch includes 6
offices, 5 teller stations, 2 drive-in windows and an ATM.
The Green Hills branch is located in a 5,000 square foot building in
Davidson County, Tennessee. The branch includes 4 offices, 6 teller stations, 2
drive-in windows and an ATM.
The Fourth and Union branch is located in a 6,900 square foot facility
in downtown Nashville, Tennessee. The branch includes 7 offices, 6 teller
stations and an ATM.
The Bank leases facilities at five separate locations in Franklin which
house the financial services subsidiary, mortgage banking subsidiary, insurance
subsidiary, data processing, operations, human resources and administrative
functions. The Company leases all but one of these facilities from Gordon E.
Inman, the Chairman of the Board of the Company.
The Bank is leasing an office suite in Chattanooga, Tennessee which
houses mortgage loan origination offices.
EMPLOYEES
The Company presently employs 198 persons on a full-time basis,
including 67 officers. The Company will hire additional persons as needed,
including additional tellers and financial service representatives.
MONETARY POLICIES
The results of operations of the Bank are affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
SUPERVISION AND REGULATION
General
The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation and administrative
policies. The business activities of the Company and the Bank are closely
supervised by a number of regulatory agencies, including the Federal
19
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Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the
Federal Deposit Insurance Corporation ("FDIC").
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act of 1956, as amended, which requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before
acquiring more than 5% of the voting shares of any bank or all or substantially
all of the assets of a bank, and before merging or consolidating with another
bank holding company. The Federal Reserve Board (pursuant to regulation and
published policy statements) has maintained that a bank holding company must
serve as a source of financial strength to its subsidiary banks. In adhering to
the Federal Reserve Board policy, the Company may be required to provide
financial support to a subsidiary bank at a time when, absent such Federal
Reserve Board policy, the Company may not deem it advisable to provide such
assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, the Company or any other bank holding company located in Tennessee, is
able to acquire a bank located in any other state, and a bank holding company
located outside Tennessee may acquire any Tennessee-based bank, in either case
subject to certain deposit percentage and other restrictions. The legislation
also provides that, unless an individual state has elected to prohibit
out-of-state banks from operating interstate branches within its territory,
adequately capitalized and managed bank holding companies will be able to
consolidate their multistate bank operations into a single bank subsidiary and
to branch interstate through acquisitions.
De novo branching by an out-of-state bank is permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state remains subject to applicable
state branching laws. Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act, the State of Tennessee adopted legislation that
authorizes out-of-state banks to operate interstate branches within its
territory effective June 1, 1997.
A bank holding company which has not elected to become a financial
holding company ("FHC") under the Gramm-Leach-Bliley Act, as discussed below,
will generally be prohibited from acquiring control of any company which is not
a bank and from engaging in any business other than the business of banking or
managing and controlling banks. However, non-FHC bank holding companies may
still engage in certain activities which have been identified by the Federal
Reserve Board to be so closely related to banking as to be a proper incident
thereto and thus permissible for bank holding companies.
The list of permissible nonbanking activities includes the following
activities: extending credit and servicing loans; acting as investment or
financial advisor to any person, with certain limitations; leasing personal and
real property or acting as a broker with respect thereto; providing management
and employee benefits consulting advice and career counseling services to
nonaffiliated banks and nonbank depository institutions; operating certain
nonbank depository institutions; performing certain trust company functions;
providing certain agency transactional services, including securities brokerage
services, riskless principal transactions, private placement services, and
acting as a futures commission merchant; providing data processing and data
transmission services; acting as an insurance agent or underwriter with respect
to limited types of insurance; performing real estate appraisals; arranging
commercial real estate equity financing; providing check-guaranty, collection
agency and credit bureau services; engaging in asset management, servicing and
collection activities; providing real estate settlement services; acquiring
certain debt which is in default; underwriting and dealing in obligations of the
United States, the states and their political subdivisions; engaging as a
principal in foreign exchange trading and dealing in precious metals; providing
other support services such as courier services and the printing and selling of
checks; and investing in programs designed to promote community welfare.
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In determining whether an activity is so closely related to banking as
to be permissible for bank holding companies, the Federal Reserve Board is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition and
gains in efficiency, that outweigh such possible adverse effects as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, and unsound banking practices. Generally, bank holding companies must
obtain approval of the Federal Reserve Board to engage in any activity not
previously approved by the Federal Reserve Board or to modify in any material
respect an activity for which Federal Reserve Board approval had been obtained.
As a national bank, the Bank is subject to the supervision of the OCC
and, to a limited extent, the FDIC and the Federal Reserve Board. The Bank is
also subject to Tennessee banking and usury laws restricting the amount of
interest which it may charge in making loans or other extensions of credit. In
addition, the Bank, as a subsidiary of the Company, is subject to restrictions
under federal law when dealing with the Company and other affiliates. These
restrictions apply to extensions of credit to an affiliate, investments in the
securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
In addition, a national bank may grant loans and extensions of credit to such
person up to an additional 10% of its unimpaired capital and surplus, provided
that each loan or extension of credit is fully secured by readily marketable
collateral having a market value, determined by reliable and continuously
available price quotations, at least equal to the amount of funds outstanding.
Loans and extensions of credit may exceed the general lending limit if they
qualify under one of several exceptions. Such exceptions include certain loans
or extensions of credit arising from the discount of commercial or business
paper, the purchase of bankers' acceptances, loans secured by documents of
title, loans secured by U.S. obligations and loans to or guaranteed by the
federal government, and loans or extensions of credit which have the approval of
the OCC and which are made to a financial institution or to any agent in charge
of the business and property of a financial institution.
Gramm-Leach-Bliley
The Gramm-Leach-Bliley Act, enacted on November 12, 1999, eliminates
the barriers erected by the 1933 Glass-Steagall Act and amends the Bank Holding
Company Act of 1956 and the Securities Exchange Act of 1934, among other
statutes. The Gramm-Leach-Bliley Act allows for the affiliation of banking,
securities and insurance activities in new financial services organizations. A
dominant theme of the Gramm-Leach-Bliley Act is the functional regulation of
financial services, with the primary regulator of the Company being the agency
which traditionally regulates the activity in which the Company wishes to
engage. For example, the Securities and Exchange Commission will regulate bank
securities transactions, and the various banking regulators will oversee banking
activities.
The Gramm-Leach-Bliley Act permits the Company to engage in activities
that are "financial in nature." Such activities include security and insurance
underwriting, investment banking, and limited merchant banking investing in
commercial and industrial companies. To be eligible for such activities, the
Company must qualify as a FHC and file a declaration as a FHC with the Federal
Reserve. To qualify
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as a FHC, the Company must be "well-capitalized," "well managed" and have at
least a satisfactory rating under the Community Reinvestment Act. Further, the
Company, if it elects FHC status, can pursue additional activities which are
incidental or complementary in nature to a financial activity, or which the
Federal Reserve subsequently determines to be financial in nature. The
Gramm-Leach-Bliley Act also allows the Bank, with OCC approval, to control or
hold an interest in a "financial subsidiary" which may engage in, among other
things, the activities specified in the Gramm-Leach-Bliley Act as being
financial in nature. However, a financial subsidiary is not permitted to engage
in activities such as insurance underwriting or annuity issuance, real estate
development, investment activities, or merchant banking activities. In addition,
any financial subsidiary of the Bank would generally be treated as an affiliate
of the Bank, rather than as a subsidiary, for purposes of affiliate transaction
restrictions of the Federal Reserve Act.
It is expected that the Gramm-Leach-Bliley Act will facilitate further
consolidation in the financial services industry on both a national and
international basis, and will cause existing bank holding companies to
restructure their existing activities in order to take advantage of the new
powers granted and comply with their attendant requirements and conditions.
Capital Adequacy Requirements
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in the risk profiles of various banking organizations.
The capital adequacy guidelines issued by the Federal Reserve Board are applied
to bank holding companies, on a consolidated basis with the banks owned by the
holding company, as well as to state member banks. The OCC's risk capital
guidelines apply directly to national banks regardless of whether they are a
subsidiary of a bank holding company. Both agencies' requirements (which are
substantially similar), provide that banking organizations must have capital
equivalent to at least 8% of risk-weighted assets. The risk weights assigned to
assets are based primarily on credit risks. Depending upon the risk level of a
particular asset, it is assigned to a risk category.
For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category, while a risk weight
of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are then added
together to determine total risk-weighted assets.
The Federal Reserve Board and the OCC have also implemented minimum
capital leverage ratios to be used in tandem with the risk-based guidelines in
assessing the overall capital adequacy of banks and bank holding companies.
Under these rules, banking institutions must maintain a ratio of at least 3%
"Tier 1" capital to total weighted risk assets (net of goodwill, certain
intangible assets, and certain deferred tax assets). Tier 1 capital includes
common shareholders equity, noncumulative perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries.
Both the risk-based capital guidelines and the leverage ratio are
minimum requirements. They are applicable to all banking institutions unless the
applicable regulating authority determines that different minimum capital ratios
are appropriate for a particular institution based upon its circumstances.
Institutions operating at or near these ratios are expected to have
well-diversified risks, excellent control
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systems, high asset quality, high liquidity, good earnings, and in general must
be considered strong banking organizations, rated composite 1 under the CAMELS
rating system of banks or the BOPEC rating system of bank holding companies. The
OCC requires that all but the most highly-rated banks and all banks with high
levels of risk or experiencing or anticipating significant growth maintain
ratios of at least 4% Tier 1 capital to total assets. The Federal Reserve Board
also requires bank holding companies without a BOPEC-1 rating to maintain a
ratio of at least 4% Tier 1 capital to total assets; furthermore, banking
organizations with supervisory, financial, operational, or managerial
weaknesses, as well as organizations that are anticipating or experiencing
significant growth, are expected to maintain capital ratios well above the 3%
and 4% minimum levels.
The FDIC has also adopted a rule substantially similar to that issued
by the Federal Reserve Board, that establishes a minimum leverage ratio of 3%
and provides that FDIC-regulated banks with anything less than a CAMELS-1 rating
must maintain a ratio of at least 4%. In addition, the FDIC rule specifies that
a depository institution operating with less than the applicable minimum
leverage capital requirement will be deemed to be operating in an unsafe and
unsound manner unless the institution is in compliance with a plan, submitted to
and approved by the FDIC, to increase the ratio to an appropriate level.
Finally, the FDIC requires any insured depository institution with a leverage
ratio of less than 2% to enter into and be in compliance with a written
agreement between it and the FDIC (or the primary regulator, with the FDIC as a
party to the agreement). Such an agreement should contemplate immediate efforts
to acquire the capital required to increase the ratio to an appropriate level.
Institutions that fail to enter into or maintain compliance with such an
agreement will be subject to enforcement action by the FDIC.
The OCC's guidelines provide that intangible assets are generally
deducted from Tier 1 capital in calculating a bank's risk-based capital ratio.
However, certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets, whether originated
or purchased and excluding any interest-only strips receivable related thereto.
The OCC has amended its guidelines to increase the limitation on such qualifying
intangibles from 50% to 100% of Tier 1 capital, of which no more than 25% may
consist of purchased credit card relationships and non-mortgage servicing
assets.
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions regarding a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
to ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a bank's financial condition and is inherent to the business of
banking. The exposure of a bank's economic value generally represents the change
in the present value of its assets, less the change in the value of its
liabilities, plus the change in the value of its interest rate off-balance sheet
contracts. Concurrently, the agencies issued a joint policy statement to
bankers, effective June 26, 1996, to provide guidance on sound practices for
managing interest rate risk. In the policy statement, the agencies emphasize the
necessity of adequate oversight by a bank's Board of Directors and senior
management and of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies' evaluations of a
bank's interest rate risk when making a determination of capital adequacy. The
agencies' risk assessment approach used to evaluate a bank's capital adequacy
for interest rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure and/or weak
management practices will be directed by the agencies to take corrective action.
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The OCC, the Federal Reserve Board and the FDIC have added a provision
to the risk-based capital guidelines that supplements and modifies the usual
risk-based capital calculations to ensure that institutions with significant
exposure to market risk maintain adequate capital to support that exposure.
Market risk is the potential loss to an institution resulting from changes in
market prices. The modifications are intended to address two types of market
risk: general market risk, which includes changes in general interest rates,
equity prices, exchange rates, or commodity prices, and specific market risk,
which includes particular risks faced by the individual institution, such as
event and default risks. The provision defines a new category of capital, Tier
3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, covered institutions must "backtest,"
comparing the actual net trading profit or loss for each of its most recent 250
days against the corresponding measures generated by the statutory model. Once
per quarter, the institution must identify the number of times the actual net
trading loss exceeded the corresponding measure and must then apply a statutory
multiplication factor based on that number for the next quarter's capital charge
for market risk.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), provides for a number of reforms relating to the safety and soundness
of the deposit insurance system, supervision of domestic and foreign depository
institutions and improvement of accounting standards. One element of the FDICIA
provides for the development of a regulatory monitoring system requiring prompt
action on the part of banking regulators with regard to certain classes of
undercapitalized institutions. While the FDICIA does not change any of the
minimum capital requirements, it directs each of the federal banking agencies to
issue regulations putting the monitoring plan into effect. The FDICIA creates
five "capital categories" ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") which are defined in the FDICIA and are used to determine the
severity of corrective action the appropriate regulator may take in the event an
institution reaches a given level of undercapitalization. For example, an
institution which becomes "undercapitalized" must submit a capital restoration
plan to the appropriate regulator outlining the steps it will take to become
adequately capitalized. Upon approving the plan, the regulator will monitor the
institution's compliance. Before a capital restoration plan will be approved,
any entity controlling a bank (i.e., a holding company) must guarantee
compliance with the plan until the institution has been adequately capitalized
for four consecutive calendar quarters. The liability of the holding company is
limited to the lesser of five percent of the institution's total assets or the
amount which is necessary to bring the institution into compliance with all
capital standards. In addition, "undercapitalized" institutions will be
restricted from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and
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ultimately providing for the appointment of a receiver for certain institutions
deemed to be critically undercapitalized.
The OCC, the Federal Reserve Board and the FDIC have established
regulations which, among other things, prescribe the capital thresholds for each
of the five capital categories established by the Act. The following table
reflects the capital thresholds:
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage
---------------- ----------------- --------
Ratio
--------
Well capitalized(1) >=10% >= 6% >= 5%
Adequately Capitalized(1) >= 8% >= 4% >= 4%(2)
Undercapitalized(4) < 8% < 4% < 4%(3)
Significantly Undercapitalized(4) < 6% < 3% < 3%
Critically Undercapitalized - - < 2%(5)
- ---------------
(1) An institution must meet all three minimums.
(2) >=3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines. -
(3) < 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(4) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(5) Ratio of tangible equity to total assets.
In addition, the Federal Reserve Board, the OCC and the FDIC have
adopted regulations, pursuant to the FDICIA, defining operational and managerial
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. Both the capital standards and the safety and soundness standards
which the FDICIA seeks to implement are designed to bolster and protect the
deposit insurance fund.
Reporting Requirements
As a national bank, the Bank is subject to examination and review by
the OCC. This examination is typically completed on-site at least every eighteen
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
As a financial holding company, the Company is required to file with
the Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Act. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.
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The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation. In
addition, regulators sometimes require higher capital levels on a case-by-case
basis based on such factors as the risk characteristics or management of a
particular institution. The Company and the Bank are not aware of any attributes
of their operating plan that would cause regulators to impose higher
requirements.
ITEM 2. PROPERTIES.
Main Office
On January 5, 1989, the organizers of the Company entered into an
agreement with Gordon E. Inman, the Chairman of the Board of the Company, to
lease a two-story commercial building to house the Bank's office. Additional
space in this building was leased by the Company from Mr. Inman in May 1991 and
in June 1993. The two floors contain an aggregate of approximately 12,000 square
feet. The building is situated on approximately one-tenth acre located at 230
Public Square, Franklin, Tennessee 37064. On May 1, 1997 the Company amended the
original lease to include a 9,300 square foot building adjacent to the current
facility. The building, Franklin Financial Center, is located at 216 East Main
Street, Franklin, Tennessee 37064. On April 6, 1998 the Company again amended
the original lease to include a 4,000 square foot building which backs up to the
original property. This building, which houses the Bank's mortgage operations,
is located at 110 3rd Avenue, Franklin, TN 37064. On January 5, 1989, the
organizers of the Company also entered into a ground lease with Mr. Inman for
the lease of approximately .05 acres located adjacent to the proposed bank
office. The Company is using this parcel to accommodate the Banks drive-in
teller and bank window facility. Both leases provide for a term of 20 years,
with three five-year renewal options, with the lease terms commencing on May 15,
1989. The current monthly rental under these leases total $38,027. The Company
is subleasing the permanent facility and the adjacent parcel to the Bank at a
rate which includes reimbursement to the Company for payment of rent, taxes,
insurance, repairs and maintenance of the properties.
Spring Hill Branch
In May 1991, the Bank acquired a 3,000 square foot office building in
Spring Hill, Tennessee from Mr. Inman at a purchase price of $305,000. This
facility houses the Bank's Spring Hill branch.
Williamson Square Branch
In November 1993, the Bank entered into a 15 year lease with an
unrelated third party for a commercial building in the Williamson Square
Shopping Center on Highway 96E in Franklin, Tennessee. This facility houses the
Bank's Williamson Square branch. In January 1997, the Company purchased this
property for $980,000.
Brentwood Branch
In July 1994, the Bank entered into a long-term lease with an unrelated
third party for a commercial building in Brentwood, Tennessee. This facility
housed the Bank's Brentwood branch from April 1995 until February 2000. A new
4,900 square foot branch office has been constructed in the Brentwood area that
is larger than the existing one. It is leased from an unrelated third party with
monthly lease payments of $10,294. This branch facility opened in February 2000.
Fairview Branch
In January 1997, the Bank purchased a parcel of land in Fairview,
Tennessee at a purchase price of $140,000. The Bank opened a branch office in a
mobile unit at this site in the second quarter of 1997.
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The Bank constructed a 5,000 sq. foot permanent facility at this location which
opened in the second quarter of 1998.
Cool Springs Branch
In October 1998, the Company purchased a parcel of land in the Cool
Springs area of Franklin for $650,000. In May 2000, the Company completed
construction and opened a 4,900 square foot branch facility.
Fieldstone Farms Branch
In July 1999, the Company purchased a parcel of land in the Fieldstone
Farms area of Franklin for $740,000. In June 2000, the Company completed
construction and opened a 4,900 square foot branch facility.
Green Hills Branch
In July 2000, the Bank assumed a lease with an unrelated third party on
a 5,000 square foot facility in the Green Hills area of Davidson County. The
branch facility opened in January 2001. The monthly lease payments are $9,300.
Fourth and Union Branch
In January 2001, the Bank leased from an unrelated third party a 6,900
square foot facility at the corner of Fourth Street and Union Street in downtown
Nashville. The branch facility opened in February 2001 with monthly lease
payments of $14,064.
Administrative Offices
In December 1993, the Bank entered into a six and one-half year lease
with Mr. Inman for office/warehouse space on Main Street in Franklin, Tennessee.
This lease was amended in January 1996 to include an additional 3,000 square
feet. The lease was amended in September 1998 to extend the term of the lease to
fifteen and one-half years. In August 1999, the lease was further amended to
include an additional 2,600 square feet. The lease, as amended, covers
approximately 9,600 square feet and, provides for monthly payments to Mr. Inman
of $9,800. The office space houses "back office" functions for the Bank,
including data processing, check and document imaging, bookkeeping, and
accounting.
The Bank also leases a building from Mr. Inman, the Home Loan Center,
which houses its mortgage origination functions. The lease provides for monthly
payments to Mr. Inman of approximately $4,100.
The Bank is leasing an office building from an unrelated third party in
downtown Franklin which houses the Human Resources department and a training
facility. The monthly lease payments are approximately $2,900.
ITEM 3. LEGAL PROCEEDINGS.
On October 12, 1999, the Bank, along with William Hooper, was sued by
Milton Prowell, the plaintiff ("Prowell"). The lawsuit, styled Milton C.
Prowell, An Individual & d/b/a MC Prowell Landscaping v. William Hooper,
Individually and as Agent for Franklin
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National Bank, and Franklin National Bank, In the Circuit Court for Maury County
at Columbia, Tennessee Civil Action No. 8895 (the "Prowell Litigation") alleges,
among other things, malicious prosecution. William Hooper, a Williamson County
Constable and two Maury County Constables served a criminal complaint on
Prowell, issued by the Williamson County Court, for hindering Franklin National
Bank, a secured creditor. William Hooper and his company, All Points Recovery,
had previously been contracted on a fee basis as an independent contractor by
Franklin National Bank to recover certain collateral on a defaulted note.
Prowell has demanded from the Bank and the other defendant $1.5 million in
alleged compensatory and punitive damages. The Bank believes that the claims of
the plaintiff in the Prowell Litigation are unfounded and completely without
merit. The Bank denies all liability with respect to these claims and intends to
vigorously defend them.
On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S.
District Court for the Middle District of Tennessee, against Franklin National
Bank and Gordon E. Inman, Chairman of the Board of the Company and the Bank,
alleging breach of contract, tortuous interference with contract, fraud, and
civil conspiracy in connection with the denial of a loan to a potential borrower
involved in a real estate transaction. The Bank and Mr. Inman filed their
answers in this matter on September 18, 2000, and a motion for Summary Judgment
on October 10, 2000. The Court denied the Bank's motion for Summary Judgment on
February 15, 2001. Mr. Pressman seeks compensatory damages in an amount not to
exceed $12 million and punitive damages in an amount not to exceed $24 million
from each defendant. The Bank and Mr. Inman deny all of the allegations and will
vigorously defend the action. Management further believes that the claims
alleged by Mr. Pressman are frivolous and without merit and the chances for
recovery by Mr. Pressman are remote.
On September 1, 2000, Highland Capital, Inc. filed a complaint in the
U.S. District Court for the Middle District of Tennessee, against Franklin
National Bank alleging that the Bank required Highland Capital, Inc. to purchase
stock in Franklin Financial Corporation, the Bank's parent company, in
conjunction with Highland Capital, Inc.'s efforts to obtain a loan from the Bank
in violation of 12 U.S.C. ss. 1972, which prohibits certain tying arrangements.
Highland Capital, Inc. is seeking an unspecified amount of damages in an amount
not to exceed $2 million, plus attorney's fees and costs. The Bank filed an
answer in the matter on September 19, 2000. The Bank has denied all allegations
under the complaint and believes the claims alleged by Highland Capital, Inc.
are without merit. The Bank intends to vigorously defend against the action.
Except as set forth above, there are no material pending legal
proceedings to which the Company or the Bank is a party or of which any of their
properties are subject; nor are there material proceedings known to the Company
to be contemplated by any governmental authority; nor are there material
proceedings known to the Company, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of the Company,
or any associate of any of the foregoing is a party or has an interest adverse
to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 3, 2000 the Company held a Special Meeting of
Shareholders. The meeting was held to approve an Amendment to the Company's
Restated Charter, as amended, to effect a 1-for-4 reverse split of the Company's
Common Stock. The shareholders approved the amendment. The number of votes cast
for the Amendment was 22,582,908, with 634,149 against. The reverse split became
effective on October 18, 2000.
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No other matters were presented or voted upon at the Special Meeting.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. The Company's common stock began trading on the
Over-The-Counter Bulletin Board under the symbol "FNFN" in November 2000. Prior
to this time, the Company's common stock was quoted in the "Pink Sheets," an
inter-broker quotation medium and no organized trading market existed. The
market for the Company's common stock must be characterized as a limited market
due to its relatively low trading volume and analyst coverage.
For the fourth quarter ended December 31, 2000, the high and low bid
quotation per share was $11.25 and $10.50. These quotations also reflect
inter-dealer prices without retail mark-ups, mark-downs, or commissions and may
not necessarily represent actual transactions. As of March 15, 2001, the
approximate number of holders of record of the Company's common stock was 637.
Dividends. In February 2001, the Company declared a $.0525 per share
cash dividend payable April 4, 2001 to shareholders of record on March 23, 2001.
The Bank is restricted in its ability to pay dividends under the
national banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. ss.
56, a national bank may not pay dividends from its capital. All dividends must
be paid out, of undivided profits, subject to other applicable provisions of
law. Payments of dividends out of undivided profits is further limited by 12
U.S.C. ss. 60(a), which prohibits a bank from declaring a dividend on its shares
of common stock until its surplus equals its shared capital, unless there has
been transferred to surplus not less than 1/10 of the Bank's net income of the
preceding two consecutive half year periods (in the case of an annual dividend).
Pursuant to 12 U.S.C. ss. 60(b), the approval of the OCC is required if the
total of all dividends declared by the Bank in any calendar year exceeds the
total of its net income for that year combined with its retained net income for
the preceding two years, less any required transfers to surplus.
The Company's credit facility restricts the payment of cash dividends
if the Bank's leverage ratio is less than 7%.
Recent Sales of Unregistered Securities.
There were no sales of unregistered securities during the fourth
quarter of 2000.
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ITEM 6. SELECTED FINANCIAL DATA.
At or for the Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- --------- -------- --------
(Dollars in thousands)
Earnings
Interest income $ 43,224 $ 30,691 $ 26,438 $ 22,521 $ 16,710
Interest expense 25,927 15,185 13,142 10,896 7,731
Net interest income 17,298 15,506 13,296 11,625 8,979
Provision for loan losses 687 350 515 420 420
Non-interest income 4,935 4,665 5,124 2,774 1,802
Non-interest expense 14,457 13,006 10,251 7,841 6,359
Net income 4,739 4,470 4,886 3,888 2,565
Net income per share (basic) $ .61 $ .58 $ .69 $ .56 $ .36
Net income per share (diluted) $ .57 $ .54 $ .62 $ .48 $ .32
Average Balances
Assets $503,964 $373,901 $308,287 $251,333 $186,021
Deposits 427,611 333,840 273,863 227,073 171,952
Loans, net 296,251 256,206 214,792 178,047 133,309
Earning assets 473,257 350,377 288,447 235,271 173,339
Shareholders' equity 24,188 23,250 21,271 15,970 12,159
Balance Sheet Data
Assets $604,946 $430,400 $349,867 $274,433 $215,667
Deposits 491,980 383,857 312,397 247,572 199,911
Loans, net 318,921 257,284 213,734 188,517 152,002
Earning assets 569,985 403,057 326,473 256,225 201,913
Long-term obligations 74,708 6,722 6,744 750 --
Shareholders' equity 30,730 22,859 23,589 17,790 13,504
Book value per share 3.94 2.94 3.08 2.56 1.96
Dividends per share .2025 .17 .04 -- --
Shares outstanding (weighted) 8,357 8,322 7,889 8,153 7,651
Key Ratios
Return on average assets 0.94% 1.20% 1.59% 1.55% 1.38%
Return on average shareholders' equity 19.59% 19.23% 22.97% 24.35% 21.10%
Shareholders' equity to total assets 5.08% 5.31% 6.74% 6.48% 6.26%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Details regarding the Company's financial performance are presented in
the following discussion, which should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
GENERAL
Franklin National Bank represents virtually all the assets of Franklin
Financial Corporation. The Bank, headquartered in Franklin, Tennessee, was
opened in December of 1989 and continues to experience substantial growth. The
Bank has nine full service branches located throughout Williamson, Davidson and
Maury Counties. In August 1996, the Bank opened an insurance subsidiary,
Franklin Financial Insurance. In October 1997, the Bank opened a financial
services subsidiary, Franklin Financial Securities. The financial services
subsidiary offers financial planning and securities brokerage services through
Legg Mason Financial Partners. In December 1997, the Bank began operating its
mortgage division as a separate subsidiary, Franklin Financial Mortgage. Also in
January 1998, the mortgage subsidiary began a wholesale mortgage operation and
in August 1998, opened a retail mortgage origination office in Chattanooga,
Tennessee. Franklin Financial Mortgage originates, sells and services mortgage
loans. In June 2000, the Company formed Franklin Capital Trust I, a Delaware
business trust and wholly owned subsidiary of the Company, for the purpose of
issuing Trust Preferred Securities to the public. In December 2000, the Company
received approval from the Federal Reserve Bank to convert from a bank holding
company to a financial holding company to allow the Company additional avenues
for growth opportunities.
On June 6, 2000, the Company filed a Registration Statement on Form
S-2, Reg. No. 333-38674, with the Securities and Exchange Commission to register
up to $16 million in aggregate principal amount of floating rate trust preferred
securities (the "Trust Preferred Securities"). The Trust Preferred Securities
were offered and sold through Franklin Capital Trust I, a Delaware business
trust and wholly owned subsidiary of the Company, on a best efforts basis with a
minimum of $10.0 million and a maximum of $16.0 million to be sold in the
offering. The Trust Preferred Securities pay cumulative cash distributions
accumulating from the date of issuance at an annual rate of three-month LIBOR
plus 3.50% of the liquidation amount of $1,000 per preferred security on a
quarterly basis beginning October 15, 2000. The Trust Preferred Securities have
a thirty-year maturity and may be redeemed by the Company upon the earlier of
five years or the occurrence of certain other conditions. On July 17, 2000 and
August 11, 2000 the Company completed the sale of $11.0 million and $5.0
million, respectively, of the Trust Preferred Securities. The Company received
net proceeds of $15.2 million from the offering, which it used to repay
approximately $5.0 million of indebtedness under its line of credit, purchase
investments as part of a leverage program to offset the interest expense
associated with the Trust Preferred Securities and for general corporate
purposes, including capital investments in the Bank. Subject to certain
limitations, the Trust Preferred Securities qualify as Tier 1 capital and are
carried in Other Borrowings on the Company's Balance Sheet. The Company
purchased approximately $81.3 million of investment securities in a leverage
program to gain immediate income benefits and offset interest expense of the
Trust Preferred Securities. This leverage program was funded through proceeds
from the Trust Preferred Securities, $52.0 million of Federal Home Loan Bank
advances and brokered certificates of deposit. The objectives of the leverage
program are to realize a 120 basis point spread between investment yields and
borrowings, to utilize cash flow from the investments purchased to help fund
future loan demand and to limit interest rate shock exposure in the up 100 basis
point rate shock scenario.
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LIQUIDITY AND CAPITAL RESOURCES
General. The Company maintains its liquidity through the management of
its assets and liabilities. The Company strives to maintain an asset/liability
mix that provides the highest possible net interest margin without taking undue
risk with regard to asset quality or liquidity. Liquidity management involves
meeting the funds flow requirements of customers who may withdraw funds on
deposit or have need to obtain funds to meet their credit needs. Banks in
general must maintain adequate cash balances to meet daily cash flow
requirements as well as satisfy reserves required by applicable regulations. The
cash balances held are one source of liquidity. Other sources are provided by
the investment portfolio, federal funds purchased, Federal Home Loan Bank
advances, sale of loan participations, loan payments, brokered and public funds
deposits and the Company's ability to borrow funds as well as issue new capital.
Liquidity is at an adequate level with cash and due from banks of $19.0
million at December 31, 2000. Loans and securities scheduled to mature within
one year exceeded $218.7 million at December 31, 2000, which should provide
further liquidity. In addition, approximately $221.0 million of securities are
classified as available for sale to help meet liquidity needs should they arise.
Based on the current interest rate environment, the Bank anticipates $47.0
million in cash flow from the investment portfolio over the next year as a
source of liquidity to help fund loan demand. The Company has lines of credit of
$10.0 million with lending institutions and the Bank is approved to borrow up to
$10.0 million in funds from the Federal Home Loan Bank and $35.0 million in
federal funds lines to assist with capital and liquidity needs. At December 31,
2000, the Company had $1.6 million in borrowings against its line of credit and
the Bank had no federal funds purchased outstanding. In February and August
1998, the Bank entered into long-term convertible Federal Home Loan Bank
advances with a ten year maturity and one year call option totaling $6.0
million. During the fourth quarter of 1999 these advances converted to variable
rate advances which reprice quarterly based on LIBOR. As part of a leverage
program to offset interest expense associated with the Trust Preferred
Securities offering, during the third quarter of 2000, the Bank entered into
three long-term convertible Federal Home Loan Bank advances. One advance of
$25.0 million has a ten year maturity with a three year call option. The other
two advances totaling $27.0 million have a five year maturity with a one year
call option. After the three and one year call options, these advances may be
converted by the FHLB from a fixed rate to a variable rate. The Bank has $1.5
million outstanding in repurchase agreements to further develop its relationship
with a customer. The Bank had approximately $60.1 million in brokered deposits
at December 31, 2000 to help fund strong loan demand. The majority of these
deposits are $100,000 or less, but they are generally considered to be more
volatile than the Bank's core deposit base.
Approximately $19.3 million in loan commitments are expected to be
funded within the next six months. Furthermore, the Bank has approximately $45.0
million of other loan commitments, primarily unused lines and letters of credit,
which may or may not be funded.
Capital Expenditures. Other than expenditures relating to the normal
course of business, the Company does not have any capital expenditures planned
for 2001.
Management monitors the Company's asset and liability positions in
order to maintain a balance between rate sensitive assets and rate sensitive
liabilities and at the same time maintain sufficient liquid assets to meet
expected liquidity needs. Management believes that the Company's liquidity is
adequate at December 31, 2000. Other than as set forth above, there are no
trends, demands, commitments, events or uncertainties that will result in or are
reasonably likely to result in the Company's liquidity increasing or decreasing
in any material way. The Company is not aware of any current recommendations by
the regulatory authorities which if they were to be implemented would have a
material effect on the Company's liquidity, capital resources, or results of
operations.
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Cash Flows. Net cash flow provided by operating activities was $7.2
million in 2000 compared to $18.7 million in 1999, a decrease of $11.5 million.
The decrease in cash flow provided is due to the sale of loans exceeding loans
originated for sale by $2.3 million in 2000 as compared to $13.7 million in
1999. The majority of this change is due to the decrease in loans originated in
the mortgage banking segment. The decrease in cash flow is offset slightly by an
increase in net income of $269,000, coupled with decreases in noncash items such
as other assets. The decrease in cash flow is also attributed to accretion
exceeding depreciation and amortization in 2000 as compared to depreciation and
amortization exceeding accretion in 1999 resulting from an increase in the
purchase of zero coupon agency securities.
Net cash used in investing activities was $163.2 million in 2000
compared to $99.2 million in 1999, representing a $64.0 million increase, which
was largely due to the banking segment. The increase in the change in net loans
of $63.4 million in 2000 compared to $45.5 million in 1999. The change in the
net investment portfolio also increased from $59.8 million in 1999 to $84.2
million in 2000 primarily due to the leverage program associated with the Trust
Preferred Securities offering.
Net cash provided by financing activities was $162.3 million in 2000
compared to $80.1 million in 1999, an $82.2 million increase. The increase is
partially due to an increase in deposits of $108.1 million in 2000 compared to
$71.5 million in the preceding year. Net cash provided by other borrowings
increased from $10.6 million in 1999 to $57.3 million in 2000. The increase in
other borrowings is a result of the $16.0 million of subordinated debt issued in
conjunction with the Trust Preferred Securities offering and the Company's
borrowing of $52.0 million in Federal Home Loan Bank advances to assist in
funding the leverage program associated with the Trust Preferred Securities
offering. This increase was offset by a decrease of $5.7 million in the
Company's line of credit. During the first quarter of 1997, the Bank entered
into a $4.4 million repurchase agreement to further develop its relationship
with a customer, of which $1.0 million matured in 2000.
Interest Rate Sensitivity. The following is an analysis of rate
sensitive assets and liabilities as of December 31, 2000:
0-3 MOS. 3-12 MOS. 1-5 YRS. 5 OR MORE YRS. TOTAL
--------- --------- -------- -------------- --------
Securities ............................. $ 9,468 $ 28,814 $136,143 $ 53,393 $227,818
Loans .................................. 185,141 46,457 94,039 3,067 328,704
Federal funds sold ..................... -- -- -- 10,438
10,438
--------- --------- -------- -------- --------
Total rate sensitive assets ............ 205,047 75,271 230,182 56,460 566,960
NOW deposits ........................... 41,749 -- -- -- 41,749
Savings deposits ....................... 109,369 -- -- -- 109,369
Time deposits .......................... 204,310 87,672 12,092 -- 304,074
Repurchase agreements .................. 1,421 -- -- 1,521
100
Other borrowings ....................... 24,318 -- -- 52,000 76,318
Total rate sensitive ................... 381,167 87,772 12,092 533,031
Liabilities ......................... 52,000
--------- --------- -------- -------- --------
Excess (deficiency) of rate
sensitive assets less
rate sensitive liabilities .......... $(176,120) $ (12,501) $218,090 $ 4,460 $ 33,929
========= ========= ======== ======== ========
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Excess (deficiency) as a
percentage of earning
assets .............................. (31.1)% (2.2)% 38.5% .8% 6.0%
Cumulative excess
(deficiency) ........................ $(176,120) $(188,621) $ 29,469 $ 33,929 $ 33,929
========= ========= ======== ======== ========
Cumulative excess
(deficiency) as a
percentage of earnings
assets .............................. (31.1)% (33.3)% 5.2% 6.0% 6.0%
As indicated in the preceding table, the negative gap in the 0-3 month
and 3-12 month categories between rate sensitive assets and rate sensitive
liabilities would allow the Company to reprice its liabilities faster than its
assets in a falling rate environment which should have a positive effect on
earnings. However, in an increasing interest rate environment, the Company may
experience a short-term decrease in earnings. The above table has been prepared
based on principal payment due dates, contractual maturity dates or repricing
intervals on variable rate instruments. With regard to mortgage-backed
securities, the estimated prepayment date is used. Actual payments on
mortgage-backed securities are received monthly and therefore should occur
earlier than the contractual maturity date.
Capital Adequacy. Stockholders' equity at December 31, 2000, was $30.7
million or 5.1% of total assets compared to $22.9 million or 5.3% of total
assets at December 31, 1999. See note 14 of the notes to consolidated financial
statements. As set forth in the following table, equity capital of the Company
and the Bank exceeded regulatory requirements as of December 31, 2000:
MINIMUM
FOR CAPITAL FOR "WELL COMPANY
ADEQUACY CAPITALIZED" CONSOLIDATED BANK'S
PURPOSES CATEGORY ACTUAL ACTUAL
----------- ------------ ------------ ------
Leverage 4.00% 5.00% 6.8% 7.1%
Tier 1 risk-based 4.00% 6.00% 10.9% 11.6%
Total risk-based 8.00% 10.00% 13.4% 13.0%
FINANCIAL CONDITION
Total assets have grown $174.5 million or 40.6% since December 31, 1999
to a total of $604.9 million at December 31, 2000. The growth during 2000 has
been funded by a $108.1 million increase in deposits, a $57.3 million increase
in other borrowings and net income of $4.7 million. Total deposits were $492.0
million at December 31, 2000. Approximately $81.3 million of the increase in
assets is due to the increase in investment securities resulting from the
leverage program associated with the Trust Preferred Securities offering. The
increase in other borrowings is due to $16.0 million of subordinated debt issued
in conjunction with the Trust Preferred Securities offering and $52.0 million in
Federal Home Loan Bank advances to assist in funding the leverage program.
The Company continues to experience excellent loan demand as
demonstrated by the growth in net loans of $61.6 million or 24.0% since December
31, 1999. The allowance for loan losses increased $546,000, or 22.0%, from the
level at December 31, 1998, for a total of $3.0 million or approximately
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.9% of total loans. The increase in the allowance for loan losses is primarily
the result of growth in the loan portfolio and not because of a decline in asset
quality. The Company has seen significant growth in construction and commercial
real estate loans which carry a higher reserve factor. Management believes that
the level in the allowance for loan losses is adequate at December 31, 2000.
Management reviews in detail the level of the allowance for loan losses on a
quarterly basis. In addition, Professional Bank Services, an external bank
consulting firm, performs an annual review of the loan portfolio to provide
management with an independent third-party opinion regarding the adequacy of the
allowance for loan losses. At December 31, 2000, the Bank had no loans on
nonaccrual and loans that were specifically classified as impaired of
approximately $72,000. The allowance for loan losses related to impaired loans
was $37,000 at December 31, 2000.
At December 31, 2000 the fair value of securities classified as
available-for-sale exceeded the cost of the securities by $980,000. At December
31, 1999, cost of the securities classified as available-for-sale exceeded the
fair value of securities by $6.6 million. As a result, unrealized gain (loss)
net of taxes of $588,000 and ($4.0 million) for the year ended December 31, 2000
and the year ended December 31, 1999, respectively, is included in "Other
Comprehensive Income" in the stockholders' equity section of the balance sheet.
The change in unrealized gain (loss) is due to economic market conditions and
decreases in interest rates during late 2000. See notes 1 and 3 to the
consolidated financial statements.
Securities available-for-sale increased $93.7 million or 73.6% during
2000 due to the leverage program and overall Bank growth. Premises and equipment
increased $2.0 million during 2000 primarily due to the leasehold improvement
costs associated with the new Brentwood branch facility and construction costs
related to the Cool Springs and Fieldstone Farms branch facilities. Accrued
interest receivable increased $1.3 million during 2000 due to combined increases
of $154.4 million in the Bank's loan and securities portfolios. Stockholders'
equity increased $7.9 million or 34.4% from December 31, 1999 to December 31,
2000. The increase in stockholders' equity is attributable to a $4.7 million
increase in net income and a $4.6 million increase in other comprehensive
income, partially offset by $1.6 million in dividends declared.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED WITH FISCAL 1999
The Company had net income of $4.7 million in 2000 compared to $4.5
million in 1999. The Company had income before taxes of $7.1 million in 2000,
representing a 4.0% increase from the $6.8 million recorded in 1999.
Total interest income increased $12.5 million, or 40.8%, in 2000 as
compared to 1999, while total interest expense increased $10.7 million or 70.7%
in 2000 as compared to 1999. The increase in total interest income is
attributable to an increase in average earning assets of $122.9 million, or
35.1%, in 2000, partially offset by a decrease in yield. The increase in total
interest income is primarily due to the banking segment. Average interest
bearing liabilities increased $124.6 million or 39.2% in 2000. Strong rate
competition, the interest expense related to the Trust Preferred Securities and
the leverage program resulted in a decrease in net yield from 4.43% in 1999 to
3.65% in 2000.
The provision for loan losses was $687,000 in 2000 as compared to
$350,000 in 1999. Provisions for loan losses have been necessary due to growth
in the Bank's loan portfolio. Net charge-offs
35
37
were $142,000 or .05% of average loans outstanding in 2000, as compared to
$64,000, or .02%, of average loans outstanding in 1999.
Total other income of $4.9 million in 2000 increased $271,000, or 5.8%,
from 1999. The increase was largely attributed to a $255,000, or 14.9%, increase
in service charges on deposit accounts at the Bank. This increase was partially
offset by a decrease of $439,000, or 22.6%, in loan origination fees related to
the mortgage banking segment. Mortgage servicing income contributed $239,000 and
$629,000 in 2000 and 1999, respectively, to the mortgage banking segment. Other
service charges, commissions and fees increased $246,000, or 48.4%, primarily
due to income from the Company's insurance subsidiary of $372,000 in 2000 as
compared to $236,000 in 1999. Income from the Bank's securities subsidiary
increased $123,000, or 31.5%, to $515,000 in 2000 as compared to $392,000 in
1999.
Total other expenses increased $1.5 million, or 11.2%, during 2000 as
compared to 1999. Salaries and employee benefits increased $1.1 million, or
16.8%, primarily due to the hiring of additional personnel in the banking
segment. The Bank had 198 full time equivalent employees at December 31, 2000 as
compared to 170 a year earlier. Salaries and employee benefits for the mortgage
banking segment was $1.2 million in 2000 as compared to $1.4 million in 1999.
The decrease is primarily due to a decrease in commissions as a result of the
decrease in mortgage loan originations. Included in salaries and employee
benefits are commissions related to the mortgage banking segment of $188,000 in
2000 compared to $300,000 in 1999. Occupancy expense and furniture and equipment
expense increased $417,000, or 32.6%, and $197,000, or 20.8%, respectively, from
1999 to 2000 primarily due to the opening of the new facilities and overall Bank
growth. Mortgage banking segment expenses decreased $523,000, or 49.3%, in 2000
as compared to 1999. The decrease is primarily due to a decrease in mortgage
correspondent loan pricing fees on wholesale loans originated. Loss on the sale
of mortgage loans was a realized loss of $164,000 in 2000 compared to $447,000
in 1999. The primary reasons for the loss are interest rate fluctuations and the
decrease in mortgage loan originations. Other expenses have increased as a
result of the overall growth of the Bank.
FISCAL 1999 COMPARED WITH FISCAL 1998
The Company had net income of $4.5 million in 1999 compared to $4.9
million in 1998. The Company had income before taxes of $6.8 million in 1999,
representing an 11.0% decrease from the $7.7 million recorded in 1998.
Total interest income increased $4.3 million, or 16.1%, in 1999 as
compared to 1998, while total interest expense increased $2.0 million, or 15.5%,
in 1999 as compared to 1998. The increase in total interest income is
attributable to an increase in average earning assets of $61.9 million, or
21.5%, in 1999, partially offset by a decrease in yield. The increase in total
interest income is primarily due to the banking segment. Average interest
bearing liabilities increased $61.4 million or 23.9% in 1999. A slightly lower
interest rate environment in 1999 as compared to 1998, strong rate competition,
and fourth quarter 1999 deposit interest rate increases due to year 2000 issues,
resulted in a decrease in net yield from 4.61% in 1998 to 4.43% in 1999.
The provision for loan losses was $350,000 in 1999 as compared to
$515,000 in 1998. Provisions for loan losses have been necessary due to growth
in the Bank's loan portfolio. Net charge-offs were $64,000 or .02% of average
loans outstanding in 1999, as compared to $149,000, or .07%, of average loans
outstanding in 1998.
36
38
Total other income of $4.7 million in 1999 decreased $459,000, or 9.0%,
from 1998. The decrease was largely attributed to a decrease of $285,000, or
12.8% in loan origination fees related to the mortgage banking segment and a
decrease in security call option fees of $379,000, or 93.6%, at the Bank. These
decreases were partially offset by an increase of $324,000, or 23.3%, in service
charges on deposit accounts at the Bank. The Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
in 1998, which superseded SFAS No. 122 "Accounting for Mortgage Servicing
Rights." Mortgage servicing income contributed $629,000 and $1.1 million in 1999
and 1998, respectively, to the mortgage banking segment. Other service charges,
commissions and fees decreased $419,000, or 45.2%, primarily due to security
call option fees offset by income from the Bank's insurance subsidiary of
$236,000 in 1999 as compared to $131,000 in 1998. Income from the Bank's
securities subsidiary increased $119,000, or 43.5%, to $392,000 in 1999 as
compared to $273,000 in 1998.
Total other expenses increased $2.8 million, or 26.9%, during 1999 as
compared to 1998. Salaries and employee benefits increased $1.1 million, or
18.7%, primarily due to the hiring of additional personnel in the banking
segment. The Bank had 170 full time equivalent employees at December 31, 1999 as
compared to 156 a year earlier. Salaries and employee benefits for the mortgage
banking segment was $1.4 million in 1999 as compared to $1.1 million in 1998.
The increase is primarily due to an increase in support staff to handle
servicing and secondary marketing issues. Included in salaries and employee
benefits are commissions related to the mortgage banking segment of $300,000 in
1999 compared to $412,000 in 1998. Occupancy expense and furniture and equipment
expense increased $130,000, or 11.4%, and $143,000, or 17.7%, respectively, from
1998 to 1999 primarily due to new facility and overall Bank growth. Mortgage
banking segment expenses increased $610,000, or 136% in 1999 as compared to
1998. The increase is primarily due to an increase in mortgage servicing rights
amortization and correspondent loan pricing fees on wholesale loans originated.
Gain (loss) on the sale of mortgage loans was a realized loss of $447,000 in
1999 compared to a gain of $103,000 in 1998. The primary reason for the loss is
interest rate fluctuations. Other expenses have increased as a result of the
overall growth of the Bank.
Selected Quarterly Financial Data
The following table sets forth certain unaudited quarterly financial
data for each of the last eight quarters of the Company. The information has
been derived from unaudited financial statements that we believe reflect all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of such quarterly financial information. The operating results
for any quarter are not necessarily indicative of the results to be expected for
any future period. All references to per share data has been restated to reflect
the reverse stock split declared by the Company during 2000.
2000
Fourth Third Second First
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Interest income 12,628 11,291 9,967 9,338
Interest expense 8,156 7,054 5,619 5,098
Net interest income 4,472 4,237 4,348 4,240
Provision for loan losses 167 190 150 180
Income before income taxes 1,834 1,698 1,868 1,689
Net income 1,223 1,145 1,241 1,130
Net income per share
Basic 0.16 0.15 0.15 0.15
Diluted 0.15 0.14 0.14 0.14
1999
Fourth Third Second First
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Interest income 8,482 7,787 7,434 6,988
Interest expense 4,275 3,810 3,600 3,500
Net interest income 4,207 3,977 3,834 3,488
Provision for loan losses 120 10 150 70
Income before income taxes 1,806 1,488 1,738 1,782
Net income 1,181 1,001 1,128 1,160
Net income per share
Basic 0.15 0.13 0.15 0.15
Diluted 0.14 0.12 0.14 0.14
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which was amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended, is effective for the Company beginning January 1,
2001. The Company had no covered call options or other derivative financial
instruments outstanding on January 1, 2001, therefore the effect of the adoption
of SFAS No. 133 had no impact on the financial position of the Company.
SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements", released in December 1999 provides guidance for applying
generally accepted accounting principles to selected revenue recognition issues.
SAB 101 was implemented in the fourth quarter of 2000. The adoption of this
bulletin did not have a material impact on the Company's financial statements.
37
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's financial performance is subject to risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. The liquidity and maturity structure of the Company's
assets and liabilities are important to the maintenance of acceptable net
interest income levels. An increasing interest rate environment negatively
impacts earnings as the Company's rate-sensitive liabilities generally reprice
faster than its rate-sensitive assets. Conversely, in a decreasing interest rate
environment, earnings are positively impacted. This potential asset/liability
mismatch in pricing is referred to as "gap" and is measured as rate sensitive
assets divided by rate sensitive liabilities for a defined time period. A gap of
1.0 means that assets and liabilities are perfectly matched as to repricing
within a specific time period and interest rate movements will not affect net
interest margin, assuming all other factors hold constant. Management has
specified gap guidelines for a one-year time horizon of between .7 and 1.3. At
December 31, 2000, the Company had a gap ratio of .7 for the one-year period
ending December 31, 2001. Thus, over the next twelve months, slightly more
rate-sensitive liabilities will reprice than rate-sensitive assets.
A 200 basis point decrease in interest rates spread evenly during 2001
is estimated to cause a decrease in net interest income of $480,000 as compared
to net interest income if interest rates were unchanged during 2001. In
comparison, a 200 basis point increase in interest rates spread evenly during
2000 is estimated to cause a decrease in net interest income of $1.4 million as
compared to net interest income if rates were unchanged during 2001. This level
of variation is within the Company's acceptable limits. This simulation analysis
assumes that savings and checking interest rates have a low correlation to
changes in market rates of interest and that certain asset prepayments change as
refinancing incentives evolve. The analysis takes into account the call features
of certain investment securities based on the 200 basis point rate shock
scenario. Further, in the event of a change of such magnitude in interest rates,
the Company's asset and liability management committee would likely take actions
to further mitigate its exposure to the change. However, given the uncertainty
of specific conditions and corresponding actions which would be required, the
analysis assumes no change in the Company's asset/liability composition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Independent Auditors' Report-Deloitte & Touche LLP
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and
1998 Notes to Consolidated Financial Statements
38
40
INDEPENDENT AUDITORS' REPORT
Board of Directors
Franklin Financial Corporation and Subsidiaries
Franklin, Tennessee
We have audited the consolidated balance sheets of Franklin Financial
Corporation and Subsidiaries as of December 31, 2000 and 1999, 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, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Franklin Financial Corporation
and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 16, 2001
41
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
Cash and cash equivalents (Notes 1 and 2) $ 18,975,825 $ 12,700,739
Federal funds sold 10,438,000 --
Investment securities available-for-sale, at fair value (Notes 1 and 3) 76,271,563 57,823,391
Mortgage-backed securities available-for-sale, at fair value (Notes 1 and 3) 144,758,477 69,526,329
Investment securities held-to-maturity, at amortized cost (Notes 1 and 3) 2,732,427 2,808,453
Mortgage-backed securities held-to-maturity, at amortized cost (Notes 1 and 3) 328,468 380,146
Federal Home Loan and Federal Reserve Bank stock 3,727,500 1,608,000
Loans held for sale (Notes 1 and 4) 9,782,755 11,147,305
Loans (Notes 1 and 4) 321,946,048 259,763,411
Allowance for loan losses (Notes 1 and 5) (3,025,138) (2,479,619)
------------- -------------
Net loans 318,920,910 257,283,792
Premises and equipment, net (Notes 1 and 8) 10,600,650 8,563,746
Accrued interest receivable 4,137,667 2,814,174
Mortgage servicing rights, net (Notes 1 and 6) 1,480,561 1,584,578
Other assets (Note 12) 2,790,911 4,159,290
------------- -------------
TOTAL $ 604,945,714 $ 430,399,943
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS (Note 9):
Noninterest-bearing $ 36,788,450 $ 37,098,767
Interest-bearing 455,191,333 346,758,272
------------- -------------
Total deposits 491,979,783 383,857,039
Repurchase agreements (Note 1) 1,520,936 2,420,936
Long-term debt and other borrowings (Note 10) 76,318,282 19,051,613
Accrued interest payable 3,130,789 1,321,829
Other liabilities (Note 12) 1,265,748 889,168
------------- -------------
Total liabilities 574,215,538 407,540,585
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
STOCKHOLDERS' EQUITY (Notes 1, 13 and 14):
Common stock, no par value - authorized, 500,000,000 shares; issued 7,799,931 and
31,052,683 shares at December 31, 2000 and 1999, respectively 11,478,717 11,344,844
Retained earnings 18,663,127 15,502,311
Accumulated other comprehensive income (loss), net of tax 588,332 (3,987,797)
------------- -------------
Total stockholders' equity 30,730,176 22,859,358
------------- -------------
TOTAL $ 604,945,714 $ 430,399,943
============= =============
See notes to consolidated financial statements.
-2-
42
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------------------------
2000 1999 1998
INTEREST INCOME:
Interest and fees on loans $31,167,353 $25,184,997 $ 22,140,914
Taxable securities 10,768,075 4,612,768 3,655,304
Tax-exempt securities 1,042,534 698,134 445,284
Federal funds sold 246,448 195,290 196,169
----------- ----------- ------------
Total interest income 43,224,410 30,691,189 26,437,671
INTEREST EXPENSE:
Certificates of deposit over $100,000 8,654,439 5,601,123 5,268,052
Other deposits 13,753,905 8,722,758 7,134,683
Federal Home Loan Bank advances 1,617,597 334,507 197,019
Other borrowed funds 1,900,800 526,791 541,916
----------- ----------- ------------
Total interest expense 25,926,741 15,185,179 13,141,670
----------- ----------- ------------
NET INTEREST INCOME 17,297,669 15,506,010 13,296,001
PROVISION FOR LOAN LOSSES (Note 5) 686,992 350,498 515,000
----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,610,677 15,155,512 12,781,001
OTHER INCOME:
Service charges on deposit accounts 1,970,498 1,715,541 1,391,672
Mortgage banking activities 1,506,685 1,945,402 2,229,942
Gain on sale of investment securities 188,952 103,650 301,840
Other service charges, commissions and fees 753,742 507,972 927,242
Commissions on sale of annuities and brokerage activity 515,495 392,140 273,301
----------- ----------- ------------
Total other income 4,935,372 4,664,705 5,123,997
OTHER EXPENSES:
Salaries and employee benefits (Note 15) 7,991,135 6,842,369 5,766,239
Occupancy (Note 11) 1,695,658 1,279,074 1,148,688
Mortgage banking 537,191 1,060,295 450,195
Furniture and equipment 1,144,885 947,828 805,067
Communications and supplies 527,890 491,675 434,189
Advertising and marketing 382,349 276,246 282,028
FDIC and regulatory assessments 193,467 133,729 105,828
Loss (gain) on sale of mortgage loans 163,842 447,077 (102,971)
Other 1,820,572 1,527,908 1,362,236
----------- ----------- ------------
Total other expenses 14,456,989 13,006,201 10,251,499
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 7,089,060 6,814,016 7,653,499
INCOME TAXES (Note 12) 2,350,426 2,343,569 2,767,001
----------- ----------- ------------
NET INCOME $ 4,738,634 $ 4,470,447 $ 4,886,498
=========== =========== ============
NET INCOME PER SHARE:
Basic $ 0.61 $ 0.58 $ 0.69
=========== =========== ============
Diluted $ 0.57 $ 0.54 $ 0.62
=========== =========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,789,844 7,657,160 7,100,451
=========== =========== ============
Diluted 8,357,434 8,321,552 7,888,872
=========== =========== ============
See notes to consolidated financial statements.
-3-
43
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
----------------------- Comprehensive Retained Comprehensive
Shares Amount Income Earnings Income (Loss) Total
BALANCE, DECEMBER 31, 1997 6,990,362 $ 9,819,631 $ 7,756,261 $ 213,780 $17,789,672
Comprehensive income:
Net income $ 4,886,498 4,886,498 4,886,498
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising
during the year (net of tax of $59,305) 168,790
Less: Reclassification adjustment for gains
included in net income (net of tax of $78,478) (223,362)
-----------
Other comprehensive loss (54,572) (54,572) (54,572)
-----------
Comprehensive income $ 4,831,926
===========
Four-for-one stock split 20,971,086
Exercise of stock options/warrants and issuance of
common stock 2,509,355 1,144,150 1,144,150
Tax benefit of stock options exercised 127,736 127,736
Cash dividend declared; $0.01 per share (304,708) (304,708)
--------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 30,470,803 11,091,517 12,338,051 159,208 23,588,776
Comprehensive income:
Net income 4,470,447 4,470,447 4,470,447
Other comprehensive income, net of tax:
Unrealized holding losses on securities arising
during the year (net of tax of $2,791,350) (4,215,414)
Less: Reclassification adjustment for gains
included in net income (net of tax of $35,241) (68,409)
-----------
Other comprehensive loss (4,147,005) (4,147,005) (4,147,005)
-----------
Comprehensive income $ 323,442
===========
Exercise of stock options/warrants and issuance of
common stock 581,880 236,988 236,988
Tax benefit of stock options exercised 16,339 16,339
Cash dividend declared; $0.03 per share (917,899) (917,899)
Cash dividend declared; $0.0125 per share -- -- (388,288) -- (388,288)
---------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 31,052,683 11,344,844 15,502,311 (3,987,797) 22,859,358
Comprehensive income:
Net income $ 4,738,634 4,738,634 4,738,634
Other comprehensive income, net of tax:
Unrealized holding gains on securities arising
during the year (net of tax of $3,122,495) 4,693,279
Less: Reclassification adjustment for gains
included in net income (net of tax of $71,802) (117,150)
-----------
Other comprehensive income 4,576,129 4,576,129 4,576,129
-----------
Comprehensive income $ 9,314,763
===========
One-for-four reverse stock split (23,289,613)
Exercise of stock options/warrants and issuance
of common stock 36,861 110,706 110,706
Tax benefit of stock options exercised 23,167 23,167
Cash dividend declared; $0.15 per share (1,168,121) (1,168,121)
Cash dividend declared; $0.0525 per share (409,697) (409,697)
--------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 7,799,931 $11,478,717 $18,663,127 $ 588,332 $30,730,176
========== =========== =========== =========== ===========
See notes to consolidated financial statements.
-4-
44
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,738,634 $ 4,470,447 $ 4,886,498
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion (162,247) 934,473 1,023,785
Provision for loan losses 686,992 350,498 515,000
Deferred income taxes (416,352) 30,331 309,895
Loans originated for sale (44,769,799) (79,450,194) (96,949,473)
Proceeds from sale of loans 47,063,217 93,132,239 89,010,999
Gain on sale of investment securities (188,952) (103,650) (301,840)
Loss (gain) on sale of loans 154,730 447,077 (141,109)
Gain on sale of fixed assets (17,266) -- (445)
Gain on sale of other real estate owned (6,608) -- --
Increase in accrued interest receivable (1,323,493) (687,810) (236,738)
Increase in accrued interest payable 1,808,960 234,970 30,001
Increase (decrease) in other liabilities 255,076 47,056 (111,764)
Increase in other assets (631,858) (704,520) (1,949,604)
------------- ------------ -------------
Net cash provided by (used in) operating activities 7,191,034 18,700,917 (3,914,795)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in federal funds sold (10,438,000) 8,229,000 (8,229,000)
Proceeds from sales of securities available-for-sale 99,974,164 10,529,143 80,045,418
Proceeds from maturities of securities available-for-sale 18,547,821 13,744,394 16,342,143
Proceeds from maturities of securities held-to-maturity 135,191 1,570,736 1,185,289
Purchases of securities available-for-sale (202,823,583) (85,635,662) (113,774,407)
Purchases of Federal Home Loan and Federal Reserve Bank stock (2,119,500) (237,500) (241,400)
Net increase in loans (63,407,708) (45,534,208) (37,558,317)
Purchases of premises and equipment, net (3,036,476) (1,873,812) (1,953,685)
------------- ------------ -------------
Net cash used in investing activities (163,168,091) (99,207,909) (64,183,959)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 108,122,744 71,460,070 64,825,260
Decrease in repurchase agreements (900,000) (1,000,000) (1,000,000)
Increase in other borrowings 57,266,669 10,627,773 5,394,299
Dividends paid (1,556,410) (1,222,607) --
Net proceeds from issuance of common stock 110,706 236,988 1,144,150
Tax benefit of stock options exercised 23,167 16,339 127,736
Debt issue costs (814,733) -- --
------------- ------------ -------------
Net cash provided by financing activities 162,252,143 80,118,563 70,491,445
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,275,086 (388,429) 2,392,691
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,700,739 13,089,168 10,696,477
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,975,825 $ 12,700,739 $ 13,089,168
============= ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes $ 2,935,500 $ 1,844,453 $ 2,986,285
============= ============ =============
Cash paid during the year for interest $ 24,117,781 $ 14,950,209 $ 13,111,669
============= ============ =============
See notes to consolidated financial statements.
-5-
45
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Franklin Financial Corporation and Subsidiaries
(the "Company") conform to accounting principles generally accepted in the
United States of America and to general practices within the banking
industry. The Company was incorporated on December 27, 1988 for the
purpose of becoming a bank holding company. On December 20, 2000, the
Company became a registered financial holding company under the
Gramm-Leach-Bliley Financial Services Modernization Act. The Company's
subsidiary bank opened for business on December 1, 1989.
CONSOLIDATED SUBSIDIARIES - The consolidated financial statements include
the accounts of the Company's wholly owned subsidiaries, Franklin National
Bank (the "Bank"), Franklin Financial Insurance and Franklin Capital Trust
I. The Bank has three subsidiaries, Hometown Loan Company, Franklin
Financial Mortgage and Franklin Financial Securities. Material
intercompany transactions and balances have been eliminated.
OPERATING SEGMENTS - The Company manages its business in two primary
operating segments, the Bank and Franklin Financial Mortgage ("FFM").
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS include cash on hand and amounts due from banks.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Securities are classified into
three categories: held-to-maturity, available-for-sale, and trading.
Securities classified as held-to-maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company has the
positive intent and ability to hold these securities to maturity.
Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs and for other purposes.
Available-for-sale securities are carried at fair value and include all
debt and equity securities not classified as held-to-maturity or trading.
Trading securities are those held principally for the purpose of selling
in the near future and are carried at fair value. The Company does not
currently maintain a trading portfolio.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, in
accumulated other comprehensive income. Realized gains and losses for
securities classified as either available-for-sale or held-to-maturity are
reported in earnings based on the adjusted cost of the specific security
sold.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
-6-
46
LOANS - Loans are stated at the principal amount outstanding. Deferred
loan fees and the allowance for loan losses are recorded as reductions of
loans. Loan origination and commitment fees in excess of certain related
costs are deferred and amortized as an adjustment of the related loan's
yield over the contractual life of the loan. Interest income on loans is
computed based on the outstanding loan balance.
Loans are generally placed on nonaccrual status when a loan is
specifically determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further
loss is remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. A loan is considered impaired
when management has determined it is probable that all amounts due
according to the contractual terms of the loan agreement will not be
collected. The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of recoveries.
FINANCIAL INSTRUMENTS - All derivative financial instruments held or
issued by the Company are for purposes other than trading. Such
instruments are entered into by the Company as hedges against exposure to
interest rate risk. Covered call options are recorded at market value
while the contracts are open with fees received recognized into income in
the period the option expires. The maximum term of such covered call
options used by the Company is 30 days.
MORTGAGE BANKING ACTIVITIES - The Company originates and sells residential
mortgage loans. Generally, such loans are sold at origination. Any loans
held for sale are carried at the lower of cost or market value in the
aggregate with respect to the entire portfolio.
Servicing assets on loans sold are measured by allocating the previous
carrying amount between the assets sold and the retained interests based
on their relative fair values at the date of transfer. The Company's
mortgage servicing rights are related to in-house originations serviced
for others. The initial amount recorded as mortgage servicing rights is
essentially the difference between the amount that can be realized when
loans are sold, servicing released, as compared to loans sold, servicing
retained.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation has been computed
on straight-line and accelerated methods, based on the estimated useful
lives of the respective assets. Leasehold improvements are being amortized
over the lease term on a straight-line basis.
INCOME TAXES - The Company files a consolidated tax return with its
subsidiaries. Income taxes are allocated to members of the consolidated
group on a separate return basis. Income taxes have been provided using
the asset and liability method.
-7-
47
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
agreements to repurchase are treated as collateralized financing
transactions and are recorded at the amounts at which the securities will
subsequently be repurchased. It is the Company's policy to maintain
collateral with a market value equal to or in excess of the principal
amount borrowed under repurchase agreements. The Company monitors the
market value of the underlying securities which collateralize the related
liability on repurchase agreements, including accrued interest, and
provides additional collateral when deemed appropriate.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the year. Diluted earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the year plus additional potentially dilutive common shares calculated for
stock options and warrants using the treasury stock method.
COMPREHENSIVE INCOME - Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that is not recognized in the calculation of net income, such
as unrealized gains and losses on available-for-sale securities. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standard Board ("FASB") issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), which was amended by SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities. SFAS
No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. SFAS
No. 133, as amended, is effective for the Company beginning January 1,
2001. The Company had no covered call options (see Note 7) or other
derivative financial instruments outstanding on January 1, 2001, therefore
the effect of the adoption of SFAS No. 133 had no impact on the financial
position of the Company.
SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, released in December 1999 provides guidance for
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 was implemented in the fourth quarter of 2000.
The adoption of this bulletin did not have a material impact on the
Company's financial statements.
2. RESTRICTED CASH BALANCES
The Bank is required to maintain reserves, in the form of cash and
deposits, with the Federal Reserve Bank against its deposit liabilities.
Aggregate reserves of approximately $1,649,000 and $3,024,000 were
maintained to satisfy federal regulatory requirements at December 31, 2000
and 1999, respectively.
-8-
48
3. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The following tables reflect the amortized cost and estimated fair values
of debt, equity and mortgage-backed securities held at December 31, 2000
and 1999.
2000
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value
U.S. Treasury obligations $ 23,620,988 $ 2,263 $ (496,840) $ 23,126,411
Obligations of U.S.
government agencies 20,931,692 112,414 (548,656) 20,495,450
Obligations of state and
political subdivisions 23,588,436 494,852 (317,634) 23,765,654
Corporate bonds 8,477,067 415,511 (8,530) 8,884,048
------------ ---------- ----------- ------------
Investment securities 76,618,183 1,025,040 (1,371,660) 76,271,563
Mortgage-backed securities 143,431,365 1,739,261 (412,149) 144,758,477
------------ ---------- ----------- ------------
Total available-for-sale $220,049,548 $2,764,301 $(1,783,809) $221,030,040
============ ========== =========== ============
2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-maturity Cost Gains Losses Value
U.S. Treasury obligations $ -- $ -- $ -- $ --
Obligations of U.S.
government agencies -- -- -- --
Obligations of state and
political subdivisions 2,732,427 59,011 -- 2,791,438
Corporate bonds -- -- -- --
---------- ------- ----- ----------
Investment securities 2,732,427 59,011 -- 2,791,438
Mortgage-backed securities 328,468 2,380 (602) 330,246
---------- ------- ----- ----------
Total held-to-maturity $3,060,895 $61,391 $(602) $3,121,684
========== ======= ===== ==========
-9-
49
1999
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-sale Cost Gains Losses Value
U.S. Treasury obligations $ 24,571,107 $ -- $(1,689,474) $ 22,881,633
Obligations of U.S.
government agencies 21,966,656 4,483 (1,364,628) 20,606,511
Obligations of state and
political subdivisions 15,519,401 427 (1,371,114) 14,148,714
Corporate bonds 289,317 -- (102,784) 186,533
------------ ------ ----------- ------------
Investment securities 62,346,481 4,910 (4,528,000) 57,823,391
Mortgage-backed securities 71,649,569 920 (2,124,160) 69,526,329
------------ ------ ----------- ------------
Total available-for-sale $133,996,050 $5,830 $(6,652,160) $127,349,720
============ ====== =========== ============
1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-maturity Cost Gains Losses Value
U.S. Treasury obligations $ -- $ -- $ -- $ --
Obligations of U.S.
government agencies -- -- -- --
Obligations of state and
political subdivisions 2,808,453 22,416 (17,799) 2,813,070
Corporate bonds -- -- -- --
---------- ------- -------- ----------
Investment securities 2,808,453 22,416 (17,799) 2,813,070
Mortgage-backed securities 380,146 172 (2,811) 377,507
---------- ------- -------- ----------
Total held-to-maturity $3,188,599 $22,588 $(20,610) $3,190,577
========== ======= ======== ==========
Gross gains of $250,263, $105,444, and $319,254 and gross losses of $61,311,
$1,794, and $17,414 were realized on sales of securities available for sale in
2000, 1999 and 1998, respectively.
-10-
50
The amortized cost and fair value of debt securities at December 31, 2000,
by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations.
Available-for-Sale Held-to-Maturity
----------------------------- -------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
Due in one year or less $ 5,296,638 $ 5,304,931 $ -- $ --
Due after 1-5 years 23,467,712 23,415,963 451,909 457,766
Due after 5-10 years 7,967,660 7,656,508 2,240,518 2,292,872
Due after ten years 39,886,173 39,894,161 40,000 40,800
------------ ------------ ---------- ----------
76,618,183 76,271,563 2,732,427 2,791,438
Mortgage-backed securities 143,431,365 144,758,477 328,468 330,246
------------ ------------ ---------- ----------
$220,049,548 $221,030,040 $3,060,895 $3,121,684
============ ============ ========== ==========
Fair value of securities is established by an independent pricing service
as of the approximate dates indicated. Securities carried at $152,632,205
and $106,120,106 at December 31, 2000 and 1999, respectively, were pledged
to secure deposits and for other purposes.
At December 31, 2000 and 1999, the Company did not hold investment
securities of any single issuer, other than obligations of the U.S.
Treasury and other U.S. government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
4. LOANS
Loans at December 31, 2000 and 1999 are summarized as follows:
2000 1999
Commercial, financial and agricultural $ 93,617,899 $ 82,287,934
Real estate - construction 58,517,536 38,982,437
Real estate - mortgage 159,439,154 130,482,480
Consumer 20,703,166 19,670,090
------------- -------------
332,277,755 271,422,941
Deferred loan fees (548,952) (512,225)
Allowance for possible loan losses (3,025,138) (2,479,619)
------------- -------------
Total loans $ 328,703,665 $ 268,431,097
============= =============
-11-
51
Direct and indirect loans to officers and directors during 2000 and 1999
are as follows:
2000 1999
Balance at beginning of year $ 2,853,088 $ 2,122,107
New loan disbursements 769,833 1,630,370
Repayments (866,837) (899,389)
----------- -----------
Balance at end of year $ 2,756,084 $ 2,853,088
=========== ===========
In addition, there were approximately $599,000 and $343,000 of undisbursed
loan commitments to such parties at December 31, 2000 and 1999,
respectively.
The Company capitalizes servicing rights on certain commercial loans
originated and sold with servicing retained. The total amount capitalized
for these servicing rights was $226,638 and $215,145 in 2000 and 1999,
respectively. Amortization of the servicing rights amounted to $41,513,
$38,677 and $11,748 during 2000, 1999 and 1998, respectively.
5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
2000 1999 1998
Balance at beginning of year $ 2,479,619 $ 2,193,614 $ 1,827,956
Provisions charged to operating expense 686,992 350,498 515,000
Loans charged off (187,927) (91,694) (158,983)
Recoveries on previously charged off loans 46,454 27,201 9,641
----------- ----------- -----------
Balance at end of year $ 3,025,138 $ 2,479,619 $ 2,193,614
=========== =========== ===========
At December 31, 2000 and 1999, the Bank had loans that were specifically
classified as impaired in the amount of approximately $72,000 and
$298,000, respectively. The allowance for loan losses related to these
impaired loans was approximately $37,000 and $74,000 at December 31, 2000
and 1999, respectively. The average carrying value of impaired loans was
approximately $287,000, $367,000 and $303,000 for the years ended December
31, 2000, 1999 and 1998, respectively. Interest income of approximately
$29,000, $29,000 and $13,000 was recognized on these impaired loans during
the year ended December 31, 2000, 1999 and 1998, respectively.
6. MORTGAGE BANKING
The unpaid principal balances of mortgage loans serviced for others were
approximately $126,905,777 and $124,112,688 at December 31, 2000 and 1999,
respectively.
Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $2,321,000
and $2,089,000 at December 31, 2000 and 1999, respectively.
-12-
52
Mortgage servicing rights, net of amortization, totaled $1,480,561 and
$1,584,578 in 2000 and 1999, respectively. Amortization of servicing
rights amounts to $343,047, $296,846, and $158,034 during 2000, 1999 and
1998, respectively.
For purposes of measuring impairment, the rights are stratified based on
the predominant risk characteristics of loan type and loan term. The
amount of impairment recognized, if any, is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair
value.
7. OTHER FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENCIES
OTHER FINANCIAL INSTRUMENTS:
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuation in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, mortgage loans sold subject to repurchase provisions
and forward contracts. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank
has in those particular financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and loans sold subject to certain repurchase
provisions is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
For forward contracts, the contract or notional amounts do not represent
exposure to credit loss. The Company controls the risk of its futures
contracts through credit approvals, limits, and monitoring procedures.
Contract or
Notional Amount
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $55,794,221
Credit card commitments 554,412
Standby letters of credit 6,217,033
Commitments to originate mortgages 1,765,020
Commitments to sell mortgages 6,158,270
Mortgage loans sold subject to repurchase provisions 13,391,280
COMMITMENTS:
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness individually. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
-13-
53
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
The Bank enters into various commitments to originate mortgage loans.
These commitment obligations are considered in conjunction with the lower
of cost or market valuation of loans held for sale.
The Bank sells essentially all of its originated mortgage loans to
governmental agencies and private investors. The Bank has entered into
various commitments to sell mortgage loans as of December 31, 2000.
The Company has, on occasion, written covered call options on U.S.
Treasury Securities, which are contracts for delayed delivery of
securities in which the seller agrees to make delivery at a specified
future date of a specified instrument at a specified price or yield. Risks
arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in securities values and interest
rates. The Company uses such contracts in connection with its
asset/liability management program in improving yield and managing
interest rate exposure arising out of non-trading assets and liabilities.
There were no outstanding positions held in U.S. Treasury note contracts
at December 31, 2000 and 1999.
The Bank primarily serves customers located in the Tennessee counties of
Williamson, Maury and Davidson. As such, the majority of the Bank's loans,
commitments and stand-by letters of credit have been granted to customers
in that area. Concentration of credit by type of loan is presented in
Note 4.
CONTINGENCIES:
The Company is involved in various legal proceedings in the normal course
of business. On August 24, 2000, the Company was served with a suit
alleging breach of contract, tortuous interference with contract, fraud
and civil conspiracy in connection with the denial of a loan to a
potential borrower involved in a real estate transaction. The plaintiff
seeks compensatory damages not to exceed $12 million and punitive damages
not to exceed $24 million. Management believes the claims are frivolous
and without merit. There are also other legal actions in which the bank is
a defendant. Management believes it has meritorious defenses against all
such claims and intends to defend such actions vigorously. No provision
has been made in the accompanying financial statements for the ultimate
resolution of these matters.
8. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2000 and 1999 are summarized as
follows:
2000 1999
Land $ 1,822,249 $ 1,822,249
Buildings 4,231,217 2,855,658
Leasehold improvements - buildings 4,059,314 3,631,482
Furniture and equipment 4,808,335 3,786,435
------------ ------------
14,921,115 12,095,824
Less accumulated depreciation and amortization (4,320,465) (3,532,078)
------------ ------------
$ 10,600,650 $ 8,563,746
============ ============
-14-
54
9. DEPOSITS
A summary of deposits at December 31, 2000 and 1999 follows:
2000 1999
Non-interest bearing demand $ 36,788,450 $ 37,098,767
Interest-bearing demand 138,384,819 97,196,420
Savings 12,733,023 12,222,039
Certificates of deposit of $100,000 or more 228,084,800 155,781,273
Other time 75,988,691 81,558,540
------------ ------------
$491,979,783 $383,857,039
============ ============
At December 31, 2000, the scheduled maturities of certificates of deposits
and other time deposits are as follows:
2001 $290,560,182
2002 8,805,213
2003 1,590,893
2004 766,738
Thereafter 2,350,465
------------
$304,073,491
============
10. LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt and other borrowings at December 31, 2000 and 1999 are
summarized as follows:
2000 1999
Line of credit $ 1,610,000 $ 7,330,000
Federal funds -- 5,000,000
Note payable 708,282 721,613
Federal Home Loan Bank advances 58,000,000 6,000,000
Trust preferred securities 16,000,000 --
----------- -----------
$76,318,282 $19,051,613
=========== ===========
The Company has a $10,000,000 line of credit established with a lending
institution secured by all of the outstanding capital stock of the Bank.
Interest floats at 90 day LIBOR plus 120 basis points (7.915% and 7.315%
at December 31, 2000 and 1999, respectively), and is payable quarterly.
The line matures on March 30, 2001. The Bank also has federal funds lines
(or the equivalent thereof) with correspondent banks totaling
approximately $35,000,000 at December 31, 2000.
During 1997, the Company entered into a note payable with a lending
institution in the amount of $753,639. Interest floats at the lending
bank's base rate (7.66% and 6.713% at December 31, 2000 and 1999,
respectively), and is payable monthly. The note is secured by the
Williamson Square branch building.
The Bank has a $10,000,000 line of credit with the Federal Home Loan Bank
(FHLB) secured by a blanket pledge of 1-4 family residential mortgage
loans. The arrangement is structured so that the carrying value of the
loans pledged amounts to 150% of the principal balance of advances from
the FHLB. At December 31, 2000
-15-
55
and 1999, there were no borrowings under this line of credit. The Bank
also has outstanding FHLB convertible advances of $27,000,000 maturing in
5 years and $31,000,000 maturing in 7 to 10 years at December 31, 2000 and
$6,000,000 maturing in 8 years at December 31, 1999. The interest rates on
$27,000,000 and $25,000,000 of these advances are fixed (6.12% - 6.46% at
December 31, 2000) during the first year and are subject to conversion to
variable rates based on LIBOR at the option of the FHLB 1 year and 3
years, respectively, from the date of the advance and quarterly
thereafter. The Company has the right to repay the advance on the date of
conversion to a variable rate without penalty. The interest rates on the
remaining $6,000,000 of these advances are variable based on LIBOR (6.75%
and 6.10% at December 31, 2000 and 1999, respectively).
During 2000, the Company issued $16,000,000 of trust preferred securities
through Franklin Capital Trust I, a Delaware business trust and wholly
owned subsidiary of the Company. These securities pay cumulative cash
distributions at a quarterly variable rate of three-month LIBOR plus 3.50%
of the liquidation amount of $1,000 per preferred security on a quarterly
basis. These securities have a 30-year maturity and may be redeemed by the
Company upon the earlier of 5 years or the occurrence of certain other
events. Subject to certain limitations, these securities qualify as Tier 1
capital.
The aggregate annual maturities of other borrowings during the five years
ending December 31, 2005 and thereafter are as follows:
Year ending December 31,
2001 $ 1,622,600
2002 695,682
2003 --
2004 --
2005 27,000,000
2006 and thereafter 47,000,000
-----------
Total $76,318,282
===========
11. RELATED PARTY AND OTHER LEASES
The Company has entered into agreements with the chairman of the board of
the Company to lease certain banking facilities. Increases are made
annually on property leased from the chairman based on the increase in the
Consumer Price Index during the previous year. All but one of the leases
provides for a term of twenty years with three, five year renewal options.
The remaining lease provides for a term of six and one half years with
four, five year renewal options. All leases are accounted for as operating
leases. Net rent expense paid to the chairman amounted to $618,995 in
2000, $548,771 in 1999, and $489,255 in 1998. Rent expense paid to
unrelated parties amounted to $396,274 in 2000, $245,023 in 1999, and
$199,633 in 1998.
-16-
56
Future minimum lease payments, exclusive of any increases related to the
Consumer Price Index, under these leases as of December 31, 2000 are as
follows:
Related
Party Others Total
2001 $ 630,550 $ 566,851 $1,197,401
2002 630,550 489,531 1,120,081
2003 630,550 478,845 1,109,395
2004 630,550 453,412 1,083,962
2005 630,550 452,414 1,082,964
Future years 2,180,652 1,739,933 3,920,585
---------- ---------- ----------
Total $5,333,402 $4,180,986 $9,514,388
========== ========== ==========
12. INCOME TAXES
Income taxes consist of the following:
2000 1999 1998
Current:
Federal $ 2,208,275 $1,882,211 $1,984,528
State 558,503 431,027 472,578
----------- ---------- ----------
Total current expense 2,766,778 2,313,238 2,457,106
Deferred:
Federal (350,543) 29,518 263,356
State (65,809) 813 46,539
----------- ---------- ----------
Total deferred (benefit) expense (416,352) 30,331 309,895
----------- ---------- ----------
Total income taxes $ 2,350,426 $2,343,569 $2,767,001
=========== ========== ==========
Net deferred income tax assets and liabilities are included in other
assets and other liabilities, respectively, on the balance sheet.
Significant temporary differences between tax and financial reporting that
give rise to net deferred tax (liabilities) assets at December 31, 2000
and 1999 are as follows:
2000 1999
Deferred tax assets:
Allowance for loan losses $ 1,172,831 $ 961,527
Unrealized loss on securities available-for-sale -- 2,658,533
Other 5,967 --
----------- -----------
Total deferred tax assets 1,178,798 3,620,060
Deferred tax liabilities:
Mortgage servicing rights (646,104) (699,719)
Accumulated depreciation (52,486) (274,526)
FHLB stock dividends (188,143) (111,569)
Unrealized gain on securities available-for-sale (392,160) --
----------- -----------
Total deferred tax liabilities (1,278,893) (1,085,814)
----------- -----------
Net deferred tax (liability) asset $ (100,095) $ 2,534,246
=========== ===========
-17-
57
Management believes that a valuation allowance against the deferred tax
assets at December 31, 2000 and 1999 is not considered necessary because
it is more likely than not they will be fully realized.
A reconciliation of income taxes with the amount of income taxes computed
by applying the federal statutory rate (34%) to pretax income follows:
2000 1999 1998
Tax expense at statutory rate $ 2,410,280 $ 2,316,765 $ 2,602,190
Increase (decrease) in taxes resulting from:
Tax-exempt income (354,462) (237,366) (151,397)
State income taxes, net of federal tax benefit 221,689 220,950 290,425
Disallowed interest expense 88,996 39,883 21,555
Other, net (16,077) 3,337 4,228
----------- ----------- -----------
Total income taxes $ 2,350,426 $ 2,343,569 $ 2,767,001
=========== =========== ===========
13. STOCK BASED COMPENSATION PLANS
Organizers of the Company received warrants in connection with the
Company's initial public offering granting the holders thereof the option
to purchase 2,354,304 shares of common stock at $0.31 per share.
Additionally, the Company has a 1990 Stock Option Plan and a 2000 Stock
Option Plan (the "Plans") which were adopted by the Company's Board of
Directors on April 19, 1990 and April 10, 2000, respectively, authorizing
up to 200,000 and 7,500,000 shares, respectively, for employees who are
contributing significantly to the management or operation of the business
of the Company as determined by the Company's Board of Directors or the
committee administering the Plan. The Plans provide for the grant of
options at the discretion of the Board of Directors of the Company or a
committee designated by the Board of Directors to administer the Plans.
The option exercise price must be at least 100% (110% in the case of a
holder of 10% or more of the common stock) of the fair market value of the
stock on the date the option is granted for qualified incentive stock
options. There is no limit with respect to the exercise price for
non-qualified stock options. The options are exercisable by the holder
thereof in full at any time prior to their expiration in accordance with
the terms of the Plans. Stock options granted pursuant to the Plans will
expire on or before (1) the date which is the tenth anniversary of the
date the option is granted, or (2) the date which is the fifth anniversary
of the date the option is granted in the event that the option is granted
to a key employee who owns more than 10% of the total combined voting
power of all classes of stock of the Company. All options granted prior to
1998 were immediately vested. In 1998, 1999 and 2000, certain options were
granted and will vest evenly over five years. In 1996, an amendment to the
1990 Stock Option Plan increased the number of shares available for grant
to 750,000 shares and provided for the granting of non-qualified options
to eligible employees and directors. The Plans provide for stock splits
which would adjust the options outstanding, the option prices and the
number of shares authorized by the Plans according to the terms of the
stock split. As more fully discussed in Note 14, the Company declared a
two-for-one stock split in January, 1998, a four-for-one stock split in
March, 1998 and a one-for-four reverse stock split in August, 2000.
Adjusted for these stock splits, the number of shares authorized under the
Plans is currently 4,875,000.
All options expire within ten years from the date of grant except for
226,000, 200,000, 50,000 and 50,000 options issued in 1997, 1998, 1999 and
2000, respectively, which expire in 15 years. The Company has continued to
apply the intrinsic value based method in accounting for its plans.
Accordingly, no compensation cost has been recognized for either plan. Had
compensation cost for the plans been determined based on the fair
-18-
58
value at the grant date for awards under those plans, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
2000 1999 1998
Net income
As reported $4,738,634 $4,470,447 $4,886,498
Pro forma 4,294,056 3,750,051 3,699,872
Net income per share As reported:
Basic $ 0.61 $ 0.58 $ 0.69
Diluted 0.57 0.54 0.62
Pro forma:
Basic 0.55 0.49 0.52
Diluted 0.51 0.45 0.45
In calculating the pro forma disclosures, the fair value of the options
granted is estimated as of the date granted using the Black-Scholes option
pricing model with the following weighted average assumptions:
2000 1999 1998
Dividend yield 1.5% 0.9% 0.6%
Expected volatility 52% 56% 46%
Risk-free interest rate range 5.1 to 5.2% 6.2% 5.5%
Expected life 7-10 years 5-10 years 5-10 years
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 2000, 1999 and 1998 is
$7.61, $14.36 and $6.24 per share, respectively.
-19-
59
A summary of the status of the Company's stock option plans and warrants
for each of the three years in the period ended December 31, 2000, and the
changes during those years is presented below.
Weighted
Options/ Average
Warrants Exercise
Outstanding Price
Options and warrants outstanding
at January 1, 1998 1,794,196 2.68
Options granted 307,160 11.00
Options and warrants exercised (619,718) 1.40
---------
Options and warrants outstanding
at December 31, 1998 1,481,638 4.96
Options granted 80,869 23.00
Options and warrants exercised (145,015) 1.56
Options expired (1,829) 11.84
---------
Options outstanding at December 31, 1999 1,415,663 6.64
Options granted 94,175 14.00
Options exercised (36,706) 2.95
Options expired (3,500) 16.89
---------
Options outstanding at December 31, 2000 1,469,632 7.10
=========
The following table summarizes information about the stock options and
warrants outstanding under the Company's plans at December 31, 2000:
Weighted Weighted
Range of Average Average
Exercise Number Exercise Remaining Number
Price Outstanding Price Life Exercisable
$ 1.37 - $ 3.00 501,083 $ 2.72 4.66 501,083
$ 3.01 - $ 4.50 482,100 $ 4.50 8.31 482,100
$ 4.51 - $11.00 315,030 $ 11.00 10.17 292,812
$11.01 - $14.00 91,800 $ 14.00 11.72 79,750
$23.00 79,619 $ 23.00 11.14 71,724
--------- ---------
1,469,632 1,427,469
========= =========
14. CAPITAL
Substantial restrictions are placed on the Company's subsidiary with
respect to payment of dividends without prior regulatory approval. The
extent of dividends which may be paid by a national bank is generally
limited to net profits for any given year combined with the retained net
profits of the two preceding years. Retained earnings totaling $13,888,284
and $13,609,978 at December 31, 2000 and December 31, 1999, respectively,
were subject to these restrictions with respect to payment of dividends.
Cash dividends are also restricted, under the Company's line of credit, if
the Bank's leverage capital ratio is less than 7%.
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60
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, specific capital guidelines must
be met that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require that the Company and the Bank maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to total average assets (as defined). Management
believes, as of December 31, 2000 and 1999, that the Company and the Bank
are in compliance with all capital adequacy requirements to which they are
subject.
As of December 31, 2000, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios must be maintained as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Actual capital amounts and ratios at December 31, 2000 and 1999, are as
follows:
To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions Actual
---------------------------- ---------------------------- -------------------------
December 31, 2000 Franklin Franklin Franklin
National Con- National Con- National Con-
Bank solidated Bank solidated Bank solidated
Amount:
Tier I to average
assets $ 23,559,800 $ 23,651,960 $ 29,449,750 $ 29,564,950 $ 42,106,423 $ 39,972,772
Tier I to risk-
weighted assets 14,535,972 14,623,076 21,803,958 21,934,614 42,106,423 39,972,772
Total capital to risk-
weighted assets 29,071,944 29,246,152 36,339,930 36,557,690 47,164,071 49,004,717
Ratios:
Tier I to average
assets 4.0% 4.0% 5.0% 5.0% 7.1% 6.8%
Tier I to risk-
weighted assets 4.0% 4.0% 6.0% 6.0% 11.6% 10.9%
Total capital to risk-
weighted assets 8.0% 8.0% 10.0% 10.0% 13.0% 13.4%
-21-
61
To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions Actual
--------------------------- ------------------------ ---------------------------
December 31, 1999 Franklin Franklin Franklin
National Con- National Con- National Con-
Bank solidated Bank solidated Bank solidated
Amount:
Tier I to average
assets $ 16,225,400 $ 16,320,280 $ 20,281,750 N/A $ 33,020,124 $ 26,672,225
Tier I to risk-
weighted assets 11,564,172 11,600,812 17,346,258 N/A 33,020,124 26,672,225
Total capital to risk-
weighted assets 23,128,344 23,201,624 28,910,430 N/A 35,519,245 29,151,844
Ratios:
Tier I to average
assets 4.0% 4.0% 5.0% N/A 8.1% 6.5%
Tier I to risk-
weighted assets 4.0% 4.0% 6.0% N/A 11.4% 9.2%
Total capital to risk-
weighted assets 8.0% 8.0% 10.0% N/A 12.3% 10.1%
In the calculation of basic and diluted earnings per share, net income is
identical. Below is a reconciliation for the three years in the period
ended December 31, 2000, of the difference between basic weighted average
common shares outstanding and diluted weighted average common shares
outstanding.
2000 1999 1998
Weighted average common shares - basic 7,789,844 7,657,160 7,100,451
Effect of dilutive securities:
Stock options 567,590 664,392 709,336
Warrants -- -- 79,085
--------- --------- ---------
Weighted average common shares - diluted 8,357,434 8,321,552 7,888,872
========= ========= =========
During January 1998, the Company declared a two-for-one common stock split
payable on February 19, 1998 to shareholders of record on February 2,
1998. On March 25, 1998, the Company declared a four-for-one common stock
split payable on June 3, 1998, to shareholders of record on April 20,
1998. On August 21, 2000, the Company declared a one-for-four reverse
stock split effective October 18, 2000, to shareholders of record on
August 25, 2000. All references to per share and weighted average share
information in the consolidated financial statements reflect the stock
splits and the reverse stock split.
15. EMPLOYEE BENEFITS
The Company has a 401(k) savings plan for all employees who have completed
ninety days of service and are twenty-one years of age or more. The
Company generally matches fifty percent of employee contributions to the
plan up to a maximum of six percent of gross wages. The Company's
contributions to the plan are included in salaries and employee benefits
on the consolidated statements of income and amounted to $114,051,
$102,668, and $78,658, in 2000, 1999 and 1998, respectively.
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62
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31, 2000 and 1999:
2000 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and cash equivalents $ 18,975,825 $ 18,975,825 $ 12,700,739 $ 12,700,739
Federal funds sold 10,438,000 10,438,000 -- --
Securities available-for-sale 221,030,040 221,030,040 127,349,720 127,349,720
Securities held-to-maturity 3,060,895 3,121,684 3,188,599 3,190,577
Federal Home Loan and Federal
Reserve Bank stock 3,727,500 3,727,500 1,608,000 1,608,000
Loans 321,946,048 322,993,527 259,763,411 258,913,743
Loans held for sale 9,782,755 9,782,755 11,147,305 11,147,305
Servicing rights 1,615,261 1,822,198 1,749,298 2,219,578
Accrued interest receivable 4,137,667 4,137,667 2,814,174 2,814,174
Financial liabilities:
Deposits with defined maturities 304,073,491 304,396,311 237,339,814 237,217,165
Deposits with undefined maturities 187,906,292 187,906,292 146,517,225 146,517,225
Other borrowings and repurchase
agreements 77,839,218 77,839,218 21,472,549 21,472,549
Accrued interest payable 3,130,789 3,130,789 1,321,829 1,321,829
Off-balance sheet instruments -- 197,092 -- 125,514
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value. These fair values are provided for disclosure
purposes only and do not impact carrying values of financial statement
amounts.
Cash and Cash Equivalents - The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values,
which includes cash and due from banks.
Federal Funds Sold - The carrying amount for federal funds sold
approximates those assets' fair value.
Investment Securities (including mortgage-backed securities) - Fair values
for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Federal Home Loan and Federal Reserve Bank stock - The carrying amount for
these securities approximates fair value.
Loans - For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently offered for loans with
similar terms to borrowers of similar credit quality.
Loans Held for Sale - Fair values for loans held for sale are based on
quoted market prices in the secondary market.
Servicing Rights - The fair values of mortgage servicing rights and
commercial servicing rights are estimated using discounted cash flows
based on a current market interest rate.
Accrued Interest - The carrying amounts of accrued interest approximate
their fair values.
Defined Maturity Deposits - The fair value for defined maturity deposits,
primarily certificates of deposit, is calculated by discounting future
cash flows to their present value. Future cash flows, consisting of
principal and interest payments, are discounted using rates offered on
similar instruments based on the remaining maturity.
Undefined Maturity Deposits - The fair value of undefined maturity
deposits is equal to the carrying value and includes demand deposits,
savings accounts, NOW accounts and money market deposit accounts.
-23-
63
Other Borrowings and Repurchase Agreements- The carrying amounts of other
borrowings and repurchase agreements approximate their fair values.
Off-Balance Sheet Instruments - Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. The fees charged for financial
futures contracts are also representative of the fair value of such
contracts.
17. PARENT COMPANY ONLY FINANCIAL INFORMATION
Financial information for Franklin Financial Corporation (parent company)
as of December 31, 2000 and 1999 and for each of the three years in the
period ended December 31, 2000 is as follows:
CONDENSED BALANCE SHEETS 2000 1999
ASSETS
Cash $ 1,418,059 $ 146,532
Investment in subsidiaries 43,657,527 29,507,273
Other 8,114,176 3,326,227
----------- -----------
TOTAL $53,189,762 $32,980,032
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $22,472,524 $10,140,176
Stockholders' equity 30,717,238 22,839,856
----------- -----------
TOTAL $53,189,762 $32,980,032
=========== ===========
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64
CONDENSED STATEMENTS OF INCOME 2000 1999 1998
INCOME:
Management fees and rental income $ 841,357 $ 442,868 $ 305,015
Interest income 149,273 1,827 1,918
Other income 1,318 -- --
----------- ----------- -----------
991,948 444,695 306,933
EXPENSES:
Interest expense 1,352,612 258,267 232,861
Salaries and employee benefits 371,736 280,744 177,585
Other 403,212 312,809 246,503
----------- ----------- -----------
2,127,560 851,820 656,949
LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES (1,135,612) (407,125) (350,016)
INCOME TAX BENEFIT 396,684 151,791 118,999
----------- ----------- -----------
LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES (738,928) (255,334) (231,017)
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 5,477,562 4,725,781 5,117,515
----------- ----------- -----------
NET INCOME $ 4,738,634 $ 4,470,447 $ 4,886,498
=========== =========== ===========
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65
CONDENSED STATEMENTS OF CASH FLOWS: 2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,738,634 $ 4,470,447 $ 4,886,498
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 52,091 25,245 25,245
Equity in undistributed earnings of subsidiary (5,477,562) (4,725,781) (5,117,515)
Increase in other assets (1,951,707) (230,227) (374,223)
(Decrease) increase in other liabilities (193,446) 65,213 117,632
------------ ----------- -----------
Net cash used in operating activities (2,831,990) (395,103) (462,363)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of premises and equipment (2,073,599) (736,127) (656,894)
------------ ----------- -----------
Net cash used in investing activities (2,073,599) (736,127) (656,894)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,556,410) (1,222,607) --
Dividends paid from subsidiary 1,435,000 1,100,000 --
Net proceeds from issuance of common stock 133,873 253,327 1,271,886
Purchase of subsidiaries stock (5,525,000) (5,200,000) --
Proceeds from (repayments) of borrowings, net 12,504,386 6,259,855 (85,701)
Debt issue costs (814,733) -- --
------------ ----------- -----------
Net cash provided by financing activities 6,177,116 1,190,575 1,186,185
------------ ----------- -----------
NET INCREASE IN CASH 1,271,527 59,345 66,928
CASH AT BEGINNING OF YEAR 146,532 87,187 20,259
------------ ----------- -----------
CASH AT END OF YEAR $ 1,418,059 $ 146,532 $ 87,187
============ =========== ===========
18. SEGMENT REPORTING
The Company's reportable segments are determined based on management's
internal reporting approach, which is by operating subsidiaries. The
reportable segments of the Company are comprised of the Bank, excluding
its subsidiaries, and the Mortgage Banking segment, Franklin Financial
Mortgage. The Bank provides a variety of banking services to individuals
and businesses through its branches in Brentwood, Franklin, Fairview and
Spring Hill, Tennessee. Its primary deposit products are demand deposits,
savings deposits, and certificates of deposit, and its primary lending
products are commercial business, construction, real estate mortgage, and
consumer loans. The Bank primarily earns interest income from loans and
investments in securities. It earns noninterest income primarily from
deposit and loan fees. The Mortgage Banking segment originates and sells
residential mortgage loans. It sells loan originations into the secondary
market, but retains much of the applicable servicing. As a result of the
retained servicing, the Mortgage Banking segment capitalizes mortgage
servicing rights into income and amortizes these rights over the estimated
lives of the associated loans. Its primary revenue is noninterest income,
but it also reports interest income earned on warehouse balances waiting
for funding. The segment originates retail mortgage loans in the Franklin
and Chattanooga areas of Tennessee. It also originates wholesale mortgage
loans through correspondent relationships with other banks. The All Other
segment consists of insurance and securities subsidiaries and the bank
holding company operations which do not meet the quantitative threshold
for separate disclosure. The revenue earned by the insurance and
securities subsidiaries is reported in noninterest income in the
consolidated financial statements. No transactions
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66
with a single customer contributed 10% or more of the Company's total
revenue. The accounting policies for each segment are the same as those
used by the Company. The segments include overhead allocations and
intercompany transactions that were recorded at estimated market prices.
All intercompany transactions have been eliminated to determine the
consolidated balances. The results of the two reportable segments and all
other segments of the Company are included in the following table.
2000
------------------------------------------------------------------------------
Mortgage
Bank Banking All Other Eliminations Consolidated
Total interest income $ 42,512,733 $ 873,592 $ 2,315,571 $ (2,477,486) $ 43,224,410
Total interest expense 24,376,577 508,740 2,083,910 (1,042,486) 25,926,741
------------- ------------ ------------ ------------ -------------
Net interest income 18,136,156 364,852 231,661 (1,435,000) 17,297,669
Provision for loan losses 700,000 -- -- (13,008) 686,992
------------- ------------ ------------ ------------ -------------
Net interest income after provision 17,436,156 364,852 231,661 (1,421,992) 16,610,677
------------- ------------ ------------ ------------ -------------
Total noninterest income 2,533,761 1,506,685 5,765,776 (4,870,850) 4,935,372
Total noninterest expense 11,265,041 2,380,581 1,652,724 (841,357) 14,456,989
------------- ------------ ------------ ------------ -------------
Income before taxes 8,704,876 (509,044) 4,344,713 (5,451,485) 7,089,060
Provision for income taxes 2,914,831 (173,075) (391,330) -- 2,350,426
------------- ------------ ------------ ------------ -------------
Net income $ 5,790,045 $ (335,969) $ 4,736,043 $ (5,451,485) $ 4,738,634
============= ============ ============ ============ =============
OTHER SIGNIFICANT ITEMS
Total assets $ 590,470,931 $ 12,763,057 $ 70,111,561 $(68,399,835) $ 604,945,714
Depreciation, amortization and accretion (649,893) 415,716 71,930 -- (162,247)
Revenues from external customers
Total interest income 42,350,818 873,592 -- -- 43,224,410
Total noninterest income 2,533,761 1,506,685 894,926 -- 4,935,372
------------- ------------ ------------ ------------ -------------
Total income $ 44,884,579 $ 2,380,277 $ 894,926 $ -- $ 48,159,782
============= ============ ============ ============ =============
Revenues from affiliates
Total interest income $ 161,915 $ -- $ 2,315,571 $ (2,477,486) $ --
Total noninterest income -- -- 4,870,850 (4,870,850) --
------------- ------------ ------------ ------------ -------------
Total income $ 161,915 $ -- $ 7,186,421 $ (7,348,336) $ --
============= ============ ============ ============ =============
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67
1999
-----------------------------------------------------------------------
Mortgage
Bank Banking All Other Eliminations Consolidated
Total interest income $ 29,348,735 $ 1,408,262 $ 1,101,827 $ (1,167,635) $ 30,691,189
Total interest expense 14,994,547 876,803 258,267 (944,438) 15,185,179
------------ ------------ ------------ ------------ ------------
Net interest income 14,354,188 531,459 843,560 (223,197) 15,506,010
Provision for loan losses 370,000 -- -- (19,502) 350,498
------------ ------------ ------------ ------------ ------------
Net interest income after provision 13,984,188 531,459 843,560 (203,695) 15,155,512
------------ ------------ ------------ ------------ ------------
Total noninterest income 2,077,235 1,945,402 4,677,563 (4,035,495) 4,664,705
Total noninterest expense 8,769,030 3,313,033 1,353,355 (429,217) 13,006,201
------------ ------------ ------------ ------------ ------------
Income before taxes 7,292,393 (836,172) 4,167,768 (3,809,973) 6,814,016
Provision for income taxes 2,824,309 (284,277) (196,463) -- 2,343,569
------------ ------------ ------------ ------------ ------------
Net income $ 4,468,084 $ (551,895) $ 4,364,231 $ (3,809,973) $ 4,470,447
============ ============ ============ ============ ============
OTHER SIGNIFICANT ITEMS
Total assets $415,805,650 $ 13,891,259 $ 33,054,898 $(32,351,864) $430,399,943
Depreciation, amortization and accretion 548,410 345,821 40,242 -- 934,473
Revenues from external customers
Total interest income 29,282,927 1,408,262 -- -- 30,691,189
Total noninterest income 2,077,235 1,945,402 642,068 -- 4,664,705
------------ ------------ ------------ ------------ ------------
Total income $ 31,360,162 $ 3,353,664 $ 642,068 $ -- $ 35,355,894
============ ============ ============ ============ ============
Revenues from affiliates
Total interest income $ 65,808 $ -- $ 1,101,827 $ (1,167,635) $ --
Total noninterest income -- -- 4,035,495 (4,035,495) --
------------ ------------ ------------ ------------ ------------
Total income $ 65,808 $ -- $ 5,137,322 $ (5,203,130) $ --
============ ============ ============ ============ ============
1998
---------------------------------------------------------------------
Mortgage
Bank Banking All Other Eliminations Consolidated
Total interest income $ 25,566,737 $ 879,138 $ 1,918 $ (10,122) $ 26,437,671
Total interest expense 12,918,931 619,653 232,861 (629,775) 13,141,670
------------ ----------- ------------ ------------ ------------
Net interest income 12,647,806 259,485 (230,943) 619,653 13,296,001
Provision for loan losses 515,000 -- -- -- 515,000
------------ ----------- ------------ ------------ ------------
Net interest income after provision 12,132,806 259,485 (230,943) 619,653 12,781,001
------------ ----------- ------------ ------------ ------------
Total noninterest income 2,489,877 2,229,942 5,826,706 (5,422,528) 5,123,997
Total noninterest expense 7,824,860 1,810,205 921,449 (305,015) 10,251,499
------------ ----------- ------------ ------------ ------------
Income before taxes 6,797,823 679,222 4,674,314 (4,497,860) 7,653,499
Provision for income taxes 2,687,196 230,935 (151,130) -- 2,767,001
------------ ----------- ------------ ------------ ------------
Net income $ 4,110,627 $ 448,287 $ 4,825,444 $ (4,497,860) $ 4,886,498
============ =========== ============ ============ ============
OTHER SIGNIFICANT ITEMS
Total assets $324,907,020 $24,333,526 $ 27,123,876 $(26,496,978) $349,867,444
Depreciation, amortization and accretion 804,040 188,273 31,472 -- 1,023,785
Revenues from external customers
Total interest income 25,558,533 879,138 -- -- 26,437,671
Total noninterest income 2,489,877 2,229,942 404,178 -- 5,123,997
------------ ----------- ------------ ------------ ------------
Total income $ 28,048,410 $ 3,109,080 $ 404,178 $ -- $ 31,561,668
============ =========== ============ ============ ============
Revenues from affiliates
Total interest income $ 8,204 $ -- $ 1,918 $ (10,122) $ --
Total noninterest income -- -- 5,422,528 (5,422,528) --
------------ ----------- ------------ ------------ ------------
Total income $ 8,204 $ -- $ 5,424,446 $ (5,432,650) $ --
============ =========== ============ ============ ============
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68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no occurrence requiring a response to this item.
PART III
The information relating to Items 10, 11, 12 and 13 of this Report will
be filed as an amendment to this Report on or before April 29, 2001 or the
Company will otherwise have filed a definitive proxy statement involving the
election of directors pursuant to Regulation 14A, which definitive proxy
statement will contain such information.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1). Financial Statements and Auditors' Report.
The following financial statements are filed with this report:
Independent Auditor's Report - Deloitte & Touche LLP
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income - Years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity
- Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
All financial statement schedules of the Registrant have been
omitted as the required information is inapplicable or the information is
presented in the financial statements or related notes.
(3) Exhibits. The following exhibits are filed with or
incorporated by reference into this report. The exhibits which are denominated
by an asterisk (*) were previously filed as a part of, and are hereby
incorporated by reference from either (i) a Registration Statement on Form S-18
under the Securities Act of 1933 for the Registrant, Registration No. 33-21232-A
(referred to as "S-18"), (ii) the Annual Report on Form 10-K for the year ended
December 31, 1989 for the Registrant (referred to as "1989 10-K"), (iii) the
Annual Report on Form 10-K for the year ended December 31, 1990 for the
Registrant (referred to as "1990 10-K"), (iv) the Annual Report on Form 10-K for
the year ended December 31, 1991 for the Registrant (referred to as "1991
10-K"), (v) the Registration Statement on Form S-2 (File No. 33-75678) of the
Registrant (referred to as "S-2"), (vi) the Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1994 (referred to as "1994 10-QSB"), (vii) the
Quarterly Report on Form 10-QSB, the quarter ended June 30, 1995 (referred to as
"1995 10-QSB"), (viii) the Annual Report on Form 10-KSB for the year ended
December 31, 1995 (referred to as "1995 10-KSB"), (ix) the Annual Report on Form
10-KSB for the year ended December 31, 1996 (referred to as "1996 10-KSB"), (x)
the Annual Report on Form 10-KSB for the year ended December 31, 1997 (referred
to as
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"1997 10-KSB"), (xi) the Annual Report on Form 10-KSB for the year ended
December 31, 1998 (referred to as "1998 10-KSB"), (xii) the Annual Report on
Form 10-K for the year ended December 31, 1999 (referred to as "1999 10-K"),
(xiii) a Registration Statement on Form S-8 for the Registrant, Registration No.
333-65359 (referred to as "1998 S-8"), (xiv) a Registration Statement on Form
S-2 (File No. 333-38674) of the Registrant (referred to as "2000 S-2"), and (xv)
a Registration Statement on Form S-8 (File No. 333-52928) of the Registrant
(referred to as "2000 S-8"). Except as otherwise indicated, the exhibit number
corresponds to the exhibit number in the referenced document.
Exhibit No. Description of Exhibit
----------- ----------------------
*3.1 - Charter dated December 27, 1988 (S-18).
*3.2 - Amended and Restated Charter dated February 16, 1989 (S-18).
*3.2.1 - Articles of Amendment dated May 20, 1997 (1997 10-KSB).
*3.2.2 - Articles of Amendment dated May 19, 1998. (1998 10-KSB).
3.2.3 - Articles of Amendment dated October 17, 2000.
*3.3 - By-Laws adopted December 30, 1988 (S-18).
4.1 - Amended and Restated Trust Agreement dated July 17, 2000
among Franklin Financial Corporation, SunTrust Bank,
Wilmington Trust Company and the Administrative Trustees.
4.2 - Indenture dated July 17, 2000 between Franklin Financial
Corporation and SunTrust Bank.
4.3 - Guarantee Agreement dated July 17, 2000 by and between
Franklin Financial Corporation and SunTrust Bank.
*10.1 - Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson Overton,
Harold W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E. Inman
for lease of offices at 230 Public Square, Franklin, Tennessee (S-18).
*10.2 - Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson Overton,
Harold W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E. Inman
for lease of land at 216A and 216B East Main Street, Franklin, Tennessee
(S-18).
*10.3 - 2000 Incentive Stock Option Plan (2000 S-8, Exhibit 10.1)
*10.8 - 1990 Incentive Stock Option Plan of Registrant, (1989 10-K).
*10.8.1 - Amendment No. 1 to 1990 Incentive Stock Option Plan (1995 10-KSB).
*10.10 - Second Amendment to Lease Agreement dated December 3, 1990 between
Gordon E. Inman and Franklin Financial Corporation for lease of
additional office pace in Franklin, Tennessee (1991 10-K).
*10.12.1 - Loan Agreement dated December 29, 1995 by and between the Registrant and
First American National Bank (1995 10-KSB).
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70
*10.12.2 - Second Master Promissory Note and Loan Agreement Modification dated
December 29, 1995 by and between the Registrant and First American National
Bank. (1995 10-KSB).
*10.12.3 - Third Loan Agreement Modification dated January 31, 1997 by and between the
Registrant and First American National Bank. (1996 10-KSB)
*10.12.4 - Master Promissory Note dated January 31, 1997 from the Registrant to First
American National Bank in the principal amount of $6,000,000. (1996 10-KSB)
*10.13 - Third amendment to Lease Agreement dated December 3, 1990 between Gordon
B. Inman and Franklin Financial Corporation for lease of additional office space
in Franklin, Tennessee (S-2).
*10.14 - Lease Agreement dated December 16, 1993 by and between Gordon E. Inman
and Franklin National Bank for lease of operations center at 334 Main Street,
Franklin, Tennessee (S-2).
*10.14.1 - First Amendment to Lease Agreement dated January 16, 1996 by and between
Gordon B. Inman and Franklin National Bank for lease of additional office space
in operations center. (1995 10-KSB).
*10.14.2 - Third Amendment to Lease Agreement dated August 1, 1999 by and between
Gordon E. Inman and Franklin National Bank for lease of additional office space
in operations center. (1999 10-K)
*10.15 - Lease Agreement dated August 16, 1993 between CNL Income Fund V. Ltd. and
Franklin National Bank for lease of office space at the Williamson Square Center
in Franklin, Tennessee (S-2).
*10.16 - Agreement for Assignment of Lease, dated July 21, 1994, by and between First
Union National Bank of Tennessee and Franklin National Bank regarding lease
of property in Brentwood, Tennessee (1994 10-QSB).
*10. 17 - Employment Agreement dated January 1, 2000 by and between Franklin
Financial Corporation and Gordon E. Inman.
*10.18 - Fourth amendment to Lease Agreement dated December 3, 1990 between
Gordon E. Inman and Franklin Financial Corporation for lease of additional
office space in Franklin, Tennessee (1997 10-KSB).
*10.19 - Fifth amendment to Lease Agreement dated December 3, 1990 between Gordon
E. Inman and Franklin Financial Corporation for lease of additional
office space in Franklin, Tennessee. (1998 10-KSB).
*10.20 - FNB 2000 Stock Purchase Plan (S-8, Exhibit 4.1)
21.1 - Subsidiaries of the Registrant
23.1 - Consent of Deloitte & Touche LLP.
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71
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 2000.
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72
SIGNATURES
Pursuant to the requirements of Section 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.
FRANKLIN FINANCIAL CORPORATION
Date: March 30, 2001 By: /s/ Richard E. Herrington
-------------------------------------------
Richard E. Herrington
President and Chief Executive Officer
(principal executive officer)
Date: March 30, 2001 By: /s/ Lisa Musgrove
-------------------------------------------
Lisa Musgrove
Senior Vice President and Chief Financial
Officer
(principal financial 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 in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Richard E. Herrington President, Chief March 30, 2001
- ------------------------- Executive Officer
Richard E. Herrington and Director
/s/ Gordon E. Inman Chairman of March 30, 2001
- ------------------------- the Board
Gordon E. Inman
/s/ James W. Cross, IV Director March 30, 2001
- -------------------------
James W. Cross, IV
/s/ Charles R. Lanier Director March 30, 2001
- -------------------------
Charles R. Lanier
/s/ Wilson Overton Director March 30, 2001
- -------------------------
Wilson Overton
/s/ Melody J. Smiley Director March 30, 2001
- -------------------------
Melody J. Smiley
/s/ Edward M. Richey Director March 30, 2001
- -------------------------
Edward M. Richey
/s/ Edward P. Silva Director March 30, 2001
- -------------------------
Edward P. Silva
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FRANKLIN FINANCIAL CORPORATION
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
3.2.3 - Articles of Amendment dated October 17, 2000
4.1 - Amended and Restated Trust Agreement dated July
17, 2000 among Franklin Financial Corporation,
SunTrust Bank, Wilmington Trust Company and
the Administrative Trustees.
4.2 - Indenture dated July 17, 2000 between Franklin
Financial Corporation and SunTrust Bank.
4.3 - Guarantee Agreement dated July 17, 2000 by and
between Franklin Financial Corporation and
SunTrust Bank.
21.1 - Subsidiaries of the Registrant
23.1 - Consent of Deloitte & Touche LLP
44