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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 0-50078
FRANKLIN BANCORP, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES 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 office) (Zip Code)
REGISTRANTS'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 358-4710
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
requirement for the past 90 days. Yes x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 14, 2003
----- ---------------------------
Common stock, $1.00 par value. 3,681,904
This document contains twenty-four (24) pages
-1-
FRANKLIN BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 2003 (UNAUDITED) AND
DECEMBER 31, 2002.......................................................................................4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND 2002 (UNAUDITED) ...................................................................................5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND 2002 (UNAUDITED) ..................................................................................6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED) ....................................................................7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003
AND 2002 (UNAUDITED)....................................................................................8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)......................................................9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............12
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED MARCH 31, 2002.......................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........................................18
ITEM 4. CONTROLS AND PROCEDURES............................................................................19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................................20
ITEM 2. CHANGES IN SECURITIES..............................................................................20
ITEM 3. DEFAULTS ON SENIOR SECURITIES......................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................20
ITEM 5. OTHER INFORMATION..................................................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................20
SIGNATURES.................................................................................................21
CERTIFICATIONS.............................................................................................22
-2-
[GRANT THORNTON LOGO]
Report of Independent Certified Public Accountant
Board of Directors and Stockholders
Franklin Bancorp, Inc.
We have reviewed the accompanying consolidated statements of financial condition
of Franklin Bancorp, Inc. and subsidiary as of March 31, 2003, and the related
consolidated statements of operations, comprehensive (loss) income,
shareholders' equity and cash flows for the three-month periods ended March 31,
2003 and 2002. These interim financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
/S/ GRANT THORNTON LLP
Southfield, Michigan
May 1, 2003
-3-
FRANKLIN BANCORP, INC.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
AT
-----------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
-----------------------------------------
(unaudited)
ASSETS
Cash and due from banks $ 29,039,975 $ 18,171,153
Interest-earning deposits 2,194,283 3,580,028
Time deposits with Federal Home Loan Bank 31,404,335 9,050,162
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents 62,638,593 30,801,343
Securities available for sale 122,030,240 149,836,545
Federal Home Loan Bank stock, at cost 5,868,900 5,868,900
Federal Reserve Bank stock, at cost 924,100 1,541,500
Loans 319,774,826 333,345,726
Allowance for loan losses (5,280,006) (5,926,813)
- --------------------------------------------------------------------------------------------------
Net loans 314,494,820 327,418,913
Real estate owned 1,927,145 2,004,449
Premises and equipment, net 3,308,329 3,026,171
Bank Owned Life Insurance (BOLI) 9,920,822 9,799,009
Other assets 8,885,483 12,181,487
- --------------------------------------------------------------------------------------------------
Total assets $ 529,998,432 $ 542,478,317
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 417,065,012 $ 429,129,830
Borrowings 65,000,000 65,000,000
Other liabilities 3,762,354 2,706,792
- --------------------------------------------------------------------------------------------------
Total liabilities 485,827,366 496,836,622
Shareholders' equity:
Common stock - par value $1; authorized 6,000,000 shares,
issued and outstanding 3,681,904 shares
(3,647,593 shares at December 31, 2002) 3,681,904 3,647,593
Additional paid-in capital 27,408,866 27,154,384
Retained earnings 11,342,971 12,413,704
Accumulated other comprehensive income 1,737,325 2,426,014
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 44,171,066 45,641,695
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 529,998,432 $ 542,478,317
==================================================================================================
See Notes to Consolidated Financial Statements
-4-
FRANKLIN BANCORP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS ENDED
--------------------------------
MARCH 31,
2003 2002
- --------------------------------------------------------------------------------------------
INTEREST INCOME
Interest on loans $ 5,679,714 $ 6,424,003
Interest on securities 1,051,594 1,650,530
Other interest and dividends 558,872 552,067
- --------------------------------------------------------------------------------------------
Total interest income 7,290,180 8,626,600
INTEREST EXPENSE
Interest on deposits 964,969 1,209,290
Interest on other borrowings 717,751 779,440
- --------------------------------------------------------------------------------------------
Total interest expense 1,682,720 1,988,730
- --------------------------------------------------------------------------------------------
Net interest income 5,607,460 6,637,870
Provision for loan losses 625,653 475,000
- --------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,981,807 6,162,870
- --------------------------------------------------------------------------------------------
NON INTEREST INCOME
Deposit account service charges 756,057 785,980
Net gain on sale of securities 455,511
Net loss on sale of other assets (77,304) (6,477)
Other 405,419 415,010
- --------------------------------------------------------------------------------------------
Total non interest income 1,539,683 1,194,513
- --------------------------------------------------------------------------------------------
NON INTEREST EXPENSE
Compensation and benefits 2,462,092 2,407,985
Severance compensation 2,759,740
Occupancy and equipment 804,999 787,938
Defaulted loan expense 130,661 89,182
Other 1,474,981 1,286,255
- --------------------------------------------------------------------------------------------
Total non interest expense 7,632,473 4,571,360
- --------------------------------------------------------------------------------------------
(Loss) income before Federal income tax (benefit) provision (1,110,983) 2,786,023
Federal income tax (benefit) provision (333,300) 721,432
- --------------------------------------------------------------------------------------------
Net (loss) income before preferred stock dividends (777,683) 2,064,591
Preferred stock dividends of subsidiary 450,225
- --------------------------------------------------------------------------------------------
Net (loss) income $ (777,683) $ 1,614,366
============================
(LOSS) INCOME PER COMMON SHARE
Average common shares outstanding
Basic 3,666,688 3,620,125
Diluted 3,754,431 3,755,540
(Loss) income per common share
Basic ($0.21) $0.45
Diluted ($0.21) $0.43
See Notes to Consolidated Financial Statements
-5-
FRANKLIN BANCORP, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)
THREE MONTHS ENDED
-------------------------------
MARCH 31,
2003 2002
-------------------------------
NET (LOSS) INCOME $ (777,683) $ 1,614,366
Other comprehensive loss, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period (989,326) (726,685)
Less: reclassification adjustment for gains included
in net income 300,637
- --------------------------------------------------------------------------------------------------
Other comprehensive loss (688,689) (726,685)
- --------------------------------------------------------------------------------------------------
Comprehensive (loss) income $ (1,466,372) $ 887,681
==================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
THREE MONTHS ENDED
-----------------------------------
MARCH 31,
2003 2002
-----------------------------------
COMMON STOCK
Balance at beginning of period $ 3,647,593 $ 3,607,542
Exercise of options 34,311 18,100
- -------------------------------------------------------------------------------------------------------------------
BALANCE END OF PERIOD 3,681,904 3,625,642
- -------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period 27,154,384 27,839,246
_Exercise of options 254,482 212,287
- -------------------------------------------------------------------------------------------------------------------
BALANCE END OF PERIOD 27,408,866 28,051,533
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 12,413,704 9,722,876
Net (loss) income (777,683) 1,614,366
Cash dividend on common stock ($0.08 per share) (293,050) (252,951)
- -------------------------------------------------------------------------------------------------------------------
BALANCE END OF PERIOD 11,342,971 11,084,291
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of period 2,426,014 1,009,795
Change in accumulated other comprehensive loss (688,689) (726,685)
- -------------------------------------------------------------------------------------------------------------------
BALANCE END OF PERIOD 1,737,325 283,110
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 44,171,066 43,044,576
===================================
See Notes to Consolidated Financial Statements
-6-
FRANKLIN BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED
-----------------------------------
MARCH 31,
2003 2002
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $ (777,683) $ 1,614,366
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses 625,653 475,000
Depreciation and amortization 282,975 282,940
Realized gain on sale of securities, net and other assets (350,900) 6,477
Increase in cash surrender value of life insurance (121,813) (155,208)
Net deferral of loan origination costs/(fees) 58,883 (21,551)
Decrease in accrued interest receivable 525,560 209,982
Amortization and accretion on securities 266,915 175,998
Decrease/(increase) in prepaid expenses and other assets 3,911,060 (2,375,418)
Increase/(decrease) in accrued interest payable, deferred taxes and other liabilities 1,055,562 (658,813)
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 6,253,895 (2,060,593)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) operating activities 5,476,212 (446,227)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (1,818,590) (5,335,570)
Proceeds from sales of securities available for sale 5,192,400
Proceeds from maturities and paydowns of securities available for sale 24,195,023 8,268,066
Net decrease/(increase) in loans 10,968,186 (2,695,802)
Proceeds from the sale of real estate owned 458,227 16,977
Capital expenditures (565,133) (131,435)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 38,430,113 122,236
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease)/increase in deposits (12,064,818) 25,412,709
Decrease in short term borrowings and subordinated capital notes (14,605,696)
Exercise of common stock options 288,793 230,387
Cash dividends paid on common stock (293,050) (252,951)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (12,069,075) 10,784,449
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 31,837,250 10,460,458
Beginning cash and cash equivalents 30,801,343 24,456,995
- -----------------------------------------------------------------------------------------------------------------------------
Ending cash and cash equivalents $ 62,638,593 $ 34,917,453
=============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,704,978 $ 1,979,754
Federal income taxes 925,001
Non-cash investing and financing activities:
Transfer from loans to real estate owned (net) 1,271,371 1,584,397
See Notes to Consolidated Financial Statements
-7-
FRANKLIN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation and Significant Accounting Policies:
The accompanying consolidated financial statements of Franklin Bancorp,
Inc. ("Franklin" or the "Bancorp") have been prepared in accordance with
the instructions for Form 10-Q. Accordingly, they do not include all
information and footnotes necessary for a fair presentation of consolidated
financial condition, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America. The statements do, however, include all adjustments (consisting of
normal recurring accruals) which management considers necessary for a fair
presentation of the interim periods.
This Form 10-Q is written with the presumption that the users of the
interim financial statements have read or have access to Franklin's Annual
Report on Form 10-K, which contains the latest audited financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations as of December 31, 2002 and
for the year then ended. Therefore, only material changes in financial
condition and results of operations are discussed in the remainder of Part
I.
The results of operations for the three month period ended March 31,
2003 are not necessarily indicative of the results to be expected for the
year ended December 31, 2003.
The Consolidated Statement of Financial Condition as of December 31,
2002 has been derived from the audited Consolidated Statement of Financial
Condition as of that date.
Stock Options
At March 31, 2003, the Corporation has two stock-based employee
compensation plans and two stocked based director compensation plans. The
Corporation accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans have an
exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. As no new options were granted during
the quarters ended March 31, 2003 and 2002, the effect on net (loss) income
and (loss) earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, as amended by FASB Statement No. 148, to
stock-based employee compensation was less than $.01 in each of the periods
presented.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
and addresses consolidation by business enterprises of variable interest
entities (more commonly known as Special Purpose Entities or SPE's). FIN
No. 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among the parties involved. FIN No. 46 also
enhances the disclosure requirements related to variable interest entities.
This statement is effective for variable interest entities created or in
which an enterprise obtains an interest after January 31, 2003. The
adoption of FIN No. 46 did not have a significant effect on results of
operations or financial position.
-8-
FRANKLIN BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 2. Earnings Per Share:
Net (loss) income per share is computed based on the weighted-average
number of shares outstanding, including the dilutive effect of stock
options, as follows:
THREE MONTHS ENDED
-----------------------------
MARCH 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
NUMERATOR
Net (loss) income $ (777,683) $ 1,614,366
Numerator for basic and diluted earnings per share
(Loss) income available for common shareholders $ (777,683) $ 1,614,366
-----------------------------
DENOMINATOR
Denominator for basic earnings per share - weighted average shares outstanding 3,666,688 3,620,125
Employee stock options 72,527 135,415
-----------------------------
Denominator for diluted earnings per share - adjusted weighted average shares outstanding 3,739,215 3,755,540
-----------------------------
Basic earnings per share $ (0.21) $ 0.45
-----------------------------
Diluted earnings per share $ (0.21) $ 0.43
-----------------------------
Note 3. Loans, Nonperforming Assets and Allowance for Loan Losses:
The following table summarizes changes in non-performing loans and
assets arising from loans being placed on non-accrual status, loans being
deemed to be non-performing and assets that Franklin currently owns:
NONPERFORMING ASSETS ANALYSIS
AT
------------------------------------
MARCH 31, DECEMBER 31,
2003 2002
------------------------------------
NONACCRUAL LOANS
Commercial $ 300,496 $ 338,547
Commercial mortgage 3,594,935 3,104,793
Residential mortgage 1,203,351 1,313,654
Consumer 386,481 75,993
Lease financing - -
- ------------------------------------------------------------------------------------------------------
Total nonaccrual loans 5,485,263 4,832,987
- ------------------------------------------------------------------------------------------------------
REAL ESTATE OWNED
Commercial mortgage 540,326 540,326
Residential mortgage 1,386,819 1,464,123
- ------------------------------------------------------------------------------------------------------
Total real estate owned 1,927,145 2,004,449
Real estate in redemption 1,271,371 485,534
- ------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 8,683,779 $ 7,322,970
======================================================================================================
TOTAL NONACCRUAL LOANS AND REAL ESTATE OWNED AS A PERCENTAGE OF:
Total assets 1.40% 1.26%
Loans and real estate owned 2.30 2.06
-9-
FRANKLIN BANCORP, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 3. Loans, Nonperforming Assets and Allowance for Loan Losses (continued):
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows and increases in the
present value of expected cash flows due to the passage of time. Cash payments
are reported as reductions in carrying value, while increases or decreases due
to changes in estimates of future payments and due to the passage of time are
reported as a valuation allowance and in gain or loss on sale of real estate
owned.
The following table summarizes changes in the allowance for loan losses
arising from loans charged off, recoveries of loans previously charged off
and additions to the allowance which have been charged to expense:
THREE MONTHS ENDED
------------------------------------------
MARCH 31,
2003 2002
------------------------------------------
Balance at beginning of period $ 5,926,813 $ 4,863,948
Provision for loan losses 625,653 475,000
CHARGE-OFFS
Commercial 42,114 353,197
Commercial mortgage 1,319,000
Consumer 335,521 514,017
Residential mortgage 23,072
Overdraft 11,764
Lease financing 57,082
- -------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 1,719,707 936,060
RECOVERIES
Commercial 159,768 18,025
Consumer 266,652 160,926
Residential mortgage 3,000 349
Overdraft 3,762
Lease financing 17,827 94,139
- -------------------------------------------------------------------------------------------------------------------------------
Total recoveries 447,247 277,201
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,272,460 658,859
- -------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 5,280,006 $ 4,680,089
===============================================================================================================================
Allowance as a percentage of
Loans 1.65% 1.43%
Nonperforming loans 96.26 178.22
Nonperforming assets 60.80 98.35
Net charge-offs (annualized) 103.74 177.58
Net charge-offs to average loans outstanding (annualized) 1.60 0.82
Information regarding impaired loans is as follows:
THREE MONTHS ENDED
------------------------------------------
MARCH 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Average investment in impaired loans $ 5,918,372 $ 2,626,038
THREE MONTHS ENDED
------------------------------------------
MARCH 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Balance of impaired loans $ 5,485,263 $ 2,626,038
Less portion of which no allowance for loan losses is allocated 648,394
Portion of impaired loan balance for which an allowance for credit losses is allocated 4,836,869 2,626,038
Portion of allowance for loan losses allocated to the impaired loan balance 1,079,112 1,159,325
-10-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 which could cause results to differ include those
listed below and other risks detailed from time to time in the Franklin's
Securities Exchange Act of 1934 reports, including the report on Form 10-K
for the year ended December 31, 2002. These forward-looking statements
represent Franklin's judgment as of the date of this report. The Bank
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 including implementation of the Act and its
effects; 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; and changes in the national economy and changes in economic
conditions of Franklin's market area. These are representative of the
future factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
CRITICAL ACCOUNTING POLICIES
ORGANIZATION
Effective at the close of business on October 23, 2002, Franklin Bank,
N.A. (the "Bank") was reorganized and Franklin was formed. All of the
outstanding common shares of the Bank were exchanged on a one for one basis
for the common shares of Bancorp to create a one bank holding company. As
control did not change, this transaction was accounted for at historical
cost, therefore there was not a significant effect on the comparability of
the financial statements presented. The Bank is a nationally chartered
commercial bank regulated by the Office of the Comptroller of the Currency,
and a member of the Federal Reserve Bank ("FRB") System and the Federal
Home Loan Bank ("FHLB") System. As a member of these systems, the Bank
maintains a required investment in capital stock of the FRB of Chicago and
the FHLB of Indianapolis.
Deposits are insured by the Savings Association Insurance Fund ("SAIF")
within certain limitations, as administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank operates four branches along with
its main office branch in the communities of Southfield, Birmingham, Grosse
Pointe Woods, Michigan and in 2003, Troy. The Bank is engaged in the
business of commercial and retail banking. The majority of the Bank's
income is derived from commercial and to a lesser extent retail business
lending activities and investments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements consist of the accounts of
Bancorp and its wholly-owned subsidiary the Bank. Significant intercompany
balances and transactions have been eliminated.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans, for which management has the intent and the Bank has the ability
to hold for the foreseeable future, until maturity or payoff, are reported
at their outstanding, unpaid principal balances, reduced by any charge-offs
or specific valuation accounts and net of any deferred fees or costs on
originated loans, unamortized premiums or discounts on purchased loans.
Loans held for sale are reported at the lower of cost or fair value.
On an ongoing basis, the Bank's loan portfolio is reviewed and analyzed
as to credit risk, performance, collateral value and quality. The allowance
for loan losses is maintained at a level believed to be adequate by
management to provide for probable loan losses inherent in the loan
portfolio. Management's judgment as to the adequacy of the allowance,
including the allocated and unallocated elements, is a result of ongoing
review of larger individual loans, the overall risk characteristics of the
smaller homogeneous loans, the level of non-performing assets, historical
net
-11-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
charge-offs and the impact of prevailing economic conditions. Loans are
charged-off to the extent they are deemed to be uncollectible.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all
principal and interest amounts due according to the contractual terms of
the loan agreement. Smaller balance homogeneous loans are collectively
evaluated for impairment. Impaired loans, or portions thereof, are charged
off when deemed uncollectible.
The carrying value of impaired loans is periodically adjusted to
reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such and
recognized as income when received. Increases or decreases in carrying
value due to changes in estimates of future payments or the passage of time
are reported as reductions or increases in the provision for loan losses.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan. Fees received for originating loans for other institutions are
recognized as income when the services are performed.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED MARCH
31, 2002:
NET INTEREST INCOME
Interest income decreased by $1.3 million, and interest expense
decreased by $306,010 resulting in an overall decrease to net interest
income of $1.0 million or 15.52%. The net interest margin was 4.75% and
5.38% for the three months ended March 31, 2003 and 2002, respectively. The
largest decrease in interest income was in the loan portfolio, with a
decrease of $744,289 or a 11.59% decrease. Interest income on securities
and other investments decreased by $592,131. The decrease in interest
income was primarily the result of the overall decrease in interest rates
over the last twelve months. Average balances for outstanding loans
decreased by $7.2 million or 2.22% when comparing the three months ended
March 31, 2003 to March 31, 2002. Average securities balances decreased
$11.2 million or 7.40%, for the three months ended March 31, 2003 compared
to March 31, 2002. Increased loan commitments and closings are expected for
the remainder of 2003. Continued increases, if any, in the loan portfolio,
may result in decreases in the securities portfolio.
Average balances for interest bearing deposits increased by $4.8
million or 2.10% when comparing March 31, 2003 to March 31, 2002. Average
FHLB advances decreased $733,000 or 1.09% while non interest bearing demand
deposits increased by $9.7 million or 5.75% for the quarters ending March
31, 2003 and March 31, 2002. Increases in deposits are expected to be used
for loan commitments.
-12-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY;
INTEREST RATE AND INTEREST DIFFERENTIAL
(Dollars in Thousands)
The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule
also presents an analysis of interest income and interest expense for the
periods indicated. All interest income is reported on a fully taxable
equivalent (FTE) basis using a 34% tax rate.
2003 2002
---------------- ----------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Three months ended March 31 (in thousands) Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans $ 317,604 $ 5,680 7.07% $ 324,834 $ 6,424 7.91%
Taxable investment securities 130,846 1,393 4.21 144,483 1,965 5.44
Non-taxable investment securities (1) 9,757 96 5.89 7,355 84 6.90
Interest bearing deposits 7,121 18 1.00 11,349 44 1.55
Other 7,232 103 5.63 7,393 110 5.95
-----------------------------------------------------------------------
Total earning assets 472,560 7,290 6.10 495,414 8,627 6.97
NON EARNING ASSETS:
Allowance for loan losses (6,020) (4,742)
Cash and due from banks 22,811 21,274
Accrued income and other assets 38,322 30,592
-------------- ----------
Total assets $ 527,673 $ 542,538
============== ==========
INTEREST BEARING LIABILITIES: $
Interest-bearing deposits 235,110 965 1.62% $ 230,261 1,209 2.10%
FHLB Advances 66,260 718 4.29 66,993 723 4.32
Other 0 - 12,534 57 1.82
-----------------------------------------------------------------------
Total interest bearing liabilities 301,370 1,683 2.21 309,788 1,989 2.57
NONINTEREST BEARING LIABILITIES:
Demand deposits 178,117 168,433
Other 2,654 21,219
Shareholders' equity 45,532 43,098
-------------- ----------
Total liabilities and equity $ 527,673 $ 542,538
============== ==========
Net interest income (FTE) $ 5,607 $ 6,638
========== ===========
Net yield on interest earning
assets (FTE) 4.75% 5.38%
====== =======
(1) Tax equivalent basis
-13-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table details the dollar amount of changes in FTE net
interest income for each major category of interest earning asset and
interest bearing liability, and the amount of change attributable to
changes in average balances (volume) or average rates. The change in
interest due to both volume and rate, has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of
the change in each.
2003 Compared to 2002
(Decrease)/Increase due to
---------------------------------------------
Three months ended March 31 (in thousands) Volume Rate Net
---------------------------------------------
CHANGES IN INTEREST INCOME:
Loans.................................. $ (130) $ (614) $ (744)
Taxable investment securities....... (169) (403) (572)
Nontaxable investment securities... 77 (65) 12
Interest bearing deposits ................. (13) (13) (26)
Other .................................. (2) (5) (7)
---------------------------------------------
Total changes in interest income (237) (1,100) (1,337)
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits..... 166 (410) (244)
FHLB Advances .................... (3) (2) (5)
Other.............. (29) (29) (58)
---------------------------------------------
Total changes in interest expense 134 (441) (307)
---------------------------------------------
Net Change in Net Interest Income (FTE) $ (371) $ (659) $ (1,030)
=============================================
-14-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NON INTEREST INCOME
Total non interest income increased by $345,170 or 28.90% for the three
months ended March 31, 2003 when compared to the same period ended 2002.
There was an increase in gain on sale of securities of $455,511 when
comparing the three months ended March 31, 2003 to the same period ended
March 31, 2002. There was a decrease in deposit account service charges of
$29,923 or 3.81%. This decrease can be attributed to competitive pricing
and current market forces regarding deposit account service charges. If the
local and national economy begins to improve the Bank expects to see an
increase in deposit account service charges throughout the remainder of
2003 with expected increases in the average balances of business checking
accounts.
NON INTEREST EXPENSE
Inclusive of severance charges, total non interest expense increased
$3.1 million or 66.96% during the three months ended March 31, 2003 when
compared to the same period ended March 31, 2002. This overall increase
included increases in the following: compensation and benefits of $54,107
or 2.25%, severance compensation of $2.8 million, occupancy and equipment
of $17,061 or 2.17%, defaulted loan expense of $41,479 or 46.51% due to
management quickly and aggressively identifying and charging off troubled
and delinquent loans, and other expense of $188,726 or 14.67% with
approximately $30,000 of other expense coming from the start up costs for
the new Troy branch for the three months ended March 31, 2003 when compared
to the three months ended March 31, 2002. Management expects that non
interest expenses will increase slightly when comparing the results of 2003
to 2002 for the remainder of the year primarily due to the opening of the
Troy branch in January of 2003. The bank currently has 8 previously
disclosed severance agreements that remain in place. If triggered, payments
under severance agreements could potentially cost the bank approximately
$300,000 on an after tax basis.
INCOME TAXES
The income tax benefit for the first quarter of 2003 totaled $333,300
compared to an income tax expense of $721,432 for the same period a year
ago. The effective tax rate was 30% for the first quarter of 2003, compared
to 30.90% for the same quarter of 2002.
FINANCIAL CONDITION
Total assets were $530.0 million at March 31, 2003 compared to $542.5
million at December 31, 2002. When comparing balances at March 31, 2003 and
December 31, 2002, cash and cash equivalents increased $31.8 million and
represented 11.82% and 5.68%, respectively, of total assets.
INVESTMENTS
Investment balances decreased $27.8 million or 18.56% from December 31,
2002 to March 31, 2003 as the Bank redeemed it's investment in Franklin
Finance Corporation's preferred stock through the reduction of FHLB time
deposit securities. The Bank will seek opportunities to buy short term
securities that provide an acceptable interest spread if increases in loan
origination is not possible.
LOANS
Loan balances decreased $13.6 million or 4.07% from December 31, 2002
to March 31, 2003. The Bank continues to target commercial real estate as
the key area for loan growth, and to a lesser extent The Franklin Line
(small business lines of credit), and consumer loans. The Bank expects to
see net growth within the Bank's primary market area in its loan portfolio
during the remaining three quarters of 2003 based on anticipated
improvement in the current economic conditions.
At March 31, 2003, the Bank had no loan commitments outstanding for
loans that have not been accepted or closed by borrowers. Typically, these
include commitments for commercial business loans, consumer, residential
mortgages and home equity loans.
-15-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Under loan agreements for transactions which had closed, the Bank had
commitments to fund commercial lines of credit, construction and home
equity loans of approximately $59.8 million at March 31, 2003. The Bank had
no commitments to fund construction loans and home equity loans, which had
not closed at March 31, 2003. As certain commitments to make loans and fund
full lines of credit expire without being used, the amount does not
necessarily represent future cash commitments
The level of nonperforming assets increased $1.4 million from $7.3
million at December 31, 2002 to $8.7 million at March 31, 2003, an increase
of 18.59%. The increase is due primarily to three relationships totaling
$1.3 million in redemption during the first quarter of 2003. Nonperforming
loans increased $652,276 or 13.50% from December 31, 2002 to March 31, 2003
primarily due to several commercial and consumer borrower relationships
moving into non-accrual status. Management continues to actively manage the
loan portfolio, seeking to identify and resolve problem assets at an early
stage while maintaining a conservative approach to their lending and
classification policies and procedures.
ALLOWANCE FOR LOAN LOSSES
At March 31, 2003, the Bank's allowance for loan and lease losses
(ALLL) as a percentage of loans outstanding was 1.65% compared to 1.43% at
March 31, 2002. The Bank increased its provision for the three months ended
March 31, 2003 to $625,653 compared to $475,000 for the three months ended
March 31, 2002. During the first quarter of 2003, the Bank had net
charge-offs of $1.3 million with the most significant quarter to quarter
increase coming from commercial mortgage loans of $1.3 million. Management
expects to see a decline in the rate of charge off activity within the
commercial and consumer loan portfolios during the remainder of 2003 if the
economy stabilizes or rebounds. Management reviews the adequacy of the ALLL
quarterly and establishes appropriate levels of allowance based on various
factors, including charge-off levels. Management believes the current level
of ALLL is adequate. However, the adequacy of the allowance for loan losses
is highly dependent upon management's estimates of variables affecting
valuation and appraisals of collateral, current economic conditions that
affect the Bank's lending customers, and the amount and timing of future
cash flows expected to be received on impaired loans. Such estimates,
appraisals, evaluations and cash flows may be subject to frequent
adjustments due to changing economic conditions of the borrowers. These
estimates are reviewed periodically and adjustments, if necessary, are
reported in the allowance for loan losses in the period in which they
become known.
LIQUIDITY
The Bank competes aggressively for business demand and money market
deposits in southeastern Michigan; which comprise The Bank's primary
liquidity source. The Bank's principal sources of funds for its lending and
investment activities have consisted of deposits, principal repayment on
loans, and, to a lesser extent, Federal Home Loan Bank advances and
repurchase agreements. Principal uses of funds for the Bank include the
origination of loans and the repayment of maturing deposit accounts and
other borrowings. The Bank anticipates it will have sufficient funds
available to meet current loan commitments, as well as its other future
liquidity needs. During the first quarter of 2003, there was a decrease of
$13.6 million in loans and a corresponding increase of $31.8 million in
cash and cash equivalents offset by a decline in investment securities of
$27.8 million, which reflected an increase in the Bank's liquid assets to
34.84% of total assets at March 31, 2003 from 33.30% at December 31, 2002.
DEPOSITS AND BORROWED FUNDS
During the three month period ended March 31, 2003, the Bank
experienced a decrease in total deposits of $12.1 million. The following
accounts decreased for the three months ended March 31, 2003: money fund
accounts by $7.0 million; jumbo certificate of deposit account balances by
$2.9 million; and certificate of deposit balances $6.3 million. The Bank
noted an increase of commercial demand deposits of $1.6 million during the
period ended March 31, 2003. Management expects a continued increase in
commercial demand deposit account balances and small net increases in
business money market accounts during the remainder of the year 2003. In
the first quarter of 2003, the Bank opened its fifth branch in southeast
Michigan. This new branch is expected to contribute to an increase the
Bank's deposits during the remainder of 2003. With the expected increase in
deposit balances,
-16-
FRANKLIN BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
management anticipates modest loan growth and growth in its investment
securities area during the remaining three quarters of 2003.
REGULATORY CAPITAL
The following table compares Franklin's regulatory capital requirements
and ratios at March 31, 2003 and December 31, 2002.
TIER 1 TIER 1 TOTAL
(In thousands) LEVERAGE RISK-BASED RISK-BASED
- ----------------------------------------------------------------------------------------------------------
Regulatory capital balances at March 31, 2003 $ 42,434 $ 42,434 $ 47,512
Required regulatory capital (well capitalized) 26,389 24,364 40,609
--------------------------------------------------
Capital in excess of well capitalized $ 16,045 $ 18,070 $ 6,903
==================================================
Capital ratios at March 31, 2003 8.04% 10.45% 11.70%
Capital ratios at December 31, 2002 7.55 10.63 11.89
Regulatory capital ratios--"well capitalized" definition 5.00 6.00 10.00
The increase in the Tier 1 Leverage Ratio from December 31, 2002 to
March 31, 2003 was the result of the decrease in total average assets of
$26 million or 4.74%. The Bank remains well capitalized with a Tier 1
Leverage ratio of 8.04% at March 31, 2003.
The decrease in Tier 1 and Total Risk-based Ratios of 0.18% and 0.19%,
respectively, was the result of the net loss for the quarter and a decrease
in total equity capital of $732,000, when comparing total equity capital at
December 31, 2002 to March 31, 2003. However, the Bank also remains well
capitalized from a Tier 1 Risk-based and Total Risk-based perspective at
March 31, 2003, with ratios of 10.45% and 11.70%, respectively.
-17-
FRANKLIN BANCORP, INC
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Net interest income, as the predominant source of revenue, is closely
monitored, measured and protected through active asset liability
management. Combinations of risk measurement tools are used to accomplish
this including static analysis, "shock" analysis, repricing schedules and
duration analysis.
In the normal course of business, assets and liabilities are not
perfectly matched, relative to their maturities and hence, repricing
opportunities. The natural difference between assets and repricing
liabilities is the "gap", or exposure to a potentially adverse impact on
net interest income. From time to time, management establishes targeted gap
levels for its static gap analysis and a net interest income at risk
tolerance for its interest rate shock analysis.
The Bank's current internal policy establishes various interest rate
risk tolerances. On a static analysis, the gap or difference between
repricing assets and liabilities within a cumulative twelve-month time
period the Bank's tolerance is plus or minus 10.0% of total assets. At
March 31, 2003 the 12 month gap was a positive 18.02%. The Bank, through
the implementation of its' balance sheet management strategies, continues
to believe it is relatively well matched. At December 31, 2002, the Bank
was positively gapped by 19.37% of assets. When comparing the March 31,
2003 and December 31, 2002 12 month gap model, the net change of negative
1.35% can be attributed primarily to a decrease in loans of $12 million.
This decrease in assets that reprice in 3 months or less is offset by a
corresponding decrease in certificates of deposit of $17 million.
Management expects to remain within gap tolerance levels throughout the
remainder of 2003 given the current repricing structure of the Bank's
balance sheet.
The Bank has noted a decrease in its net interest margin resulting from
the continued low short term market rates. During the first quarter of
2003, the Federal Reserve held the targeted the prime lending rate steady
from the prior quarter. In the short term, the Bank expects a tightening of
their net interest margin as a result of the non-linear reduction in
interest bearing assets decreasing more rapidly than interest bearing
liabilities.
In determining interest rate risk exposure, numerous additional factors
and assumptions are built into the analysis. Prepayments, competition,
economic forecast, yield curve assumptions are all factors that can affect
net interest income. Management builds in assumptions based on both
historical experience and predictions to create a more accurate assessment
of the true portfolio position. The goal is to achieve proper balance and
alignment between assets and liabilities not only to protect net interest
income but also fully capitalize on the effect of anticipated future
fluctuations.
-18-
FRANKLIN BANCORP, INC
INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS) AT MARCH 31, 2003
---------------------------------------------------------------------------
0-3 3-12 1-3 3-5 OVER 5
MONTHS MONTHS YEARS YEARS YEARS TOTAL
---------------------------------------------------------------------------
ASSETS
Interest-bearing deposits $ 2,194 $ 2,194
Securities (at cost) 45,145 29,203 20,480 1,954 22,621 119,403
FHLB and FRB stock 6,793 6,793
Loans, excluding lease financing 159,630 52,250 69,355 26,844 11,684 319,763
Lease financing 9 1 1 1 12
---------------------------------------------------------------------------
Total rate sensitive assets $ 213,771 $ 81,454 $ 89,836 $ 28,799 $ 34,305 $ 448,165
---------------------------------------------------------------------------
LIABILITIES
Savings, NOW and time deposits $ 15,424 $ 16,874 $ 16,449 $6,912 $ 55,659
Money market deposits 157,162 157,162
Borrowings 15,000 10,000 40,000 65,000
---------------------------------------------------------------------------
Total rate sensitive liabilities $ 187,586 $ 26,874 $16,449 $6,912 $ 40,000 $ 277,821
---------------------------------------------------------------------------
Interest sensitivity gap 26,185 54,580 73,387 21,887 (5,695) 170,344
---------------------------------------------------------------------------
Cumulative interest sensitivity gap 26,185 80,765 154,152 176,039 170,344
--------------------------------------------------------------
Cumulative interest sensitivity gap to
total rate sensitive assets 5.84% 18.02% 34.40% 39.28% 38.01%
==============================================================
ITEM 4. 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.
-19-
FRANKLIN BANCORP, INC.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The corporation is subject to various claims and legal proceedings arising
out of the normal course of business, none of which in the opinion of
management is expected to have a material effect on the corporation's
operations of financial position.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.19 Employment agreement of David L. Shelp
99.1 Chief Executive Officer and Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b. On January 13, 2003, Franklin filed a Form 8-K disclosing in Item J
thereof retirement of a director and advisory director of Franklin.
On January 31, 2003, Franklin filed a Form 8-K disclosing in Item J
thereof earnings as of and for the year ended December 31, 2002, a
stock buyback program and a cash dividend.
On February 6, 2003, Franklin filed a Form 8-K disclosing in Item J
thereof the opening of its Troy Business Center.
On March 24, 2003, Franklin filed a Form 8-K disclosing in Item J
thereof the appointment of a new executive officer.
-20-
FRANKLIN BANCORP, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the corporation has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FRANKLIN BANCORP, INC.
May 14, 2003 By: /s/ David L. Shelp
---------------------------------------------------------
(David L. Shelp, President, CEO and Chief Financial Officer)
-21-
FRANKLIN BANCORP, INC.
CERTIFICATIONS
I, David L. Shelp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Franklin
Bancorp, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiary, is made known to me
by others within those entities, particularly during the
period in which this quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on our 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 registrant's board
of directors:
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 quarterly 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.
Date: May 14, 2003 /s/ David L. Shelp
--------------------------------------------
DAVID L. SHELP
CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL EXECUTIVE AND
PRINCIPAL FINANCIAL OFFICER)
-22-
FRANKLIN BANCORP, INC.
EXHIBIT INDEX
10.19 Employment agreement of David L. Shelp
99.1 Chief Executive Officer and Chief Financial Officer Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-23-