-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N+JRhiLsdmYfZXzx3Wm6odnNrqA/XV3qgYaqlXdqdcQQsXOeMvglm25JXlYJrr2i GdsHb1SaACgiW9zETzXTpQ== 0000950124-03-003608.txt : 20031113 0000950124-03-003608.hdr.sgml : 20031113 20031112185924 ACCESSION NUMBER: 0000950124-03-003608 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN BANCORP INC MI CENTRAL INDEX KEY: 0001199025 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382483920 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-50078 FILM NUMBER: 03995424 MAIL ADDRESS: STREET 1: 24725 WEST TWELVE MILE RD CITY: SOUTHFIELD STATE: MI ZIP: 48034 10-Q 1 k80611e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/03 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 SEPTEMBER 30, 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) MICHIGAN 38-2606280 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 24725 WEST TWELVE MILE ROAD SOUTHFIELD, MICHIGAN 48034 (Address of principal executive 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 NOVEMBER 6, 2003 ----- ------------------------------- Common stock, no par value. 3,722,870
FRANKLIN BANCORP, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Financial Condition at September 30, 2003 (unaudited) and December 31, 2002................................................................................................4 Consolidated Statements of Income for the nine months and three months ended September 30, 2003 and 2002 (unaudited)..........................................................................5 Consolidated Statements of Comprehensive Income/(Loss) for the nine months and three months ended September 30, 2003 and 2002 (unaudited)..........................................................................6 Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2003 and 2002 (unaudited).............................................................................................7 Consolidated Statements of Cash Flows for the nine months ended September 30, 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........................13 Comparison of nine months ended September 30, 2003 to nine months ended September 30, 2002........................................................................................13 Comparison of three months ended September 30, 2003 to three months ended September 30, 2002........................................................................................17 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...................................................18 ITEM 4. Controls and procedures......................................................................................18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings............................................................................................19 ITEM 4. Submission of Matters to a Vote of Security Holders..........................................................19 ITEM 6. Exhibits and Reports on Form 8-K.............................................................................20 Signatures...........................................................................................................21
[GRANT THORNTON LOGO] 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 September 30, 2003, and the related consolidated statements of operations and comprehensive income for the three and nine month periods ended September 30, 2003 and 2002 and consolidated statements of shareholders' equity and cash flows for the nine month period ended September 30, 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 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. Southfield, Michigan October 22, 2003 -3- PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
At ----------------------------------------- September 30, 2003 December 31, 2002 ------------------ ----------------- ASSETS (unaudited) Cash and due from banks $ 21,494,754 $ 18,171,153 Interest-earning deposits 783,107 3,580,028 Time deposits with Federal Home Loan Bank 31,570,621 9,050,162 --------------- --------------- Cash and cash equivalents 53,848,482 30,801,343 Securities available for sale 112,315,199 149,836,544 Federal Home Loan Bank stock, at cost 5,946,700 5,868,900 Federal Reserve Bank stock, at cost 932,750 1,541,500 Loans 336,087,199 333,345,726 Allowance for loan losses (4,466,450) (5,926,813) --------------- --------------- Net loans 331,620,749 327,418,913 Real estate owned 1,905,835 2,004,449 Premises and equipment, net 3,304,218 3,026,171 Bank Owned Life Insurance (BOLI) 11,009,463 9,799,009 Other assets 7,500,647 12,181,487 --------------- --------------- Total assets $ 528,384,043 $ 542,478,316 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 416,713,944 $ 429,129,830 Borrowings 65,000,000 65,000,000 Other liabilities 1,822,066 2,706,791 --------------- --------------- Total liabilities 483,536,010 496,836,621 Shareholders' equity: Common stock - no par value; stated value $1 per share; authorized 6,000,000 shares, Issued and outstanding 3,718,870 shares (3,647,593 shares at December 31, 2002) 3,718,870 3,647,593 Additional paid in capital 27,783,381 27,154,384 Retained earnings 11,906,191 12,413,704 Accumulated other comprehensive income 1,439,591 2,426,014 --------------- --------------- Total shareholders' equity 44,848,033 45,641,695 --------------- --------------- Total liabilities and shareholders' equity $ 528,384,043 $ 542,478,316
-4- Franklin Bancorp, Inc. Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------- ---------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Interest income Interest on loans $ 5,191,672 $ 6,357,729 $ 16,474,418 $ 19,051,026 Interest on securities 636,166 1,389,756 2,460,913 4,683,824 Other interest and dividends 634,241 677,330 1,847,405 1,841,228 ------------ ------------ ------------ ------------ Total interest income 6,462,079 8,424,815 20,782,736 25,576,078 Interest expense interest on deposits 719,052 1,255,225 2,471,101 3,745,267 Interest on other borrowings 728,723 729,103 2,167,470 2,230,331 ------------ ------------ ------------ ------------ Total interest expense 1,447,775 1,984,328 4,638,571 5,975,598 ------------ ------------ ------------ ------------ Net interest income 5,014,304 6,440,487 16,144,164 19,600,480 Provision for loan losses 1,025,653 300,000 2,276,959 1,275,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 3,988,651 6,140,487 13,867,205 18,325,480 Non interest income Deposit account service charges 777,566 814,187 2,302,780 2,392,713 Net gain on sale of securities - 327,948 455,511 648,356 Net (loss) on sale of other assets - (40,000) - (41,602) Other 376,156 420,978 1,165,687 1,246,647 ------------ ------------ ------------ ------------ Total non interest income 1,153,722 1,523,113 3,923,978 4,246,114 Non interest expense Compensation and benefits 2,314,687 2,389,274 7,095,143 7,117,177 Severance compensation 2,637 69,516 2,977,539 199,835 Occupancy and equipment 836,998 805,591 2,440,218 2,390,538 Defaulted loan expense 179,649 214,149 638,150 446,380 Other 1,356,105 2,010,821 4,260,537 4,734,472 ------------ ------------ ------------ ------------ Total non interest expense 4,690,076 5,489,351 17,411,587 14,888,402 ------------ ------------ ------------ ------------ Income before Federal income tax provision 452,296 2,174,249 379,596 7,683,192 Federal income tax provision 25,132 502,646 3,335 1,900,145 ------------ ------------ ------------ ------------ Net income before preferred stock dividends 427,164 1,671,603 376,261 5,783,047 Preferred stock dividend of subsidiary - 450,225 - 1,350,675 ------------ ------------ ------------ ------------ Net income $ 427,164 $ 1,221,378 $ 376,261 $ 4,432,372 ============ ============ ============ ============ Net income per common share Average common shares outstanding Basic 3,709,083 3,635,331 3,687,546 3,629,075 Diluted 3,794,077 3,774,348 3,769,369 3,769,934 Net income per common share Basic $ 0.12 $ 0.34 $ 0.10 $ 1.22 Diluted $ 0.11 $ 0.32 $ 0.10 $ 1.18
See Notes to Consolidated Financial Statements -5- Consolidated Statements of Comprehensive Income/(Loss) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net income $ 427,164 $1,221,378 $ 376,261 $4,432,372 Other comprehensive income/(loss), net of tax Unrealized gains/(losses) on securities: Unrealized holding gains/(losses) arising during the period (847,482) 1,126,002 (685,786) 2,303,100 Less: reclassification adjustment for gains included in net income - 327,948 300,637 648,356 ---------- ---------- ---------- ---------- Other comprehensive income/(loss) (847,482) 798,054 (986,423) 1,654,744 ---------- ---------- ---------- ---------- Comprehensive income/(loss) $ (420,318) $2,019,432 $ (610,162) $6,087,116 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements. -6- Franklin Bancorp, Inc. Consolidated Statements of Shareholders' Equity (unaudited)
Nine Months Ended September 30, ------------------------------------ 2003 2002 ---- ---- COMMON STOCK Balance at beginning of period $ 3,647,593 $ 3,607,542 Exercise of options 71,277 28,789 ------------ ------------ BALANCE AT END OF PERIOD 3,718,870 3,636,331 ADDITIONAL PAID IN CAPITAL Balance at beginning of period 27,154,384 27,839,246 Exercise of options 628,997 405,864 ------------ ------------ BALANCE AT END OF PERIOD 27,783,381 28,245,110 RETAINED EARNINGS Balance at beginning of period 12,413,704 9,722,876 Net income 376,261 4,432,372 Cash dividend on common stock ($.24 per share in 2003) (883,774) (833,712) ------------ ------------ BALANCE AT END OF PERIOD 11,906,191 13,321,536 ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Balance at beginning of period 2,426,014 1,009,795 Change in accumulated other comprehensive income/(loss) (986,423) 1,654,744 ------------ ------------ BALANCE AT END OF PERIOD 1,439,591 2,664,539 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY $ 44,848,033 $ 47,867,516 ============ ============
-7-
Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, ------------------------------------- 2003 2002 ---- ---- Cash flows from operating activities Net income $ 376,261 $ 4,432,372 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 2,276,959 1,275,000 Depreciation and amortization 897,551 861,598 Realized gain on sale of securities, net and other assets (455,511) (689,959) Increase in cash surrender value of life insurance (380,455) (454,192) Net deferral of loan origination costs/fees 29,856 60,632 Decrease in accrued interest receivable 714,643 426,800 Amortization and accretion on securities 913,948 (577,030) Decrease in prepaid expenses and other assets 3,999,306 2,023,142 Decrease in accrued interest payable, deferred taxes and other liabilities (884,726) (318,351) ------------ ------------ Total adjustments 7,111,571 2,607,640 ------------ ------------ Net cash provided by operating activities 7,487,832 7,040,012 Cash flows from investment activities Purchase of securities available for sale (30,836,248) (46,671,223) Proceeds from sales of securities available for sale 5,192,400 27,874,409 Proceeds from maturities and paydowns of securities available for sale 61,670,914 23,148,073 Increase in loans (8,343,382) (10,999,884) (Purchase) sale of Federal Reserve Bank/Federal Home Loan Bank stock 530,950 (19,500) Purchase of cash value life insurance (830,000) - Proceeds from the sale of real estate owned 1,949,656 462,557 Capital expenditures (1,175,598) (694,644) ------------ ------------ Net cash provided by investment activities 28,158,692 (6,900,212) Cash flows from financing activities Net (decrease)/increase in deposits (12,415,886) 34,304,628 Decrease in short term borrowings and subordinated capital notes - (14,605,696) Exercise of common stock options 700,274 434,653 Cash dividends paid on common stock (883,773) (833,712) ------------ ------------ Net cash (used in)/provided by financing activities (12,599,385) 19,299,873 ------------ ------------ Net increase in cash and cash equivalents 23,047,139 19,439,673 ------------ ------------ Beginning cash and cash equivalents 30,801,343 24,456,994 ------------ ------------ Ending cash and cash equivalents $ 53,848,482 $ 43,896,667 ============ ============ Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 4,697,222 $ 6,001,413 Federal income taxes - 1,927,839 Non-cash investing and financing activities: Transfer from loans to real estate owned (net) 1,834,731 2,086,302
-8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation and Significant Accounting Policies: The accompanying consolidated financial statements of Franklin Bancorp, Inc. ("Franklin", the "Corporation" 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 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 the Bancorp'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. The results of operations for the three month or the nine month period ended September 30, 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 September 30, 2003, the Corporation had two stock-based employee compensation plans and two stock 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 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. The Corporation did not grant options on shares during the quarter ended September 30, 2003. 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, the effect on net income per share of stock-based employee compensation was less than $.01 per share in each of the periods presented. Recent Accounting Pronouncements In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149 which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition to conform to language used in FASB Interpretation No. 45, and amends certain other existing pronouncements. This statement is effective for contracts entered into or modified after September 30, 2003. It is not expected that the provisions of Statement No. 149 will have a material impact on the financial position or results of operations of the Corporation. In May 2003, the FASB issued SFAS No. 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. It is not expected that provisions of Statement No. 150 will have a material impact on the financial position or results of operations of the Corporation. -9- Franklin Bancorp, Inc. Notes to Consolidated Financial Statements (unaudited) Note 2. 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 Nine Months Ended September 30, September 30, ----------------------------- ------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- NUMERATOR Net income $ 427,164 $1,221,378 $ 376,261 $4,432,372 Numerator for basic and diluted earnings per share Income available for common shareholders 427,164 $1,221,378 $ 376,261 $4,432,372 DENOMINATOR Denominator for basic earnings per share - weighted average share outstanding 3,709,083 3,635,331 3,687,546 3,629,075 Employee stock options 84,994 139,017 81,823 140,859 Denominator for diluted earnings per share - adjusted weighted average share outstanding 3,794,077 3,774,348 3,769,369 3,769,934 Basic earnings per share $ 0.12 $ 0.34 $ 0.10 $ 1.22 Diluted earnings per share 0.11 0.32 0.10 1.18
-10- Note 3. Loans, Nonperforming Assets and Allowance for Loan Losses: The following table summarizes changes in the allowance for loan and lease losses arising from loans being charged off, recoveries on loans which had previously been charged off, and the provision for loan losses.
September 30, ------------------------------- 2003 2002 ---- ---- Balance at beginning of period $5,926,813 $4,863,948 Provision for loan losses 2,276,959 1,275,000 CHARGE-OFFS Commercial 1,346,371 722,561 Commercial mortgage 2,656,641 Consumer 1,219,574 1,343,446 Residential mortgage 432,971 Overdraft 35,887 58,686 Lease financing -- 68,334 ---------- ---------- Total charge-offs 5,691,443 2,193,027 RECOVERIES Commercial 568,854 129,648 Commercial mortgage 473,819 Consumer 815,432 770,039 Residential mortgage 12,000 -- Overdraft 28,884 15,341 Lease financing 55,132 197,587 ---------- ---------- Total recoveries 1,954,121 1,112,615 ---------- ---------- Net charge-offs 3,737,322 1,080,412 ---------- ---------- Balance at end of period $4,466,450 $5,058,536 ========== ========== Allowance as a percentage of Loans 1.33% 1.52% Nonperforming loans 136.54% 90.00% Nonperforming assets 85.40% 64.44% Net charge-offs (annualized) 89.63% 351.15% Net charge-offs to average loans outstanding (annualized) 1.60% 0.45%
-11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 3. Loans, Nonperforming Assets and Allowance for Loan Losses: The following table summarizes the non-performing loans and assets arising from loans on non-accrual status, loans being deemed to be non-performing and real estate assets acquired in satisfaction of debt that the Bank currently owns: NONPERFORMING ASSETS ANALYSIS
At -------------------------------------------------- September 30, December 31, September 30, 2003 2002 2002 ---- ---- ---- NONACCRUAL LOANS Commercial $1,029,700 $ 338,547 $2,364,036 Commercial mortgage 1,441,493 3,104,793 2,329,761 Residential mortgage 599,987 1,313,654 834,766 Consumer 200,020 75,993 91,872 ---------- ---------- ---------- Total nonaccrual loans 3,271,200 4,832,987 5,620,435 REAL ESTATE OWNED Commercial mortgage 1,130,835 540,326 636,475 Residential mortgage 775,000 1,464,123 101,678 ---------- ---------- ---------- Total real estate owned 1,905,835 2,004,449 738,153 Real estate in redemption 53,265 485,534 1,491,429 ---------- ---------- ---------- Total nonperforming assets $5,230,300 $7,322,970 $7,850,017 ========== ========== ==========
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. -12- 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 results to differ include those listed below and other risks detailed from time to time in the Bancorp'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 the Bancorp's judgment as of the date of this report. The Bancorp disclaims, however, any intent or obligation to update these forward-looking statements. Future factors include, but are not limited to, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulations; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances and issues; governmental and regulatory policy changes; the outcomes of pending and future litigation and contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national economy. These are representative of the future factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2003 TO NINE MONTHS ENDED SEPTEMBER 30, 2002: NET INTEREST INCOME Interest income decreased by $4.8 million, along with interest expense which decreased by $1.3 million, resulting in a decrease in net interest income of $3.5 million or 17.6% when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. The net interest margin was 4.46% and 5.03% for the nine months ended September 30, 2003 and 2002, respectively. Interest income earned on the loan portfolio decreased $2.6 million or 13.5% when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. Another large decrease in interest income came from securities and other investments, with a decrease of $2.2 million when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. The decrease in interest income was primarily the result of the overall decrease in interest rates over the last fifteen months and the decline in average earning asset balances of $19.5 million or 3.9% for the nine months ended September 30, 2003. Average balances for outstanding loans decreased by $11.1 million or 3.5% when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. Average balances for securities decreased $27.9 million or 17.2%, for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Offsetting some of these decreases was an increase in the average balance of $19.5 million in the Federal Home Loan Bank time deposit account, a short-term investment vehicle. Interest expense is comprised of interest on deposits and interest on other borrowings, primarily Federal Home Loan Bank advances. Interest on deposits decreased $1.3 million or 34.0% when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. Both the decline in market interest rates and the shift of deposit balances to non-interest bearing accounts caused the reduction. The Federal Home Loan Bank advances carried fixed rates during these periods, which equated to a weighted average rate of 4.42 percent and 4.41 percent for the nine months ended September 30, 2003 and the nine months ended September 30, 2002, respectively. The interest on other borrowings declined $62,861 or 2.8% when comparing the nine months ended September 30, 2003 to the nine months ended September 30, 2002. -13- (Dollars in Thousands) The following schedule presents 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. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding.
Average balances/Net interest income/Average rates Nine months ended September 30 2003 2002 ----------------------------------------- ---------------------------------------- Tax Average Tax Average Average Equivalent Yield\ Average Equivalent Yield\ Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- INTEREST EARNING ASSETS: Loans $ 311,351 $ 16,474 7.05 % $ 322,478 $ 19,051 7.88 % Taxable investment securities 73,149 2,163 3.94 68,173 4,516 5.06 Non-taxable investment securities 11,138 462 5.53 8,314 407 6.36 Interest bearing deposits 33,310 268 1.07 13,847 179 1.71 Other 49,949 1,573 4.20 85,603 1,561 5.98 ------------- ------------ ------------- ----------- Total earning assets 478,897 20,940 5.83 498,415 25,714 6.88 NON EARNING ASSETS Allowance for loan losses (5,385) (4,843) Cash and due from banks 22,414 21,040 Accrued income and other assets 35,961 32,972 ------------- ------------- Total assets $ 531,887 $ 547,584 ============= ============= INTEREST BEARING LIABILITIES Interest-bearing demand deposits 185,437 1,361 0.98 175,131 3,745 2.08 FHLB advances 65,422 2,168 4.42 65,687 2,173 4.41 Other 48,114 1,110 3.08 68,729 57 1.88 ------------- ------------ ------------- ----------- Total interest bearing liabilities 298,973 4,639 2.07 309,547 5,975 2.57 ------------ ----------- NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 185,680 172,089 Other 2,251 1,524 Preferred stock of subsidiary - 19,500 Shareholders' equity 44,983 44,922 ------------- ------------- Total liabilities and shareholders' equity $ 531,887 $ 547,582 ============= ============= Interest rate spread 3.76 4.31 Net interest income (FTE) 16,301 19,739 Less: FTE adjustment 157 139 ------------ ----------- Net interest income 16,144 19,600 ============ =========== Contribution to net interest margin from noninterest bearing sources of funds 0.70 0.72 ------- -------- Net interest margin (FTE) 4.46 % 5.03 %
-14- NON INTEREST INCOME Total non interest income decreased by $322,136 or 7.6% for the nine months ended September 30, 2003 when compared to the same period ended 2002. There was a decrease in deposit account service charges of $89,933 or 3.8% and a reduction in securities gains of $192,845 to $455,511 or 29.7% when comparing the nine months ended September 30, 2003 to the same period ended September 30, 2002. These changes can be attributed to competitive pricing and current market forces regarding deposit account service charges along with the Bank's conservative approach to management of its investment securities portfolio. Operating fee income (defined as non interest income excluding gains or losses on sales of securities, loans, real estate owned and repossessed assets) decreased slightly by $170,893 for the nine months ended September 30, 2003 compared to the same period in 2002. NON INTEREST EXPENSE Non interest expenses were $17.4 million for the nine months ended September 30, 2003 compared to $14.9 million for the same period ended September 30, 2002. Increases in severance compensation accounted for $2.8 million of the $2.5 million increase. Compensation and benefits decreased modestly by $22,034 for the nine months ended September 30, 2003 compared to the same period in 2002. Defaulted loan expenses increased $191,769 for the nine months ended September 30, 2003 compared to the same period in 2002. INCOME TAXES The income tax provision for the first nine months of 2003 totaled $3,335 compared to $1,900,145 for the same period a year ago. The effective tax rate was 20.0% for the first nine months of 2003, compared to 30.0% for the nine months ended September 30, 2002. In addition there was an adjustment to the 2003 tax provision for the difference between taxes accrued in 2002 and the amount of the final calculation of taxes as shown in the 2002 federal income tax return in the amount of $72,500. FINANCIAL CONDITION Total assets were $528.4 million at September 30, 2003 compared to $542.5 million at December 31, 2002. When comparing average balances for the nine month periods ending September 30, 2003 and 2002, cash and cash equivalents increased $20.8 million and represented 10.5% and 6.4%, respectively, of total assets. However, cash and cash equivalents increased by $23.0 million from December 31, 2002 to September 30, 2003. The majority of these funds are invested on a short term basis in the Federal Home Loan Bank time deposit account. Late in the third quarter of 2003, the Bank purchased $29.5 million of high quality single family whole loans that are located in markets with which the Bank is familiar. The weighted average yield on these loans is 5.13 percent and the funds used to purchase these loans were funds previously invested with The Federal Home Loan Bank which yielded only 0.96 percent during the month of September. It is anticipated that these loan purchases will serve three very positive and important goals, (1) improve the net interest margin, (2) diversify the loan portfolio and (3) continue to improve the overall credit quality of the Bank's loan portfolio. INVESTMENTS Investment balances decreased $37.5 million or 25.0% from December 31, 2002 to September 30, 2003 as securities matured throughout the period. The Bank continues to maintain a conservative approach to its investment acquisitions. Market conditions during the first nine months of 2003 have provided limited opportunities to invest for a term and at a yield that management considered attractive. LOANS Net loan balances increased $2.7 million or 0.8% from December 31, 2002 to September 30, 2003. Residential loan purchases caused the growth as short-term deposits held with the Federal Home Loan Bank were used as a funding source. Franklin continues to aggressively manage its credit risk during the current sluggish economic period. As a result, total non-performing assets declined to $5.2 million at September 30, 2003, down from $6.8 million at December 31, 2002. In addition to the improvement in the non-performing assets classification, the Bank's delinquent loans, (loans with scheduled payments 30 days or more past due) to total loans ratio improved from 2.45% as of December 31, 2002 to -15- 1.37% as of September 30, 2003. The quality of the loan portfolio has been improved through the reduction in delinquent loans and the addition of the high quality residential mortgages. ALLOWANCE FOR LOAN LOSSES At September 30, 2003, Franklin's allowance for loan losses (ALLL) as a percentage of loans outstanding was 1.33% compared to 1.52% at September 30, 2002. Franklin increased its provision for the nine months ended September 30, 2003 to $2,276,959 compared to $1,275,000 for the nine months ended September 30, 2002. During the first nine months of 2003, Franklin had net charge-offs of $3.7 million compared to $1.1 million for the first nine months of 2002. The majority of the increase in net charge-offs was related to five commercial loan relationships which were charged-off during the nine months ended September 30, 2003. Management reviews the adequacy of the ALLL quarterly and establishes appropriate levels of allowance based on various factors, including historical charge-off levels, evaluation of impaired loans in accordance with the provision of FASB Statement No. 114, and its view of how economic conditions may affect the ability of borrowers to repay their loans. Management believes the current level of ALLL is adequate. Any adjustments, if necessary, are reported in the allowance for loan losses and the related provision 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 or purchase 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. The liquid asset level increased during the first nine months of 2003 by $23.0 million substantially as a result of the decrease in investments. DEPOSITS AND BORROWED FUNDS During the nine month period ended September 30, 2003, Franklin experienced a decrease in total deposits of $12.4 million. Commercial demand deposits were the principal source of growth in deposits with an increase of $3.0 million, which was more than offset by the decrease in time deposits of $17.6 million and a decrease in the money fund accounts of $1.5 million. Thus the majority of the decrease was within the higher interest rate paying certificate categories. REGULATORY CAPITAL The following table compares the Bank's regulatory capital requirements and ratios at September 30, 2003 and December 31, 2002.
TIER 1 TIER 1 TOTAL (In thousands) LEVERAGE RISK-BASED RISK-BASED - ------------------------------------------------------------------------------------------------------------------------------ Regulatory capital balances at September 30, 2003 $ 43,408 $ 43,408 $ 47,875 Required regulatory capital (well capitalized) 26,594 24,864 41,440 ------------------------------------------------------------- Capital in excess of well capitalized $16,814 $18,544 $6,435 ============================================================= Capital ratios at September 30, 2003 8.16% 10.48% 11.55% 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 September 30, 2003 was the result of decreases in risk weighted assets. The Bank remains well capitalized with a Tier 1 Leverage ratio of 8.16% at September 30, 2003. The changes in Tier 1 Risk-based and Total Risk-based Ratios are a reduction of 15 basis points and a decrease of 34 basis points, respectively, despite an increase in regulatory equity capital of $192,761, but a decrease in total regulatory capital of $1.3 million when compared to December 31, 2002. This decrease in total regulatory capital at September 30, 2003 is primarily due to the reduction in the allowance for loan losses from the December 31, 2002 balance. -16- COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED SEPTEMBER 30, 2002 The trends and comparisons for the quarters ended September 30, 2003 and 2002 are substantially similar to those of the nine month periods ended on the same respective dates. This portion of Management's Discussion and Analysis of Financial Condition and Results of Operations is written with the presumption that the reader has read the preceding. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2. NET INTEREST INCOME The decrease in net interest income of $1.4 million in the third quarter of 2003 compared to the third quarter of 2002 is a result of declining interest rates and a shift in earning asset composition from loans and securities to short term interest bearing deposits. Interest expense on other borrowings increased from 37% to 50% of total interest expense as the balance of the fixed rate borrowings from the Federal Home Loan Bank remained stable while the rates and balances of interest bearing deposits declined, which resulted in less of a decline in interest expense than interest income. This resulted in a drop in the Bank's net interest income when comparing the quarters. Therefore, a positive gap position in a declining rate environment will generally result in reduced net interest income unless volume increases are able to compensate. PROVISION FOR LOAN LOSSES The provision for loan losses of $1,025,653 in the third quarter of 2003 was $725,653 greater than the provision in 2002's second quarter. The provision for loan losses will vary from quarter to quarter as the changes in the assessment of the adequacy of the allowance for loan losses and net charge offs during the period will determine the amount of provision required. NON INTEREST INCOME Non interest income in the third quarter of 2003 had no gains on the sale of securities, while the third quarter of 2002 included $327,948 of gains on the sale of securities. NON INTEREST EXPENSE Non interest expense decreased by $799,276 in the third quarter of 2003 compared to the same quarter in 2002. Severance expenses were $66,879 higher in the third quarter of 2002 than in the third quarter of 2003. Outside service expenses were down $474,786, compensation and benefits declined by $74,587 and communication expense declined by $27,004 in the third quarter of 2003 compared to the third quarter of 2002. -17- 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. Management also monitors the impact on the market value of equity and the impact on net interest income at risk in its interest rate shock analysis. When comparing the September 30, 2003 and December 31, 2002 12 month gap model, the increase in the positive gap can be attributed primarily to a decrease in investment securities along with an increase in time deposits with the Federal Home Loan Bank, which have a shorter duration. The increase in assets that reprice in 12 months or less is compounded by a decrease in time deposits and an increase in commercial demand deposits. Management also modified its gap model to distribute the repricing points for the Bank's money market deposit accounts. This distribution moved $50 million from the 12 month or less repricing category into the 1 to 5 year repricing category. Management believes that this modification to its gap model more accurately reflects the reaction to interest rate fluctuations relative to non-maturity deposits. Management expects to remain in a positive gap position throughout the remainder of 2003 given the current repricing structure of the Bank's balance sheet. The purchase of residential mortgages has reduced the asset sensitivity since the end of the second quarter by redeploying some of the short term deposits with the FHLB into loans. The Bank has noted a decrease in its net interest margin resulting from the current decline in short term market rates. During the second quarter of 2003, the Federal Reserve lowered the targeted fed funds rate from the prior quarter. In the short term, the Bank expects a tightening of its net interest margin as a result of the reduction in the yield on interest bearing assets decreasing more rapidly than interest bearing liabilities; however if interest rates rise, a significant portion of the earning assets should reprice upward while the growth in noninterest bearing deposits will tend to hold down funding costs, which should result in improvement in the margin. 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. ITEM 4. CONTROLS AND PROCEDURES a. The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These rules refer to the controls and other 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 our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by the 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 Corporation known to others within the Corporation which is required to be included in our periodic reports filed under the Exchange Act. b. There have been no changes in the Corporation's internal controls over financial reporting that occurred during the period this Form 10-Q was being prepared that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. -18- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bank 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 Bank's operations or financial position. 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. On July 29, 2003, the Corporation filed a Form 8-K disclosing in Item 12 thereof and including as an exhibit in Item 7 thereof, a press release announcing the consolidated results of operations for the second quarter ended June 30, 2003. -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN BANCORP, INC. November 10, 2003 By: /s/ Craig L. Johnson --------------------------- Craig L. Johnson, President and Chief Executive Officer By: /s/ Leonard B. Carleton --------------------------- Leonard B. Carleton, Chief Financial Officer -20- EXHIBIT INDEX 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -21- EX-31.1 3 k80611exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, David L. Shelp, the Chief Executive Officer of Franklin Bancorp, Inc. (the "registrant") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 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. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly during the period in which this quarterly report is being prepared; (b) [Intentionally omitted]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 10, 2003 /s/ Craig L. Johnson --- -------------------- Craig L. Johnson Chief Executive Officer -22- EX-31.2 4 k80611exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION OF THE FINANCIAL OFFICER I, Leonard B. Carleton, the Chief Financial Officer of Franklin Bancorp, Inc. (the "registrant") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 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. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly during the period in which this quarterly report is being prepared; (b) [Intentionally omitted]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during registrant's most recent fiscal quarter (registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 10, 2003 /s/ Leonard B. Carleton --- ------------------------ Leonard B. Carleton Chief Financial Officer -23- EX-32.1 5 k80611exv32w1.txt 906 CERTIFICATION OF CEO & CFO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Quarterly Report on Form 10-Q of Franklin Bancorp, Inc. ("Franklin") for the quarter ended September 30, 2003 (the "Report"), each of the undersigned, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of our respective knowledge and belief, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Franklin. November 10, 2003 /s/ Craig L. Johnson --- -------------------- Craig L. Johnson Chief Executive Officer November 10, 2003 /s/ Leonard B. Carleton --- ------------------------ Leonard B. Carleton Chief Financial Officer -24- -----END PRIVACY-ENHANCED MESSAGE-----