<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 JUNE 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: 1,116,516 SHARES OF COMMON
STOCK AS OF JULY 31, 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
<TABLE>
<CAPTION>
A S S E T S
December 31, June 30,
1997 1998
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents 12,415,800 14,267,878
Investments - Held-To-Maturity
(Estimated Market 1997 - $10,023,214)
(Estimated Market 1998 - $998,573) 10,000,000 998,125
Investments - Available-for-Sale 6,462,901 17,147,619
Loans Receivable, Net 50,374,093 68,401,137
Accrued Interest Receivable, Net 400,760 681,169
Land, Buildings and Equipment at Cost Less
Accumulated Depreciation of $146,286 in 1997
and $216,276 in 1998 3,568,281 4,147,358
Prepaid Expense and Accounts Receivable 80,110 49,948
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 55,445 46,584
Federal Home Loan Bank Stock -- 454,800
------------ ------------
Total Assets 83,372,390 106,209,618
============ ============
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
Liabilities:
Deposits 72,243,884 85,686,259
Advances by Borrowers for Taxes and Insurance 59,911 178,126
Accrued Interest 43,469 89,931
Accounts Payable and Accrued Expenses 122,025 157,012
Federal Home Loan Bank Advances -- 9,000,000
Deferred Gain -- 21,448
------------ ------------
Total Liabilities 72,469,289 95,132,776
------------ ------------
Stockholders' Equity:
Common Stock, $1.00 Par Value,
10,000,000 Shares Authorized;
1,111,280 Shares Outstanding at December 31, 1997
and 1,116,516 Shares Outstanding at June 30, 1998 1,111,280 1,116,516
Paid-In Capital 10,160,136 10,208,374
Accumulated Other Comprehensive Income 25,382 (11,231)
Retained Earnings (393,697) (236,817)
------------ ------------
Total Stockholders' Equity 10,903,101 11,076,842
------------ ------------
Total Liabilities and Stockholders' Equity 83,372,390 106,209,618
============ ============
</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 Ended For the Six Months Ended
June 30, June 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans 546,163 1,280,989 937,876 2,355,314
Interest on Cash Equivalents and Investments 503,318 449,102 979,571 860,839
---------- ---------- ---------- ----------
Total Interest Income 1,049,481 1,730,091 1,917,447 3,216,153
---------- ---------- ---------- ----------
Interest Expense
Interest on Deposits 701,540 1,093,842 1,302,581 2,068,109
Other Interest 786 42,018 786 42,018
---------- ---------- ---------- ----------
Total Interest Expense 702,326 1,135,860 1,303,367 2,110,127
---------- ---------- ---------- ----------
Net Interest Income Before
Provision for Loan Losses 347,155 594,231 614,080 1,106,026
Provision for Loan Losses (60,393) (77,736) (97,350) (127,379)
---------- ---------- ---------- ----------
Net Interest Income
After Provision for Loan Losses 286,762 516,495 516,730 978,647
---------- ---------- ---------- ----------
Other Income
Loan Fees 45,889 88,058 74,321 165,098
Other Fees and Service Charges 19,697 40,191 28,738 79,960
Net Gain on Sale and Maturity of Securities 6,120 14,235 11,277 38,769
Insurance Commission Income 17,177 11,075 17,177 18,297
Rental Income, Net -- 16,928 -- 45,805
Other 1,627 3,163 3,475 5,307
---------- ---------- ---------- ----------
Total Other Income 90,510 173,650 134,988 353,236
---------- ---------- ---------- ----------
Other Expenses
Compensation and Related Benefits 216,464 235,411 397,914 482,508
Occupancy Expenses 36,609 50,217 74,157 111,161
Furniture and Equipment Expenses 16,578 45,026 35,269 87,312
Advertising 14,257 28,865 82,961 53,134
Data Processing Expense 28,694 50,328 57,811 97,983
Other 115,062 130,461 273,474 275,152
---------- ---------- ---------- ----------
Total Other Expenses 427,664 540,308 921,586 1,107,250
---------- ---------- ---------- ----------
Income (Loss) Before Income Tax Benefit (50,392) 149,837 (269,868) 224,633
Provision for Income Taxes 29,852 (33,161) 57,230 (67,752)
---------- ---------- ---------- ----------
Net Income (Loss) (20,540) 116,676 (212,638) 156,881
Other Comprehensive Income
Net Unrealized Gains (Losses) on Securities
Available-For-Sale, Net of Income Taxes of
$26,569, $5,333, $7,444
and $5,786, Respectively (150,558) (10,352) 42,183 (11,232)
---------- ---------- ---------- ----------
Comprehensive Income (171,098) 106,324 (170,455) 145,649
========== ========== ========== ==========
Basic and Diluted Earnings (Loss) Per Share (.03) .10 (.35) .14
========== ========== ========== ==========
</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>
Six Months Ended June 30,
1997 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) (212,638) 156,881
Items Not Affecting Cash and Cash Equivalents:
Depreciation 38,425 96,564
(Increase) in Accrued Interest (271,433) (280,409)
Deferred Tax Assets (57,230) 27,723
Provisions for Loan Losses, Net 97,350 127,102
(Increase) Decrease in Prepaid Expenses
and Accounts Receivable (546) 30,163
Increase in Interest Payable 15,292 46,462
Increase (Decrease) in Accounts Payable
and Accrued Expenses (224,492) 34,986
Increase in Deferred Loan Fees, Net 19,068 8,063
(Gain) on Sale of Investments (11,277) (38,770)
Discount Accretion (27,617) 32,635
Increase in Deferred Gain on Sale of REO -- 21,449
----------- -----------
Net Cash Provided (Used) by Operating Activities (635,098) 262,849
----------- -----------
Cash Flows from Investing Activities
Purchase of Investments (13,289,531) (19,524,638)
Proceeds from Maturities of Held-to-Maturity Investments 1,016,740 11,571,458
Proceeds from Sale of Investments 1,991,250 6,220,996
Net Increase in Loans Receivable (14,850,807) (18,162,209)
Purchases of Premises and Equipment (297,587) (675,641)
Purchase of Federal Home Loan Bank Stock -- (454,800)
----------- -----------
Net Cash (Used) by Investing Activities (25,429,935) (21,024,834)
----------- -----------
Cash Flows from Financing Activities
Net Increase in Deposits 24,484,883 13,442,375
Net Increase in Advances by Borrowers for Taxes and Insurance 65,668 118,215
Issuance of Common Stock, Net -- 57,596
Subscriptions on Common Stock Received 1,872,264 --
Organization Costs -- (4,123)
Proceeds from FHLB Advance -- 9,000,000
----------- -----------
Net Cash Provided by Financing Activities 26,422,815 22,614,063
----------- -----------
Net Increase in Cash and Cash Equivalents 357,782 1,852,078
Cash and Cash Equivalents at Beginning of Period 6,888,983 12,415,800
----------- -----------
Cash and Cash Equivalents at End of Period 7,246,765 14,267,878
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability 42,183 (11,232)
=========== ===========
REO Sold in Exchange for Loan Receivable -- 245,681
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Income Taxes -- --
=========== ===========
Interest 1,288,075 2,063,665
=========== ===========
</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
JUNE 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 will exchange their shares for the
shares of the Company, whereby the Savings Bank will become 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-Q SB. 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 six months ended
June 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 June 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Other Noninterest Expense:
Seminars and Education Expenses 14,094 16,564
Insurance Expense 16,685 16,455
Professional Expenses and Supervisory Examinations 43,803 51,543
Office Supplies and Postage 87,774 77,512
Telephone 22,036 36,436
Other 89,082 76,642
------- -------
273,474 275,152
======= =======
</TABLE>
5
<PAGE> 7
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 1998
NOTE 4 LOANS RECEIVABLE
Loans receivable at December 31, 1997 and June 30, 1998, consist of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
First Mortgage Loans 24,984,570 31,725,142
Construction Loans 11,859,068 18,573,979
Consumer Loans 4,764,911 6,578,757
Participation Loans, Net 873,264 1,508,556
Commercial Loans 12,256,079 18,436,873
Savings Account Loans 193,130 278,434
Credit Line Advances 239,115 473,727
----------- -----------
Gross Loans Receivable 55,170,137 77,575,468
----------- -----------
Less:
Undisbursed Portion of Loans in Process (4,387,881) (8,631,003)
Net Deferred Loan Origination Fees (52,689) (60,752)
Accumulated General Loan Loss Reserves (355,474) (482,576)
----------- -----------
(4,796,044) (9,174,331)
----------- -----------
Loans Receivable as Determined in Accordance
with Generally Accepted Accounting Principles 50,374,093 68,401,137
=========== ===========
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Balance - Beginning of Period 130,715 355,474
Provision for Losses 226,095 127,379
Net Charge-Offs (1,336) (277)
----------- -----------
Balance - End of Period 355,474 482,576
=========== ===========
</TABLE>
NOTE 5 ORGANIZATION EXPENSE
Miscellaneous organization expenses of the Company totaling $4,123 were
netted against paid-in capital.
6
<PAGE> 8
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 30, 1998
NOTE 6 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 six month and three month periods ended
June 30, 1997 and 1998, respectively.
7
<PAGE> 9
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
JUNE 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 $1,872,264 for the second three months ended June
30, 1997.
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 at June 30, 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 stock will 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 seven 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 dollar for dollar.
8
<PAGE> 10
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 SIX MONTHS 1998 COMPARED TO SIX MONTHS 1997
EARNINGS REVIEW
Total net income of the Company for the first six months of 1998 was
$157,000, an increase of $370,000 over the six months ended June 30,
1997 loss of $213,000. Net income per common share was $.14 compared to
per share loss of $.35 in 1997. Return on average assets was .33% and
the return on average equity was 2.85% for the six month period ended
June 30, 1998.
Operating results in 1998 reflected higher net interest income and
noninterest income. Net interest income of $1.1 million for the six
months ended June 30, 1998 was up 80% over the 1997 period. Loans
increased 244% and deposits increased 70%. The 1998 provision for
possible loan losses was $127,000. Noninterest income increased
$218,000, or 162%, with loan fees, other fees and service charges, net
gain on sale and maturity of securities and net rental income
contributing most of the increase over the six months ended June 30,
1997. Noninterest expense was $1.1 million for the 1998 period, an
increase of 20% over the 1997 period, primarily resulting from increased
salaries and benefits. Expenses also increased due to the opening an
additional location.
NET INTEREST INCOME AND MARGIN
Net interest income increased $492,000 or 80% for the six months ended
June 30, 1998 to $1.1 million compared to $614,000 in the first six
months of 1997. Average loans outstanding increased $35.1 million or
244% over average loans at June 30, 1997.
Average deposits increased by 70% or $3.2 million to $78.9 million in
1998 compared to $46.4 million in the first six months of 1997. The rate
paid on average interest-bearing liabilities increased 20 basis points
during the six months ended June 30, 1998 to 5.20%.
PROVISION FOR LOAN LOSSES
During the six months ended June 30, 1998, the provision for possible
loan losses was $127,000. There were $300 in charge-offs during the six
months ended June 30, 1998 and $0 for the six months ended June 30,
1997. The allowance for possible loan losses represented .7% of total
loans, net of mortgage loans held-for-sale, at June 30, 1998, compared
to .7% at June 30, 1997. A mortgage loan of $246,000 was made on the
sale of real estate owned.
PROVISION FOR INCOME TAXES
The provision for income taxes consists of provisions for federal income
taxes. For the six months ended June 30, 1998, the provision was
$68,000, an increase of $125,000 from 1997, primarily due to the
increase in income before income taxes.
9
<PAGE> 11
NONINTEREST INCOME
The Company's noninterest income was $353,000 during the six months
ended June 30, 1998, an increase of $218,000 or 162% over the comparable
1997 period. The increase was attributable to increases in loan fees,
other fees and service charges, net gain on sale and maturity of
securities, insurance commission income, and net rental income of
$91,000, $51,000, $27,000, $1,000 and $46,000, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $1.1 million for the period ending June 30,
1998, an increase of $186,000. Salaries and wages of $483,000 accounted
for 44% of the total compared to $398,000 or 43% for the first six
months of 1997.
FOR THE THREE MONTHS 1998 COMPARED TO THREE MONTHS 1997
EARNINGS REVIEW
Total net income of the Company for the second three months of 1998 was
$117,000, an increase of $138,000 over the three months ended June 30,
1997 loss of $21,000. Net income per common share was $.10 compared to
per share loss of $.03 in 1997. Return on average assets was .47% and
the return on average equity was 4.23% for the three month period ended
June 30, 1998.
Operating results in 1998 reflected higher net interest income and
noninterest income. Net interest income of $594 million for the three
months ended June 30, 1998 was up 71% over the 1997 period. Loans
increased 232% and deposits increased 53%. The 1998 provision for
possible loan losses was $78,000. Noninterest income increased $83,000,
or 92%, with loan fees, other fees and service charges, net gain on sale
and maturity of securities and net rental income contributing most of
the increase over the three months ended June 30, 1997. Noninterest
expense was $540,000 for the 1998 period, an increase of 26% over the
1997 period, primarily resulting from increased salaries and benefits.
Expenses also increased due to the opening an additional location.
NET INTEREST INCOME AND MARGIN
Net interest income increased $247,000 or 71% for the three months ended
June 30, 1998 to $594,000 compared to $347,000 in the second three
months of 1997. Average loans outstanding increased $35.8 million or
232% over average loans at June 30, 1997.
Average deposits increased by 53% or $29.1 million to $83.5 million in
1998, compared to $54.4 million in the second three months of 1997. The
rate paid on average interest-bearing liabilities decreased 9 basis
points during the three months ended June 30, 1998 to 5.20%.
PROVISION FOR LOAN LOSSES
During the three months ended June 30, 1998, the provision for possible
loan losses was $78,000. There were $300 in net charge-offs during the
three months ended June 30, 1998 and $0 for the three months ended June
30, 1997. The allowance for possible loan losses represented .7% of
total loans, net of mortgage loans held-for-sale, at June 30, 1998,
compared to .7% at June 30, 1997. A mortgage loan of $246,000 was made
on the sale of real estate owned.
10
<PAGE> 12
PROVISION FOR INCOME TAXES
The provision for income taxes consists of provisions for federal income
taxes. For the three months ended June 30, 1998, the provision was
$33,000, an increase of $63,000 from 1997, primarily due to the increase
in income before income taxes.
NONINTEREST INCOME
The Company's noninterest income was $174,000 during the three months
ended June 30, 1998, an increase of $83,000 or 92% over the comparable
1997 period. The increase was attributable to increases in loan fees,
other fees and service charges, net gain on sale and maturity of
securities, and net rental income of $42,000, $20,000, $8,000, and
$17,000, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $540,000 for the period ending June 30,
1998, an increase of $113,000. Salaries and wages of $235,000 accounted
for 44% of the total compared to $216,000 or 51% for the second three
months of 1997.
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 $18.6 million at June 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 June 30, 1998, approximately $17.1 million of investment
securities were held as available-for-sale compared to $14.6 million at
June 30, 1997. This $2.5 million increase was offset by a $9 million
decrease in investments held-to-maturity.
LOANS
Loans outstanding totaled $68.4 million at June 30, 1998. This
represented an increase of 216% from the June 30, 1997 outstanding loans
of $31.7 million.
Consumer loans increased to $6.6 million at June 30, 1998, a increase of
206% from $3.2 million at June 30, 1997. Real estate construction
lending totaled $9.5 and $18.6 million at June 30, 1997 and 1998,
respectively. Commercial loans of $18.4 million at June 30, 1998
increased 255% from $5.2 million at June 30, 1997. During the first six
months of 1998, commercial loans serviced increased to $1.5 million from
$945,000 at June 30, 1997.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at June 30, 1998
and June 30, 1997. The allowance for possible loan losses was $483,000
and $228,000 at June 30, 1998 and 1997, respectively. Management
believes the allowance for possible loan losses is adequate to provide
for potential loan losses.
11
<PAGE> 13
DEPOSITS
Total deposits at June 30, 1998 of $85.7 million, represented an
increase of $27 million or a 146% increase from $58.7 million at June
30, 1997. Non-interest bearing demand deposits totaled $4.3 million at
June 30,1998, an increase of $452,000 from June 30, 1997. Interest
bearing demand and money market deposits increased $4.6 million to $13.2
million at June 30, 1998. Savings deposits increased $1 million to $4.3
million at June 30, 1998. Time deposits of $63.8 million were increased
$18.5 million from $45.3 million at June 30, 1997.
CAPITAL
Equity capital at June 30, 1998 was $11.1 million, an increase of $4.3
million from $6.8 million at June 30, 1997. The Savings Bank is
currently prohibited from paying dividends to the Company as required by
banking regulations.
At June 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 17.78%, 18.95% and 11.02%, 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 totaling
$3 million at June 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
At the Annual Meeting on April 7, 1998, the shareholders elected four of its
current directors to continue in office for a three-year term or until their
successors are duly elected and qualified. On April 7, 1998, shareholders of
State of Franklin Savings Bank (the "Bank") approved a Plan of Exchange ("Plan")
pursuant to which State of Franklin Bancshares, Inc. (the "Company") acquired
all of the outstanding stock of the Bank as a result of the exchange of shares
between the shareholders of the Bank and the Company. After the share exchange,
the Bank survived as a wholly-owned subsidiary of the Company and continues its
operations as State of Franklin Savings Bank. Under the terms of the Plan, each
one of the existing outstanding shares of the Bank's common stock was exchanged
for one of the Company's common shares so that each existing shareholder of the
Bank became a shareholder of the Company, owning the same number and percentage
of shares in the Company as the Bank. The shares of the Company issued in
connection with the transaction were not registered under the Securities Act of
1933, as amended (the "Act"), in reliance upon the exemption from registration
set forth in Section 3(a)(12) of the Act.
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.
STATE OF FRANKLIN BANCSHARES, INC.
(Registrant)
Date: August 11, 1998 /s/Randal R. Greene, President
(principal executive officer)
Date: August 11, 1998 /s/Charles E. Allen, Jr., Chief Financial
Officer (principal financial and accounting
officer)
14
<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 SIX MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,267,878
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,147,619
<INVESTMENTS-CARRYING> 998,125
<INVESTMENTS-MARKET> 998,573
<LOANS> 68,401,137
<ALLOWANCE> 482,576
<TOTAL-ASSETS> 106,209,618
<DEPOSITS> 85,686,259
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,446,517
<LONG-TERM> 0
0
0
<COMMON> 1,116,516
<OTHER-SE> 9,960,326
<TOTAL-LIABILITIES-AND-EQUITY> 106,209,618
<INTEREST-LOAN> 2,355,314
<INTEREST-INVEST> 860,839
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,216,153
<INTEREST-DEPOSIT> 2,068,108
<INTEREST-EXPENSE> 2,110,127
<INTEREST-INCOME-NET> 978,646
<LOAN-LOSSES> 127,379
<SECURITIES-GAINS> 38,769
<EXPENSE-OTHER> 1,107,250
<INCOME-PRETAX> 224,633
<INCOME-PRE-EXTRAORDINARY> 224,633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,881
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 3.4
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 355,474
<CHARGE-OFFS> 277
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 482,576
<ALLOWANCE-DOMESTIC> 482,576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
