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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
June 30, 2001 0-24133
FRANKLIN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 62-1376024
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Public Square, Franklin, Tennessee 37064
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615)790-2265
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Not applicable
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(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
------------ --------------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, No Par Value 7,819,385
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Class Outstanding at August 13, 2001
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PART I. - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
June 30, December 31,
2001 2000
---------- ------------
ASSETS
Cash and cash equivalents $ 15,492 18,976
Federal funds sold 9,824 10,438
Investment securities available-for-sale, at fair value 61,933 76,272
Mortgage-backed securities available-for-sale, at fair value 177,507 144,758
Investment securities held-to-maturity, fair value $2,807
at June 30, 2001 and $2,791 December 31, 2000 2,722 2,732
Mortgage-backed securities held-to-maturity, fair value
$307 at June 30, 2001 and $377 at December 31, 2000 298 328
Federal Home Loan and Federal Reserve Bank stock 3,845 3,728
Loans held for sale 12,807 9,783
Loans 361,232 321,946
Allowance for loan losses (3,578) (3,025)
---------- ----------
Loans, net 357,654 318,921
---------- ----------
Premises and equipment, net 10,906 10,714
Accrued interest receivable 3,816 4,138
Mortgage servicing rights 1,605 1,481
Other assets 3,821 2,677
---------- ----------
$ 662,240 604,946
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 41,178 36,789
Interest-bearing 508,393 455,191
---------- ----------
Total deposits 549,571 491,980
Repurchase agreements 200 1,521
Other borrowings 76,299 76,318
Accrued interest payable 2,192 3,131
Other liabilities 1,182 1,266
---------- ----------
Total liabilities 629,444 574,216
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Stockholders' equity:
Common stock, No par value. Authorized
500,000,000 shares; issued 7,819,385 and 7,799,931
at June 30, 2001 and December 31, 2000,
respectively 11,507 11,479
Accumulated other comprehensive income, net of tax 656 588
Retained earnings 20,633 18,663
---------- ----------
Total stockholders' equity 32,796 30,730
---------- ----------
$ 662,240 604,946
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See Notes to Consolidated Financial Statements
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- ------ ------ ------
Interest income:
Interest and fees on loans $ 8,482 7,591 16,788 14,267
Taxable securities 3,855 2,139 7,479 4,215
Tax-exempt securities 157 219 383 429
Federal funds sold 67 18 199 34
-------- ------ ------ ------
Total interest income 12,561 9,967 24,849 19,305
-------- ------ ------ ------
Interest expense:
Certificates of deposit over $100,000 2,785 2,186 5,640 4,034
Other deposits 3,132 3,022 6,641 5,820
Federal Home Loan Bank advances 891 97 1,793 237
Other borrowed funds 424 314 875 626
-------- ------ ------ ------
Total interest expense 7,242 5,619 14,949 10,717
-------- ------ ------ ------
Net interest income 5,319 4,348 9,900 8,588
Provision for loan losses 310 150 590 330
-------- ------ ------ ------
Net interest income after
provision for loan losses 5,009 4,198 9,310 8,258
Other income:
Service charges on deposit accounts 628 511 1,200 923
Mortgage banking activities 816 301 1,528 559
Other service charges, commissions and fees 146 168 417 314
Commissions on sale of annuities and brokerage activity 93 120 174 237
Gain on sale of investment securities 302 18 804 18
-------- ------ ------ ------
Total other income 1,985 1,118 4,123 2,051
-------- ------ ------ ------
Other expenses:
Salaries and employee benefits 2,569 1,931 5,043 3,779
Occupancy expense 513 409 1,036 784
Mortgage banking 285 127 487 265
Furniture and equipment 366 267 692 505
Communications and supplies 169 133 342 254
Advertising and marketing 91 88 195 177
FDIC and regulatory assessments 56 51 111 99
Loss on sale of mortgage loans 124 22 158 95
Other 571 420 1,024 794
-------- ------ ------ ------
Total other expenses 4,744 3,448 9,088 6,752
-------- ------ ------ ------
Income before income taxes 2,250 1,868 4,345 3,557
Income taxes 819 627 1,555 1,186
-------- ------ ------ ------
NET INCOME $ 1,431 1,241 2,790 2,371
-------- ------ ------ ------
NET INCOME PER SHARE - BASIC $ 0.18 0.16 0.36 0.30
-------- ------ ------ ------
NET INCOME PER SHARE - DILUTED $ 0.17 0.15 0.34 0.29
-------- ------ ------ ------
Dividends declared per share 0.0525 0.05 0.105 0.10
Weighted average shares outstanding:
Basic 7,818 7,797 7,809 7,780
Diluted 8,272 8,113 8,262 8,089
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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
June 30,
2001 2000
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Cash flows from operating activities:
Net income $ 2,790 2,371
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation, amortization and accretion 302 (203)
Provision for loan losses 590 330
Loans originated for sale (57,647) (18,577)
Proceeds from sale of loans 54,466 21,167
Gain on sale of investment securities (804) (18)
Loss on sale of loans 158 89
Loss (gain) on sale of other real estate owned 5 (7)
Gain on sale of premises and equipment (8) --
Decrease (increase) in accrued interest receivable 322 (356)
(Decrease) increase in accrued interest payable (939) 87
Increase (decrease) in other liabilities (94) (558)
Increase in other assets (1,505) (494)
---------- --------
Net cash (used in) provided by operating activities (2,364) 3,831
---------- --------
Cash flows from investing activities:
Decrease (increase) in federal funds sold 614 (541)
Proceeds from maturities of securities available-for-sale 29,554 7,089
Proceeds from sale of securities available-for-sale 87,669 1,712
Proceeds from maturities of securities held-to-maturity 43 109
Purchases of securities available-for-sale (134,209) (17,579)
Purchase of Federal Home Loan and Federal Reserve stock (117) (418)
Net increase in loans (39,324) (27,586)
Purchases of premises and equipment, net (809) (2,472)
---------- --------
Net cash used in investing activities (56,579) (39,686)
---------- --------
Cash flows from financing activities
Net proceeds from issuance of common stock 28 108
Dividend paid (820) (778)
Increase in deposits 57,591 31,679
Decrease in repurchase agreements (1,321) (1,000)
(Decrease) increase in other borrowings (19) 9,632
---------- --------
Net cash provided by financing activities 55,459 39,641
---------- --------
Net (decrease) increase in cash and cash equivalents (3,484) 3,786
Cash and cash equivalents at beginning of period 18,976 12,701
---------- --------
Cash and cash equivalents at end of period $ 15,492 16,487
---------- --------
Cash payments for interest $ 15,888 10,630
Cash payments for income taxes $ 1,943 1,686
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See Notes to Consolidated Financial Statements
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FRANKLIN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Franklin
Financial Corporation and Subsidiaries (the "Company") have been prepared in
accordance with generally accounting principles accepted in the United States of
America for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six-month period
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
NOTE B - COMPREHENSIVE INCOME
Comprehensive income as defined by Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" includes net income and other
comprehensive income which includes non-owner related transactions in equity.
The following table sets forth the amounts in thousands of other comprehensive
income included in equity for the six months ended June 31, 2001 and 2000.
June 30, 2001 June 30, 2000
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(in thousands)
Total comprehensive income $2,334 $2,509
Net unrealized gain on securities available for sale $ 68 $ 240
NOTE C - DIVIDENDS
In May 2001, the Company's Board of Directors declared a $.0525 per share cash
dividend payable on July 5, 2001.
NOTE D - SEGMENTS
The Company's reportable segments are determined based on management's internal
reporting approach, which is by operating subsidiaries. The reportable segments
of the Company are comprised of Franklin National Bank (the "Bank"), excluding
its insurance and securities 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, Nashville and Spring Hill, Tennessee. Its primary deposit products are
demand deposits, savings deposits, and certificates of deposit, and its primary
lending products are commercial business, construction, real estate mortgage and
consumer loans. The Bank primarily earns interest income from loans and
investments in securities. It earns noninterest income primarily from deposit
and loan fees. The Mortgage Banking segment originates and sells residential
mortgage loans. It sells loan originations into the secondary market, but
retains much of the applicable servicing. As a result of the retained servicing,
the Mortgage Banking segment capitalizes mortgage servicing rights and amortizes
these rights into income over the estimated lives of the associated loans. Its
primary revenue is noninterest income, but it also reports interest income
earned on warehouse balances waiting for funding. The Mortgage Banking segment
originates retail mortgage loans in the Franklin and Chattanooga areas of
Tennessee. It also originates wholesale mortgage loans through correspondent
relationships with other banks. The All Other segment consists of the Company's
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insurance and securities subsidiaries, Franklin Capital Trust I and the bank
holding company operations which do not meet the quantitative threshold for
separate disclosure. The revenue earned by the insurance and securities
subsidiaries is reported in noninterest income in the consolidated financial
statements. No transactions with a single customer contributed 10% or more of
the Company's total revenue. The accounting policies for each segment are the
same as those used by the Company. The segments include overhead allocations and
intercompany transactions that were recorded at estimated market prices. All
intercompany transactions have been eliminated to determine the consolidated
balances. The results of the two reportable segments and all other segments of
the Company are included in the following table.
SIX MONTHS ENDED JUNE 30, 2001
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
Total interest income $ 24,434 $ 531 $ 1,633 $ (1,749) $ 24,849
Total interest expense 14,261 280 1,627 (1,219) 14,949
-------- ------- -------- -------- --------
Net interest income 10,173 251 6 (530) 9,900
Provision for loan losses 590 -- -- -- 590
-------- ------- -------- -------- --------
Net interest income
after provision 9,583 251 6 (530) 9,310
-------- ------- -------- -------- --------
Total noninterest income 2,275 1,528 3,387 (3,067) 4,123
Total noninterest expense 7,022 1,654 980 (568) 9,088
-------- ------- -------- -------- --------
Income before taxes 4,836 125 2,413 (3,029) 4,345
Provision for income taxes 1,816 44 (305) -- 1,555
-------- ------- -------- -------- --------
Net income $ 3,020 $ 81 $ 2,718 $ (3,029) $ 2,790
======== ======= ======== ======== ========
Other significant items
Total assets $644,491 $15,981 $ 72,241 $(70,473) $662,240
Depreciation, amortization
and accretion 9 236 57 -- 302
Revenues from external customers
Total interest income 24,318 531 -- -- 24,849
Total noninterest income 2,275 1,528 320 -- 4,123
-------- ------- -------- -------- --------
Total income $ 26,593 $ 2,059 $ 320 -- $ 28,972
======== ======= ======== ======== ========
Revenues from affiliates
Total interest income 116 -- 1,633 (1,749) --
Total noninterest income -- -- 3,067 (3,067) --
-------- ------= -------- -------- --------
Total income $ 116 -- $ 4,700 $ (4,816) --
======== ======= ======== ======== ========
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SIX MONTHS ENDED JUNE 30, 2000
MORTGAGE
(In thousands) BANK BANKING ALL OTHER ELIMINATIONS CONSOLIDATED
Total interest income $ 18,924 $ 429 $ 651 $ (699) $ 19,305
Total interest expense 10,417 245 349 (294) 10,717
---------- -------- -------- -------- ----------
Net interest income 8,507 184 302 (405) 8,588
Provision for loan losses 330 -- -- -- 330
---------- -------- -------- -------- ----------
Net interest income
after provision 8,177 184 302 (405) 8,258
---------- -------- -------- -------- ----------
Total noninterest income 1,064 559 2,703 (2,275) 2,051
Total noninterest expense 5,235 1,195 720 (398) 6,752
---------- -------- -------- -------- ----------
Income before taxes 4,006 (452) 2,285 (2,282) 3,557
Provision for income taxes 1,437 (153) (98) -- 1,186
---------- -------- -------- -------- ----------
Net income (loss) $ 2,569 $ (299) $ 2,383 $ (2,282) $ 2,371
========== ======== ======== ======== ==========
Other significant items
Total assets $ 459,382 $ 11,977 $ 35,298 $(34,476) $ 472,181
Depreciation, amortization
and accretion (423) 200 20 -- (203)
Revenues from external customers
Total interest income 18,876 429 -- -- 19,305
Total noninterest income 1,064 559 428 -- 2,051
---------- -------- -------- -------- ----------
Total income $ 19,940 $ 988 $ 428 -- $ 21,356
========== ======== ======== ======== ==========
Revenues from affiliates
Total interest income 48 -- 651 (699) --
Total noninterest income -- -- 2,275 (2,275) --
---------- -------- -------- -------- ----------
Total income $ 48 -- $ 2,926 $ (2,974) --
========== ======== ======== ======== ==========
NOTE E - TRUST PREFERRED SECURITIES
On June 6, 2000, the Company filed a Form S-2 Registration Statement, Reg. No.
333-38674, with the Securities and Exchange Commission to register up to $16
million in aggregate principal amount of floating rate trust preferred
securities (the "Trust Preferred Securities"). The Trust Preferred Securities
were offered and sold through Franklin Capital Trust I, a Delaware business
trust and wholly owned subsidiary of the Company, on a best efforts basis with a
minimum of $10.0 million and a maximum of $16.0 million to be sold in the
offering. The Trust Preferred Securities 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, in aggregate principal amount 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
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Borrowings on the Company's Balance Sheet. As a result of the Trust Preferred
Securities offering, which was completed in August 2000, the Company initiated a
leverage program to enhance margins and offset the interest expense associated
with the Trust Preferred Securities. During the third quarter of 2000, the
company purchased approximately $81.3 million in investment securities as part
of the leverage program. The leverage program was funded by $52.0 million in
Federal Home Loan Bank advances, $10.5 million received in the Trust Preferred
Securities offering and $18.8 million in deposit growth. The Company plans to
utilize cashflow from the securities to assist with future loan growth.
NOTE F - REVERSE STOCK SPLIT
On October 3, 2000 the Company held a Special Meeting of Shareholders at which
the Company's shareholders approved an Amendment to the Company's Restated
Charter, as amended, to effect a 1-for-4 reverse split of the Company's common
stock. The reverse stock split was effective on October 18, 2000. All references
to per share data and weighted average share data has been restated to reflect
the reverse stock split.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Bank represents virtually all of the assets of the Company. The Bank,
located in Franklin, Tennessee, was opened in December of 1989 and continues to
experience substantial growth. The Bank has nine full service branches. In
August 1996, the Bank opened an insurance subsidiary, Franklin Financial
Insurance. In October 1997, the Bank opened a financial services subsidiary,
Franklin Financial Securities. The financial services subsidiary offers
financial planning and securities brokerage services through Legg Mason
Financial Partners. In December 1997, the Bank began operating its mortgage
division as a separate subsidiary, Franklin Financial Mortgage. In August 1998,
the mortgage subsidiary opened a retail mortgage origination office in
Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells and
services wholesale and retail mortgage loans. In 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.
FINANCIAL CONDITION
Total assets have increased $57.3 million, or 9.5%, since December 31, 2000, to
a total of $662.2 million at June 30, 2001. The growth in assets has been funded
by a $57.6 million increase in deposits and net income of $2.8 million. Total
deposits were $549.6 million at June 30, 2001.
The Bank continues to experience excellent loan demand as demonstrated by the
growth in net loans of $38.7 million, or 12.1%, since December 31, 2000. Loans
held for sale increased $3.0 million, or 30.9%, since December 31, 2000. The
increase is predominately due to an increase in mortgage loan originations in
the mortgage banking segment. The allowance for loan losses increased $553,000,
or 18.3%, since December 31, 2000, to a total of $3.6 million or approximately
0.95% of total loans. The increase is primarily the result of loan growth in the
loan portfolio and not because of a decline in asset quality. The Company has
seen significant growth in construction and commercial real estate loans, which
carry a higher reserve factor. Management believes that the level of the
allowance for loan losses is adequate at June 30, 2001. Management reviews in
detail the level of the allowance for loan losses on a quarterly basis. The
allowance is below the Bank's peer group average as a percentage of loans.
However, the level of allowance for loan losses is primarily due to the fact
that the Bank's past due loans, at 0.6% of total loans at June 30, 2001, are
substantially below the peer group average. At
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June 30, 2001, the Bank had nonaccrual loans of $585,000. At June 30, 2001, the
Bank had loans that were specifically classified as impaired of approximately
$8,753,000. The allowance for loan losses related to impaired loans was $358,456
at June 30, 2001. The average carrying value of impaired loans was approximately
$6,629,000 for the six month period ended June 30, 2001. Interest income of
approximately $379,000 was recognized on these impaired loans during the six
month period ended June 30, 2001.
At June 30, 2001 the fair value of securities classified as available-for-sale
exceeded the cost of the securities by $1.1 million. At December 31, 2000 the
fair value of securities classified as available-for-sale exceeded the cost of
the securities by $980,000. As a result, unrealized gain net of taxes of
$656,000 and $588,000 at June 30, 2001 and December 31, 2000, respectively, is
included in "Other Comprehensive Income" in the stockholders' equity section of
the balance sheet. The unrealized gain is primarily due to economic market
conditions and decreases in interest rates during the last quarter of 2000 and
for the six months ended June 30, 2001.
Securities available-for-sale increased $18.4 million, or 8.3%, during the six
months ended June 30, 2001 due to overall Bank growth. Premises and equipment
increased by $192,000 since December 31, 2000 primarily due to costs related to
leasehold improvements and fixtures for the Green Hills and downtown Nashville
branch facilities which opened in the first quarter of 2001 and software and
equipment costs related to the implementation of a check imaging system. Accrued
interest receivable decreased $322,000, or 7.8%, since December 31, 2000. This
decrease is due to significantly lower interest rates, offset partially by the
combined increase of $60.8 million in loans and securities since December 31,
2000.
Accrued interest payable decreased $939,000, or 30.0%, since December 31, 2000.
The decrease is due to a significant decrease in interest rates during the first
half of 2001 offset partially by the increase in deposits. Stockholders' equity
increased $2.1 million, or 6.8%, from December 31, 2000 to June 30, 2001. The
increase is primarily attributable to $2.8 million in net income and a $68,000
increase in other comprehensive income offset by $820,000 in dividends declared.
LIQUIDITY AND CAPITAL RESOURCES
Management continuously monitors the Bank's liquidity, but strives to maintain
an asset/liability mix that provides the highest possible net interest margin
without taking undue risk with regard to asset quality or liquidity. Liquidity
management involves meeting the funds flow requirements of customers who may
withdraw funds on deposit or have need to obtain funds to meet their credit
needs. Banks in general must maintain adequate cash balances to meet daily cash
flow requirements as well as satisfy reserves required by applicable
regulations. The cash balances held are one source of liquidity. Other sources
of liquidity are provided by the investment portfolio, federal funds purchased,
Federal Home Loan Bank advances, sales of loan participations, loan payments,
brokered and public funds deposits and the Company's ability to borrow funds as
well as issue new capital.
Management believes that liquidity is at an adequate level with cash and due
from banks of $15.5 million at June 30, 2001. Loans and securities scheduled to
mature within one year exceeded $223.2 million at June 30, 2001, which should
provide further liquidity. In addition, approximately $239.4 million of
securities are classified as available-for-sale to help meet liquidity needs
should they arise. The Company has lines of credit of $10.0 million with lending
institutions and the Bank is approved to borrow up to $10.0 million in funds
from the Federal Home Loan Bank through overnight advances and $52.0 million in
federal funds lines to assist with capital and liquidity needs. The Company has
$1.6 million in borrowings against its line of credit and the Bank had no
federal funds purchased at June 30, 2001. 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
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million. During the fourth quarter of 1999, these advances converted to variable
rate advances, which reprice quarterly based on 90-day LIBOR. As part of the
leverage program, during the third quarter of 2000 the Bank entered into three
long-term convertible Federal Home Loan Bank advances. One advance of $25.0
million has a 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 Federal Home Loan Bank from a fixed to a variable rate. The
Bank has the right to repay the advances on the date of conversion to a variable
rate without penalty. The Bank has $200,000 outstanding in repurchase agreements
to further develop its relationship with a customer. The Bank has approximately
$79.0 million in brokered deposits at June 30, 2001 to help fund strong loan
demand. The majority of these brokered deposits are $100,000 or less, but they
are generally considered to be more volatile than the Bank's core deposit base.
Approximately $45.2 million in loan commitments are expected to be funded within
the next six months. Furthermore, the Bank has approximately $50.4 million of
other loan commitments, primarily unused lines and letters of credit, which may
or may not be funded.
As discussed in Note E to the Consolidated Financial Statements included herein,
in August 2000, the Company completed the sale of $16.0 million of Trust
Preferred Securities. The Company received net proceeds of $15.2 million which
it used to repay approximately $5.0 million of indebtedness on its line of
credit, purchase investments as part of a leverage program to offset the
interest expense associated with the Trust Preferred Securities and for general
corporate purposes.
Management monitors the Company's asset and liability positions in order to
maintain a balance between rate sensitive assets and rate sensitive liabilities
and at the same time maintain sufficient liquid assets to meet expected
liquidity needs. Management believes that the Company's liquidity is adequate at
June 30, 2001. Other than as set forth above, there are no known trends,
commitments, events or uncertainties that will result in or are reasonably
likely to result in the Company's liquidity increasing or decreasing in any
material way. The Company is not aware of any current recommendations by the
regulatory authorities, which if they were to be implemented, would have a
material adverse effect on the Company's liquidity, capital resources or results
of operations.
Net cash flow used by operating activities was $2.4 million for the first six
months of 2001 compared to cash flow provided by operating activities of $3.8
million during the same period in 2000, a decrease of $6.2 million. The decrease
in cash flow between periods is due to loans originated for sale exceeding the
sale of loans by $3.2 million for the six months ended June 30, 2001 as compared
to the sale of loans exceeding loans originated for sale by $2.6 million for the
six months ended June 30, 2000. The majority of this change is due to the
increase of loan originations as compared to the sale of loans in the mortgage
banking segment during the six months ended June 30, 2001. The decrease in cash
flow is also due to an increase in other assets of $1.5 million in the first six
months of 2001 as compared to an increase of $494,000 for the same period in
2000. The decrease in cash flow is also attributable to a decrease of $939,000
in accrued interest payable for the six months ended June 30, 2001 as compared
to an increase in accrued interest payable of $87,000 in the same period in
2000. The decrease in cash flow was partially offset by a decrease in accrued
interest receivable of $322,000 for the six months ended June 30, 2001 as
compared to an increase in accrued interest receivable of $356,000 for the same
period in 2000.
Net cash used in investing activities was $56.6 million for the six months ended
June 30, 2001 compared to $39.7 million for the six months ended June 30, 2000,
representing a $16.9 million change, which was largely due to the banking
segment. The increase in the change in net loans was $39.3 million for the first
six months of 2001 compared to $27.6 million in the first six months of 2000.
The change in the net investment portfolio also
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increased from $8.7 million for the six months ended June 30, 2000 to $16.9
million for the six months ended June 30, 2001. Federal funds sold decreased
$614,000 for the six months ended June 30, 2001 compared to an increase of
$541,000 for the same period in 2000.
Net cash provided by financing activities was $55.5 million for the first six
months of 2001 compared to $39.6 million for the same period in 2000, a $15.8
million increase. The increase between periods is primarily due to an increase
in deposits of $57.6 million in the first six months of 2001 compared to an
increase of $31.7 million for the same period in 2000. The increase is offset
partially due to a decrease of $19,000 in other borrowings for the six months
ended June 30, 2001 compared to a increase of $9.6 million for the same period
in the preceding year.
Equity capital exceeded regulatory requirements at June 30, 2001, at 6.7% of
average assets. The Company and the Bank's minimum capital requirements and
compliance with the same are shown in the following table.
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL RISK-BASED CAPITAL
-------------------- -------------------- ------------------------
REGULATORY REGULATORY REGULATORY
MINIMUM ACTUAL MINIMUM ACTUAL MINIMUM ACTUAL
---------- ------ ---------- ------ ---------- ------
Company 3.0% 6.7% 4.0% 10.5% 8.0% 12.7%
Bank 3.0% 7.1% 4.0% 11.0% 8.0% 12.4%
RESULTS OF OPERATIONS
The Company had net income of $1.4 million in the second quarter and $2.8
million for the first six months of 2001 compared to net income of $1.2 million
and $2.4 million for the same periods in 2000. Net income for the second quarter
and six months ended June 30, 2001 increased $191,000, or 15.4%, and $419,000,
or 17.7%, respectively.
Total interest income increased $2.6 million, or 26.0%, in the three months
ended June 30, 2001 and $5.5 million, or 28.7%, for the six months ended June
30, 2001 compared to the same periods in 2000. Total interest expense increased
$1.6 million, or 28.9%, for the three months ended June 30, 2001 and $4.2
million, or 39.5%, for the six months ended June 30, 2001 compared to the same
periods in 2000. The increase in total interest income is primarily attributable
to the increase in average earning assets of $166.0 million, or 39.2%, for the
first six months of 2001 compared to 2000 offset partially by a decrease in
interest rates. The increase in total interest income is primarily due to the
banking segment. The increase in total interest expense is primarily due to an
increase in average interest-bearing liabilities of $153.8 million, or 39.2%, at
June 30, 2001 as compared to the same period in 2000. The banking segment
continues to experience strong deposit rate competition.
The provision for loan losses was $310,000 and $150,000 for the three months
ended June 30, 2001 and 2000, respectively. The year-to-date provision is
$590,000 for the six months ended June 30, 2001 as compared to $330,000 for the
same period in 2000. While the Bank's asset quality remains good, provisions for
loan losses continue to be needed as a result of growth in the Bank's loan
portfolio. Net charge-offs were $38,000, or .01%, of loans outstanding at June
30, 2001 compared to net charge-offs of $16,000, or .01%, of loans outstanding
at June 30, 2000.
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Total other income of $2.0 million in the second quarter of 2001 increased
$869,000, or 77.7%, from $1.1 million for the same period in 2000. The increase
was largely attributable to an increase of $515,000, or 171%, in loan
origination fees related to the mortgage banking segment, an increase of
$117,000, or 22.9%, in service charges on deposit accounts and an increase of
$284,000, or 1578%, in the gain on the sale of investment securities in the
banking segment. Total other income of $4.1 million for the six months ended
June 30, 2001 increased $2.1 million, or 101%, from $2.1 million for the six
months ended June 30, 2000. The increase is primarily attributable to an
increase of $969,000, or 173%, in loan origination fees related to the mortgage
banking segment, an increase of $277,000, or 30.0%, in service charges on
deposit accounts and an increase of $786,000, or 4367%, in the gain on the sale
of investment securities in the banking segment. Mortgage servicing rights
income contributed $326,000 and $101,000 for the six months ended June 30, 2001
and 2000, respectively, to the mortgage banking segment. Other service charges
and fees increased $103,000, or 32.8%, during the first six months of 2001
compared to the first six months of 2000, primarily due to the receipt of
$131,000 in call option fees related to covered calls written on Treasury Notes.
Income from the Bank's securities subsidiary decreased $69,000, or 26.6%, to
$174,000 during the six months ended June 30, 2001 compared to $243,000 during
the same period in 2000. The decrease is due to uncertainty in overall economic
conditions. Gain on sale of investment securities increased $786,000 for the six
months ended June 30, 2001 compared to the same period in 2000 due to sales in
the Bank's investment portfolio.
Total other expenses increased $1.3 million, or 37.6%, during the second quarter
of 2001 as compared to the same period in 2000. Total other expenses increased
$2.3 million, or 34.6%, for the six months ended June 30, 2001 as compared to
the same period in 2000. Salaries and employee benefits increased $1.3 million,
or 33.4%, primarily due to the hiring of additional personnel for the four new
branch locations in the banking segment and the hiring of internal audit and
loan review staff by the Company. Salaries and employee benefits expense for the
mortgage banking segment was $747,000 for the six months ended June 30, 2001
compared to $578,000 for the same period in 2000. The increase is attributable
to a increase in commission expense from $68,000 in 2000 to $286,000 in 2001 due
to the increase in mortgage loan originations. Occupancy expense increased
$252,000, or 32.1%, for the six months ended June 30, 2001 compared to the same
period in 2000. The increase is attributable to the costs associated with the
opening of the Cool Springs, Fieldstone Farms, Green Hills and downtown
Nashville branch facilities and overall Bank growth. Mortgage banking expenses
increased $222,000, or 83.8%, from the first six months of 2000 to the first
three months of 2001 primarily due to a increase in mortgage correspondent
pricing related to the increase in loan originations. Other expenses have
increased as a result of the overall growth of the banking segment.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards 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, was effective for the Company on January
1, 2001. The Company had no covered call options or other derivative instruments
outstanding on January 1, 2001 and June 30, 2001, therefore the effect of the
adoption of SFAS No. 133 had no impact on the financial position of the Company.
In October 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of SFAS No. 125. SFAS No. 140 is effective for the Company for the
quarter ended June 30, 2001. The adoption of SFAS No. 140 had no impact on the
financial position of the Company.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 addresses financial accounting and reporting for business combinations
initiated after June 30, 2001. At June 30, 2001, the Company has no plans to
initiate a business combination and, therefore, the adoption of SFAS No. 141 is
not expected to have a material impact on the financial position of the Company.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets for fiscal years beginning after December
15, 2001. Management has not assessed the impact of the adoption of SFAS No.
142 on the financial position of the Company.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Form 10-Q contain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as "may," "will," "expect," "estimate," "anticipate,"
believe," "target," "plan," "project," or "continue" or the negatives thereof or
other variations thereon or similar terminology, and are made on the basis of
management's plans and current analyses of the Company, its business and the
industry as
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a whole. These forward looking statements are subject to risk and uncertainties,
including, but not limited to, economic conditions, competition, interest rate
sensitivity and exposure to regulatory and legislative changes. The above
factors, in some cases, have affected, and in the future could affect, the
Company's financial performance and could cause actual results for fiscal 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.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. The liquidity and maturity structure of the Company's
assets and liabilities are important to the maintenance of acceptable net
interest income levels. An increasing interest rate environment negatively
impacts earnings as the Company's rate sensitive liabilities generally reprice
faster than its rate sensitive assets. Conversely, in a decreasing interest rate
environment, earnings are positively impacted. This potential asset/liability
mismatch in pricing is referred to as "gap" and is measured as rate sensitive
assets divided by rate sensitive liabilities for a defined time period. A gap of
1.0 means that assets and liabilities are perfectly matched as to repricing
within a specific time period and interest rate movements will not affect net
interest margin, assuming all other factors hold constant. Management has
specified gap guidelines for a one-year time horizon between .7 and 1.3. At June
30, 2001, the Company had a gap ratio of .7 for the one-year period ending June
30, 2002. Thus, over the next twelve months, slightly more rate sensitive
liabilities will reprice than rate sensitive assets.
A 200 basis point decrease in interest rates spread evenly during the next
twelve months is estimated to cause an increase in net interest income of
$682,000 as compared to net interest income if interest rates were unchanged
during the next twelve months. In comparison, a 200 basis point increase in
interest rates spread evenly during the next twelve months is estimated to cause
a decrease in net interest income of $682,000 as compared to net interest income
if rates were unchanged during the next twelve months. This level of variation
is within the Company's acceptable limits. This simulation analysis assumed that
savings and checking interest rates had a low correlation to changes in market
rates of interest and that certain asset prepayments changed as refinancing
incentives evolved. Further, in the event of a change in such magnitude in
interest rates, the Company's asset and liability management committee would
likely take actions to further mitigage its exposure to the change. However,
given the uncertainty of specific conditions and corresponding actions which
would be required, the analysis assumed no change in the Company's
asset/liability composition.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S. District
Court for the Middle District of Tennessee, against Franklin National Bank and
Gordon E. Inman, Chairman of the Board of the Company and the Bank, alleging
breach of contract, 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. On July 27, 2001, the Bank and Mr. Inman filed their second
motion for Summary Judgment. Mr. Pressman has not responded. 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.
There are also other pending legal proceedings in which the company and Bank are
defendants. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 15, 2001 the Company held its 2001 Annual Meeting of Shareholders. At
the meeting, the following persons were elected to serve on the company's Board
of Directors for a term of one year and until their successors are elected and
have qualified: Richard E. Herrington, Gordon E. Inman, Charles R. Lanier, D.
Wilson Overton, Edward M. Richey, Edward P. Silva, Melody J. Smiley and James
W. Cross, IV. The number of votes cast for and withheld for the election of
each nominee for director was as follows:
Votes Votes
Director For Withheld
-------- --- --------
Richard E. Herrington 7,113,552 8,965
Gordon E. Inman 7,112,327 10,190
Charles R. Lanier 7,096,077 26,440
D. Wilson Overton 7,113,552 8,965
Edward M. Richey 7,112,552 9,965
Edward P. Silva 7,112,327 10,190
Melody J. Smiley 7,113,552 8,965
James W. Cross, IV 7,112,552 9,965
In addition, the shareholders approved the adoption of the Company's 2001 by
Employer Restricted Stock Plan. The number of votes cast for the Plan
was 7,045,811 with 35,022 against and 41,684 abstaining.
No other matters were presented or voted upon at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. No exhibits are filed with this report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended June 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN FINANCIAL CORPORATION
Dated: August 14, 2001 By: /s/ Richard E. Herrington
--------------- --------------------------------------------------
Richard E. Herrington, President and Chief
Executive Officer (principal executive officer)
Dated: August 14, 2001 By: /s/ Lisa L. Musgrove
--------------- --------------------------------------------------
Lisa L. Musgrove, Senior Vice President and
Chief Financial Officer (principal financial
officer)
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