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1
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, 1999
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-B
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. [ ]
Revenues for the fiscal year ended December 31, 1999: $35,355,894
The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (11,937,740 shares) on March 15, 2000 was
approximately $8,833,928. As of such date, no organized trading market existed
for the common stock of the registrant. The aggregate market value was computed
by reference to the book value of the common stock of the registrant as of
December 31, 1999. 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, 2000: 31,054,187 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 16, 2000 are incorporated by reference to Items 10, 11, 12 and 13
of this Report.
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
2
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 risk and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for fiscal 2000 and beyond to differ materially from those
expressed or implied in such forward-looking statements. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
ITEM 1. BUSINESS.
GENERAL
Franklin Financial Corporation (the "Company") is a registered bank
holding company under the federal Bank Holding Company Act of 1956, as amended,
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 acquisition of other financial
institutions and provision of additional banking-related services which the
traditional commercial bank may not provide under present laws.
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 four 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; and one located
in Fairview, Tennessee, which opened in May 1997. The Bank also leases 9,000 and
4,000 square foot facilities from Mr. Inman which house its mortgage banking
subsidiary, financial services subsidiary and insurance subsidiary sales
function.
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 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.
3
In August 1996, the Bank opened an insurance agency subsidiary,
Franklin Financial Insurance (formally Hometown Insurance Agency), which
operates from the Bank's Spring Hill location. The agency sells property,
business and life insurance. In October 1997, the Bank opened a financial
services subsidiary, Franklin Financial Securities. The financial services
subsidiary offers financial planning and securities broker services through Legg
Mason Financial Partners. In December 1997, the Bank opened a mortgage banking
subsidiary, Franklin Financial Mortgage. This subsidiary originates and services
mortgage loans.
During January 1998, the Company's Board of Directors approved a
two-for-one stock split payable on February 17, 1998 to shareholders of record
at the close of business on February 2, 1998. During March 1998, the Company
also declared a four-for-one stock split payable June 3, 1998 to shareholders of
record at the close of business on May 20, 1998. All share data has been
retroactively restated as if both 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 58 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.
-2-
4
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance
sheet of the Company for the years ended December 31, 1999, 1998 and 1997. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
Year Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Cash and due from banks ............................... $ 10,550 $ 9,335 $ 7,435
-------- -------- --------
Interest-earning deposits ............................. -- -- --
Securities ............................................ 90,366 70,173 54,206
Federal funds sold and reverse repurchases ............ 3,805 3,482 3,018
Net loans ............................................. 256,206 214,792 178,047
-------- -------- --------
Total earning assets ......................... 350,377 288,447 235,271
-------- -------- --------
Other assets .......................................... 12,974 10,505 8,627
-------- -------- --------
Total assets ................................. $373,901 $308,287 $251,333
======== ======== ========
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
Year Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Non interest-bearing deposits ......................... $ 32,116 $ 29,103 $ 24,360
NOW deposits, including MMDA .......................... 82,091 63,818 48,411
Savings deposits ...................................... 11,520 8,729 7,307
Time deposits ......................................... 208,113 172,213 146,995
Repurchase Agreements ................................. 2,594 3,596 3,670
Other borrowings ...................................... 13,829 8,400 3,793
Other liabilities ..................................... 388 1,157 827
Total liabilities ............................ 350,651 287,016 235,363
Stockholders equity ................................... 23,250 21,271 15,970
-------- -------- --------
Total liabilities and stockholders' equity ... $373,901 $308,287 $251,333
======== ======== ========
-3-
5
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-earning
liability:
Year Ended December 31, 1999
-------------------------------------------------
Average Interest Average Net
Amount Earned Yield Yield
--------- -------- ------ -------
(Dollars in thousands)
ASSETS
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%
======== ========
Average Interest Average
Amount Paid Rate Paid
-------- ------- ---------
(Dollars in thousands)
LIABILITIES
NOW deposits, including MMDA ....... $ 82,091 $ 2,925 3.56%
Savings deposits ................... 11,520 298 2.59
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
Amount Earned Yield Yield
-------- -------- ------- -----
(Dollars in thousands)
ASSETS
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%
======== ========
-4-
6
Average Interest Average
Amount Paid Rate Paid
-------- -------- ---------
LIABILITIES (Dollars in thousands)
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.
Year Ended December 31, 1997
-----------------------------------------------------------
Average Interest Average Net
Amount Earned Yield Yield
-------- -------- ------- ------
(Dollars in thousands)
ASSETS
Securities ................................... $ 54,206 $ 3,489 6.44%
Federal funds sold and reverse repurchases ... 3,018 161 5.33
Net loans .................................... 178,047(1) 18,872(2) 10.60
-------- --------
Total earning assets ................ $235,271 $ 22,522 9.57% 4.94%
======== ========
Average Interest Average
Amount Paid Rate Paid
-------- -------- ---------
LIABILITIES
NOW deposits, including MMDA ......... $ 48,411 $ 1,825 3.77%
Savings deposits ..................... 7,307 190 2.60
Other time deposits .................. 146,995 8,390 5.71
Other borrowings ..................... 7,463 491 6.58
-------- --------
Total interest-bearing liabilities ... $210,176 $ 10,896 5.18%
======== ========
- ----------
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $1,782,000 in loan fees and loan
service fees.
-5-
7
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,
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, including MMDA ...... 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
============ ============ ============
-6-
8
Year Ended December 31,
1998
compared with
Year Ended December 31,
1997
Increase (Decrease) due to:
-------------------------------
Volume Rate Total
------ ------ ------
(In thousands)
Interest earned on:
Securities ........................ $ 933 (321) 612
Federal funds sold ................ 26 9 35
Net loans ......................... 3,788 (519) 3,269
------ ------ ------
Total earning assets .............. 4,747 (831) 3,916
------ ------ ------
Interest paid on:
NOW deposits ...................... 564 (52) 512
Savings deposits .................. 37 (1) 36
Time deposits ..................... 1,441 9 1,450
Other borrowings .................. 279 (31) 248
------ ------ ------
Total interest expense ............ 2,321 (75) 2,246
------ ------ ------
Change in net
interest income ............... $2,426 $ (756) $1,670
====== ====== ======
-7-
9
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, 1999
-----------------------------------
Deposit Category Average Amount Average Rate Paid
---------------- -------------- -----------------
(Dollars in thousands)
Non interest-bearing
demand deposits .............. $ 32,116 Not Applicable
NOW deposits, including MMDA ...... $ 82,091 3.56%
Savings deposits .................. $ 11,520 2.59%
Time deposits ..................... $208,113 5.33%
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%
-8-
10
Year Ended
December 31, 1997
----------------------------------
Deposit Category Average Amount Average Rate Paid
---------------- -------------- -----------------
(Dollars in thousands)
Non interest-bearing
demand deposits .............. $ 24,360 Not Applicable
NOW deposits ...................... $ 48,411 3.77%
Savings deposits .................. $ 7,307 2.60%
Time deposits ..................... $146,995 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, 1999:
Time
Certificates
of Deposit
--------
(In thousands)
3 months or less .................. $ 85,266
3-6 months ........................ 42,622
6-12 months ....................... 23,069
over 12 months .................... 4,824
--------
Total ...................... $155,781
========
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.
-9-
11
At December 31, 1999, loans within four broad categories exceeded 10%
of total loans: single family residential real estate loans ($69,992,000 or 26%
of total loans), commercial real estate loans ($51,385,000 or 19% of total
loans), commercial and industrial loans ($51,949,000 or 19% of total loans) and
residential construction loans ($38,982,000 or 14% of total loans). Management
believes that there is material borrower diversification within both 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 1999 1998 1997 1996 1995
------------ --------- --------- --------- --------- ---------
(In thousands)
Domestic:
Commercial, financial ........ $ 82,288 $ 60,418 $ 44,824 $ 34,280 $ 24,143
and agricultural
Real estate-construction ..... 38,982 29,335 33,708 23,307 13,073
Real estate-mortgage ......... 130,483 132,327 100,989 86,999 62,895
Consumer loans ............... 19,670 18,006 15,001 13,230 12,016
--------- --------- --------- --------- ---------
Total loans ............... 271,423 240,086 194,522 157,816 112,127
Less: deferred loan fees ..... (512) (516) (440) (362) (296)
Allowance for possible
loan losses ........... (2,480) (2,194) (1,828) (1,472) (1,062)
--------- --------- --------- --------- ---------
Total (net of allowance) ..... $ 268,431 $ 237,376 $ 192,254 $ 155,982 $ 110,769
========= ========= ========= ========= =========
The following is a presentation of an analysis of maturities of loans
as of December 31, 1999:
Due in 1 Due After 1 to Due After
Type of Loan Year or Less 5 Years 5 Years Total
- ------------ -------- -------- -------- --------
(In thousands)
Commercial, financial
and agricultural ............... $ 57,251 $ 24,965 $ 72 $ 82,288
Real estate-construction .......... 37,080 1,902 -- 38,982
Real estate-mortgage .............. 62,110 55,587 12,786 130,483
Consumer loans .................... 7,084 12,568 18 19,670
-------- -------- -------- --------
Total ............................. $163,525 $ 95,022 $ 12,876 $271,423
======== ======== ======== ========
-10-
12
The following is a presentation of an analysis of sensitivities of
loans to changes in interest rates as of December 31, 1999 (in thousands):
Loans due after 1 year with
predetermined interest rates........................ $84,389
Loans due after 1 year with
floating interest rates............................. $23,509
The following table presents information regarding non-accrual, past
due and restructured loans at the dates indicated (in thousands):
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
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 ................................ 4 4 0 0 0
Amount ................................ $ 769 $ 195 $ -- $ -- $ --
Loans defined as "troubled debt
restructurings":
Number ................................ 0 0 0 0 0
Amount ................................ $ -- $ -- $ -- $ -- $ --
As of December 31, 1999, there are 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.
-11-
13
Additional interest income of approximately $0 in 1999, $0 in 1998, $0
in 1997, $0 in 1996, and $423 in 1995 would have been recorded 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 during the five year
period ended December 31, 1999, 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, 1999, management has identified other possible credit problems as
follows (in thousands):
Special mention ............................ $1,482
Substandard ................................ 2,078
Doubtful ................................... 74
Loss ....................................... --
------
Total ...................................... $3,634
======
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 $94,000 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.
-12-
14
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a breakdown of the allowance for
possible loan losses:
Years Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning
of period .............................. $ 2,194 $ 1,828 $ 1,472 $ 1,062 $ 762
Charge-offs:
Commercial, financial &
agricultural ........................ 25 112 36 4 --
Consumer loans ......................... 66 47 40 18 38
Real estate-mortgage ................... -- -- -- -- --
------- ------- ------- ------- -------
Total charge-offs ................... 91 159 76 22 38
------- ------- ------- ------- -------
Recoveries:
Commercial, financial &
agricultural ........................ 9 2 1 -- 4
Consumer loans ......................... 18 8 11 12 14
Total recoveries .................... 27 10 12 12 18
Net charge-offs ........................ (64) (149) (64) (10) (20)
------- ------- ------- ------- -------
Additions charged to operations ........ 350 515 420 420 320
------- ------- ------- ------- -------
Balance at end of period ............... $ 2,480 $ 2,194 $ 1,828 $ 1,472 $ 1,062
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans
outstanding during the period ....... .02% .07% .04% .01% .02%
======= ======= ======= ======= =======
-13-
15
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:
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Commercial, financial
and agricultural ..... $ 882 30.3% $ 686 25.2% $ 489 23.1% $ 272 21.0% $ 189 21.6%
Real estate -
construction ......... 449 14.4 352 12.2 377 17.3 331 14.8 172 11.6
Real estate-mortgage .... 886 48.1 840 55.1 813 51.9 735 55.8 479 56.1
Consumer loans .......... 255 7.2 211 7.5 109 7.7 98 8.4 79 10.7
Unallocated ............. 8 N/A 105 N/A 40 N/A 36 N/A 143 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ ------
Total ................... $2,480 100.0% $2,194 100.0% $1,828 100.0% $1,472 100.0% $1,062 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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, 1999,
30% 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 94%
of these commercial loans at December 31, 1999 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, 1999, 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, 1999, real estate mortgage loans constituted 48% of
outstanding loans. Approximately $59,663,000 or 46% 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. 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.
-14-
16
INVESTMENTS
As of December 31, 1999, investment securities, including
mortgage-backed securities, comprised approximately 30% of the Bank's assets and
loans comprised approximately 62% 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 ------------------------------------
Category 1999 1998 1997
- ---------- -------- -------- --------
AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and
other U.S. Agencies ................. $ 43,488 $ 25,881 $ 20,862
Obligations of States and Political
Subdivisions ........................ 14,149 14,254 4,189
Mortgage-backed securities ............. 69,526 32,406 29,654
Other securities ....................... 187 -- 350
-------- -------- --------
Total ......................... $127,350 $ 72,541 $ 55,055
======== ======== ========
December 31,
Investment ------------------------------
Category 1999 1998 1997
------ ------ ------
HELD-TO-MATURITY:
Obligations of U.S. Treasury and
other U.S. Agencies ................. $ 0 $1,354 $2,098
Obligations of States and Political
Subdivisions ........................ 2,809 2,817 2,974
Mortgage-backed securities ............. 380 591 857
Other securities ....................... 0 -- 30
------ ------ ------
Total ......................... $3,189 $4,762 $5,959
====== ====== ======
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The following tables indicate for the year ended December 31, 1999, 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:
Investment Weighted Average
Category Amount Yield (1)
-------- ---------------
(Dollars in thousands)
AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and other
U.S. Agencies:
O through 1 Yr .............................. $ 4,979 4.91%
Over 1 through 5 Yrs ........................ 15,644 5.13
Over 5 through 10 Yrs ....................... 9,433 4.97
Over 10 Yrs ................................. 13,432 7.73
Obligations of States and Political
Subdivisions:
O through 1 Yr .............................. 249 5.50
Over 1 through 5 Yrs ........................ 562 6.29
Over 5 through 10 Yrs ....................... 1,328 6.10
Over 10 Yrs ................................. 12,010 6.79
Other Securities:
Over 10 Yrs ................................. 187 7.69
Mortgage-backed securities .................. 69,526 6.92
--------
Total available-for-sale ................. $127,350 6.54%
======== ========
(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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Investment Weighted Average
Category Amount Yield (1)
---------- ------ ---------------
(Dollars in thousands)
HELD-TO-MATURITY:
Obligations of U.S. Treasury and other
U.S. Agencies:
O through 1 Yr .............................. $ 0 0%
Obligations of States and Political
Subdivisions:
O through 1 Yr .............................. 75 8.00
Over 1 through 5 Yrs ........................ 370 8.67
Over 5 through 10 Yrs ....................... 2,087 7.15
Over 10 Yrs ................................. 277 7.25
Mortgage-backed securities .................. 380 7.04
------ --------
Total held-to-maturity ................... $3,189 7.34%
====== ========
(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,
-----------------------------------
1999 1998 1997
----- ----- -----
Return on average assets .......... 1.20% 1.59% 1.55%
Return on average equity .......... 19.23% 22.97% 24.35%
Average equity to average .........
assets ratio ................. 6.22% 6.90% 6.35
Dividend payout ratio ............. 29.22% 6.24% --%
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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.
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.
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 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 (automated teller machine) and 2
drive-in windows. The second floor of the facility consists of the personnel
department, the marketing department, the call center, 4 executive offices and
the compliance office. The Bank also has an off-site ATM. The Company leases
these facilities from Gordon E. Inman, the Chairman of the Board of the Company.
The Bank's 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 (automated teller machine) and 2 drive-in windows.
The Bank's 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.
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The Bank's 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. A new branch office is being constructed in the
Brentwood area that is larger than the existing one and will replace the current
Brentwood branch when opened. The new branch facility is expected to open in the
second quarter of 2000.
The Bank's 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 Bank leases facilities at four separate locations in Franklin which
house the Bank's financial services subsidiary, mortgage banking subsidiary,
insurance subsidiary, data processing, operations and administrative functions.
The Company leases these facilities from Gordon E. Inman, the Chairman of the
Board of the Company.
The Bank is leasing office suites in Bartlett and Chattanooga,
Tennessee which house mortgage loan origination offices.
The Bank has been approved to open a full service branch facility in
the Cool Springs area of Franklin. In October 1998, the Company purchased a
parcel of land and has begun construction of a permanent branch facility which
is expected to be completed in the second quarter of 2000. The Bank has also
been approved for a full service branch facility in the Fieldstone Farms area of
Franklin. In July 1999, the Company purchased a parcel of land and has begun
construction on the facility which is expected to open during the second quarter
of 2000.
EMPLOYEES
The Company presently employs 170 persons on a full-time basis,
including 54 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
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 federal regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the
Federal Deposit Insurance Corporation ("FDIC").
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21
The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, 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 can 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.
On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act was signed into law. The Financial Services Modernization Act
eliminates the barriers erected by the 1933 Glass-Steagall Act and amends the
Bank Holding Company Act of 1956, among other statutes. Further, it allows for
the affiliation of banking, securities and insurance activities in new financial
services organizations.
A dominant theme of the new legislation is 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 principal provisions of the Financial Services Modernization Act
will permit the Company, if it meets the standards for a "well- managed" and
"well-capitalized" institution and has at least a "satisfactory" Community
Reinvestment Act performance, to engage in any activity that is "financial in
nature," including security and insurance underwriting, investment banking, and
merchant banking investing in commercial and industrial companies. The Company,
if it satisfies the above criteria, can file a declaration of its status as a
"financial holding company" ("FHC") with the Federal Reserve, and thereafter
engage directly or through nonbank subsidiaries in the expanded range of
activities which the Financial Services Modernization Act identifies as
financial in nature. Further, the Company, if it elects FHC status, will be able
to 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 Financial Services Modernization Act will also allow
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 Financial Services Modernization Act as being financial in nature. Such a
subsidiary, though, is not permitted to engage in insurance underwriting or
annuity issuance, real estate development, investment activities, or
-20-
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merchant banking activities. Further, any financial subsidiary that the Bank
created would generally be treated as an affiliate of the Bank, rather than as a
subsidiary for purposes of affiliate transaction restrictions of Sections 23A
and 23B of the Federal Reserve Act.
It is expected that the Financial Services Modernization 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.
A bank holding company which has not elected to become a FHC 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, these non-FHC bank holding companies
will still be able to 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 permissible nonbanking activities, including those listed below,
are left unchanged by the Financial Services Modernization Act which does not
prohibit non-FHC bank holding companies from engaging in these activities.
Effective April 21, 1997, the Federal Reserve Board revised and expanded the
list of permissible non-banking activities, which includes the following
activities: extending credit and servicing loans; acting as investment or
financial advisor to any person, with certain limitations; leasing personal or
real property or acting as a broker with respect thereto; providing management
and employee benefits consulting advice and career counseling services to
non-affiliated 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.
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 and unfair competition, conflicts of
interest and unsound banking practices. Generally, bank holding companies are
required to obtain prior 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 has
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. With respect
to expansion, the OCC has approved several applications
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submitted by banks in the State of Tennessee, allowing such banks to establish
branch offices outside the territorial limits of the counties in which the
national banks are located. Prior to such ruling, national banks were only
permitted to establish branch offices within the geographical limits of the
county in which their main office is situated (with the exception that (i) a
bank may branch into another county by acquiring the assets and deposits of a
closed state bank in such other county, and (ii) a bank may, in certain
situations, establish and operate as a branch bank any branch office previously
operated by an affiliate). The OCC's initial ruling on this matter was upheld in
federal court, as were similar rulings in other states. The Bank is also subject
to the 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 in dealing with the Company and other affiliates, if any. 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 any one
person up to 10% of its unimpaired capital and surplus, provided that the
transactions are 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. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. 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 the financial institution.
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 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. 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 provide that banking organizations must have capital
equivalent to at least 8% of weighted risk assets. The risk weights assigned to
assets are based primarily on credit risks. Depending upon the riskiness 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 added
together to determine total risk-weighted assets. At December 31, 1999, the
Company's consolidated total risk-based capital and Tier 1 ratios were 10.1% and
9.2% respectively. Both 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
-22-
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adequacy of banks and bank holding companies. Under these rules, banking
institutions are required to maintain a ratio of at least 3% "Tier 1" capital to
total assets (net of goodwill, certain intangible assets, and certain deferred
tax assets). Tier 1 capital includes common stockholders equity, noncumulative
perpetual preferred stock and related surplus, 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 regulatory 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 risk, excellent control systems, high asset quality, high
liquidity, good earnings and in general, have to be considered strong banking
organizations, rated composite 1 under the CAMELS rating system for banks or the
BOPEC rating system for 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 will maintain ratios at least
100 to 200 basis points above the stated minimums. The Federal Reserve Board
requires bank holding companies without a BOPEC-1 rating to maintain a ratio of
at least 4% Tier I 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 adopted a rule substantially similar to that issued by the
Federal Reserve Board, establishing a minimum leverage ratio of 3% and providing
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 will nearly always 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 I capital in calculating a bank's risk-based capital ratio.
However, certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as part of Tier I 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.
Furthermore, the OCC's guidelines formerly provided that the amount of such
qualifying intangibles that may be included in Tier I was limited to a maximum
of 50% of total Tier I capital. The OCC has amended its guidelines to increase
the limitation on such qualifying intangibles from 50% to 100% of Tier I
capital, of which no more than 25% may consist of purchased credit card
relationships and non-mortgage servicing assets. Furthermore, banks may now
deduct from Tier I capital disallowed servicing assets on a basis that is net of
any associated deferred tax liability. Deferred tax liabilities netted this way
may not also be netted against deferred tax assets when determining the amount
of deferred tax assets that are dependent upon future taxable income.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie
-23-
25
Mae, Freddie Mac and Farmer Mac programs. The rules clarify that even though
those transactions are treated as asset sales for bank Call Report purposes,
those assets will still be subject to a capital charge under the risk-based
capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include 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.
The OCC, the Federal Reserve Board and the FDIC recently added a
provision to the risk-based capital guidelines that supplements and modifies the
usual risk-based capital calculations to insure 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 to the new standard is
deemed necessary or appropriate for safe banking practices. For institutions for
which the modifications apply, Tier 2 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 in 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, beginning no later than January 1,
1999, 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 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 the number for the next quarter's capital charge
for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act"), enacted on December 19, 1991, provides for a number of reforms relating
to the safety and soundness of the deposit
-24-
26
insurance system, supervision of domestic and foreign depository institutions
and improvement of accounting standards. One aspect of the Act involves 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 Act 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 Act creates five
"capital categories" ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") which are defined in the Act and which will be 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 drops to lower capital levels, the extent of action
to be taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The Act also provides that banks will have to meet new safety and
soundness standards. In order to comply with the Act, the Federal Reserve Board,
the OCC and the FDIC have adopted regulations 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 Act seeks to implement are designed to bolster and protect the deposit
insurance fund.
In response to the directive issued under the Act, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established under the Act.
The following table reflects the capital thresholds:
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27
Total Risk-based Tier 1 Risk- Tier 1
Capital Based Capital Leverage
Ratio Ratio Ratio
------------------------- ------------------------ ------------------------
Well capitalized (1)...................... less than or equal to 10% less than or equal to 6% less than or equal to 5%
Adequately capitalized (1)................ less than or equal to 8% less than or equal to 4% less than or equal to 4% (2)
Undercapitalized (4)...................... less than or equal to 8% less than or equal to 4% less than or equal to 4% (3)
Significantly undercapitalized (4)........ less than 6% less than 3% less than 3%
Critically undercapitalized............... -- -- less than 2%
(1) An institution must meet all three minimums.
(2) Greater than 3% for composite 1-rated institutions, subject to
appropriate federal banking agency guidelines.
(3) Less than 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.
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 as well. The Bank submits to the OCC
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
As a bank holding company, the Company is required to file with the
Federal Reserve Board quarterly reports of its operations 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.
The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation.
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
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total $37,495. 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 from 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 from 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. This new 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. The Bank constructed a
5,000 sq. foot permanent facility at this location which opened the second
quarter of 1998.
ADDITIONAL BRANCHES
The Bank has been approved to open a full service branch in the Cool
Springs area of Franklin. In October 1998, the Company purchased a parcel of
land in this area for $650,000. Expenditures related to the facility are
expected to be approximately $500,000, with completion expected in the second
quarter of 2000. The Bank has also been approved to open a full service branch
facility in the Fieldstone Farms area of Franklin. In July 1999, the Company
purchased a parcel of land in this area for $740,000 with additional
expenditures related to this facility expected to be approximately $700,000. The
expected completion date is during the second quarter of 2000.
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 $9,100. The office/warehouse space houses "back office" functions for the
Bank, including data processing, proof and transit, 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 monthly
payments to Mr. Inman of approximately $4,100.
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The Bank is leasing an office building from an unrelated third party in
downtown Franklin for future expansion. The monthly lease payments are
approximately $2,800.
ITEM 3. LEGAL PROCEEDINGS.
On November 24, 1998, the Bank, along with B & G Construction, Inc. and
two principals of B & G Construction, was sued by Manfred and Muriel Polk (the
"Polk Plaintiffs"). The lawsuit, styled Manfred Polk and Muriel Polk v. B & G
Construction, Inc., William H. Smith, George Bivens and Franklin National Bank,
In the United States District Court, Middle District of Tennessee, File No.
3-98-1089 Polk, alleges, among other things, that the Bank violated the civil
rights of the Plaintiffs by imposing an unacceptable condition to financing of
residential real estate proposed to be purchased by the Polk Plaintiffs. The
Polk Plaintiffs have demanded from the Bank and the other defendants $10 million
in compensatory damages and $15 million in punitive damages.
The Bank filed a motion for summary judgment in August 17, 1999. On
March 27, 2000, the court ruled on the motion for summary judgment in favor of
the Bank. Accordingly, the Bank has been dismissed from this action, effective
March 27, 2000.
On October 12, 1999, the Bank, along with William Hooper, was sued by
Milton C. 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 National Bank and Franklin National Bank,
In the Circuit Court for Maury County at Columbia, Tennessee, Civil Action #
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 Auto 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 Company 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 vigorously to defend them.
The Prowell Litigation is at an early procedural stage, however, and it is not
possible at this time to determine the outcome of the action or the effect of
its resolution or the Company's financial condition on operating results.
Management of the Company and its legal counsel handling the defense of this
litigation believe that the Bank's defenses have merit; however, there can be no
assurance that this litigation will not have a material adverse effect on the
Company's results of operations for some period or the Company's financial
condition.
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.
No matter was submitted during the fourth quarter ended December 31,
1999 to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
During the period covered by this report and to date, there has been no
established public trading market for the Company's common stock. As of March
15, 2000, the approximate number of holders of record of the Company's common
stock was 748.
DIVIDENDS. In February 2000, the Company declared a $.0125 per share
cash dividend payable April 5, 2000 to shareholders of record on March 24, 2000.
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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.
On May 5, 1999, a director of the Company exercised warrants to
purchase 115,792 shares of common stock of the Company at a price of $0.3125 per
share. On November 19, 1999, another director of the Company exercised warrants
to purchase 385,952 shares of common stock of the Company at a price of $0.3125
per share.
The issuances of securities described above were made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 as transactions by an issuer not involving a public offering. All of the
securities were acquired by the recipients thereof for investment and with no
view toward the resale or distribution thereof. In each instance, the purchaser
had a pre-existing relationship with the Company, the offers and sales were made
without any public solicitation, the certificates bear restrictive legends and
appropriate stop transfer instructions have been or will be given to the
transfer agent. No underwriter was involved in the transactions and no
commissions were paid.
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ITEM 6. SELECTED FINANCIAL DATA.
At or for the Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
EARNINGS
Interest income $ 30,691 $ 26,438 $ 22,521 $ 16,710 $ 11,980
Interest expense 15,185 13,142 10,896 7,731 6,024
Net interest income 15,506 13,296 11,625 8,979 5,956
Provision for loan losses 350 515 420 420 320
Non-interest income 4,665 5,124 2,774 1,802 1,326
Non-interest expense 13,006 10,251 7,841 6,359 5,277
Net income 4,470 4,886 3,888 2,565 1,123
Net income per share (basic) $ .15 $ .17 $ .14 $ .09 $ .04
Net income per share (diluted) $ .13 $ .15 $ .12 $ .08 $ .04
AVERAGE BALANCES
Assets $373,901 $308,287 $251,333 $186,021 $137,070
Deposits 333,840 273,863 227,073 171,952 125,920
Loans, net 256,206 214,792 178,047 133,309 92,349
Earning assets 350,377 288,447 235,271 173,339 126,408
Shareholders' equity 23,250 21,271 15,970 12,159 10,002
BALANCE SHEET DATA
Assets $430,400 $349,867 $274,433 $215,667 $162,361
Deposits 383,857 312,397 247,572 199,911 150,368
Loans, net 257,284 213,734 188,517 152,002 109,346
Earning assets 403,057 326,473 256,225 201,913 148,741
Long-term obligations 6,722 6,744 750 -- --
Shareholders' equity 22,859 23,589 17,790 13,504 10,998
Book value per share .74 .77 .64 .49 .40
Dividends per share .04 .01 -- -- --
Shares outstanding (weighted) 34,393 33,182 32,613 30,604 29,343
KEY RATIOS
Return on average assets 1.20% 1.59% 1.55% 1.38% .82%
Return on average shareholders' equity 19.23% 22.97% 24.35% 21.10% 11.23%
Shareholders' equity to total assets 5.31% 6.74% 6.48% 6.26% 6.77%
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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, located in Franklin, Tennessee, was opened in
December of 1989 and continues to experience substantial growth. The Bank has
five full service branches located throughout Williamson County and expects to
open two additional branches by the second quarter of 2000. In August 1996, the
Bank opened an insurance subsidiary, Franklin Financial Insurance (formerly
Hometown Insurance Agency). In October 1997, the Bank opened a financial
services subsidiary, Franklin Financial Securities. The subsidiary offers
financial planning and securities broker 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 located in an office in
Bartlett, Tennessee and in August 1998, opened a retail mortgage origination
office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells
and services mortgage loans.
In April 1999, the Bank entered into a memorandum of understanding with
the OCC, which obligates the Bank to take certain actions, including the
following: (i) adopt a strategic plan; (ii) hire additional administrative
personnel, including a full-time compliance officer and a full-time credit
administrator; (iii) appoint new board committees to oversee compliance and
community reinvestment act efforts; (iv) adopt and implement programs, policies,
procedures, and management information systems to improve consumer compliance
and loan administration; and (v) correct certain violations of the Home Mortgage
Disclosure Act. Management believes that the Bank has complied with all of the
requirements of the memorandum of understanding.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company maintains its liquidity through the management of
its assets and liabilities. 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
sold, 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
$12.7 million at December 31, 1999. Loans and securities scheduled to mature
within one year exceeded $168.8 million at December 31, 1999, which should
provide further liquidity. In addition, approximately $127.3 million of
securities are classified as available for sale to help meet liquidity needs
should they arise. The Company has lines of credit of $10.0 million with
lending institutions and the Bank is approved to borrow up to $10.0 million
in funds from the Federal Home Loan Bank and $33.5 million in federal funds
lines to assist with capital and liquidity needs. At December 31, 1999, the
Company had $7.3 million in borrowings against its line of credit and the
Bank had $5.0 million in federal funds purchased outstanding. Due to the
escalation of short-term
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interest rates, the Bank has chosen to borrow against federal funds lines
instead of replacing some brokered deposits at higher costs. In February and
August 1998, the Bank entered into long-term convertible Federal Home Loan Bank
advances with an October 1 call option totaling $6.0 million. The Bank has $2.4
million outstanding in repurchase agreements to further develop its relationship
with a customer. The Bank had approximately $48.2 million in brokered deposits
at December 31, 1999 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 $22.1 million in loan commitments are expected to be
funded within the next six months. Furthermore, the Bank has approximately $54.1
million of other loan commitments, primarily unused lines and letters of credit,
which may or may not be funded.
CAPITAL EXPENDITURES. The Bank has been approved to open a full
service branch in the Cool Springs area of Franklin. In October 1998, the
Company purchased a parcel of land in this area for $650,000. Expenditures
related to the facility are expected to be approximately $500,000, with
completion expected in the first quarter of 2000. The Bank has been approved
to open a replacement branch facility in Brentwood, Tennessee, which opened
during the first quarter of 2000. The Brentwood facility will be leased with
annual payments of $124,000 and constructed to the Bank's specifications.
Accordingly, no renovation expenditures are expected. The Bank has also been
approved to open a full service branch facility in the Fieldstone Farms area
of Franklin. In July 1999, the Company purchased a parcel of land in this
area for $740,000 with additional expenditures related to this facility
expected to be approximately $700,000. The expected completion date is during
the second quarter of 2000. Total capital expenditures for 2000 are expected
to be approximately $1.7 million.
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, 1999. 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.
CASH FLOWS. Net cash flow provided by operating activities was $18.7
million in 1999 compared to net cash flow used of $3.9 million in 1998, an
increase of $22.6 million. The increase in cash flow is due to the sale of
loans exceeding the loans originated for sale by $13.7 million in 1999 as
compared to the loans originated for sale exceeding the sale of loans by $7.9
million in 1998. The majority of this change is due to the increased sale of
loans in the mortgage banking segment. The increase in cash flow is offset
slightly by a decrease in net income of $416,000, coupled with decreases in
noncash items such as depreciation and other assets.
Net cash used in investing activities was $99.2 million in 1999
compared to $64.2 million in 1998, representing a $35.0 million increase,
which was largely due to the banking segment. The increase in the change in
net loans of $45.5 million in 1999 compared to $37.6 million in 1998 was
offset by a decrease in federal funds sold of $8.2 million in 1999, compared
to an increase of $8.2 million in the prior year. The change in the net
investment portfolio also increased from $16.2 million in 1998 to $59.8
million in 1999.
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Net cash provided by financing activities was $80.1 million in 1999
compared to $70.5 million in 1998, a $9.6 million or 14% increase. The increase
is primarily due to an increase in deposits of $71.5 million in 1999 compared to
$64.8 million in the preceding year. The increase is attributed in part, to the
Company borrowing $5.6 million on its line of credit in 1999 as compared to
repaying $600,000 in 1998. 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 1999.
INTEREST RATE SENSITIVITY. The following is an analysis of rate
sensitive assets and liabilities as of December 31, 1999:
0-3 MOS. 3-12 MOS. 1-5 YRS. 5 OR MORE YRS. TOTAL
--------- --------- --------- -------------- ---------
Securities ........................ $ 5,391 $ 15,979 $ 70,998 $ 39,777 $ 132,145
Loans ............................. 139,893 44,008 85,447 2,074 271,422
Federal funds sold ................ -- -- -- -- --
--------- --------- --------- --------- ---------
Total rate sensitive assets ....... 145,284 59,987 156,445 41,851 403,567
NOW deposits ...................... 36,869 -- -- -- 36,869
Savings deposits .................. 72,550 -- -- -- 72,550
Time deposits ..................... 120,576 106,645 10,118 -- 237,339
Repurchase agreements ............. 1,000 -- 1,421 -- 2,421
Other borrowings .................. 19,052 -- -- -- 19,052
Total rate sensitive
liabilities .................... 250,047 106,645 11,539 -- 368,231
============================================================================
Excess (deficiency) of rate
sensitive assets less
rate sensitive liabilities ..... $(104,763) $ (46,658) $ 144,906 $ 41,851 $ 35,336
========= ========= ========= ========= =========
Excess (deficiency) as a
percentage of earning
assets ......................... (25.9)% (11.5)% 35.9% 10.3% 8.8%
Cumulative excess
(deficiency) ................... $(104,763) $(151,421) $ (6,515) $ 35,336 $ 35,336
========= ========= ========= ========= =========
Cumulative excess
(deficiency) as a
percentage of earnings
assets ......................... (25.9)% (37.4)% (1.5)% 8.8% 8.8%
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.
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CAPITAL ADEQUACY. Stockholders' equity at December 31, 1999, was $22.9
million or 5.3 % of total assets compared to $23.6 million or 6.7% of total
assets at December 31, 1998. 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, 1999:
Minimum
For Capital For "Well Company
Adequacy Capitalized" Consolidated Bank's
Purposes Category Actual Actual
---- ----- ---- ------
Leverage 4.00% 5.00% 6.5% 8.1%
Tier 1 risk-based 4.00% 6.00% 9.2% 11.4%
Total risk-based 8.00% 10.00% 10.1% 12.3%
FINANCIAL CONDITION
Total assets have grown $80.5 million or 23.0% since December 31, 1998
to a