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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NO. 0-50078
FRANKLIN BANCORP, INC
(Exact name of bank as specified in its charter)
MICHIGAN 38-2606280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
24725 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN 48034
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 358-4710
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES NO X
---- ---
As of March 25, 2003 there were issued and outstanding 3,681,904 shares of the
Registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the price at which
the stock was sold as of March 25, 2003 was approximately $52.9 million.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Shareholders for the year ended December 31,
2002 are incorporated by reference into Parts I, II and IV. Portions of the
definitive Proxy Statement in connection with the Annual Meeting of Shareholders
to be held on June 14, 2003 are incorporated by reference into Part III.
INDEX
PART I
ITEM 1. BUSINESS.............................................................4
ITEM 2. PROPERTIES..........................................................13
ITEM 3. LEGAL PROCEEDINGS...................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................14
PART II
ITEM 5. MARKET FOR AND DIVIDENDS ON THE BANK'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS.............................................14
ITEM 6. SELECTED FINANCIAL DATA.............................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION..........................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.........15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................................15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK.......................16
ITEM 11. EXECUTIVE COMPENSATION.............................................16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................16
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PART IV
ITEM 14. CONTROLS AND PROCEDURES............................................16
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....17
SIGNATURES..................................................................19
CERTIFICATION...............................................................20
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PART I
ITEM 1. BUSINESS
HISTORY OF FRANKLIN
Franklin Bancorp, Inc. (the "Company" or "Bancorp") was incorporated under
the Michigan Business Corporation Act on February 14, 2002. The Company is a
bank holding company registered with, and subject to, the supervision of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
under the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"). The Company's wholly-owned subsidiary, Franklin Bank, National
Association ("Bank"), is a national bank which was incorporated in 1983 and
converted to a national bank in 1991. The Company became a bank holding company
after the close of business on October 23, 2002 as a result of the
reorganization of the Bank involving an exchange of all the outstanding common
stock of the Bank on a one-for-one basis into common stock of the Company.
Franklin Finance Corporation was a wholly-owned subsidiary of the Bank,
however, effective as of December 31, 2002, the Bank approved the dissolution
and liquidation of Franklin Finance Corporation.
The Company has corporate power to engage in such activities as permitted
to business corporations under the Michigan Business Corporation Act, subject to
the limitations of the Bank Holding Company Act and regulations of the Federal
Reserve System. In general, the Bank Holding Company Act and regulations
restrict the Company with respect to its own activities and activities of any
subsidiaries to the business of banking or such other activities which are
closely related to the business of banking. The principal role of the Company is
to supervise the activities of the Bank. The Company derives all of its income
from dividends from the Bank.
Since its conversion, the Bank's business strategy has been focused on low
cost deposit gathering and niche lending activities designed to serve small to
medium-sized businesses, the business owners and, to a lesser extent, individual
customers found in the Bank's primary market areas of Southeast Oakland County
and parts of Wayne and Macomb counties. While the Bank offers many standard
lending and deposit products, the Bank promotes its products and services
through non-traditional delivery platforms which emphasize courier deposit
pick-up services, lockbox remittance services, web banking and free ATM
services; all of which do not require significant branch facilities.
The Company's headquarters are located at 24725 West Twelve Mile Road in
Southfield, Michigan. The Bank maintains its principal office at 24725 West
Twelve Mile Road in Southfield, Michigan, three full service regional branches
located in Southfield, Birmingham and Grosse Pointe Woods, Michigan, and two
unique Business Center branches in Southfield and Troy.
LENDING ACTIVITIES
The Bank's lending activities focus on originating commercial mortgage
loans, other non-real estate commercial loans, residential construction loans
and consumer loans.
Commercial Real Estate Lending. The Bank has historically originated
permanent loans secured by commercial real estate and, to a significantly lesser
extent, land development loans. Essentially all
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commercial real estate loans originated by the Bank to date have been secured by
real property located in Michigan.
The Bank's commercial real estate loans generally are for terms of five to
ten years with 25-year amortization periods, generally have loan-to-value ratios
of up to 80% of the appraised value of the secured property, and are typically
secured by full or partial personal guarantees of the borrowers. At December 31,
2002, approximately 33.3% of the Bank's commercial real estate loan portfolio
had adjustable rates. Of these, 96% are tied to prime interest rate.
At December 31, 2002, the Bank's largest commercial real estate loan was a
$4.2 million loan secured by an office building located in Plymouth, Michigan.
The Bank had 5 other commercial real estate loans in excess of $2.5 million at
such date. At December 31, 2002, all of these loans were performing in
accordance with their payment terms.
Commercial real estate lending entails potential risks that are not
inherent in other types of lending. These potential risks include the
concentration of principal in a limited number of loans and borrowers, the
effects of a decline in commercial real estate values on property
collateralizing the loan, and the effects of a decline in general economic
conditions on income producing properties. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the successful
operation of the related real estate project. If the cash flow from the project
is reduced (for example, if leases are not obtained or renewed, or a bankruptcy
court modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired.
Commercial Lending. To a lesser extent, the Bank originates both secured
and unsecured commercial loans to small and medium-sized businesses located in
Southeast Michigan and parts of Wayne and Macomb counties. The loans include
term loans, lines of credit, documentary and standby letters of credit. Loans
originated on a secured basis generally have interest rates tied to the
prevailing prime interest rate. Collateral consists of accounts receivable,
inventory, specific equipment and other designated business assets. All such
loans typically are wholly or partially personally guaranteed by the business
owner or related party.
A secured small business line of credit is available to the Bank's
qualified business checking account customers in amounts of up to $50,000. These
loans are structured at higher rates than are charged other types of business
borrowers. The Bank attempts to provide each customer with a 24-hour loan review
and decision process.
Commercial loans involve significant risk and typically are made on the
basis of the borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Residential Construction Lending. The Bank makes construction loans on
single-family residences to individuals who will ultimately be the
owner-occupier of the house. Substantially all of the Bank's
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construction loans have been originated with adjustable rates of interest and
have terms of eighteen months or less.
The Bank's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value upon completion of
the project and the estimated cost (including interest) of the project. If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally committed in order to permit
completion of the project. If the estimate of value proves to be inaccurate, the
Bank may be confronted, at or prior to the maturity of the loan, with a project
having a value insufficient to assure full repayment. When loan payments become
due, borrowers may experience cash flow from the property that is not adequate
to service the total debt. In such cases, the Bank may be required to modify the
terms of the loan.
Consumer Lending. The Bank originates directly and through various dealers
a limited number of consumer loans, which are offered at fixed and adjustable
rates of interest. In late 1999, the Bank entered into an agreement with DTE
Energy (formerly MichCon) a large Michigan utility company, from which the Bank
has significantly increased its consumer home improvement loan portfolio.
Consumer loans generally entail greater risk than do mortgage loans, since
many consumer loans are typically unsecured or secured by rapidly depreciating
assets such as automobiles and home improvement collateral. In such cases, any
repossessed collateral for defaulted consumer loans may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrowers beyond
obtaining a deficiency judgement. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
LOANS TO ONE BORROWER
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus. At December 31, 2002, the Bank's loans-to-borrower limit
was approximately $6.5 million at the 15% level. At December 31, 2002, the Bank
had no loans to one borrower in excess of its lending limit.
NONPERFORMING ASSETS AND RISK ELEMENTS
When, in the opinion of management, reasonable doubt exists as to the full
and timely collection of interest or principal on the Bank's outstanding loans,
the Bank will put such loans on nonaccrual status. Generally, consumer loans are
charged off no later than when they reach 120 days past due status, or earlier,
if deemed uncollectible. Loans, other than consumer loans, are generally placed
on nonaccrual status when management determines that principal or interest may
not be fully collectible, but no later than when the loan is 90 days past due on
principal or interest. Interest on loans is generally accrued daily based on the
principal balance outstanding. However, when a loan is placed on nonaccrual
status, the accrued
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interest income is discontinued and interest previously accrued but not
collected on nonaccrual loans is charged against current income.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses reflects management's evaluation
of the adequacy of the allowance for loan and lease losses. The allowance for
loan and lease losses represents management's assessment of probable losses
inherent in the Bank's loan portfolio, including all binding commitments to
lend. The allowance provides for probable losses that have been identified with
specific borrowing customers and for probable losses believed to be inherent but
that have not been specifically identified. The Bank allocates the allowance for
loan and lease losses to each loan category based on a defined methodology that
has been in use for several years. Internal risk ratings are assigned to each
business loan at the time of approval and are subject to subsequent periodic
reviews by Bank management and the Bank's loan review consultants. Business
loans consist of non-real estate commercial loans, commercial mortgages and Bank
lines of credit. A detailed review of the loan portfolio is performed on a
quarterly basis to assess the credit quality of the Bank's commercial loan
portfolio. A specific portion of the allowance is allocated to such loans based
upon this review. The portion of the allowance allocated to the remaining
business loans is determined by applying projected loss ratios to each risk
rating based on both qualitative and quantitative factors. The portion of the
allowance allocated to consumer and mortgage loans is determined by applying
projected loss ratios to various segments of the loan portfolio. Projected loss
ratios incorporate factors such as recent charge-off experience, current
economic conditions and trends, geographic dispersion of borrowers, and trends
with respect to past due and non-accrual amounts.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to the allowance for loan losses, the loan
portfolio composition, loan commitments, loan maturity schedule and
nonperforming assets.
SOURCE OF FUNDS
The Bank's deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, the
Bank derives funds from loan repayments, advances from the Federal Home Loan
Bank ("FHLB") of Indianapolis and other borrowings, and at times has derived
funds from repurchase agreements and loan and securities sales. Scheduled loan
repayments are a relatively stable source of funds, while loan prepayments and
interest-bearing deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used to
compensate for reductions in normal sources of funds, such as deposit inflows at
less than projected levels, deposit outflows, or to support expanded activities.
Historically, the Bank has borrowed primarily from the FHLB of Indianapolis and
through repurchase agreements.
The ability of the Bank to attract and maintain deposits, and its cost of
funds, have been, and will continue to be, significantly affected by general
economic and business conditions.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to deposits and other sources of funds.
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INVESTMENT ACTIVITIES
The Bank invests in various securities, which are acquired in the capital
markets. These investments may consist of mortgage, government, agency,
municipal and corporate debt securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" relating to the
securities maturity schedule.
COMPETITION
The Bank competes aggressively for its business through a systematic
program of direct calling on both customers and referral sources such as
attorneys, accountants and business people. The Bank's program is enhanced
because of its well-established network of existing relationships, which have
been created over the years in the area's business community and because of the
years of banking experience and community involvement of its senior management
and lending officers. The Bank's programs and services are further enhanced by
its distinctive marketing focus, including its radio advertising campaign, and
by referrals from the growing base of existing business customers.
Generally, the Bank believes that it should attempt to compete in areas in
which it can truly develop niche products and services so as to avoid direct
face-to-face competition with larger financial institutions. The larger banks
tend to need very large homogeneous markets in order to support high levels of
automation and systems development. This leaves smaller product markets and
heterogeneous product lines under-served. The larger banks also tend to have
rigid structures, which adapt slowly to changing market environments and,
therefore, provide opportunities for smaller institutions that can react more
quickly. Finally, competitive pressures and relaxation of anti-trust policies by
the Justice Department and other regulatory agencies in the past decade have
caused a rapid increase in the merger and acquisition activity among the larger
banks. This activity has frequently diverted the larger banks' attention away
from their smaller customers in local markets resulting in big-bank customer
dissatisfaction while creating marketing opportunities for many smaller
institutions, such as the Bank.
SUPERVISION AND REGULATION
Overview -- Bancorp
The Company is a Michigan corporation subject to the Michigan
Business Corporation Act. The Company is a one-bank holding company within the
meaning of the Bank Holding Company Act and is registered as such with, and
subject to, the supervision of the Federal Reserve Board. The Company will be
required to file with the Federal Reserve Board quarterly and annually reports
and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board regularly
conducts examinations of bank holding companies and their subsidiaries.
As a banking holding company, the Company will be required to obtain the
approval of the Federal Reserve Board:
8
- before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if,
after giving effect to such acquisition of shares, the Company
would own or control more than 5% of the voting shares of such
bank.
- before the merger or consolidation of the Company and another bank
holding company.
The Company will also be prohibited by the Bank Holding Company Act,
except in certain statutorily prescribed instances, from:
- acquiring direct or indirect ownership or control of more than 5%
of the outstanding voting shares of any company that is not a bank
or bank holding company; and
- from engaging, directly or indirectly, in activities other than
those of banking, managing or controlling banks or furnishing
services to its subsidiaries.
However, the Company may, subject to the prior approval of the Federal
Reserve Board, engage in any, or acquire shares of companies engaged in,
activities that are deemed by the Federal Reserve Board to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Under the Federal Reserve Board's regulations:
- a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe and unsound manner;
- in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks.
A bank holding company's failure to meet its obligations to serve as a
source of strength to its subsidiary banks will generally be considered by the
Federal Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board's regulations or both.
The Gramm-Leach-Bliley Act of 1999, will give the Company the option to
file for "financial holding company" status and engage in additional "financial
activities" under the new legislation, such as merchant banking and insurance
underwriting, if the Company and the Bank meet certain standards. There are no
current plans to do so.
Overview -- Bank
The Bank is a federally chartered national banking association.
Accordingly, the Bank is subject to broad federal regulation and oversight
extending to all it operations by the Office of the Comptroller of the Currency
("OCC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis and is subject to certain limited regulation by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a member of the Savings Association
Insurance Fund ("SAIF") and its deposits are insured by the FDIC. As a result,
the FDIC has certain regulatory authority over Franklin.
9
Insurance of Accounts and Regulation by the FDIC. The Bank is currently a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insurance
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well-capitalized (i.e. those with a core capital ratio of at least 5%, a ratio
of Tier 1 or core capital to risk weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than adequately
capitalized (i.e. those with core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions will be made by the FDIC for each semi-annual
assessment period.
Prompt Corrective Action. The OCC is authorized and, under certain circumstances
required, to take certain actions against national banks that fail to meet their
capital requirements. The OCC is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier I risked-based capital
ratio or an 8% risk-based capital ratio). Any such national bank must submit a
capital restoration plan and, until such plan is approved by the OCC, may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OCC
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
Any national bank that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier I risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of it operations and include a forced
merger or acquisition of the bank. Any national bank that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the OCC must
appoint a receiver (or conservator with the concurrence of the FDIC) for a
national bank, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized association is also subject to
the general enforcement authority of the OCC, including the appointment of a
conservator or a receiver.
The OCC is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
See the discussion under "Regulatory Capital" in Management's Discussion
and Analysis of Financial Condition and Results of Operations. During 2002, the
Bank's capital levels remained significantly above the "well-capitalized" OCC
classification.
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Limitations on Dividends and Other Capital Distributions. As a national bank,
the Bank's ability to pay dividends is governed by the National Bank Act and OCC
regulations. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits, after deducting
reserves for losses and bad debts. The National Bank Act further restricts the
payment of dividends out of net profits by prohibiting a national bank from
declaring a dividend on its shares of common stock until the surplus fund equals
the amount of capital stock or, if the surplus fund does not equal the amount of
capital stock, until one-tenth of the national bank's net profits for the
preceding two half-year periods in the case of annual dividends, are transferred
to the surplus fund. In addition, the prior approval of the OCC is required for
the payment of a dividend if the total of all dividends declared by a national
bank in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, it would be classified
as "undercapitalized" under the OCC's regulations. See "-Regulatory Capital
Requirements -- Prompt Corrective Action."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC-insured institution, including national banks, has a continuing and
affirmative obligation, consistent with safe and sound banking practices, to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OCC, in connection with the examination of the Bank, to assess its
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or the
establishment of a branch, by the Bank. An unsatisfactory rating may be used as
the basis for the denial of an application by the OCC.
Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in 1999
and received a satisfactory rating. In addition, the Bank was not denied
permission to establish its recently opened Troy branch.
Federal Reserve System. As a national bank, the Bank is required to become a
member of the Federal Reserve System and subscribe for stock in the Federal
Reserve Bank ("FRB") of Chicago in an amount equal to 6% of its paid in capital
and surplus (payment for one-half is initially required with the remainder
subject to call by the FRB). At December 2002, the Bank had $1.5 million in FRB
stock.
The FRB requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At December 31, 2002,
the Bank was in compliance with these reserve requirements.
Federal Home Loan Bank System. The Bank is currently a member of the FHLB of
Indianapolis, which is one of 12 regional FHLB's that administer the home
financing credit function of savings associations. Each FHLB
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serves as a reserve or central bank for its member within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidation
obligations of the FHLB System. It makes loans to members (i.e. advances) in
accordance with policies and procedures, established by the board of directors
of the FHLB which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all loan advances are
required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 2002, the Bank had $5.9 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 7.55% and averaged 6.06% for
calendar year 2002.
RECENT LEGISLATION
USA Patriot Act. On October 26, 2001, President Bush signed into law, the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"). The USA
Patriot Act is intended to allow the federal government to address terrorist
threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing and broadened anti-money laundering
requirements. Title III of the USA Patriot Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Certain provisions of Title III impose affirmative obligations on a
broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among its provisions, the USA Patriot Act requires each financial
institution: (i) to establish an anti-money laundering program, (ii) to
establish due diligence policies, procedures and controls with respect to its
private banking accounts and corresponding banking accounts involving foreign
individuals and certain foreign banks and (iii) to avoid establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, the USA Patriot Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist
acts, or money laundering activities. The federal banking agencies have become
proposing and implementing regulations in interpreting the USA Patriot Act. It
is not anticipated that the USA Patriot Act will have a significant impact on
the financial condition or results of operations of the Company.
Sarbanes-Oxey Act. On July 30, 2002, President Bush signed into law the
Sarbanes- Oxley Act of 2002 (the "Sarbanes-Oxley Act") which is intended to
address systemic and structural weaknesses of the capital markets in the United
States that were perceived to have contributed to recent corporate scandals. The
Sarbanes-Oxley Act creates the Public Company Accounting Oversight Board to
oversee the conduct of audits of public companies. Such Board will be funded
from assessments on public companies. In addition, the Sarbanes-Oxley Act
attempts to strengthen the independence of public company auditors and to
increase the responsibility of corporate management. Although the Company
anticipates that it will incur additional
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expense in complying with the provisions of the Sarbanes-Oxley Act and the
regulations promulgated by the Securities and Exchange Commission thereunder,
the Company does not expect that such compliance will have a material impact on
the Company's financial condition or results of operations.
EMPLOYEES
At December 31, 2002, the Bank had a total of 191 full-time equivalent
employees, none of whom were employed pursuant to collective bargaining
agreements. The Bank considers its relations with its employees to be
satisfactory.
SELECTED STATISTICAL AND OTHER INFORMATION.
Certain statistical and other information referenced below is including in
the Company's Annual Report to Shareholders for the year ended December 31, 2002
on the pages referenced below which are incorporated herein by reference:
Page
----
I. Distribution of Assets, Liabilities and Stockholder's Equity;
Interest Rates and Interest Differential
A. Average Balance Sheets.......................................7
B. Net Interest Earnings........................................7
II. Investment Portfolio..........................................14,32
III. Loan Portfolio
A. Types of Loans..............................................13
B. Maturities and Sensitivities of Loans to Changes in
Interest Rates............................................14
C. Risk Elements............................................17,18
D. Other Interest Bearing Assets...............................NA
IV. Summary of Loan and Lease Loss Experiences......................8,9
V. Deposit Portfolio..............................................7,15
VI. Return on Equity and Assets.....................................2,3
VII Short Term Borrowings.........................................15,34
ITEM 2. PROPERTIES
The Bank leases space for its executive offices located at 24725 West
Twelve Mile Road, Southfield, Michigan 48034. The term of the lease was extended
as of January 1, 2003 and now expires on January 1, 2010. The Bank has an option
to extend the lease for an additional three years.
13
The Bank also leases its Southfield branch office located at 26336 West
Twelve Mile Road, Southfield, Michigan 48034. This lease expires on March 31,
2008. The Bank has four options to extend the lease for a period of five years
each.
The Bank owns its approximately 2,200 square-foot Grosse Pointe Woods
branch office located at 20247 Mack Avenue. This property had a net book value
of $302,274 at December 31, 2002.
The Bank leases its Birmingham branch office located at 479 Old South
Woodward Avenue. The building's lease expires May 1, 2007, but carries an option
to renew the lease for an additional 20-year term.
The Bank leases its Troy branch located at 755 West Big Beaver Road, Suite
101, Troy, MI 48084. This lease expires on November 1, 2010. The Bank has two
options to extend the lease for a period of five years each.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to routine legal proceedings
arising out of its general lending activities and other operations. However,
there are no material pending legal proceedings to which the Company or its
subsidiary are a party, or to which any of their property is subject, which, if
determined adversely to the Company or its subsidiary, would individually or in
the aggregate have a material adverse effect on its consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information with respect to the market for and dividends on the
Company's common stock and related shareholder matters is included on pages 44
and 45 of the Annual Report to Shareholders attached to this Form 10-K as
Exhibit 13 and incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information with respect to selected financial data is included in the
table entitled "Ten Year Summary of Selected Consolidated Financial Data" and
"Quarterly Summary of Selected Consolidated Financial Data" on pages 3 and 4 of
the Annual Report to Shareholders attached to this Form 10-K as Exhibit 13 and
incorporated herein by reference.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information with respect to management's discussion and analysis of
financial condition and results of operation is contained under the heading
"Management's Discussion and Analysis" on pages 5 through 22 of the Annual
Report to Shareholders attached to this Form 10-K as Exhibit 13 and incorporated
herein by reference.
Except for the historical information contained herein, the matters
discussed in this report may be deemed to be forward-looking statements that
involve risk and uncertainties. Words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Factors
that could cause results to differ include those listed below and other risks
detailed from time to time in the Company's Securities and Exchange Act of 1934
reports, including this report on Form 10-K for the year ended December 31,
2002. These forward-looking statements represent the judgment as of the date of
this report. The Company disclaims, however, any intent or obligation to update
these forward-looking statements.
Future factors include, but are not limited to, changes in interest rates
and interest rate relationships; demand for products and services; the degree of
competition by traditional and non-traditional competitors; changes in banking
regulations; changes in tax laws; changes in prices, levies and assessments; the
impact of technological advances and issues; governmental and regulatory policy
changes; the outcomes of pending and future litigation and contingencies; trends
in customer behavior as well as their ability to repay loans; changes in the
national economy and changes in economic conditions of the Bank's market area.
These are representative of the future factors that could cause a difference
between an ultimate actual outcome and the preceding forward-looking statement.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information with respect to quantitative and qualitative market risk
is contained under the heading "Interest Rate Sensitivity" on pages 19, 20 and
21 of the Annual Report to Shareholders attached to this Form 10-K as Exhibit 13
and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The auditor's report, consolidated financial statements and notes to
consolidated financial statements included on pages 25 through 43 in the Annual
Report to Shareholders are attached to this Form 10-K as Exhibit 13 and
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers of the
Company is included in the definitive Proxy Statement for the 2003 Annual
Meeting ("2003 Proxy Statement") in the section subtitled "Election of
Directors," which are incorporated herein by reference and in the subsection
thereunder entitled "Executive Officers Who Are Not Directors" and under
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is included in the 2003
Proxy Statement in the subsections entitled "Compensation Committee Interlocks
and Insider Participation," "Employment Agreements/Severance Agreements,"
"Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregate
Option Exercises in Fiscal Year and Fiscal Year End Option Values," and
"Compensation of Directors" which are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information with respect to the security ownership of certain
beneficial owners and management and with respect to equity compensation plans
are included in the 2003 Proxy Statement in the sections subtitled "Principal
Shareholders," and "Equity Compensation Plan Information" which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
is included in the 2003 Proxy Statement in the subsection subtitled
"Transactions with Franklin," which is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) The term "disclosure controls and procedures" is defined in rules
13a-14(c) and 15(d)-14(c) of the Securities Exchange Act of 1934 (the "Exchange
Act"). These Rules refer to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Our Chief Executive Officer, who is
also the Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures as of a date within 90 days before the filing
of this annual report (the "Evaluation Date"), and has concluded that our
disclosure controls and procedures are effective in providing him with material
information relating to the Company known to others within the Company which is
required to be included in our periodic reports filed under the Exchange Act.
(b) There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the Evaluation Date.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) (1) FINANCIAL STATEMENTS
The following financial statements of the Company are incorporated herein
by reference from the Annual Report to Shareholders. Page number references are
to the Annual Report to Shareholders.
PAGE(S)
- --------------------------------------------------------------------------------
Management's Letter.......................................................AR-23
Report of Independent Certified Public Accountants........................AR-24
Consolidated Statements of Financial Condition at
December 31, 2002 and 2001..............................................AR-25
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000........................................AR-26
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001
and 2000................................................................AR-27
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000........................................AR-27
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000........................................AR-28
Notes to Consolidated Financial Statements................................AR-29
(a) (2) FINANCIAL STATEMENT SCHEDULES
ALL OTHER FINANCIAL STATEMENT SCHEDULES HAVE BEEN OMITTED AS THE REQUIRED
INFORMATION IS INAPPLICABLE.
(a) (3) EXHIBITS
SEQUENTIAL
PAGE NUMBER
WHERE ATTACHED
EXHIBITS ARE
EXHIBIT LOCATED IN
NO. DOCUMENT THE 10-K
- --------------------------------------------------------------------------------
2.1 Business Combination Application dated March 14, 2002
filed with the OCC(1)...................................
2.2 Consolidation Agreement dated as of April 23, 2002(2)................
3.1 Articles of Incorporation(1).........................................
3.2 Bylaws(1)............................................................
3.3 Amendments to Bylaws(3)..............................................22
4.1 Specimen Stock Certificate(1)........................................
10.1 Key Executive Stock Option Plan(2)...................................
10.2 1986 Directors' Stock Option Plan(2).................................
10.3 1994 Amended and Restated Key Executive Incentive
Stock Option Plan(2).........................................
10.4 Amendment (1998) to 1994 Key Executive Stock Option Plan(2)..........
10.5 1994 Directors' Stock Option Plan(2).................................
10.6 Amendment (1998) to 1994 Directors' Stock Option Plan(2).............
10.7 Form of Officers Severance Agreement(2)..............................
10.8 Form of Amendment to Officers Amended and Restated
Severance Agreement(2)......................................
10.9 Amendment No. 1 to Severance Agreement of Douglas W. Mires(2)........
- ----------------------
(1) Incorporated by reference to Exhibits to form 8-K filed on
November 7, 2002, Commission File No. 50078.
(2) Incorporated by reference to Exhibits to form 8-K/A filed on
November 15, 2002, Commission file No. 50078.
(3) Filed herewith
17
10.10 Limited Waiver and Amendment to Severance Agreement of
Douglas W. Mires(2)................................................
10.11 Amendment No. 1 to Severance of Marjorie K. Duncanson(2).............
10.12 Limited Waiver and Amendment to Severance Agreement of
Marjorie K. Duncanson(2)...........................................
10.13 Form of Amended and Restated Severance Agreement
(Non-Employee Directors)(2)........................................
10.14 Form of Amendment to Amended and Restated Severance
Agreement (Non-Employee directors)(2)..............................
10.15 Form of Second Amendment to amended and Restated
Severance Agreement (Non-Employee Directors).......................
10.16 Amended and Restated Severance Agreement of David L. Shelp(2)........
10.17 Letter of employment of David L. Shelp(2)............................
10.18 Employment Agreement of George J. Hall(3)............................23
11 Statement Regarding Computation of Per Share Earnings..............AR-2
13 Annual Report to Shareholders for period ended December 31, 2002...AR-1
21 Subsidiaries of Registrant........................................AR-45
23.1 Consent of Grant Thornton LLP........................................32
24.1 Powers of Attorney ....................(included on Signature Page)
99.1 Chief Executive Officer and Chief Financial Officer Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002..........33
(b) REPORTS ON FORM 8-K
On November 7, 2002, the company filed a Form 8K/12g-3, which was
amended on November 15, 2002, disclosing in Item 5 thereof that the Company
became the successor issuer to Franklin Bank, National Association, pursuant to
rule 12g-3 under the Securities Exchange Act of 1934.
On December 5, 2002, the Company filed a Form 8-K disclosing in Item
5 thereof the resignation of a director.
(c) EXHIBITS
See Item 14(a)(3)
(d) FINANCIAL STATEMENT SCHEDULES
None
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FRANKLIN BANCORP, INC.
March 28, 2003 By: /s/ David L. Shelp
------------------------------------------
David L. Shelp, President, Chief Executive
Officer, and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David F. Simon and Dean A. Friedman, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (including his capacity as a director and/or officer of
Franklin Bancorp, Inc.), to sign and file pursuant to the Securities Exchange
Act of 1934, as amended, any and all amendments to this Annual Report on Form
10-K together with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on behalf of Franklin Bancorp, Inc. this 28th day of March 2003.
/s/ David F. Simon /s/ Irving R. Beimler
- ------------------------------------------ ---------------------------------
David F. Simon, Chairman of the Board Irving R. Beimler, Director
/s/ David L. Shelp /s/ John W. Palmer
- ------------------------------------------ ---------------------------------
David L. Shelp, President, CEO, CFO John W. Palmer, Director
and Director (Principal Executive
Officer, Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard J. Lashley /s/ Dean A. Friedman
- ------------------------------------------ ---------------------------------
Richard J. Lashley, Director Dean A. Friedman, Director
19
CERTIFICATION
I, David L. Shelp, President, Chief Executive Officer, and Chief Financial
Officer of Franklin Bancorp, Inc. (the "registrant") certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to me by others, particularly during the period in which
this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of the board of directors
(or persons fulfilling the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 28, 2003 /s/ David L. Shelp
------------------------------------------
David L. Shelp
President, Chief Executive Officer
and Chief Financial Officer
(principal executive and principal
financial officer)
20
EXHIBITS INDEX
PAGE
EXHIBIT..................................................................... NO.
3.3 Amendments to Bylaws..................................................22
10.18 Employment Agreement of George J. Hall................................23
11. Statement Regarding Computation of Per Share Earnings...............AR-2
13 Annual Report to Shareholders for period ended December 31, 2002....AR-1
21 Subsidiaries of Registrant.........................................AR-45
23.1 Consent of Grant Thornton LLP.........................................32
24.1 Power of Attorney ......................Included on signature page
99.1 Chief Executive Officer and chief Financial Officer Certification
Pursuant to Section 906 of the Sanbares-Oxley Act of 2002...........33
21