<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ---------------
Commission file number 000-24675
STATE OF FRANKLIN BANCHSHARES, INC.
(Exact name of small business issuer as specified in its charter)
TENNESSEE 62-1607709
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
(Address of principal executive offices)
(423) 926-3300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,128,495 SHARES OF COMMON
STOCK AS OF SEPTEMBER 30, 1998.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE> 3
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Cash and Cash Equivalents 12,415,800 14,294,159
Investments - Held-To-Maturity
(Estimated Market 1997 - $10,023,214)
(Estimated Market 1998 - $1,000,081) 10,000,000 998,179
Investments - Available-for-Sale 6,462,901 17,547,201
Loans Receivable, Net 50,374,093 78,654,995
Accrued Interest Receivable, Net 400,760 768,832
Land, Buildings and Equipment at Cost Less
Accumulated Depreciation of $146,286 in 1997
and $216,276 in 1998 3,568,281 4,125,658
Prepaid Expense and Accounts Receivable 80,110 47,954
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 55,445 --
Federal Home Loan Bank Stock -- 463,100
---------- -----------
Total Assets 83,372,390 116,915,078
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 72,243,884 95,538,290
Advances by Borrowers for Taxes and Insurance 59,911 192,102
Accrued Interest 43,469 102,805
Accounts Payable and Accrued Expenses 122,025 151,304
Federal Home Loan Bank Advances -- 9,000,000
Notes Payable -- 700,000
Deferred Gain on REO -- 21,448
Deferred Tax Liability -- 4,060
---------- -----------
Total Liabilities 72,469,289 105,710,009
---------- -----------
Stockholders' Equity:
Common Stock, $1.00 Par Value,
10,000,000 Shares Authorized;
1,116,516 Shares Outstanding at December 31, 1997
and 1,128,495 Shares Outstanding
at September 30, 1998 1,116,516 1,128,495
Paid-In Capital 10,154,900 10,887,790
Accumulated Other Comprehensive Income 25,382 60,170
Retained Earnings (393,697) (171,386)
Less: Employee Stock Ownership Plan -- (700,000)
---------- -----------
Total Stockholders' Equity 10,903,101 11,205,069
---------- -----------
Total Liabilities and Stockholders' Equity 83,372,390 116,915,078
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
1997 1998 1997 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans 793,342 1,571,074 1,805,539 4,091,486
Interest on Cash Equivalents and Investments 508,151 523,739 1,487,722 1,384,578
--------- --------- --------- ---------
Total Interest Income 1,301,493 2,094,813 3,293,261 5,476,064
--------- --------- --------- ---------
Interest Expense
Interest on Deposits 793,912 1,187,979 2,096,493 3,256,088
Other Interest -- 123,028 786 165,046
--------- --------- --------- ---------
Total Interest Expense 793,912 1,311,007 2,097,279 3,421,134
--------- --------- --------- ---------
Net Interest Income Before
Provision for Loan Losses 507,581 783,806 1,195,982 2,054,930
Provision for Loan Losses (61,416) (85,655) (158,766) (213,034)
--------- --------- --------- ---------
Net Interest Income
After Provision for Loan Losses 446,165 698,151 1,037,216 1,841,896
--------- --------- --------- ---------
Other Income
Other Fees and Service Charges 22,858 43,005 51,596 122,965
Net Gain on Sale and Maturity of Securities 32,822 -- 44,099 38,769
Insurance Commission Income 9,400 8,472 26,577 26,769
Rental Income, Net 5,279 25,828 5,279 71,633
Other 2,669 2,440 6,144 7,747
--------- --------- --------- ---------
Total Other Income 73,028 79,745 133,695 267,883
--------- --------- --------- ---------
Other Expenses
Compensation and Related Benefits 191,399 317,109 589,313 799,617
Occupancy Expenses 42,880 59,543 117,037 170,704
Furniture and Equipment Expenses 15,779 47,041 51,048 134,353
Advertising 23,882 25,844 106,843 78,978
Data Processing Expense 34,632 56,122 92,443 154,105
Other 89,268 154,990 362,742 430,142
--------- --------- --------- ---------
Total Other Expenses 397,840 660,649 1,319,426 1,767,899
--------- --------- --------- ---------
Income (Loss) Before Income Tax Benefit 121,353 117,247 (148,515) 341,880
Provision for Income Taxes (10,330) (51,817) 46,900 (119,569)
--------- --------- --------- ---------
Net Income (Loss) 111,023 65,430 (101,615) 222,311
Other Comprehensive Income
Net Unrealized Gains on Securities
Available-For-Sale, Net of Income Taxes of
$11,167, $36,783, $18,611
and $30,997, Respectively 63,278 71,402 105,461 60,170
--------- --------- --------- ---------
Comprehensive Income 174,301 136,832 3,846 282,481
========= ========= ========= =========
Basic and Diluted Earnings (Loss) Per Share 0.15 0.06 (0.13) 0.20
========= ========= ========= =========
Basic Weighted Average
Common Shares Outstanding 757,253 1,122,506 757,253 1,122,506
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1998
---------- ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) (101,615) 222,311
Items Not Affecting Cash and Cash Equivalents:
Depreciation 57,820 144,846
(Increase) in Accrued Interest (480,447) (368,072)
Deferred Income Taxes (Benefit) (46,900) 41,584
Provisions for Loan Losses, Net 158,255 212,757
Decrease in Prepaid Expenses
and Accounts Receivable 7,359 32,156
Increase in Interest Payable 18,600 59,336
Increase (Decrease) in Accounts Payable
and Accrued Expenses (134,175) 29,279
Increase in Deferred Loan Fees, Net 26,092 15,489
(Gain) on Sale of Investments (44,099) (38,770)
Discount Accretion (19,735) (1,951)
Increase in Deferred Gain on Sale of REO -- 21,448
FHLB Stock Dividends -- (8,300)
----------- ----------
Net Cash Provided (Used) by Operating Activities (558,845) 362,113
----------- ----------
Cash Flows from Investing Activities
Purchase of Investments (14,293,458) (19,855,339)
Proceeds from Maturities of Held-to-Maturity Investments 1,049,046 11,606,525
Proceeds from Sale of Investments 4,445,391 6,259,765
Net Increase in Loans Receivable (23,828,412) (28,509,148)
Purchases of Premises and Equipment (1,801,224) (702,223)
Purchase of Federal Home Loan Bank Stock -- (454,800)
----------- ----------
Net Cash (Used) by Investing Activities (34,428,657) (31,655,220)
----------- ----------
Cash Flows from Financing Activities
Net Increase in Deposits 31,339,355 23,294,406
Net Increase in Advances by Borrowers for Taxes and Insurance 122,482 132,191
Issuance of Common Stock, Net 3,113,097 55,276
Organization Costs -- (10,407)
Proceeds from FHLB Advance -- 9,000,000
Proceeds from Loan -- 700,000
----------- ----------
Net Cash Provided by Financing Activities 34,574,934 33,171,466
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (412,568) 1,878,359
Cash and Cash Equivalents at Beginning of Period 6,888,983 12,415,800
----------- ----------
Cash and Cash Equivalents at End of Period 6,476,415 14,294,159
=========== ==========
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized Gain on Securities Available-For-Sale,
Net of Deferred Tax Liability 105,461 60,170
=========== ==========
REO Sold in Exchange for Loan Receivable -- 245,681
=========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Income Taxes -- --
=========== ==========
Interest 2,078,679 3,361,797
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 1998
NOTE 1 STATE OF FRANKLIN BANCSHARES, INC.
State of Franklin Bancshares, Inc. (the "Company") was incorporated
under the laws of the State of Tennessee for the purpose of becoming
the holding company of State of Franklin Savings Bank (the "Savings
Bank"). The stockholders of the Savings Bank exchanged their
shares for the shares of the Company, whereby the Savings Bank
became the Company's wholly owned subsidiary. The consolidated
financial statements included herein are for the Company, the
Savings Bank, and the Savings Bank's wholly owned subsidiary, John
Sevier Title Services, Inc. (the "Title Company").
NOTE 2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles
for interim financial information in accordance with the
instructions for Form 10-QSB. Accordingly, they do not include all
disclosures necessary for a complete presentation of the
consolidated statements of financial condition, consolidated
statements of comprehensive income, consolidated statements of
stockholders' equity, and consolidated statements of cash flows in
conformity with generally accepted accounting principles. However,
all adjustments which are, in the opinion of management, necessary
for the fair presentation of the interim financial statements have
been included. All such adjustments are of a normal recurring
nature. The statement of comprehensive income for the nine months
ended September 30, 1998, is not necessarily indicative of the
results which may be expected for the entire year.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto for the Savings Bank for the year ended December 31,
1997.
NOTE 3 OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the
periods ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Other Noninterest Expense:
Seminars and Education Expenses 19,249 27,575
Insurance Expense 22,681 24,066
Professional Expenses and Supervisory Examinations 65,555 75,730
Office Supplies and Postage 108,748 112,295
Telephone 31,911 58,884
Other 114,598 131,592
-------- --------
362,742 430,142
======== =======
</TABLE>
5
<PAGE> 7
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 1998
NOTE 4 LOANS RECEIVABLE
Loans receivable at December 31, 1997 and September 30, 1998, consist of the
following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
First Mortgage Loans 24,984,570 35,082,110
Construction Loans 11,859,068 20,110,751
Consumer Loans 4,764,911 7,294,514
Participation Loans, Net 873,264 873,162
Commercial Loans 12,256,079 23,145,341
Savings Account Loans 193,130 433,381
Credit Line Advances 239,115 460,245
----------- -----------
Gross Loans Receivable 55,170,137 87,399,504
----------- -----------
Less:
Undisbursed Portion of Loans in Process (4,387,881) (8,108,100)
Net Deferred Loan Origination Fees (52,689) (68,178)
Accumulated General Loan Loss Reserves (355,474) (568,231)
----------- -----------
(4,796,044) (8,744,509)
----------- -----------
Loans Receivable as Determined in Accordance
with Generally Accepted Accounting Principles 50,374,093 78,654,995
=========== ===========
An analysis of the allowance for loan losses is as follows:
1997 1998
----------- -----------
Balance - Beginning of Period 130,715 355,474
Provision for Losses 226,095 213,034
Net Charge-Offs (1,336) (277)
----------- -----------
Balance - End of Period 355,474 568,231
=========== ===========
</TABLE>
NOTE 5 ORGANIZATION EXPENSE
Miscellaneous organization expenses of the Company
totaling $10,407 were netted against paid-in capital
for the nine month period ended September 30, 1998.
Previous organization expenses of $259,585 were
netted against paid-in capital.
6
<PAGE> 8
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 1998
NOTE6 COMPREHENSIVE INCOME
In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, (SFAS No. 130),
Reporting Comprehensive Income. This new statement establishes
standards for reporting and displaying comprehensive income and its
components in a basic set of financial statements. The purpose of
reporting comprehensive income is to report a measure of all changes
in equity of an enterprise that results from recognized transactions
and other economic events of the period other than transactions with
owners in their capacity as owners.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners.
Reclassification adjustments are made to avoid counting in
comprehensive income items that are displayed as part of net income
for a period that also had been displayed as part of other
comprehensive income in that period or earlier periods. For example,
gains on investment securities that were realized and included in net
income of the current period that also had been included in other
comprehensive income as unrealized holding gains in the period in
which they arose must be deducted through other comprehensive income
of the period in which they are included in net income to avoid
including them in comprehensive income twice.
The Savings Bank adopted SFAS No. 130 effective December 31, 1997 and
restated the previous year's financial statements to comply with the
new reporting requirements.
NOTE 7 FEDERAL HOME LOAN BANK
In the second quarter of 1998, the Savings Bank became a member of the
Federal Home Loan Bank of Cincinnati ("FHLB of Cincinnati"). The
Savings Bank, as a member of the FHLB of Cincinnati, is required to
own capital stock in the FHLB of Cincinnati. The Savings Bank received
$9,000,000 in advances from the FHLB of Cincinnati.
NOTE 8 EARNINGS PER SHARE
Basic earnings per share amounts are based on the average number of
shares outstanding through the period. Basic and dilutive earnings per
share amounts are equal for the nine month and three month periods
ended September 30, 1997 and 1998, respectively. Unallocated ESOP
shares are not considered as outstanding for purposes of this
calculation.
7
<PAGE> 9
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 1998
NOTE 9 STOCK OPTION PLANS
On December 21, 1996, the Company's Board of Directors approved the
Stock Option Plan for Directors and the Stock Option Plan for
Management. A total of 15% of the original stock offering (91,500
shares) was reserved for these plans. These plans were retroactively
amended after year end.
Under the amended stock option plan for the outside directors,
one-third of the total shares were granted to the outside directors as
compensation for directors' fees over the next five years. Beginning
when the Company has annual profitability, the options will vest at
20% per year to each director. This will total 2,770 shares per
director. The exercise price of the options is $10.00 per share. The
vested portion of the options may be exercised at any time. There is
no termination date on the options, but in the event of death, the
estate must exercise the options within twelve months. If the Company
is sold or merged, the options become 100% vested.
Under the stock option plan for management, the remaining 61,000
shares were granted to management as an incentive in the Savings
Bank's performance. The options retroactively began to vest after
three consecutive quarters of profitability. The options will vest at
20% per year for five years. The exercise price of the options is
$10.00 per share. The vested portion of the options may be exercised
at any time. There is no termination date on the options, but in the
event of death, the estate must exercise the options within twelve
months. If the individual leaves the service of the Savings Bank, the
options must be exercised within three months, although this
requirement may be waived by the board. If the Savings Bank is sold or
merged, the options become 100% vested.
The stock option plans for outside directors and for management were
amended again, effective April 17, 1998, for 15% of the secondary
offering (75,192 shares). One-third of these shares was allocated to
outside directors and the remaining to management. Exercise price of
these options was set at $11.00 per share. The other terms of these
options are the same as the terms of the original options.
NOTE 10 STOCKHOLDERS' EQUITY
A private placement offering was conducted in 1997 with 501,280 shares
of subscribed common stock sold for $11.00 per share. The offering
began April 7, 1997 and expired on September 30, 1997. Net proceeds
received from the offering were $3,113,097 for the six months ended
September 30, 1997.
The Company was incorporated under Tennessee law in May 1998 to
acquire and hold all of the outstanding stock of the Savings Bank. The
Company issued 1,116,516 shares of $1.00 par value common stock which
it exchanged for 1,116,516 shares of outstanding Savings Bank stock.
NOTE 11 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
The Employee Stock Ownership Plan and Trust (ESOP) was established and
funded for 1997 although it was not leveraged until September 1998. A
contribution of $57,600 was contributed to the plan for 1997. At
February 28, 1998, 5,236 shares were issued to the plan for the 1997
contribution. The Savings Bank stock was exchanged for Company stock
as discussed in Notes 1 and 10. The ESOP borrowed $700,000 from the
Company and used the funds to purchase 63,636 shares of common stock
of the Company. At September 30, 1998, the ESOP had 68,872 shares of
which approximately 11,979 shares were considered committed to be
released and 56,893 shares were unallocated. The stock will
8
<PAGE> 10
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 1998
be allocated to employees based on their salaries. All employees who work over
1,000 hours are immediately eligible for the plan. Employees will be fully
vested after six years of service. This plan has a 401k feature that began in
1998, which allows employees to defer up to 6% of their salary and is matched
by the Savings Bank up to the maximum allowed amount. For the nine months ended
September 30, 1998, compensation related to the ESOP of approximately $62,500
was expensed.
9
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The following discussion and analysis is intended to assist in understanding
the financial condition and the results of operations of the Company.
References to the "Company" include State of Franklin Bancshares, Inc. and/or
State of Franklin Savings Bank.
FOR THE NINE MONTHS 1998 COMPARED TO NINE MONTHS 1997
EARNINGS REVIEW
Total net income of the Company for the first nine months of 1998 was $222,311,
an increase of $323,926 over the nine months ended September 30, 1997 loss of
$101,615. Net income per common share was $0.20 compared to per share loss of
$0.13 in 1997. Return on average assets was .3% and the return on average
equity was 2.68% for the nine month period ended September 30, 1998.
Operating results in 1998 reflected higher net interest income and noninterest
income. Net interest income of $2.1 million for the nine months ended September
30, 1998 was up 72% over the 1997 period. Loans increased 124% and deposits
increased 68%. The 1998 provision for possible loan losses was $213,000.
Noninterest income increased $134,000, or 100%, with other fees and service
charges and net rental income responsible for most of the increase over the
nine months ended September 30, 1997. Noninterest expense was $1.8 million for
the 1998 period, an increase of 34% over the 1997 period, primarily resulting
from increased salaries and benefits. Expenses also increased due to opening an
additional location.
NET INTEREST INCOME AND MARGIN
Net interest income increased $859,000 or 72% for the nine months ended
September 30, 1998 to $2.1 million compared to $1.2 million in the first nine
months of 1997. Average loans outstanding increased $36 million or 124% over
average loans at September 30, 1997.
Average deposits increased by 68% or $34 million to $83.9 million in 1998
compared to $49.9 million in the first nine months of 1997. The rate paid on
average interest-bearing liabilities increased 4 basis points during the nine
months ended September 30, 1998 to 5.04%.
PROVISION FOR LOAN LOSSES
During the nine months ended September 30, 1998, the provision for possible
loan losses was $213,000. There were $300 in charge-offs during the nine months
ended September 30, 1998 and $511 for the nine months ended September 30, 1997.
The allowance for possible loan losses represented .7% of total loans, net of
mortgage loans held-for-sale, at September 30, 1998, compared to .7% at
September 30, 1997. A mortgage loan of $246,000 was made on the sale of real
estate owned.
PROVISION FOR INCOME TAXES
For the nine months ended September 30, 1998, the provision for federal income
taxes was $119,569, an increase of $166,469 from 1997, primarily due to the
increase in income before income taxes.
NONINTEREST INCOME
The Company's noninterest income was $268,000 during the nine months ended
September 30, 1998, an increase of $134,000 or 100% over the comparable 1997
period. The increase was attributable to increases in other fees and service
charges, net rental income and other income of $71,000, $66,000 and $2,000,
respectively, which were offset by decreases in net gain on sale and maturity
of securities of $5,000.
10
<PAGE> 12
NONINTEREST EXPENSE
Noninterest expense totaled $1.8 million for the period ending September 30,
1998, an increase of $448,000. Salaries and wages of $800,000 accounted for 45%
of the total compared to $600,000 or 45% for the first nine months of 1997.
FOR THE THREE MONTHS 1998 COMPARED TO THREE MONTHS 1997
EARNINGS REVIEW
Total net income of the Company for the third three months of 1998 was $65,000,
a decrease of $46,000 over the three months ended September 30, 1997 income of
$111,000. Net income per common share was $0.06 compared to $0.15 in 1997.
Return on average assets was .23% and the return on average equity was 2.35%
for the three month period ended September 30, 1998.
Operating results in 1998 reflected higher net interest income and noninterest
income. Net interest income of $784,000 for the three months ended September
30, 1998 was up 54% over the 1997 period. Loans increased 103% and deposits
increased 46%. The 1998 provision for possible loan losses was $86,000.
Noninterest income increased $7,000, or 9%, with other fees and service charges
and net rental income responsible for most of the increase over the three
months ended September 30, 1997. Noninterest expense was $661,000 for the 1998
period, an increase of 66% over the 1997 period, primarily resulting from
increased salaries and benefits. Expenses also increased due to opening an
additional location.
NET INTEREST INCOME AND MARGIN
Net interest income increased $276,000 or 54% for the three months ended
September 30, 1998 to $784,000 compared to $508,000 in the third three months
of 1997. Average loans outstanding increased $38 million or 103% over average
loans at September 30, 1997.
Average deposits increased by 46% or $28.5 million to $90.6 million in 1998
compared to $62.1 million in the third three months of 1997. The rate paid on
average interest-bearing liabilities decreased 16 basis points during the three
months ended September 30, 1998 to 5.04%.
PROVISION FOR LOAN LOSSES
During the three months ended September 30, 1998, the provision for possible
loan losses was $86,000. There were no net charge-offs during the three months
ended September 30, 1998 and $512 for the three months ended September 30,
1997. The allowance for possible loan losses represented .7% of total loans,
net of mortgage loans held-for-sale, at September 30, 1998, compared to .7% at
September 30, 1997.
PROVISION FOR INCOME TAXES
For the three months ended September 30, 1998, the provision for federal income
taxes was $52,000, an increase of $41,000 from 1997, primarily due to an
increased effective tax rate in 1998 and the use of the NOL carryforward.
NONINTEREST INCOME
The Company's noninterest income was $80,000 during the three months ended
September 30, 1998, an increase of $7,000 or 9% over the comparable 1997
period. The increase was attributable to increases in other fees and service
charges and in net rental income of $20,000 and $21,000, respectively, which
were offset by decreases in net gain on sale and maturity of securities and
insurance commission income of $33,000 and $1,000, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $661,000 for the period ending September 30, 1998,
an increase of $263,000. Salaries and wages of $317,000 accounted for 48% of
the total compared to $191,000 or 48% for the third three months of 1997.
11
<PAGE> 13
BALANCE SHEET REVIEW
The Company places an emphasis on an integrated approach to its balance sheet
management. Significant balance sheet components of investment securities,
loans and sources of funds are managed in an integrated manner with the
management of interest rate risk, liquidity, and capital. These components are
examined below.
INVESTMENT SECURITIES
Investment securities totaled $19 million at September 30, 1998. The majority
of the holdings are backed by U. S. Government or Federal Agency guarantees
limiting the credit risk associated with these securities. At September 30,
1998, approximately $17.5 million of investment securities were held as
available-for-sale compared to $13.2 million at September 30, 1997. This $4.3
million increase was offset by a $9 million decrease in investments
held-to-maturity.
LOANS
Loans outstanding totaled $79.3 million at September 30, 1998. This represented
an increase of 94% from the September 30, 1997 outstanding loans of $40.9
million.
Consumer loans increased to $7.3 million at September 30, 1998, an increase of
76% from $4.2 million at September 30, 1997. Real estate construction lending
totaled $12.2 million and $20.1 million at September 30, 1997 and 1998,
respectively. Commercial loans of $23.1 million at September 30, 1998 increased
192% from $7.9 million at September 30, 1997. During the first nine months of
1998, commercial loans serviced decreased to $873,000 from $918,000 at
September 30, 1997.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at September 30, 1998
and September 30, 1997. The allowance for possible loan losses was $568,000 and
$289,000 at September 30, 1998 and 1997, respectively. Management believes the
allowance for possible loan losses is adequate to provide for potential loan
losses.
DEPOSITS
Total deposits at September 30, 1998 of $95.6 million, represented an increase
of $30 million or a 46% increase from $65.6 million at September 30, 1997.
Non-interest bearing demand deposits totaled $6.1 million at September 30,
1998, a decrease of $500,000 from September 30, 1997. Interest bearing demand
and money market deposits increased $8 million to $15.8 million at September
30, 1998. Savings deposits increased $2.2 million to $5.2 million at September
30, 1998. Time deposits of $68.4 million were increased $20.3 million from
$48.1 million at September 30, 1997.
CAPITAL
Equity capital at September 30, 1998 was $11.2 million, an increase of $2.9
million from $8.3 million at September 30, 1997. A $5,000 dividend was paid by
the Savings Bank to the Company in connection with the reorganization. This
special one time dividend was approved by the Commissioner of the Tennessee
Department of Financial Institutions.
At September 30, 1998, all capital ratios were in excess of the regulatory
minimums, with the Company's Tier 1, total risk-based and leverage ratio of
16.89%, 15.64% and 9.36%, respectively.
LIQUIDITY
The purpose of liquidity management is to ensure that there is sufficient cash
flow to satisfy demands for credit, deposit withdrawals, and other corporate
needs. Traditional sources of liquidity include asset maturities and growth in
core deposits. Other sources of funds such as securities sold under agreements
to repurchase, negotiable certificates of deposit and other liabilities are
sources of liquidity which the Company has not significantly used. The Company
had unused sources of liquidity in the form of unused federal funds lines of
credit totaling $3 million at September 30, 1998.
12
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
None.
ITEM 2.
CHANGES IN SECURITIES
None
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 -- Financial Data Schedule (For SEC Use Only)
(b) The Company filed Form 8-K (12g-3) on July 23, 1998 as notice that it is
the successor issuer to the Bank and thereby subject to the informational
requirements of the Exchange Act, and the rules and regulations promulgated
thereunder, and in accordance therewith will file reports and other information
with the Securities and Exchange Commission.
13
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C>
STATE OF FRANKLIN BANCSHARES, INC.
(Registrant)
Date: November 13, 1998 /s/Randal R. Greene
------------------------------------------------------
Randal R. Greene, President and Chief Executive
Officer (principal executive officer)
Date: November 13, 1998 /s/ Charles E. Allen, Jr.,
------------------------------------------------------
Charles E. Allen, Jr., Chairman of the Board and Chief
Financial Officer (principal financial and accounting
officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE FINANCIAL
STATEMENTS OF STATE OF FRANKLIN BANCSHARES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,294,159
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,547,201
<INVESTMENTS-CARRYING> 998,179
<INVESTMENTS-MARKET> 1,000,081
<LOANS> 79,223,226
<ALLOWANCE> 568,231
<TOTAL-ASSETS> 116,915,078
<DEPOSITS> 95,538,290
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,171,719
<LONG-TERM> 0
0
0
<COMMON> 1,128,495
<OTHER-SE> 10,076,574
<TOTAL-LIABILITIES-AND-EQUITY> 116,915,078
<INTEREST-LOAN> 4,091,486
<INTEREST-INVEST> 1,384,578
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,476,064
<INTEREST-DEPOSIT> 3,256,088
<INTEREST-EXPENSE> 3,421,134
<INTEREST-INCOME-NET> 1,841,896
<LOAN-LOSSES> 213,034
<SECURITIES-GAINS> 38,769
<EXPENSE-OTHER> 1,767,899
<INCOME-PRETAX> 341,880
<INCOME-PRE-EXTRAORDINARY> 341,880
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222,311
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 3.18
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 355,474
<CHARGE-OFFS> 277
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 568,231
<ALLOWANCE-DOMESTIC> 568,231
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
