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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, 2004
[ ] 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)
REGISTRANT'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 12, 2004
----- ---------------------------
Common stock, no par value. 3,791,957 shares
This document contains twenty-one (21) pages
FRANKLIN BANCORP, INC.
FRANKLIN BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 2004 (UNAUDITED) AND
DECEMBER 31, 2003........................................................................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND 2003 (UNAUDITED)..................................................................................... 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2004 and 2003 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003 (UNAUDITED)...................................................................... 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004
AND 2003 (UNAUDITED)..................................................................................... 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 11
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 TO THREE MONTHS ENDED
MARCH 31, 2003........................................................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................................ 15
ITEM 4. CONTROLS AND PROCEDURES.............................................................................. 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 17
SIGNATURES................................................................................................... 18
2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Board of Directors and Stockholders
Franklin Bancorp, Inc.
We have reviewed the accompanying consolidated statement of financial condition
of Franklin Bancorp, Inc. and subsidiary as of March 31, 2004, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity and cash flows for the three-month periods ended March 31,
2004 and 2003. 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 to financial
data 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.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position as of December 31, 2003, and the related consolidated
statements of operations, comprehensive income (loss), shareholders' equity and
cash flows for the year then ended (not presented herein) and in our report
dated January 23, 2004, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated statement of financial position as of
December 31, 2003, is fairly stated, in all material respects, in relation to
the consolidated statement of financial position from which it has been derived.
/s/ GRANT THORNTON LLP
- --------------------------
GRANT THORNTON LLP
Southfield, Michigan
May 7, 2004
FRANKLIN BANCORP, INC.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
Unaudited
March 31, 2004 December 31, 2003
-------------- -----------------
Assets
Cash and Due From Banks $ 21,048,984 $ 46,995,714
Interest-Earning Deposits 777,107 744,479
Time Deposits with Federal Home Loan Bank 51,211,730 103,983
------------- -------------
Cash and Cash Equivalents 73,037,821 47,844,176
Securities Available for Sale 84,941,303 91,570,290
Federal Home Loan Bank Stock, at Cost 5,946,700 5,946,700
Federal Reserve Bank Stock, at Cost 920,500 932,750
Loans 361,663,954 355,124,239
Allowance for Loan Losses (5,299,685) (4,923,469)
------------- -------------
Net Loans 356,364,269 350,200,770
Accrued Interest Receivable 2,341,878 2,717,721
Real Estate Owned 89,894 147,144
Premises and Equipment, Net 2,886,782 3,075,976
Cash Surrender Value of Life Insurance 11,270,367 11,144,263
Prepaid Expenses and Other Assets 5,442,356 5,383,188
------------- -------------
Total Assets 543,241,870 $ 518,962,978
============= =============
Liabilities and Shareholders' Equity
Deposits 439,098,059 406,379,774
Borrowings 55,000,000 65,000,000
Accrued Interest Payable 198,044 214,827
Other Liabilities 2,084,686 1,631,095
------------- -------------
Total Liabilities 496,380,789 473,225,696
Commitments and Contingencies -
Shareholders' Equity
Common Stock - No Par Value; Stated Value $1; Authorized
6,000,000 shares, issued and outstanding 3,782,882
and 3,753,667 at March 31, 2004 and December 31, 2003, respectively 3,782,882 3,753,667
Additional Paid-In Capital 28,636,036 28,214,668
Retained Earnings 12,764,501 12,310,373
Accumulated Other Comprehensive Income (Loss) 1,677,662 1,458,574
------------- -------------
Total Shareholders' Equity 46,861,081 45,737,282
------------- -------------
Total Liabilities and Shareholders' Equity 543,241,870 $ 518,962,978
============= =============
See Notes to Consolidated Financial Statements
3
FRANKLIN BANCORP, INC.
Consolidated Statements of Operations - Unaudited
For the Three Months Ended March 31,
------------------------------------
2004 2003
------------- -------------
Interest Income
Interest On Loans $ 5,446,570 $ 5,679,714
Interest on Securities 604,638 1,051,594
Other Interest and Dividends 406,857 558,872
------------- -------------
Total Interest Income 6,458,065 7,290,180
Interest Expense
Interest on Deposits 694,065 964,969
Interest on Other Borrowings 662,855 717,751
------------- -------------
Total Interest Expense 1,356,920 1,682,720
------------- -------------
Net Interest Income 5,101,145 5,607,460
Provision for Loan Losses 600,000 625,653
------------- -------------
Net Interest Income After Provision for Loan Losses 4,501,145 4,981,807
Non-Interest Income
Deposit Account Service Charges 795,999 756,057
Net Gain on Sale of Securities - 455,511
Net Gain on Sale of Other Assets (17,250) (77,303)
Increase in Cash Value or and Proceeds from Life Insurance 126,105 121,814
Other 144,512 283,605
------------- -------------
Total Non-Interest Income 1,049,366 1,539,684
Non-Interest Expense
Compensation and Benefits 2,234,367 2,462,092
Severance Compensation 92,978 2,759,740
Occupancy and Equipment 820,420 804,999
Advertising 135,960 154,626
Federal Insurance Premiums 15,611 17,495
Defaulted Loan Expense 118,145 130,661
Communication Expense 104,082 126,481
Outside Services 478,253 587,621
Merger Expense 228,219 -
Other 398,819 588,760
------------- -------------
Total Non-Interest Expense 4,626,854 7,632,475
------------- -------------
Income Before Provision for Federal Income Taxes 923,657 (1,110,984)
Provision for Federal Income Taxes 167,890 (333,300)
------------- -------------
Net Income $ 755,767 $ (777,684)
============= =============
Income Per Common Share
Basic $ 0.20 $ (0.21)
Diluted 0.20 (0.21)
See Notes to Consolidated Financial Statements
4
FRANKLIN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
For the Three Months Ended March 31,
------------------------------------
2004 2003
------------- -------------
Net Income $ 755,767 $ (777,684)
Other comprehensive income net of tax:
Unrealized gains on securities:
Unrealized gains/(loss) arising during period 219,088 (989,326)
Less reclassification adjustment for gains included
in net income - 300,637
------------- -------------
Other comprehensive income 219,088 (688,689)
------------- -------------
Comprehensive Income / (Loss) $ 974,855 $ (1,466,373)
============= =============
See Notes to Consolidated Financial Statements.
5
FRANKLIN BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED
For the three months ended March 31, 2004 and 2003
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
STOCK CAPITAL EARNINGS INCOME/(LOSS) EQUITY
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 3,647,593 27,154,384 12,413,704 2,426,014 45,641,695
Net income/(loss) (777,684) (777,684)
Exercise of options 34,311 254,482 288,793
Less: cash dividends declared (293,049) (293,049)
Other comprehensive income (688,689) (688,689)
------------- ------------- ------------- ------------- -------------
Balance at March 31, 2003 $ 3,681,904 $ 27,408,866 $ 11,342,971 $ 1,737,325 $ 44,171,066
============= ============= ============= ============= =============
Balance at December 31, 2003 $ 3,753,667 $ 28,214,668 $ 12,310,373 $ 1,458,574 $ 45,737,282
Net income 755,767 755,767
Exercise of options 29,215 421,368 450,583
Less: cash dividends declared (301,639) (301,639)
Other comprehensive income 219,088 219,088
------------- ------------- ------------- ------------- -------------
Balance at March 31, 2004 $ 3,782,882 $ 28,636,036 $ 12,764,501 $ 1,677,662 $ 46,861,081
============= ============= ============= ============= =============
See Notes to Consolidated Financial Statements.
6
FRANKLIN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW - UNAUDITED
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
------------- --------------
Cash flows from operating activities
Net income $ 755,767 $ (777,684)
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan losses 600,000 625,653
Depreciation and amortization 269,315 282,975
Realized (gain)/loss on sale of securities, net and other assets 17,250 (350,900)
Increase in cash surrender value of life insurance (126,104) (121,813)
Net deferral of loan origination costs/fees 184,059 58,883
Decrease in accrued interest receivable 375,843 525,560
Amortization and accretion on securities 68,987 266,915
Decrease/(increase) in prepaid expenses and other assets (59,168) 3,911,060
Increase/(decrease) in accrued interest payable, deferred
taxes and other liabilities 436,808 1,055,562
------------- -------------
Total adjustments 1,766,990 6,253,895
------------- -------------
Net cash provided by operating activities 2,522,757 5,476,211
Cash flows from investment activities
(Purchase) of securities available for sale - (1,818,590)
Proceeds from sales of securities available for sale - 5,192,400
Proceeds from maturities and paydowns of securities available for
sale 6,779,088 24,195,023
Net decrease/(increase) in loans (6,947,558) 10,968,186
(Purchase)/sale of Federal Reserve Bank/Federal Home Loan Bank stock 12,250 -
Proceeds from the sale of real estate owned 40,000 458,227
Capital expenditures (80,121) (565,133)
------------- -------------
Net cash provided by/(used in) investment activities (196,341) 38,430,113
Cash flows from financing activities
Net (decrease)/increase in deposits 32,718,285 (12,064,818)
Decrease in borrowings and subordinated capital notes (10,000,000) -
Exercise of common stock options 450,583 288,793
Cash dividends paid on common stock (301,639) (293,050)
------------- -------------
Net cash (used in)/provided by financing activities 22,867,229 (12,069,075)
------------- -------------
Net increase in cash and cash equivalents 25,193,645 31,837,249
Beginning cash and cash equivalents 47,844,176 30,801,343
------------- -------------
Ending cash and cash equivalents $ 73,037,821 $ 62,638,592
============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest 1,373,703 1,704,978
Federal income taxes - -
Non-cash investing and financing activities:
Transfer from loans to real estate owned (net) - 1,271,371
See Notes to Consolidated Financial Statements.
7
FRANKLIN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements of Franklin Bancorp,
Inc. ("Franklin") and its wholly-owned subsidiary, Franklin Bank, National
Association (the "Bank") 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 generally accepted accounting
principles. 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, 2003 and for the year
then ended.
The results of operations for the three month period ended March 31, 2004
are not necessarily indicative of the results to be expected for the year ending
December 31, 2004.
The Consolidated Statement of Financial Condition as of December 31, 2003
has been derived from the audited Consolidated Statement of Financial Condition
as of that date.
NOTE 2. PENDING BUSINESS COMBINATION
On November 10, 2003, Franklin announced that it had entered into an
Agreement and Plan of Merger ("merger agreement") to be acquired by Warren,
Ohio-based First Place Financial Corp, a Delaware corporation ("First Place").
The merger agreement has been approved by the boards of directors of First Place
and Franklin and by the shareholders of Franklin. The consummation of the merger
is subject to receipt of all applicable regulatory approvals and other customary
closing conditions. The acquisition is expected to be completed in the last half
of the second calendar quarter of 2004.
NOTE 3. EARNINGS PER SHARE:
Net 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,
-------------------------
2004 2003
----------- -----------
NUMERATOR
Net income $ 755,767 $ (777,684)
Numerator for basic and diluted earnings per share
Income available for common shareholders $ 755,767 $ (777,684)
DENOMINATOR
Denominator for basic earnings per share -
weighted average share outstanding 3,777,708 3,666,688
Employee stock options 82,310 72,527
Denominator for diluted earnings per share -
adjusted weighted average share outstanding 3,860,018 3,739,215
Basic earnings per share $ 0.20 $ (0.21)
Diluted earnings per share 0.20 (0.21)
8
FRANKLIN BANCORP, INC.
NOTE 4. 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 deemed to be
non-performing and assets that the Bank currently owns:
NONPERFORMING ASSETS ANALYSIS
AT
------------------------------
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
NONACCRUAL LOANS
Commercial $ 485,678 $ 344,963
Commercial mortgage 1,086,035 1,231,987
Residential mortgage 106,404 -
Consumer 85,270 126,430
Lease financing - -
------------- -------------
Total nonaccrual loans 1,763,387 1,703,380
------------- -------------
REAL ESTATE OWNED
Commercial mortgage 0 57,250
Residential mortgage 89,894 89,894
------------- -------------
Total real estate owned 89,894 147,144
Real estate in redemption 549,345 549,345
------------- -------------
Total nonperforming assets $ 2,402,626 $ 2,399,869
============= =============
TOTAL NONACCRUAL LOANS AND REAL ESTATE OWNED
AS A PERCENTAGE OF:
Total assets 0.34% 0.36%
Loans and real estate owned 0.51% 0.52%
TOTAL NONPERFORMING ASSETS AS A PERCENTAGE OF:
Total assets 0.44% 0.46%
Loans and real estate owned 0.66% 0.68%
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.
9
FRANKLIN BANCORP, INC.
NOTE 4. LOANS, NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
(CONTINUED):
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,
2004 2003
---------- ----------
In thousands of dollars
Balance at beginning of period $ 4,923 $ 5,927
Provision for loan losses 600 626
CHARGE-OFFS
Commercial 137 42
Commercial mortgage - 1,319
Consumer 363 336
Residential mortgage 35 23
Overdraft - -
Lease financing - -
---------- ----------
Total charge-offs 535 1,720
RECOVERIES
Commercial 17 160
Commercial mortgage - 267
Consumer 292 3
Residential mortgage -
Overdraft -
Lease financing 2 17
---------- ----------
Total recoveries 311 447
---------- ----------
Net charge-offs 224 1,273
---------- ----------
Balance at end of period $ 5,299 $ 5,280
========== ==========
Allowance as a percentage of
Loans 1.47% 1.65%
Nonperforming loans 300.53% 96.26%
Nonperforming assets 220.57% 60.80%
Net charge-offs (annualized) 591.84% 103.74%
Net charge-offs to average loans outstanding (annualized) 1.50% 1.60%
NOTE 5. RECENT ACCOUNTING DEVELOPMENTS
PROPOSED STOCK BASED COMPENSATION
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
a proposed Statement, Share-Based Payment an Amendment of FASB Statements No.
123 and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its results
of operations.
10
FRANKLIN BANCORP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 actual results to differ include those listed below and other
risks detailed from time to time in Franklin's Securities Exchange Act of 1934
reports, including the report on Form 10-K for the year ended December 31, 2003.
These forward-looking statements represent Franklin's judgment as of the date of
this report. Franklin 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; changes in the national economy And
changes in economic conditions of Franklin's market area.
On April 5, 2004, the shareholders of Franklin approved the merger with
First Place Financial Corp. The merger is expected to be completed during the
second quarter of 2004.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 TO THREE MONTHS ENDED
MARCH 31, 2003:
NET INTEREST INCOME
For the three months ended March 31, 2004 in comparison to the three
months ended March 31, 2003, interest income decreased by $0.8 million and
interest expense decreased by $0.3 million resulting in net interest income
decreasing by $0.5 million or 9.0%. The net interest margin was 4.35% and 4.79%
for the three months ended March 31, 2004 and 2003, respectively. The largest
decrease in interest income was in the securities portfolio, with a decrease of
$0.4 million or a 42.5% decrease. Interest income on loans decreased by $0.2
million. The decrease in interest income was primarily the result of the overall
decrease in interest rates over the last twelve months and the decrease in the
average balance of the securities portfolio. Average balances for outstanding
loans increased by $35.7 million or 11.2% when comparing the three months ended
March 31, 2004 to March 31, 2003. Average securities balances decreased $74.6
million or 53.0%, for the three months ended March 31, 2004 compared to March
31, 2003.
Interest-bearing deposits decreased by $9.2 million or a 3.0% decrease
while non-interest bearing deposits increased $6.3 million or 3.5%. Interest
expense on deposits decreased by $270.9 thousand or a 28.1% decrease because of
the decrease in the average balance of interest-bearing deposits and the overall
decrease in interest rates over the last twelve months. Interest expense on FHLB
advances decreased by $54,896 or 7.6% primarily as a result of the scheduled
paydown of a $10 million advance in the first quarter of 2004.
The following table presents the daily average amount outstanding for each major
category of interest earning assets, non-interest earning assets, interest
bearing liabilities, and non-interest 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. Nonrecurring loans, for the purpose of the following
computations, are included in the average loan amounts outstanding.
11
FRANKLIN BANCORP,INC.
Net Interest Analysis- Table 2
(Dollars in Thousands)
Three Months Ended March 31,
2004 2003
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ----------- ----------- ----------- ----------- -------
Assets
Loans:
Commercial $ 261,507 $ 4,181 6.40% $ 256,842 $ 4,737 7.38%
Residential 73,236 840 4.59% 38,384 404 4.21%
Consumer 18,560 426 9.18% 22,355 530 9.48%
Lease Financing - - 22 9 167.02%
Total Loans 353,303 5,447 6.17% 317,603 5,680 7.15%
U.S. Treasuries and Mortgage-Backed Securities 54,959 510 3.71% 130,846 1,393 4.26%
Tax-Exempt Muncipal Securities (1) 11,074 138 4.98% 9,757 145 5.96%
Interest-Bearing Deposits With Banks 28,720 69 0.96% 7,121 18 1.01%
Other 25,644 341 5.32% 7,232 103 5.70%
Total Earning Assets/Interest Income 473,700 6,505 5.49% 472,559 7,339 6.21%
Cash and Due from Banks 20,532 22,811
All Other Assets 31,200 38,322
Allowance for Possible Credit Losses (5,120) (6,020)
Total Assets 520,312 527,672
Liabilities:
Money Markets 152,343 326 0.86% 159,313 522 1.31%
Savings Accounts 142 - 0.00% 169 0 0.95%
NOW Checking 23,627 18 0.30% 20,539 21 0.41%
Certificates 29,721 235 3.16% 35,130 301 3.43%
Jumbo Certificates 20,061 115 2.29% 19,959 121 2.42%
Total Interest-Bearing Deposits 225,894 694 1.23% 235,110 965 1.64%
FHLB Advances 60,934 663 4.35% 66,260 718 4.33%
Other - -
Total Interest-Bearing Liabilities/Expense 286,828 1,357 1.89% 301,370 1,683 2.23%
----------- -----------
Business/Personal Checking 184,417 178,117
Preferred Stock - -
Other Liabilities 2,680 2,653
Shareholders' Equity 46,387 45,532
----------- -----------
Total Liabilities and Shareholders' Equity $ 520,312 $ 527,672
Net Interest Income (FTE) 5,148 5,656
Net Interest Spread 3.60% 3.98%
FTE adjustment 47 49
----------- -----------
Impact of Net Non-Interest Bearing Source of
Funds And Equity 0.75% 0.81%
---- ------
Net Interest Margin $ 5,101 4.35% $ 5,607 4.79%
(1) Interest rates are calculated on a federal tax equivalent basis. Interest
and principal balances pertaining to non-accrual loans are not included for this
analysis
12
FRANKLIN BANCORP, INC.
The following table shows the effect of volume and rate charges on net interest
income for the three months ended March 31, 2004 compared to 2003 on a fully
taxable equivalent basis using a 34% tax rate.
Rate-Volume Analysis
(Amounts in Thousands)
Three Months Ended March 31,
2004 Compared to 2003
Increase/(Decrease) Due to
VOLUME RATE NET
--------- --------- ---------
Assets
Loans:
Commercial $ 539 $ (1,095) $ (556)
Residential 397 39 436
Consumer (88) (16) (104)
Lease Financing (5) (5) (9)
--------- --------- ---------
Total Loans 2,709 (2,942) (233)
U.S. Treasuries and Mortgage-Backed Securities - (883) (883)
Tax-Exempt Muncipal Securities (1) 83 (91) (8)
Interest-Bearing Deposits With Banks 57 (6) 51
Other 285 (47) 238
--------- --------- ---------
Total Earning Assets/Interest Income 122 (956) (834)
Cash and Due from Banks
All Other Assets
Allowance for Possible Credit Losses
Total Assets
Liabilities:
Money Markets (10) (186) (196)
Savings Accounts (0) (0) (0)
NOW Checking 21 (24) (3)
Certificates (11) (55) (66)
Jumbo Certificates 5 (11) (6)
--------- --------- ---------
Total Interest-Bearing Deposits (12) (259) (271)
FHLB Advances (5) (50) (55)
--------- --------- ---------
Total Interest-Bearing Liabilities/Expense $ (19) $ (308) $ (326)
NON INTEREST INCOME
Total non interest income decreased by $490,318 or 31.8% for the three
months ended March 31, 2004 when compared to the same period ended 2003. There
were increases in deposit account service charges of $39,942 or 5.3% while there
was no gain on sale of securities in 2004 compared to a gain of $455,511 in the
three months ended March 31, 2003. The increase in deposit account service
charges was due to fee increases. The decrease with respect to the sale of
securities can be attributed to the Bank's conservative approach to securities
trading. Other non interest income was down by $139,093 or a decrease of 49.0%.
NON INTEREST EXPENSE
Inclusive of severance charges, total non interest expense decreased
$3.0 million or 39.4% during the three months ended March 31, 2004 when compared
to the same period ended March 31, 2003. This overall decrease included
decreases in the following: compensation and benefits of $227,725 or 9.2% as the
number of full time equivalent employees decreased from 192 as of March 31, 2003
to 164 as of March 31, 2004; severance compensation of $2.7 million or 96.6%, as
only two officers received severance payments upon termination during the first
quarter of 2004, outside services of $109,360 or 18.6% as for the three months
ended March 31, 2004 when compared to the three months ended March 31, 2003.
There were merger expenses of $228,219 in 2004, but no merger expenses in 2003.
INCOME TAXES
The provision for income taxes for the first quarter of 2004 totaled
$167,890, compared to a benefit of $333,300 reported for the same period a
year ago. The effective tax rate was 18.2% for the first quarter of 2004
due to the estimated annual tax calculation and an adjustment for the
prior years' actual income tax per the income tax returns.
13
FRANKLIN BANCORP, INC.
NET INCOME
Net income was $755,767 for the three months ended March 31, 2004
compared to a net loss of $777,684 for the three months ended March 31,
2003. Although net interest income and total non-interest income for the
three months ended March 31, 2004 were $506,315 and $490,318 less
than they were, respectively, for the three months ended March 31, 2003,
total non-interest expense was $3,056,621 less (primarily because of the
decrease in severance compensation) for the three months ended March 31,
2004 as compared to three months ended March 31, 2003.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets were $543.2 million at March 31, 2004 compared to $519.0
million at December 31, 2003. When comparing balances at March 31, 2004 and
December 31, 2003, cash and cash equivalents increased $25.2 million and
represented 13.4% and 9.2%, respectively, of total assets.
INVESTMENTS
Investment balances decreased $6.6 million or 7.2% from December 31, 2003
to March 31, 2004 as securities matured throughout the quarter. The Bank
continues to maintain a conservative approach to its investment acquisitions.
There were no securities purchases or sales during the first quarter of 2004.
LOANS
Net loan balances increased $6.2 million or 1.8% from December 31, 2003 to
March 31, 2004. The Bank targets two key areas for loan growth - commercial real
estate and residential mortgages. These two areas will be the primary focus of
the two loan production offices, which opened in the first quarter of 2004, and
their newly hired lending staff. The growth in residential mortgages during 2003
was primarily due to whole loan portfolio purchases.
At March 31, 2004, the Bank had loan commitments outstanding for loans
that have been accepted but not closed by borrowers in the amount of $22.4
million. Typically, these include commitments for commercial business loans,
consumer, residential mortgages and home equity loans.
The level of nonperforming assets remained approximately the same at $2.4
million from December 31, 2003 to March 31, 2004. 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, 2004, Franklin's allowance for loan and lease losses (ALLL)
as a percentage of loans outstanding was 1.47% compared to 1.39% at December 31,
2003. Franklin decreased its provision for the three months ended March 31, 2004
to $600,000 compared to $625,653 for the three months ended March 31, 2003.
During the first quarter of 2003, Franklin had net charge-offs of $1,273,000
compared to $223,854 in the first three months of 2004. 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
Franklin competes aggressively for business demand and money market
deposits in southeastern Michigan; which comprise Franklin's primary liquidity
source. Franklin'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 Franklin 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 2004, there was an increase of $6.2 million in net loans and a
corresponding increase of $18.6 million in cash and securities, which reflected
an increase in the Bank's liquid assets to 29.1% of total assets at March 31,
2004 from 26.9% at December 31, 2003.
DEPOSITS AND BORROWED FUNDS
During the three month period ended March 31, 2004, Franklin experienced
an increase in total deposits of $32.7 million.
14
FRANKLIN BANCORP, INC.
REGULATORY CAPITAL
The following table compares Franklin's regulatory capital
requirements and ratios at March 31, 2004 and December 31, 2003.
Tier 1 Tier 1 Total
(In thousands) Leverage Risk-based Risk-based
---------- ---------- ----------
Regulatory capital balances at March 31, 2004 $ 45,183 $ 45,183 $ 50,274
Required regulatory capital (well capitalized) 27,138 26,485 44,200
---------- ---------- ----------
Capital in excess of well capitalized $ 18,046 $ 18,699 $ 6,075
========== ========== ==========
8.68% 11.12% 12.37%
Capital ratios at December 31, 2003 8.32% 10.24% 11.37%
Regulatory capital ratios -- "well capitalized"
definition 5.00% 6.00% 10.00%
The increase in the Tier 1 Leverage Ratio from December 31, 2003 to March
31, 2004 was the result of the increase in the year to date income and the
exercise of stock options. Franklin remains well capitalized with a Tier 1
Leverage ratio of 8.68% at March 31, 2004.
The increase in Tier 1 and Total Risk-based Ratios of 0.88% and 1.00%,
respectively, was the result of an increase in total equity capital of $1.2
million, when comparing total equity capital at December 31, 2003 to March 31,
2004. As a result, Franklin also remains well capitalized from a Tier 1
Risk-based and Total Risk-based perspective at March 31, 2004, with ratios of
11.12% and 12.37%, respectively.
CONTRACTUAL OBLIGATIONS
Information regarding our contractual obligations is contained in Item 7
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
No material changes to such information have occurred during the three months
ended March 31, 2004.
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.
During the first quarter of 2004, the Federal Reserve held the targeted
fed funds rate steady from the prior quarter.
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.
15
FRANKLIN BANCORP, INC.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands)
March 31, 2004
---------------------------------------------------------------------------------------
0-3 3-12 1-3 3-5 Over 5
Months Months Years Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
Assets
Interest-bearing deposits $ 51,307 $ - $ - $ - $ - $ 51,307
Securities (at cost) 9,011 8,120 15,628 8,707 40,255 81,721
FHLB and FRB stock 6,867 6,867
Loans 158,623 16,314 53,043 66,722 66,962 361,664
----------- ----------- ----------- ----------- ----------- -----------
Total rate sensitive assets 225,809 24,434 68,671 75,429 107,217 501,560
Liabilities
Savings, NOW and time deposits 7,498 13,725 29,238 6,964 - 57,425
Money market deposits 27,237 79,362 28,446 23,229 - 158,274
Borrowings - - - - 55,000 55,000
----------- ----------- ----------- ----------- ----------- -----------
Total rate sensitive liabilities 34,735 93,087 57,684 30,193 55,000 270,699
----------- ----------- ----------- ----------- ----------- -----------
Interest sensitivity gap $ 191,074 $ (68,653) $ 10,987 $ 45,236 $ 52,217 $ 230,861
Cumulative interest sensitivity gap $ 191,074 $ 122,421 $ 133,408 $ 178,644 $ 230,861
Cumulative interest sensitivity gap to
total rate sensitive assets 38.10% 24.41% 26.60% 35.62% 46.03%
ITEM 4. CONTROLS AND PROCEDURES
(a) The term "disclosure controls and procedures" is defined in rules
13a-15(e) and 15(d)-15(e) 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 and Chief Financial
Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this report (the "Evaluation Date"), and have concluded that,
as of the Evaluation Date, our disclosure controls and
procedures are effective in providing them with material
information relating to the Company know to other within the
Company which is required to be included in our periodic
reports filed under the Exchange Act.
(b) There has been no change in the Company's internal control over
financial reporting that occurred during the quarter ended
March 31, 2004 that materially affected, or is reasonably
likely to materially affect, the Company's internal control
over financial reporting.
16
FRANKLIN BANK N.A. AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders of Franklin held on April 5, 2004,
the shareholders of Franklin voted to approve and adopt the Agreement and Plan
of Merger dated as of November 10, 2003 and as amended on February 3, 2004, by
and between First Place Financial Corp. and Franklin, and to approve the
transactions contemplated thereby, as follows: For: 2,680,096; Against: 46,500;
and Abstain: 2,754.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
Report on Form 8-K was filed on February 5, 2004, disclosing
in Items 7, 9 and 12 thereof, the results of operations for the year
ended December 31, 2003
Report on Form 8-K filed March 4, 2004 disclosing in Items 5,
and 7 thereof, the appointment of a new Senior Vice President, Chief
Lending Officer.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FRANKLIN BANCORP, INC.
May 17, 2004 By: /s/ Craig L. Johnson
--------------------------------------
Craig L. Johnson, President and
Chief Executive Officer
By: /s/ Leonard B. Carelton
---------------------------------
Leonard B. Carelton, Chief
Financial Officer and Treasurer
17
FRANKLIN BANCORP, INC.
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18