<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24675
-------------
STATE OF FRANKLIN BANCSHARES, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1607709
- ---------------------------------------- ------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
- ---------------------------------------- ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE)
(423) 232-4400
- --------------------------------------------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 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 [ ]
1,190,427
- --------------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF JUNE 30, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [ ] NO [X]
<PAGE> 2
STATE OF FRANKLIN BANCSHARES, INC
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
CONSOLIDATED STATEMENTS OF INCOME 4-5
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 7
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULT UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks $ 2,790,196 2,507,173
Federal Funds Sold 3,804,000 6,421,000
Short-Term Interest Bearing Deposits 0 5,000,000
Investments - HTM 12,987,995 0
Investments - AFS 19,857,132 12,248,572
Loans Held for Sale 436,813 1,627,400
Loans and Leases Receivable 98,476,576 85,228,897
Less: Allowance for Loan Loss (748,454) (630,324)
- -------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 97,728,122 84,598,573
- -------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,164,054 685,963
Land, Buildings & Equip at Cost Less Accum Depr
of $347,134 in 1998 and $472,996 in 1999 4,076,728 4,117,351
Prepaid Expense and Accounts Receivable 102,230 48,218
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 422,979 186,946
FHLB Stock 1,368,200 471,200
Cash due from ESOP 0 108,286
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 144,753,450 118,035,681
- -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------
LIABILITIES:
Interest-free Checking $ 7,044,477 5,539,590
Interest-bearing Deposits 115,866,396 90,824,486
Advances by borrowers for Taxes and Insurance 215,149 98,784
Accrued Interest on Deposits 72,165 103,769
Accounts Payable and Accrued Expenses 253,183 189,379
FHLB Advances 9,000,000 9,000,000
Deferred Gain on REO 21,449 21,449
Notes Payable 652,590 687,925
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 133,125,409 106,465,382
- -------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,190,427 1,180,152
Common Stock Subscribed 0 6,996
Paid-in Capital 10,937,656 10,905,359
Accumulated Other Comprehensive Income (345,023) 39,820
Retained Earnings 497,571 102,792
Unearned Compensation - ESOP (652,590) (664,820)
- -------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 11,628,041 11,570,299
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,753,450 118,035,681
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 1,921,330 1,357,425
Other Interest Income 581,750 449,102
- ----------------------------------------------------------------------------------
TOTAL INTEREST INCOME 2,503,081 1,806,527
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INTEREST EXPENSE:
Interest on Deposits 1,384,985 1,093,842
Other Interest Expense 124,330 42,018
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TOTAL INTEREST EXPENSE 1,509,316 1,135,860
- ----------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 993,765 670,667
PROVISION FOR LOAN LOSSES (70,641) (77,736)
- ----------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 923,123 592,931
- ----------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 55,196 40,191
Net Gain on Loans Sold 18,136 11,622
Net Gain on Sale and Maturity of Securities 12,724 14,235
Insurance Commission Income 15,678 11,075
Rental Income, Net 31,269 16,928
Other (24) 3,163
- ----------------------------------------------------------------------------------
TOTAL OTHER INCOME 132,978 97,214
- ----------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 306,873 235,411
Occupancy Expenses 56,359 50,217
Furniture and Equipment Expense 77,972 45,026
Advertising 28,589 28,865
Data Processing Expense 65,973 50,328
Other 198,054 130,461
- ----------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 733,820 540,308
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INCOME BEFORE INCOME TAX 322,281 149,837
PROVISION FOR INCOME TAXES (106,575) (33,161)
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NET INCOME $ 215,706 116,676
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EARNINGS PER SHARE:
BASIC $ 0.19 0.10
DILUTED 0.19 0.10
- ----------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,126,149 1,115,207
DILUTED 1,138,830 1,123,525
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</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 3,730,261 2,502,163
Other Interest Income 987,717 860,839
- ----------------------------------------------------------------------------------
TOTAL INTEREST INCOME 4,717,978 3,363,002
- ----------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 2,587,230 2,068,109
Other Interest Expense 244,684 42,018
- ----------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,831,913 2,110,127
- ----------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,886,065 1,252,875
PROVISION FOR LOAN LOSSES (119,146) (127,379)
- ----------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,766,919 1,125,496
- ----------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 105,445 79,960
Net Gain on Loans Sold 85,899 18,249
Net Gain on Sale and Maturity of Securities 12,724 38,769
Insurance Commission Income 26,443 18,297
Rental Income, Net 59,154 45,805
Other -- 5,307
- ----------------------------------------------------------------------------------
TOTAL OTHER INCOME 289,663 206,387
- ----------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 614,485 482,508
Occupancy Expenses 126,932 111,161
Furniture and Equipment Expense 130,037 87,312
Advertising 64,217 53,134
Data Processing Expense 153,810 97,983
Other 374,455 275,152
- ----------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,463,935 1,107,250
- ----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 592,647 224,633
PROVISION FOR INCOME TAXES (197,868) (67,752)
- ----------------------------------------------------------------------------------
NET INCOME $ 394,779 156,881
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EARNINGS PER SHARE:
BASIC $ 0.35 0.14
DILUTED 0.35 0.14
- ----------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,125,012 1,113,898
DILUTED 1,136,479 1,122,216
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 394,779 156,881
Items Not Affecting Cash:
Depreciation 125,862 96,564
(Increase) in Accrued Interest (478,092) (280,409)
Deferred Income Taxes (Benefit) 42,871 27,723
Provisions for Loan Losses 118,130 127,102
(Increase) Decrease in Prepaid Expenses and Accounts Receivable (54,012) 30,163
(Decrease) in Interest Payable (31,604) 46,462
Increase in Accounts Payable and Accrued Expenses 63,804 34,986
(Decrease) in Deferred Loan Fees, Net (972) 8,063
(Gain) on Sale of Investments (12,724) (38,770)
Discount Accretion (3,033) 32,635
Increase in Deferred Gain on Sale of REO -- 21,449
Earned ESOP Shares 35,335 --
FHLB Stock Dividends (26,300) --
Net (Increase) Decrease in Loans Held for Sale 1,190,587 (1,384,700)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,364,632 (1,121,851)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments (27,907,489) (19,524,638)
Proceeds from Maturities of Held-to-Maturity Investments -- 11,500,000
Proceeds from Sale of Available-for-Sale Investments -- 6,220,996
Proceeds from Maturities of Available-for-Sale Investments 6,595,000 --
Principal payments on Mortgage Backed Securities - AFS 35,965 71,458
(Increase) Decrease in Federal Funds Sold 2,617,000 2,886,000
(Increase) Decrease in Short-Term Interest Bearing Deposits 5,000,000 (5,000,000)
Increase in Loans Receivable, Net (13,129,550) (16,777,509)
Purchases of Premises and Equipment (85,239) (675,641)
Purchases of Federal Home Loan Bank Stock (870,700) (454,800)
- ----------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (27,745,013) (21,754,134)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 26,546,797 13,442,375
Net Increase in Advances by Borrowers for Taxes and Insurance 116,366 118,215
Issuance of Common Stock, Net 35,576 57,596
Repayment of Debt (35,335) --
Organization Costs -- (4,123)
Proceeds from FHLB Advances -- 9,000,000
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,663,404 22,614,063
- ----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 283,024 (261,922)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,507,173 2,321,800
- ----------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,790,196 2,059,878
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized Gain on Securities Available-For-Sale,
Net of Deferred Tax Liability $ (345,023) (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 $ 169,460 --
Interest $ 2,863,517 2,063,665
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET INCOME $ 215,706 116,676
- ----------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:
UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD (548,758) (29,213)
LESS: RECLASSIFICATION ADJUSTMENT FOR (GAINS) INCLUDED
IN NET INCOME (6,807) 13,528
- ----------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (555,565) (15,685)
INCOME TAXES (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME (188,892) (5,333)
- ----------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $(150,967) 106,324
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
--------- ---------
NET INCOME $ 394,779 156,881
- ----------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:
UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD (583,096) (57,664)
LESS: RECLASSIFICATION ADJUSTMENT FOR (GAINS) INCLUDED
IN NET INCOME (12,724) 40,646
- ----------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (595,820) (17,018)
INCOME TAXES (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME (202,579) (5,786)
- ----------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 1,538 145,649
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1 INCORPORATION AND OPERATIONS
State of Franklin Bancshares, Inc. (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 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. State of Franklin Leasing Corporation was incorporated
under the laws of the state of Tennessee for the purpose of lease
financing. The Leasing Corp is a wholly owned subsidiary of the
Company. John Sevier Title services, Inc. is the wholly owned
subsidiary of the Savings Bank.
NOTE 2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These
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, comprehensive
income, and 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, 1999, 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 Company for the year ended December 31, 1998.
NOTE 3 RECLASSIFICATIONS
In instances where required, amounts reported in prior year's
financial statements included herein have been reclassified to put
them on a comparable basis to the amounts reported in the December
31, 1998 consolidated financial statements.
NOTE 4 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
At June 30, 1999, the ESOP had 78,529 shares of which approximately
15,990 shares were released and allocated, 3,212 shares were
considered committed to be released and 59,327 shares were
unallocated. For the six months ended June 30, 1999, compensation
related to the ESOP of approximately $57,800 was expensed.
Unallocated ESOP shares are not considered outstanding for the
earnings per share calculation.
NOTE 5 ORGANIZATION EXPENSE
There were no miscellaneous organization expenses of the Company
netted against paid-in capital for the six month period ended June
30, 1999. Miscellaneous organization expenses of $11,355 were netted
against paid-in capital in 1998.
8
<PAGE> 9
NOTE 6 LOANS RECEIVABLE
Loans receivable at June 30, 1999 and December 31, 1998, consist of
the following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
First Mortgage Loans 37,871,102 35,195,869
Construction Loans 25,605,763 22,024,861
Consumer Loans 8,754,721 7,726,136
Participation Loans, Net 413,296 863,162
Commercial Loans 32,940,835 26,603,529
Savings Account Loans 380,026 545,011
Credit Line Advances 114,611 396,618
Lease Finance 459,277 120,999
------------ -----------
Gross Loans Receivable 106,539,631 93,476,185
------------ -----------
Less:
Undisbursed Portion of Loans in Process (7,996,465) (8,179,727)
Net Deferred Loan Origination Fees (66,589) (67,561)
Accumulated General Loan Loss Allowance (748,454) (630,324)
------------ -----------
(8,811,508) (8,877,612)
------------ -----------
Loans Receivable, Net 97,728,122 84,598,573
============ ===========
</TABLE>
An analysis of the allowance for loan losses at June 30, 1999 and
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Balance - Beginning of Period 630,324 355,474
Provision for Losses 119,146 275,127
Net Charge-Offs (1,016) (277)
------------ -----------
Balance - End of Period 748,454 630,324
============ ===========
</TABLE>
ITEM NO. 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations
of the Company. State of Franklin Savings Bank (the "Bank") and State
of Franklin Leasing Corporation (the "Leasing Company") represents
virtually all of the assets of State of Franklin Bancshares, Inc.
(the "Company"). 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.
9
<PAGE> 10
BALANCE SHEET REVIEW
At June 30, 1999, assets of State of Franklin Bancshares, Inc.
totaled $144.8 million reflecting an increased $26.7 million or 22.6%
since December 31, 1998. The growth in assets has been funded
primarily by a $26.5 million increase in deposits.
LOANS
Loans outstanding totaled $98.5 million at June 30, 1999. This
represented an increase of 15.5% from the December 31, 1998
outstanding loans of $84.6 million.
Commercial loans increased $6.3 million at June 30, 1999, an increase
of 24% from $26.6 million at December 31, 1998. Real estate
construction lending totaled $25.6 million compared with $22 million
at December 31, 1998, reflecting an increase of $3.6 million or
16.3%. Consumer loans of $8.8 million at June 30, 1999 increased
13.3% from $7.7 million at December 31, 1998. During the first six
months of 1999, first mortgage residential loans increased $2.7
million or 7.6% to $37.9 million at June 30, 1999. The loan portfolio
mix at June 30, 1999, consists of 36% residential mortgages, 31%
commercial, 24% real estate construction, and 9% consumer loans.
INVESTMENT SECURITIES
Investment securities totaled $32.8 million at June 30, 1999. 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, 1999, approximately $19.9 million of
investment securities were held as available-for-sale compared to
$12.2 million at December 31, 1998. This $7.7 million increase, in
addition to a $13 million increase in investments held-to-maturity,
was funded in part from a $7.6 million reduction in fed funds and
short-term interest bearing deposits.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at June 30,
1999 and December 31, 1998. The allowance for possible loan losses
was $748,454 at June 30, 1999 compared with $630,324 at year end
1998. Management believes the allowance for possible loan losses is
adequate to provide for potential loan losses.
DEPOSITS
Total deposits at June 30, 1999 of $122.9 million, represented an
increase of $26.5 million or a 27.5% increase from $96.4 million at
December 31, 1998. Non-interest bearing demand deposits totaled $7.1
million at June 30, 1999, an increase of $1.5 million from December
31, 1998. Interest bearing deposits increased $25 million to $115.9
million at June 30, 1999.
CAPITAL
Equity capital at June 30, 1999 was $11.6 million. At June 30, 1999,
all capital ratios were in excess of the regulatory minimums, with
the Bank's Tier 1, total risk-based and leverage ratio of 13.15%,
14.38% and 9.05%, 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 that the Company has not significantly used.
The Company had unused sources of liquidity in the form of unused
federal funds lines of credit and a line of credit with the Federal
Home Loan Bank of Cincinnati totaling $22 million at June 30, 1999.
10
<PAGE> 11
EARNINGS REVIEW
The Company had net income of $216,000 for the three months ending
June 30, 1999, compared with $117,000 for the same period last year,
resulting in an increase of 85%. Net income of the six months ended
June 30, 1999 was $395,000, an increase of $238,000 or 152% over the
six months ended June 30, 1998 total net income of $157,000. Net
income per common share was $0.35 compared to earnings per share of
$0.14 in 1998. Return on average assets was .60% and the return on
average equity was 6.81% for the six month period ended June 30,
1999.
Noninterest income increased $102,000, or 54%, with other fees and
service charges, net gains on loans sold and insurance commissions
responsible for most of the increase over the six months ended June
30, 1998. noninterest expense was $1,464,000 for the 1999 period, an
increase of 32% over the 1998 period, primarily resulting from
increased salaries and benefits, data processing, and furniture and
equipment expense.
NET INTEREST INCOME
Interest income and interest expense both increased from 1998 to 1999
resulting primarily from the increases in both earning assets and
interest bearing liabilities. Net interest income of $994,000 for the
three months ending June 30, 1999 reflects an increase of $323,000 or
48% over the same period a year ago. Net interest income of
$1,886,000 for the six months ended June 30, 1999 was up $633,000 or
51% over the same period in 1998. For the six months ending June 30,
1999, average earning assets increased $36 million or 42% while
average interest bearing liabilities increased $30 million or 40%
compared with the same period in 1998. Average earning asset yield
declined 10 basis points to 7.70% while the cost on interest bearing
liabilities declined 20 basis points. Consequently, the net interest
margin based on average earning assets increased to 3.08% for the six
months ending June 30, 1999, compared with 2.90% for the same period
in 1998.
PROVISION FOR LOAN LOSSES
During the six months ended June 30, 1999, the provision for possible
loan losses was $119,000 compared with $127,000 for the same period
last year. Loan charge-offs for the six months ended June 30, 1999,
were $1,000 compared with no charge-offs in 1998. The allowance for
possible loan losses represented .76% of total loans, net of mortgage
loans held-for-sale, at June 30, 1999, compared to .74% at June 30,
1998. Management considers the allowance for loan losses to be
adequate to cover losses inherent in the loan portfolio.
PROVISION FOR INCOME TAXES
For the six months ended June 30, 1999, the provision for federal and
state income taxes was $198,000, an increase of $130,000 from 1998,
primarily due to the increase in income before income taxes.
NONINTEREST INCOME
The Company's noninterest income was $290,000 during the six months
ended June 30, 1999, an increase of $105,000 or 54% over the
comparable 1998 period. The increase was attributable to increases in
other fees and service charges, net gains on loans sold, insurance
commissions, and rental income of $25,000, $86,000, $8,000, and
$13,000, respectively, which were offset by decreases in net gain on
sale and maturity of securities and other income of $26,000 and
$5,000, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $734,000 for the three month period
ending June 30, 1999, an increase of $194,000 or 36%. For the six
month period ending June 30, 1999, noninterest expense was up
$357,000 or 32% over the same period in 1998. The increases were a
result primarily of growth in both the loan and deposit functions of
the organization. Compensation and related benefits, data processing
expense, and other operating expenses, which include postage,
printing and supplies, and telephone expense, reflect the growth in
the customer base and the general increased size of the organization.
11
<PAGE> 12
YEAR 2000 COMPLIANCE
The Year 2000 poses serious challenges to the banking industry. Many
experts believe that even the most prepared organizations may
encounter some implementation problems. The federal banking agencies
are concerned that financial institutions avoid major disruptions to
service and operations. All banks are required to have an action plan
to address Year 2000 issues which must include an indication of
management awareness of the problems and the commitment to solutions;
identification of external risks; and operational issues that are
relevant to the bank's Year 2000 planning.
The Federal Financial Institutions Examination Council (FFIEC) has
issued guidelines and target time frames to accomplish critical
actions concerning Year 2000 compliance:
- By September 30, 1997, all banks should have identified
affected applications and databases. Mission critical
applications should be identified and an action plan set
for Year 2000 work.
- By December 31, 1997, code enhancements and revisions,
hardware upgrades, and other associated changes should be
largely completed by all banks. In addition, for mission
critical applications, programming changes should be
largely completed and testing should be well underway.
- Between January 1, 1999 and December 31, 1999, banks
should be testing and implementing their Year 2000
conversion programs.
External factors which may adversely affect the Company include
reliance on vendors, such as third-party data processing services and
software and hardware vendors; electronic data-sensitive exchange
among other financial institutions which may not be Year 2000
compliant; corporate customers of the Company and other debtors.
The Company has communicated with its significant vendors in order to
determine the extent to which interfaces with such entities are
vulnerable to Year 2000 issues and whether the products and services
purchased from such entities are Year 2000 compliant. The Company has
received either verbal or written assurances from these vendors that
they have tested their products or systems and are Year 2000 ready.
The Company has tested all mission-critical systems including direct
involvement with the service provider in a detail testing of all core
processing applications. Areas where problems resulted have been
corrected and the Company now believes all mission critical systems
and core processing applications to be Year 2000 ready. Year 2000
testing has been compliant within the guidelines established by the
FFIEC in Interagency Statements relating to Year 2000 testing of
financial institutions. With respect to significant borrowers and
depositors, the Company does not anticipate any material Year 2000
issues.
The Company has developed a Year 2000 Contingency Plan in the event
problems arise. The plan includes staff assignments of
responsibilities and alternative methods of processing to assure a
quick recovery in the event of failures.
The Company anticipates total expenses relating to Year 2000 issues
not to exceed $25,000 with approximately $7,000 remaining in relation
to final testing of the Contingency Plan, staff training, and
continued emphasis on customer awareness.
12
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting on April 20, 1999, the shareholders voted on the following
proposals with the results as indicated:
1. Elected five of its current directors to continue in office, with four
directors elected for a three-year term and one director elected for a one-year
term as follows:
Three-year term:
<TABLE>
<CAPTION>
FOR WITHHOLD AUTHORITY
<S> <C> <C>
Randal R. Greene 902,076 385
Kenneth E. Cutshall, M.D. 902,076 385
Cameron E. Perry 902,076 385
Henry J. Williams, M.D. 902,076 385
One-year term:
Charles E. Allen, Sr. 901,926 535
</TABLE>
Directors continuing to serve include:
Charles E. Allen, Jr. Vance W. Cheek
Stephen K. Gross Donald R. Jeanes
Verrill M. Norwood, Jr. Richard S. Venable
2. Approved the State of Franklin Bancshares, Inc. Stock Incentive Plan as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C>
772,829 34,143 16,489 79,000
</TABLE>
3. Ratified the appointment of Baylor & Backus as the Company's independent
accountants and auditors for 1999 as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C>
895,261 5,000 2,200 0
</TABLE>
13
<PAGE> 14
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 27 Financial Data Schedule (for SEC use only)
b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE OF FRANKLIN BANCSHARES, INC.
(Registrant)
August 6, 1999 /s/ Randal R. Greene
- ------------------------------ --------------------------------------
(Date) Randal R. Greene, President and Chief
Executive Officer
(Principal Executive Officer)
August 6, 1999 /s/ Charles E. Allen, Jr.
- ------------------------------ --------------------------------------
(Date) Charles E. Allen, Jr.,
Chairman of the Board
and Chief Financial Officer
(Principal Executive,
Financial and Accounting Officer)
15
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,790,196
<INT-BEARING-DEPOSITS> 115,866,396
<FED-FUNDS-SOLD> 3,804,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,857,132
<INVESTMENTS-CARRYING> 12,987,995
<INVESTMENTS-MARKET> 12,517,359
<LOANS> 98,476,576
<ALLOWANCE> (748,454)
<TOTAL-ASSETS> 144,753,450
<DEPOSITS> 122,910,873
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,214,536
<LONG-TERM> 0
0
0
<COMMON> 1,190,427
<OTHER-SE> 10,437,614
<TOTAL-LIABILITIES-AND-EQUITY> 144,753,450
<INTEREST-LOAN> 3,730,261
<INTEREST-INVEST> 987,717
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,717,978
<INTEREST-DEPOSIT> 2,587,230
<INTEREST-EXPENSE> 2,831,913
<INTEREST-INCOME-NET> 1,886,065
<LOAN-LOSSES> 119,146
<SECURITIES-GAINS> 12,724
<EXPENSE-OTHER> 1,463,935
<INCOME-PRETAX> 592,647
<INCOME-PRE-EXTRAORDINARY> 592,647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,779
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.35
<YIELD-ACTUAL> 2.87
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 630,324
<CHARGE-OFFS> 1,016
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 748,454
<ALLOWANCE-DOMESTIC> 748,454
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
