FRANKLIN FINANCIAL CORP 
By RICHMOND, Va., Aug. 2, 2012 /PRNewswire/ -- Franklin Financial Corporation (NASDAQ: FRNK), or "the Company", the parent company of Franklin Federal Savings Bank, announced a net loss for the three months ended June 30, 2012 of $354,000, or $0.03 per share, compared to a net loss of $3.3 million, or $0.25 per share, for the three months ended June 30, 2011. Net income for the nine months ended June 30, 2012 was $3.9 million, or $0.30 per share, compared to $494,000, or $0.04 per share, for the nine months ended June 30, 2011.
"We are disappointed to report a net loss for the quarter ended June 30, 2012, which we believe masks some very positive developments during the quarter, including significant reductions in non-performing, classified and criticized assets and an increase in tangible book value per share despite the net loss," noted Richard T. Wheeler, Jr., Chairman, President, and Chief Executive Officer. "The net loss was due primarily to other-than-temporary impairment charges and realized losses on corporate equity securities, which have been adversely affected by global economic events. We have decided to reduce our exposure in response to these events, so in July 2012, we sold $5.6 million of equity securities, and we will continue this process in the months ahead."
Third Quarter Highlights
-- The net loss for the three months ended June 30, 2012 was primarily the
result of other-than-temporary impairment ("OTTI") charges on securities
included in earnings of $2.1 million and net losses on sales of
securities of $777,000 for the quarter resulting from the Company's
efforts to reduce its exposure to equity securities. The Company
received no tax benefit on these charges/losses due to its capital loss
carry-forwards.
-- The Company recorded a credit provision for loan losses of $390,000 for
the three months ended June 30, 2012 compared to a provision expense of
$1.8 million for the three months ended June 30, 2011.
-- Nonperforming assets decreased $7.0 million in the three months ended
June 30, 2012 to $37.8 million.
-- Total criticized assets declined $17.8 million in the three months ended
June 30, 2012 to $73.3 million.
-- Net interest margin for the three months ended June 30, 2012 declined
three basis points to 2.65% from the prior quarter.
-- The Company repurchased 526,300 shares of its common stock for $8.0
million ($15.19 per share on average) under its stock repurchase program
announced last quarter and conducted under SEC Rule 10b5-1.
-- The Company, through an independent trustee, purchased 284,600 shares of
its common stock for $4.3 million ($15.18 per share on average) for its
2012 Equity Incentive Plan.
-- During the three months ended June 30, 2012, the Company exchanged nine
FHLB borrowings totaling $160.0 million for new advances of the same
amount. The exchanges will reduce interest expense on FHLB advances in
future years, including $2.0 million over the next eighteen months.
Net Interest Income
Net interest income for the three months ended June 30, 2012 decreased $199,000, or 2.9%, compared to the same period in the prior year as a result of a lower interest rate environment and a higher mix of investment securities rather than loans in the quarter ended June 30, 2012 compared to the comparable quarter in 2011. Average interest-earning assets decreased $60.0 million and average interest-bearing liabilities declined $35.1 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Interest income on loans declined $457,000 and interest income on securities declined $549,000 while deposit costs declined $613,000 and FHLB borrowing costs declined $236,000. Our net interest margin for the three months ended June 30, 2012 increased 5 basis points to 2.65% from the same period in the prior year, as a decrease in the yield on securities of 66 basis points was more than offset by a 32 basis point decline in the cost of deposits and a 24 basis point decline in the cost of FHLB borrowings. The primary cause of the decrease in the yield on securities was a 125 basis point decline in the yield on collateralized mortgage obligations ("CMOs") as we continued to purchase lower-yielding short-term CMOs in order to comply with qualified thrift lender requirements without taking on excessive interest rate risk. The decline in the cost of FHLB borrowings was the result of the Company's exchange of nine FHLB advances for lower-rate advances. In connection with these exchanges, the Company paid prepayment penalties totaling $18.3 million, which will be amortized over the life of the new advances as an adjustment to rate. The exchanges will reduce interest expense on FHLB advances in future years, including $2.0 million over the next eighteen months.
Net interest income for the nine months ended June 30, 2012 increased $970,000, or 5.0%, compared to the same period in the prior year primarily as a result of investing the funds received in the Company's mutual-to-stock conversion in April 2011 and the decline in rates paid on deposits. Deposit costs declined $2.0 million for the nine months ended June 30, 2012 compared to the comparable period in the prior year. Our net interest margin for the nine months ended June 30, 2012 decreased 2 basis points to 2.67% from the same period in the prior year, as a decrease in the cost of deposits of 38 basis points was more than offset by a 72 basis point decline in the yield on securities. The primary cause of the decrease in the yield on securities was a 125 basis point decline in the yield on CMOs for the reasons explained above.
Noninterest Income, Excluding Impairment Charges and Gains and Losses on Sales of Securities
Noninterest income, excluding impairment charges and gains and losses on sales of securities, increased $856,000, or 134.4%, to $1.5 million for the three months ended June 30, 2012 compared to $638,000 for the three months ended June 30, 2011. This increase was primarily the result of a $796,000 increase in net gains on sales of real estate owned, which were $711,000 for the three months ended June 30, 2012 compared to net losses of $85,000 for the three months ended June 30, 2011.
For the nine months ended June 30, 2012, noninterest income, excluding impairment charges and gains and losses on sales of securities, increased $1.9 million, or 102.0%, to $3.8 million compared to $1.9 million for the nine months ended June 30, 2011. This increase was primarily the result of a $1.4 million increase in net gains on sales of real estate owned, which were $1.3 million for the nine months ended June 30, 2012 compared to net losses of $32,000 for the nine months ended June 30, 2011, combined with a $541,000 increase in other service charges and fees. The increase in other service charges and fees related to fees received on the prepayment of several large loans.
Impairment Charges and Gains and Losses on Sales of Securities
The Company recorded OTTI charges in earnings of $2.1 million for the three months ended June 30, 2012 compared to charges of $1.3 million for the three months ended June 30, 2011. OTTI charges for the three months ended June 30, 2012 included $153,000 on debt securities and $1.9 million on equity securities compared to $501,000 on debt securities and $752,000 on equity securities for the three months ended June 30, 2011. OTTI charges on equity securities related primarily to the impairment of an exchange-traded fund designed to move inversely with 20-year treasury yields. In addition to the OTTI recognized on this security, the Company sold a portion of its investment in the security and recognized a loss on sale of $1.4 million. This loss on sale was partially offset by gains on sales of other securities for net losses on sales of securities of $777,000 for the quarter ended June 30, 2012 compared to no net gains or losses for quarter ended June 30, 2011.
For the nine months ended June 30, 2012, the Company recorded OTTI charges in earnings of $4.4 million compared to charges of $1.9 million for the nine months ended June 30, 2011. OTTI charges for the nine months ended June 30, 2012 included $968,000 on debt securities and $3.4 million on equity securities compared to charges of $1.1 million on debt securities and $803,000 on equity securities for the nine months ended June 30, 2011. OTTI charges on equity securities related primarily to investments in Virginia-based community banks as well as the exchange-traded fund discussed previously. In addition to the OTTI recognized on this exchange-traded fund, the Company sold a portion of its investment in the security and recognized a loss on sale of $1.4 million. This loss on sale was partially offset by gains on sales of other securities for net losses on sales of securities of $777,000 for the nine months ended June 30, 2012 compared to net gains of $265,000 for the nine months ended June 30, 2011.
In July 2012, the Company sold all of its remaining investment in the exchange-traded fund as well as a significant portion of its investments in stocks of financial institutions and other companies with exposure to global credit, currency, and other risks. In total, the Company sold $5.6 million of such stocks in July 2012 and realized a gain on the sale of $281,000. At July 31, 2012, the Company's available for sale corporate equity securities had an estimated fair value of $18.9 million, with gross unrealized gains of $3.1 million and gross unrealized losses of $397,000. Of the $18.9 million, approximately 74% was in Virginia-based community banks.
Despite the realized losses and the OTTI charges on equity securities recognized in net income for the nine months ended June 30, 2012, there was unrealized appreciation on equity securities of $5.3 million for the nine months ended June 30, 2012, and the equity securities portfolio improved from a net unrealized loss of $7.1 million at September 30, 2011 to a net unrealized gain of $2.4 million at June 30, 2012.
Other Noninterest Expenses
Other noninterest expenses were $5.1 million and $12.2 million for the three and nine months ended June 30, 2012, respectively, compared to $9.6 million and $17.1 million for the three and nine months ended June 30, 2011, respectively. The primary cause of the decline in both comparative periods was $5.6 million in contributions to The Franklin Federal Foundation made in April 2011 in connection with the Company's mutual-to-stock conversion compared to no such contributions made in the three or nine months ended June 30, 2012. These decreases were partially offset by increases in personnel expense of $395,000 and $646,000, respectively, for the three and nine months ended June 30, 2012 compared to the comparable prior year periods related primarily to the employee stock ownership plan that was established in connection with the Company's mutual-to-stock conversion and stock-based compensation expense recognized in connection with the Franklin Financial Corporation 2012 Equity Incentive Plan. Also, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, impairment charges on other real estate owned increased $553,000.
Asset Quality
Nonperforming assets decreased $7.0 million in the three months ended June 30, 2012 and $13.0 million in the nine months ended June 30, 2012 to $37.8 million. The decrease for the three months ended June 30, 2012 was the result of a $8.7 million decrease in nonperforming loans partially offset by a $1.7 million increase in other real estate owned. Nonperforming loans totaled $27.3 million at June 30, 2012 compared to $36.0 million at March 31, 2012 and $42.2 million at September 30, 2011. Other real estate owned increased to $10.6 million at June 30, 2012 from $8.8 million at March 31, 2012 and $8.6 million at September 30, 2011. Total nonperforming loans as a percentage of total loans at June 30, 2012 were 5.72% compared to 7.63% at March 31, 2012 and 8.50% at September 30, 2011.
The Company recorded a credit provision for loan losses of $390,000 for the three months ended June 30, 2012 compared to a provision expense of $1.8 million for the three months ended June 30, 2011. The Company recorded a credit provision for loan losses of $542,000 for the nine months ended June 30, 2012 compared to a provision expense of $2.5 million for the nine months ended June 30, 2011. The allowance for loan losses as a percentage of total loans was 2.26% at June 30, 2012 compared to 2.38% at March 31, 2012 and 2.95% at September 30, 2011.
Share Repurchase Program
On May 3, 2012, the Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 715,141 shares, of its outstanding common stock either on the open market or through private transactions until October 31, 2012. Purchases are being conducted through an SEC Rule 10b5-1 repurchase plan with Sandler O'Neill & Partners, L.P. ("Sandler") whereby Sandler will, from time to time and in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, act as agent for the Company in purchasing shares based upon the parameters of the Rule 10b5-1 repurchase plan. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal trading blackout period. During the three months ended June 30, 2012, the Company repurchased 526,300 shares of outstanding common stock for $8.0 million, or an average price of $15.19 per share.
FHLB Advance Restructurings
During the three months ended June 30, 2012, the Company exchanged nine FHLB borrowings totaling $160.0 million for new advances of the same amount. In connection with these exchanges, the Company paid prepayment penalties totaling $18.3 million, which have been treated as a discount on the new debt and are being amortized over the life of the new advances as an adjustment to the rate. The exchange extended borrowings with original interest rates of 3.44% to 5.85% and maturities of 2013 to 2020 into new borrowings with stated rates of 1.05% to 4.49% and maturities of 2016 to 2032. These exchanges will reduce FHLB borrowing expenses in future years, including $2.0 million over the next eighteen months.
About Franklin Financial Corporation
Franklin Financial Corporation is the parent of Franklin Federal Savings Bank, a federally chartered capital stock savings bank engaged in the business of attracting retail deposits from the general public and originating both owner and non-owner-occupied one-to four-family loans as well as multi-family loans, nonresidential real estate loans, construction loans, and land and land development loans. The Bank is headquartered in Glen Allen, Virginia and operates eight branch offices. Franklin Financial Corporation trades under the symbol FRNK (NASDAQ).
Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to our actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
-- general economic conditions, either internationally, nationally, or in
our primary market area, that are worse than expected;
-- a continued decline in real estate values;
-- changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial instruments;
-- increased competitive pressures among financial services companies;
-- changes in consumer spending, borrowing and savings habits;
-- legislative, regulatory or supervisory changes that adversely affect our
business;
-- adverse changes in the securities markets; and
-- changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Financial Accounting Standards Board or
the Public Company Accounting Oversight Board.
Additional factors that may affect our results are discussed in the Company's Form 10-K for the year ended September 30, 2011 under the Item 1A titled "Risk Factors." These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, we assume no obligation and disclaim any obligation to update any forward-looking statements.
Website: www.franklinfederal.com
Selected Financial Data
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
(Dollars in
thousands) 2012 2011 2012 2011
---- ---- ---- ----
Operating Data:
Interest and
dividend
income $10,698 $11,746 $33,152 $34,437
Interest
expense 3,989 4,838 12,602 14,857
----- ----- ------ ------
Net interest
income 6,709 6,908 20,550 19,580
Provision for
loan losses (390) 1,825 (542) 2,537
---- ----- ---- -----
Net interest
income after
provision
for loan losses 7,099 5,083 21,092 17,043
----- ----- ------ ------
Noninterest
(expense)
income:
Impairment of
securities
reflected in
earnings (2,058) (1,253) (4,384) (1,934)
(Losses) gains
on sales of
securities,
net (777) - (777) 265
Gains (losses)
on sales of
other real
estate owned 711 (85) 1,336 (32)
Other
noninterest
income 783 723 2,429 1,896
--- --- ----- -----
Total
noninterest
(expense)
income (1,341) (615) (1,396) 195
------ ---- ------ ---
Other
noninterest
expenses 5,065 9,587 12,231 17,084
----- ----- ------ ------
Income (loss)
before
provision
for income
taxes 693 (5,119) 7,465 154
Income tax
expense
(benefit) 1,047 (1,844) 3,536 (340)
----- ------ ----- ----
Net (loss)
income $(354) $(3,275) $3,929 $494
===== ======= ====== ====
Per Share Data
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
(Amounts in thousands, except
per share data) 2012 2011 2012 2011
---- ---- ---- ----
Basic (loss) income
per share $(0.03) $(0.25) $0.30 $0.04
Diluted (loss) income
per share $(0.03) $(0.25) $0.30 $0.04
Tangible book value
per share at end of
period $18.40 $17.95 $18.40 $17.95
Shares outstanding at
end of period 13,777 14,303 13,777 14,303
Weighted-average
shares outstanding
Basic 13,029 13,166 13,152 13,166
Diluted 13,050 13,166 13,159 13,166
Linked-Quarter Data
(Dollars in
thousands) June 30, March 31, 2012 September 30, 2011
2012
----
Financial
Condition Data:
Total assets $1,080,994 $1,099,870 $1,096,977
Cash and cash
equivalents 130,873 135,996 115,749
Securities
available for
sale 384,389 404,659 396,809
Securities held
to maturity 21,801 22,975 25,517
Loans, net 462,861 457,037 478,423
Loans held for
sale 665 1,953 922
Cash surrender
value of bank-
owned life
insurance 32,679 32,356 31,714
Deposits 647,324 637,943 648,754
Federal Home Loan
Bank borrowings 171,887 190,000 190,000
Total
stockholders'
equity 253,485 262,905 249,558
Capital
Ratios(1):
Tier 1 capital to
adjusted
tangible assets 17.15% 16.73% 16.07%
Tier 1 risk-
based capital to
risk weighted
assets 25.85 24.95 23.81
Tangible capital
to adjusted
tangible assets 17.15 16.73 16.07
Risk-based
capital to risk
weighted assets 27.11 26.21 25.07
---------------- ----- ----- -----
((1)) Ratios are for Franklin Federal Savings Bank.
For the Three Months Ended
--------------------------
June 30, March 31, September 30,
2012 2012 2011
---- ---- ----
Performance
Ratios:
Return
on
average
assets(2) (0.13)% 0.93% 0.33%
Return
on
average
equity(2) (0.54) 3.89 1.45
Interest
rate
spread(2)(3) 2.27 2.27 2.22
Net
interest
margin(2)(4) 2.65 2.68 2.63
Efficiency
ratio(5) 59.28 48.52 45.37
Average
interest-
earning
assets
to
average
interest-
bearing
liabilities 123.71 124.41 124.33
Average
equity
to
average
assets 23.85 23.76 23.12
------- ----- ----- -----
((2)) Annualized
((3)) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
((4)) Represents net interest income as a percent of average interest-earning assets.
((5)) A non-GAAP measure calculated by dividing other noninterest expenses, net of impairment charges on OREO and net losses on the sale of fixed assets and foreclosed assets, by the sum of net interest income and other noninterest income, net of impairments of securities, gains or losses on sales of securities, gains and losses on sales of OREO and net gains on sales of fixed assets.
For the Three Months Ended
--------------------------
(Dollars in thousands) June 30, March 31, 2012 September 30, 2011
2012
----
Asset Quality:
Allowance for Loan Losses
Beginning balance $11,206 $11,749 $13,432
Provision (390) (298) 1,207
Recoveries 12 3 18
Charge-offs (22) (248) (33)
--- ---- ---
Ending balance $10,806 $11,206 $14,624
======= ======= =======
Nonperforming Assets at
Period End
Nonaccrual loans $27,270 $35,966 $42,205
Accruing loans 90+ days
past due - - -
Other real estate owned 10,569 8,831 8,627
------ ----- -----
Total nonperforming
assets at period end $37,839 $44,797 $50,832
======= ======= =======
Allowance for loan losses
as a percent of total
loans at period end 2.26% 2.38% 2.95%
Allowance for loan losses
as a percent of
nonperforming loans at
period end 39.63 31.16 34.65
Nonperforming loans as a
percent of total loans
at period end 5.72 7.63 8.50
Nonperforming assets as a
percent of total assets
at period end 3.50 4.07 4.63
0.01 0.21 0.01
Net charge-offs to
average loans
outstanding during the
period (annualized)
Non-GAAP Reconciliation
For the Three Months Ended
--------------------------
(Dollars in
thousands) June 30, March 31, 2012 September 30, 2011
2012
----
Net interest income $6,709 $6,786 $6,955
Total noninterest
(expense) income (1,341) 188 132
Less: Losses on sales
of securities, net 777 - 22
Less: Net impairment
reflected in income 2,058 871 637
Less: (Gains) on
sales of OREO (711) (428) (100)
---- ---- ----
Total net interest
income and adjusted
other noninterest
income
$7,492 $7,417 $7,646
====== ====== ======
Other noninterest
expenses $5,065 $3,612 $3,852
Less: Impairment
charges on OREO (611) - (370)
Less: Net losses on
sales of fixed
assets (13) (13) (13)
--- --- ---
Adjusted other
noninterest expenses $4,441 $3,599 $3,469
====== ====== ======
Efficiency ratio 59.28% 48.52% 45.37%
SOURCE Franklin Financial Corporation
