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| FFHS > SEC Filings for FFHS > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
GENERAL
First Franklin Corporation ("First Franklin" or the "Company") is a savings and
loan holding company that was incorporated under the laws of the State of
Delaware in September 1987. The Company owns all of Franklin's outstanding
common stock.
As a Delaware corporation, the Company is authorized to engage in any activity
permitted by the Delaware General Corporation Law. As a unitary savings and loan
holding company, the Company is subject to examination and supervision by the
Office of Thrift Supervision ("OTS"). The Company's assets consist of cash,
interest-earning deposits, the building in which the Company's corporate offices
are located and investments in Franklin and DirectTeller Systems Inc.
("DirectTeller").
Franklin is an Ohio chartered stock savings and loan association headquartered
in Cincinnati, Ohio. It was originally chartered in 1883 as the Green Street
Number 2 Loan and Building Company. Franklin's business consists primarily of
attracting deposits from the general public and using those deposits, together
with borrowings and other funds, to originate real estate loans and purchase
investments. Franklin operates seven banking offices in Hamilton County, Ohio
through which it offers a full range of consumer banking services, including
mortgage loans, home equity and commercial lines of credit, credit and debit
cards, checking accounts, auto loans, savings accounts, automated teller
machines, a voice response telephone inquiry system and an internet-based
banking system which allow its customers to transfer funds between financial
institutions, pay bills, transfer funds between Franklin accounts, download
account and transaction information into financial management software programs
and inquire about account balances and transactions. To generate additional fee
income and enhance the products and services available to its customers,
Franklin also offers annuities, mutual funds and discount brokerage services in
its offices through an agreement with a third party broker dealer.
Franklin has one wholly owned subsidiary, Madison Service Corporation
("Madison"). At the present time, Madison has no operations, its only assets are
cash and interest-earning deposits and its only source of income is the interest
earned on its deposits.
First Franklin owns 51% of DirectTeller's outstanding common stock. DirectTeller
was formed in 1989 by the Company and DataTech Services Inc. to develop and
market a voice response telephone inquiry system to allow financial institution
customers to access information about their accounts via the telephone and a
facsimile machine. Franklin currently offers this service to its customers. The
inquiry system is currently in operation at Harland Financial Solutions, Inc.
("Harland"), a computer service bureau which offers the DirectTeller system to
the financial institutions it services. The agreement with Harland gives
DirectTeller a portion of the profits generated by the use of the inquiry system
by Harland's clients. Harland can terminate this agreement at any time by
switching the existing users to a different system. At the present time, Harland
offers a comparable system and customers using its new teller platform are being
converted to Harland's system. It is anticipated that sometime in the future,
Harland will no longer offer the DirectTeller system. There are no assets on the
consolidated balance sheet that are determined to be impaired as a result of the
Company's ownership of DirectTeller.
On October 14, 2008, the FDIC established the Temporary Liquidity Guarantee
Program ("TLGP") which includes the Transaction Account Guarantee Program
("TAGP"). Franklin has elected to participate in the TAGP, which provides
unlimited deposit insurance coverage through December 31, 2009 for non-interest
bearing transaction accounts (typically business checking accounts) and certain
funds swept into non-interest bearing savings accounts. Franklin pays a 10 basis
points fee (annualized) on the balance of each covered account in excess of
$250,000, while the extra deposit insurance is in place. After December 31,
2009, the TAGP will expire and deposit insurance coverage will revert back to
$250,000 per account. On January 1, 2014, insurance coverage is scheduled to
return to $100,000 per account.
The TLGP also includes the Debt Guarantee Program (DGP), under which the FDIC
guarantees certain senior unsecured debt of FDIC insured institutions and their
holding companies. The Company is eligible to participate in the DGP, although
the Company has not issued, and does not intend to issue, debt under the DGP.
In May 2009, the Federal Deposit Insurance Corporation imposed a special
assessment on all insured depository institutions of five basis points times the
amount of the institution's assets. As a result, in the current quarter,
Franklin Savings recognized a $150,000 expense for the special assessment.
Because the results of operations of Madison and DirectTeller were not material
to the Company's operations and financial condition, the following discussion
focuses primarily on Franklin.
Statements included in this document which are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results. Such statements may be identified by use of the words
"may," "anticipates," "expects," "hopes," "believes," "plans," "intends," and
similar expressions. Factors that could cause financial performance to differ
materially from that expressed in any forward-looking statement include, but are
not limited to, credit risk, interest rate risk, competition, changes in the
regulatory environment and changes in general and local business and economic
trends.
CRITICAL ACCOUNTING POLICIES
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Changes in the overall local
economy in which the Company operates may impact the allowance for loan losses.
Generally, the Company establishes a specific reserve, instead of a charge-off,
on a loan if the underlying collateral is valued less than the book value. This
allows some flexibility in the future if the collateral value increases. Any
decline in the value of real estate owned is recognized by a write-down of the
book value.
Loans, including impaired loans, are generally classified as non-accrual if they
are past due for a period of more than 90 days, unless such loans are
well-secured and in the process of collection. Loans that are on a current
payment status or past due less than 90 days may also be classified as
non-accrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms
of the loan. While a loan is classified as non-accrual, interest income is
generally recognized on a cash basis.
A loan is defined as impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company considers its
investment in one to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification of
impairment. With respect to the Company's investment in non-residential and
multifamily residential real estate loans, the evaluation of impairment is based
on the lower of cost or fair value of the underlying collateral.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Consolidated assets decreased $8.24 million (2.58%) from $318.78 million at
December 31, 2008 to $310.54 million at June 30, 2009, compared to a
$1.28 million (0.4%) decrease for the same period in 2008. During 2009,
mortgage-backed securities decreased $791,000, cash and investments decreased
$3.63 million, loans receivable decreased $4.82 million, deposits increased
$19.36 million and borrowings decreased $26.51 million. The decrease in cash and
investments and loan receivable were used with the increase in deposits to
reduce borrowings.
Loan disbursements were $124.60 million during the current six-month period
compared to $29.66 million during the six months ended June 30, 2008.
Disbursements during the second quarter of 2009 were $55.30 million compared to
$13.51 million during the same quarter in 2008. Mortgage loan sales of
$96.70 million occurred during the current six-month period compared to loan
sales of $6.56 million in the first half of 2008. At the beginning of 2009,
Franklin increased its loan origination staff, which will affect the way loans
are retained in the portfolio or sold in the future. The majority of loans
originated during the current six months, and possibly in the future, will be
sold with servicing transferred to the purchaser. This may cause outstanding
loan balances and interest earned on loans to decline, but origination fees and
profit on the sale of loans to increase. The increase in loan disbursements and
sales during the current quarter and six-month period reflects an increase in
the loan origination staff and lower interest rates which caused many borrowers
to refinance their existing loans. At June 30, 2009, commitments to originate
mortgage loans were $3.00 million, $1.12 million of undisbursed loan funds were
being held on various construction loans, and the Company had approximately
$19.14 million of undisbursed lines of credit on consumer and commercial loans.
Management believes that sufficient cash flow and borrowing capacity exist to
fund these commitments. Due to the short term of the commitments and
comparability of current levels of interest rates and committed rates, there is
no significant market risk with respect to these commitments.
Liquid assets decreased $3.63 million during the six months ended June 30, 2009
to $17.22 million. This decrease reflects loan and mortgage-backed securities
repayments of $33.79 million, loan sales of $96.70 million and savings inflows
of $19.36 million, less loan disbursements of $124.60 million and the repayment
of $26.51 million of borrowings. At June 30, 2009, liquid assets were 5.54% of
total assets.
The Company's investment and mortgage-backed securities are classified based on
its current intention to hold to maturity or have available for sale, if
necessary. The following table shows the gross unrealized gains or losses on
mortgage-backed securities and investment securities as of June 30, 2009. No
securities are classified as trading.
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
Available-for-sale
Investment securities $ 11,110 $ 6 $ 223 $ 10,893
Mortgage-backed securities 2,991 48 4 3,035
Held-to-maturity
Mortgage-backed securities 4,468 93 0 4,561
$ 18,569 $ 147 $ 227 $ 18,489
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None of the investments have other than a temporary impairment as of June 30, 2009. Management has the intent and ability to hold these securities for the foreseeable future. The decline in the market value of the investment and mortgage-backed securities is due to the recent increase in market interest rates and other economic factors such as the risk associated with mortgage-backed securities. Management expects the market value to recover as securities approach their maturity dates.
At June 30, 2009, deposits were $242.47 million compared to $223.11 million at
December 31, 2008, an increase of $19.36 million. During the current six months,
consumers moved funds into insured deposit products from uninsured investments,
such as stocks, bonds and mutual funds, due to the uncertainty in the financial
markets. As a result, core deposits increased $5.91 million and certificates
increased $13.45 million. Interest of $3.36 million during the six-month period
was credited to accounts. After eliminating the effect of interest credited,
deposits increased $16.00 million during the six months ended June 30, 2009.
At June 30, 2009, Franklin had outstanding FHLB advances of $41.96 million at an
average cost of 4.66%. During the current six-month period, Franklin used the
unexpected deposit inflow and loan repayments to repay borrowings by
$26.51 million. During the next twelve months, required principal reduction on
these borrowings will be $16.71 million. Management believes that the Company
has sufficient cash flow to meet these commitments and maintain desired
liquidity levels.
At June 30, 2009, $13.28 million of assets were classified substandard, no
assets were classified doubtful, $1.91 million were classified loss and
$6.28 million were designated by management as special mention, compared to
$9.70 million as substandard, $2.23 million as loss and $3.80 million designated
as special mention at December 31, 2008. Non-accruing loans and accruing loans
delinquent 90 days or more, net of reserves, were $7.36 million at June 30, 2009
and $5.20 million at December 31, 2008. The increase in assets classified
substandard and non-accruing loans is due to the addition of a single family
home with a book value of $1.66 million and 15 other mortgage loans secured by
one-to four-family properties with an aggregate net book value of $1.43 million.
At June 30, 2009, the recorded investment in loans for which impairment has been
recognized was approximately $7.56 million with related reserves of
$1.76 million. Because of the current state of the real estate market, and the
economy in general, Franklin believes that non-performing assets may increase,
and resolving problem assets may be a long-term process. The charge-offs shown
in the table below include $230,000 on a multi-family loan and $186,000 on four
one- to-four family non-owner occupied properties.
The following table shows the activity that has occurred on loss reserves during
the six months ended June 30, 2009.
(Dollars in thousands)
Balance at beginning of period $ 3,668
Charge offs 454
Additions charged to operations 247
Transfers to real estate owned 0
Recoveries 17
Balance at end of period $ 3,478
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The Company's capital supports business growth, provides protection to depositors, and represents the investment of stockholders. At June 30, 2009, net worth was $24.00 million, which was 7.73% of assets. At the same date, book value per share was $14.28, compared to $14.19 per share at December 31, 2008.
The following table summarizes, as of June 30, 2009, Franklin's regulatory capital position.
Capital Standard Actual Required Excess Actual Required Excess
(Dollars in thousands)
Core $ 23,285 $ 12,392 10,893 7.51 % 4.00 % 3.51 %
Risk-based 24,805 17,532 7,273 11.32 % 8.00 % 3.32 %
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Franklin continues to be rated as "well capitalized" under OTS regulations.
COMPREHENSIVE INCOME
Comprehensive income (loss) for the six months ended June 30, 2009 and 2008 was
$151,000 and $(1.05) million, respectively. The difference between net income
and comprehensive income consists solely of the effect of unrealized gains and
losses, net of taxes, on available-for-sale securities.
RESULTS OF OPERATIONS
The Company had net income of $7,000 ($0.01 per basic share) for the current
quarter and $267,000 ($0.16 per basic share) for the six months ended June 30,
2009, compared to a net losses of $(874,000) ($0.52 per basic share) for the
second quarter of 2008 and $(770,000) ($0.46 per basic share) for the six months
ended June 30, 2008. The increase in income before taxes during the current
six-month period, when compared to the same period in 2008, reflects increases
of $71,000 in net interest income and $1.04 million in profits on the sale of
loans and a decrease of $1.23 million in the provisions for loan losses, which
were offset by an increase of $883,000 in noninterest expenses, which is
discussed below.
Net interest income, before provisions for loan losses, was $1.47 million for the current quarter and $3.04 million for the first six months of 2009, compared to $1.50 million and $2.97 million, respectively, for the same periods in 2008. The following rate/volume analysis describes the extent to which changes in interest rates and the volume of interest related assets and liabilities have affected net interest income during the periods indicated.
For the six month periods ended June 30,
2009 vs 2008
Total
Increase (decrease) due to increase
Volume Rate (decrease)
(Dollars in thousands)
Interest income attributable to:
Loans receivable (1) $ (184 ) $ (429 ) $ (613 )
Mortgage-backed securities 35 15 50
Investment securities (21 ) (94 ) (115 )
FHLB stock 4 (20 ) (16 )
Total interest-earning assets $ (166 ) $ (528 ) $ (694 )
Interest expense attributable to:
Demand deposits $ 7 $ (63 ) $ (56 )
Savings accounts 5 (63 ) (58 )
Certificates 221 (448 ) (227 )
FHLB advances and other borrowings (278 ) (146 ) (424 )
Total interest-bearing liabilities $ (45 ) $ (720 ) $ (765 )
Decrease in net interest income $ (121 ) $ 192 $ 71
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(1) Includes non-accruing loans.
Managing interest rate risk is fundamental to banking. Financial institutions must manage the inherently different maturity and repricing characteristics of their lending and deposit products to achieve a desired level of earnings and to limit their exposure to changes in interest rates. Franklin is subject to interest rate risk to the degree that its interest-bearing liabilities, consisting principally of customer deposits and FHLB advances, mature or reprice more or less frequently, or on a different basis, than its interest-earning assets, consisting primarily of loans, mortgage-backed securities and investment securities. While having assets that mature or reprice more rapidly than liabilities may be beneficial in times of rising interest rates, such a structure may have the opposite effect during periods of declining interest rates. Conversely, having liabilities that reprice or mature more rapidly than assets may adversely affect net interest income during periods of rising interest rates. As of March 31, 2009, the most current data available, Franklin's assets repriced or matured more rapidly than its liabilities and Franklin was rated in the most favorable interest rate risk category under OTS guidelines.
As the tables below illustrate, average interest-earning assets decreased $5.67 million to $296.58 million during the six months ended June 30, 2009, from $302.25 million for the six months ended June 30, 2008. Average interest-bearing liabilities decreased $935,000 from $290.99 million for the six months ended June 30, 2008, to $290.02 million for the current six-month period. Thus, average net interest-earning assets decreased $4.74 million when comparing the two periods. The interest rate spread (the yield on interest-earning assets less the cost of interest-bearing liabilities) was 1.98% for the six months ended June 30, 2009, compared to 1.82% for the same period in 2008. The increase in the interest rate spread was the result of the cost of interest-bearing liabilities decreasing at a greater rate the yield on interest-earning assets. The yield on interest-earning assets decreased from 5.70% for the six months ended June 30, 2008 to 5.35% for the current six month period, due to decreases in the yield on loans from 5.75% to 5.43% and in the yield on the FHLB stock from 5.28% to 4.49%. During the current six month period the cost of interest-bearing liabilities decreased from 3.88% to 3.37% due to a decrease in the cost of FHLB advances from 4.84% to 4.36%, savings deposits from 1.21% to 0.79%, checking accounts from 0.80% to 0.41% and certificates of deposit from 4.54% to 4.05%. The decline in the yield on interest-earning assets and the cost of interest-bearing liabilities is the result of a general decline in market interest rates.
For the six months ended June 30, 2009
Average
outstanding Yield/cost
(Dollars in thousands)
Average interest-earning assets
Loans $ 268,652 5.43 %
Mortgage-backed securities 7,842 5.05 %
Investment securities 15,091 4.24 %
FHLB stock 4,991 4.49 %
Total $ 296,576 5.35 %
Average interest-bearing liabilities
Demand deposits $ 32,408 0.41 %
Savings accounts 29,505 0.79 %
Certificates 176,080 4.05 %
FHLB advances 52,029 4.36 %
Total $ 290,022 3.37 %
Net interest-earning assets/interest rate spread $ 6,554 1.98 %
For the six months ended June 30, 2008
Average
outstanding Yield/cost
(Dollars in thousands)
Average interest-earning assets
Loans $ 275,074 5.75 %
Mortgage-backed securities 6,431 4.60 %
Investment securities 15,896 5.47 %
FHLB stock 4,849 5.28 %
Total $ 302,250 5.70 %
Average interest-bearing liabilities
Demand deposits $ 30,747 0.80 %
Savings accounts 28,670 1.21 %
Certificates 167,225 4.54 %
FHLB advances 64,315 4.84 %
Total $ 290,957 3.88 %
Net interest-earning assets/interest rate spread $ 11,293 1.82 %
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Noninterest income was $1.18 million for the quarter and $2.18 million for the six months ended June 30, 2009 compared to $433,000 for the same quarter in 2008 and $963,000 for the six months ended June 30, 2008. The majority of the increase in noninterest income is the result of an increase of $1.04 million in the gains on the sale of loans. As discussed above, this increase is the result of an increase in Franklin's loan origination staff and a reduction in market interest rates which caused mortgage originations and sales to substantially increase.
Noninterest expenses were $2.58 million for the current quarter and
$4.59 million for the current six-month period compared to $1.92 million for the
same quarter in 2008 and $3.71 million for the six months ended June 30, 2008.
As a percentage of average assets, this is 2.89% for the six months ended
June 30, 2009 compared to 2.32% for the first six months of 2008. The increase
in noninterest expense is due to an increase of $609,000 in compensation and
employee benefit costs associated with the new loan originators and the $150,000
FDIC special assessment in the second quarter of 2009.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required
Item 4T. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the . . .
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