<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 000-24675
STATE OF FRANKLIN BANCSHARES, INC.
(Name of small business issuer in its charter)
TENNESSEE 62-1607709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
(Address of principal executive offices and Zip Code)
Issuer's telephone number (423) 926-3300
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK
Check whether the issuer (1) filed all reports required to be filed by
Section 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
THE REGISTRANT'S REVENUES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
WERE $7,987,923.
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 15, 1999 IS APPROXIMATELY
$8.7 MILLION. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. OUTSTANDING AT MARCH 15, 1999,
COMMON STOCK, $1.00 PAR VALUE, 1,190,363.
Documents Incorporated by Reference: NONE
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
State of Franklin Bancshares, Inc. (the "Company") is a registered bank
holding company organized under the laws of Tennessee. Effective May 15, 1998,
the Company exchanged its shares of common stock with holders of the shares of
common stock of State of Franklin Savings Bank (the "Savings Bank"). As a
result, the Savings Bank became the wholly owned subsidiary of the Company. The
Company, with consolidated total assets of approximately $118 million at
December 31, 1998, is headquartered in Johnson City, Tennessee and conducts its
operations through its subsidiary, the Savings Bank. The Company believes it can
present an alternative to recent mergers of large financial institutions by
offering local ownership, local decision making and other personalized service
characteristics of local, community-based financial institutions. State of
Franklin Leasing Corporation is a wholly owned subsidiary of the Company
conducting the business of lease financing. The holding company structure
provides flexibility for expansion of the Company's banking business through
acquisition of other financial institutions and provision of additional
banking-related services which the traditional commercial bank may not provide
under present laws.
THE SAVINGS BANK
The Savings Bank was incorporated under the laws of the State of
Tennessee and commenced business on February 26, 1996, as a Tennessee-chartered
savings bank whose deposits are insured by the Federal Deposit Insurance
Corporation's ("FDIC") Bank Insurance Fund ("BIF"). The Savings Bank is
regulated by the Tennessee Department of Financial Institutions (the
"Department") and the FDIC. The Savings Bank operates a main office and two
branches in Johnson City, Washington County, Tennessee, and one branch in
Kingsport, Sullivan County, Tennessee. The Savings Bank owns John Sevier Title
Services Inc., a Tennessee-chartered and regulated title insurance company.
SERVICES
The Company provides a wide range of personal and corporate banking
services. Its principal business is to accept demand and savings deposits from
the general public and to invest such funds in residential mortgage loans and,
to a lesser extent, in commercial and consumer loans in the Company's market
area. The Company seeks savings deposits and transaction accounts from
households and businesses by offering a full range of savings accounts,
retirement and professional accounts, checking accounts and time certificates.
The Company offers 24-hour automated teller machines and other financial
services.
MARKETS
The Company competes with other commercial banks, savings and
loan associations, credit unions and finance companies operating in Washington
and Sullivan counties and elsewhere in the Tri-Cities region. The Company is
subject to substantial competition in all aspects of its business. Intense
competition for loans and deposits comes from other financial institutions in
the market area. In certain aspects of its business, the Company also competes
with credit unions, small loan companies, insurance companies, mortgage
companies, finance companies, brokerage houses and other financial institutions,
some of which are not subject to the same degree of regulation and restriction
as the Company and some of which have financial resources greater than those of
the Company. The future success of the Company will depend primarily upon the
difference between the cost of its borrowing (primarily interest paid on
deposits) and income from operations (primarily interest or fees earned on
loans, sales of loans and investments). The Company competes for funds with
other institutions, which, in most cases, are significantly larger and are able
to provide a greater variety of services than the Company and thus may obtain
deposits at lower rates of interest. Customers of the Company are primarily
individuals and households and small-to-medium sized businesses, as well as
physicians and other professionals.
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<PAGE> 3
NET INTEREST INCOME
The following table sets forth weighted average yields earned by the
Company on its earning assets and the weighted average rates paid on its average
deposits and other interest-bearing liabilities for the years indicated, and
certain other information:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- -------------------------------
(Fully taxable equivalent) Interest Average Interest Average
(Dollars in thousands) Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans net of unearned income................ $ 68,732 $5,757 8.4% $33,907 $ 2,729 8.0%
U.S. Treasury and other U.S. government
agencies.................................. 13,946 978 7.0% 14,892 1,569 10.5%
Other earning assets ....................... 3,206 195 6.1% 481 51 10.6%
Federal funds sold.......................... 8,258 453 5.5% 7,659 257 3.4%
-------- ------ ------- ------
Total interest-earning assets/
interest income....................... 94,142 7,383 7.8% 56,939 4,606 8.1%
-------- ------ ------- ------
Cash and due from banks..................... 2,414 1,993
Other assets................................ 4,641 3,002
Allowance for loan losses................... (493) (243)
-------- -------
Total................................... $100,704 $61,691
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits............................. $ 13,529 $ 546 4.0% $ 6,231 $ 273 4.4%
Savings..................................... 4,699 192 4.1% 2,157 117 5.4%
Individual retirement accounts.............. 4,336 269 6.2% 2,490 161 6.5%
Time certificates........................... 55,398 3,451 6.2% 37,653 2,425 6.4%
Note payable................................ 4,844 304 6.3% -- -- --
-------- ------ ------- ------
Total interest-bearing liabilities/
interest expense...................... 82,806 4,762 5.8% 48,531 2,976 6.1%
-------- ------ ------- ------
Non-interest bearing demand deposits........ 6,343 4,700
Other liabilities........................... 319 284
Stockholders' equity........................ 11,236 8,176
-------- -------
Total................................... $100,704 $61,691
======== =======
Net interest earnings....................... $2,621 $1,630
====== ======
Net interest on interest-earning assets..... 2.8% 2.9%
Return on average assets.................... 0.49% 0.09%
Return on average equity.................... 4.42% 0.70%
Cash dividends declared..................... -- --
Dividend payout ratio....................... -- --
</TABLE>
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<PAGE> 4
The following table presents a summary of changes in interest income,
interest expense, and the interest rate differential aggregated by the changes
in volumes and rates:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
versus versus
December 31, 1997 December 31, 1996
Increase (Decrease) Increase (Decrease)
Change Due to: (1) Change Due to: (1)
--------------------------------- -----------------------------
(Dollars in Thousands) Volume Rate Total Volume Rate Total
------- ------- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in(2):
Loans, net of unearned income ........................... $ 2,892 $ 136 $ 3,028 $2,048 $ 111 $ 2,159
U.S. Treasury and other U.S. government agency securities (70) (521) (591) 863 574 1,437
Other earning assets .................................... 166 (22) 144 10 5 15
Federal funds sold ...................................... 35 161 196 167 (196) (29)
------- ------- ------- ------ ----- -------
Total interest income .......................... 2,777 3,582
======= =======
Increase (decrease) in(2):
Demand deposits ......................................... 298 (25) 273 190 17 207
Savings deposits ........................................ 103 (28) 75 89 (3) 86
Individual retirement accounts .......................... 113 (7) 108 124 11 135
Time certificates ....................................... 1,101 (75) 1,026 1,600 260 1,860
Note payable ............................................ 304 -- 304 -- -- --
------- ------- ------- ------ ----- -------
Total interest expense ......................... 1,786 2,288
------- -------
Increase (decrease) in net interest income .............. $ 991 $ 1,294
======= =======
</TABLE>
- ----------
(1) Increases (decreases) are attributable to volume changes and rate
changes on the following basis: Volume Change equals change in volume
times prior year rate. Rate Change equals change in rate times prior
year volume. Changes that are not due solely to volume or rate changes
are allocated to volume.
(2) For purposes of this schedule, non-accruing loans are included in the
average balances and tax exempt income is reflected on a tax equivalent
basis. As tax exempt income is exempt only for Federal income tax
purposes and not Tennessee purposes, tax equivalent income is based
upon an effective 34% tax rate. Loan fees included in interest income
are not material to the presentation.
LIABILITY AND ASSET MANAGEMENT
A committee composed of officers and directors of the Company is
responsible for managing the assets and liabilities of the Company. The chairman
of the committee is Chairman of the Board, Charles E. Allen, Jr. The committee
attempts to manage asset growth, liquidity and capital in order to maximize
income and reduce interest rate risk. The committee directs the Company's
overall acquisition and allocation of funds. The committee reviews and discusses
the Company's assets and liability funds budget in relation to the actual flow
of funds. The committee also reviews and discusses peer group comparisons, the
ratio of the amount of rate-sensitive assets to the amount of rate-sensitive
liabilities; the ratio of allowance for loan losses to outstanding and
nonperforming loans; and other variables, such as expected loan demand,
investment opportunities, core deposit growth within specific categories,
regulatory changes, monetary policy adjustments, and the overall state of the
local and national economies.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative
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<PAGE> 5
gap would tend to result in an increase in net interest income while a positive
gap would tend to adversely affect net interest income.
The following table represents an interest sensitivity profile for the
Savings Bank as of December 31, 1998 and 1997. The table represents a static
point in time and does not consider other variables, such as changing spread
relationships or interest rate levels. "Net repricing gap" is the difference
between total earning assets and total interest-bearing liabilities repricing in
any given period and "cumulative gap" is the sum of the net repricing gap from
period to period. Interest-bearing demand, savings and money market account
deposits are presented as repricing in the earliest period presented.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- -------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans ........................... $16,424 $ 7,443 $ 38,406 $14,286 $ 86,559
Investment securities:
Available for sale ......... 36 12,045 12,081
Held to maturity ........... --
Federal funds sold .............. 6,421 6,421
Interest-bearing deposits ....... 5,113 5,113
------- -------- -------- ------- --------
Total earning assets ... $37,958 $ 7,443 $ 38,442 $26,331 $116,174
======= ======== ======== ======= ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....... $22,879 $ 24,515 $ 43,534 $ $ 90,928
Long-term debt .................. 3,000 6,000 9,000
------- -------- -------- ------- --------
Total interest-bearing
liabilities .......... $22,879 $ 27,515 $ 49,534 $ -- $ 99,928
======= ======== ======== ======= ========
Cumulative net repricing gap .... $15,079 $(20,072) $(11,092) $26,331 $ 10,246
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets ....... 13.69% (18.22)% (10.07)% 23.90% 9.30%
Cumulative gap .................. $15,079 $ (4,993) $(16,085) $10,246 $ 10,246
Cumulative gap as a percentage of
total earning assets .......... 13.69% (4.53)% (14.60)% 9.30% 9.30%
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- -------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans ........................... $ 8,116 $ 6,945 $ 11,882 $23,843 $50,786
Investment securities:
Available for sale ......... 4 -- 1,930 4,530 6,464
Held to maturity ........... -- -- 2,300 7,700 10,000
Federal funds sold .............. 10,094 -- -- -- 10,094
-------- -------- -------- ------- -------
Total earning assets ... $ 18,214 $ 6,945 $ 16,112 $36,073 $77,344
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....... $ 21,379 $ 24,977 $ 18,742 $ -- $65,098
-------- -------- -------- ------- -------
Total interest-bearing
liabilities .......... $ 21,379 $ 24,977 $ 18,742 $ -- $65,098
======== ======== ======== ======= =======
Net repricing gap ............... $ (3,165) $(18,032) $ (2,630) $36,073 $12,246
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets ....... (4.09)% (23.31)% (3.40)% 46.64% 15.83%
Cumulative gap .................. $ (3,165) $(21,197) $(23,827) $12,246 $12,246
Cumulative gap as a percentage of
total earning assets .......... (4.09)% (27.41)% (30,81)% 15.83% 15.83%
</TABLE>
Management has made the following assumptions in the above analysis:
(a) Assets and liabilities are generally assigned to a period based upon
their earliest repricing period when the repricing is less than the
contractual maturity.
(b) Nonaccrual loans are included in the loan category.
(c) Investment securities available for sale are currently treated in the
same manner as comparable securities in the investment securities held
to maturity portfolio in that they are scheduled according to the
earlier of their contractual maturities or earliest repricing dates;
however, the maturities of callable agency securities are scheduled
according to their call dates when valued at a premium to par.
(d) Money market deposits and savings deposits that have no contractual
maturities are scheduled in the within 3 months category.
DEPOSITS
The Company offers a full range of depositor accounts and services to
both consumers and businesses. None of these deposits were brokered. The
Company's primary sources of funds are interest-bearing deposits. The following
table sets forth the Company's deposit structure at December 31, 1998 and
1997(in thousands).
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations ... $ 4,346 $ 5,838
Certified and official checks ................ 1,292 1,309
------- -------
Total non interest-bearing deposits ........ 5,638 7,147
Interest-bearing deposits:
Interest-bearing demand accounts ............. 18,306 8,648
Savings accounts ............................. 6,108 3,291
Certificates of deposit, less than $100,000 .. 49,587 40,306
Certificates of deposit, greater than $100,000 16,725 12,852
------- -------
Total interest-bearing deposits ............ 90,726 65,097
------- -------
Total deposits ............................. $96,364 $72,244
======= =======
</TABLE>
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<PAGE> 7
The following table presents a breakdown by category of the weighted
average rate on deposits and the average amount of deposits for the periods as
indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997
----------------- -------------------
(In Thousands)
<S> <C> <C> <C> <C>
Non interest-bearing commercial deposits............ 0.00% $ 4,365 0.00% $ 6,653
Savings deposits.................................... 4.25% 6,108 4.25% 3,291
Money market deposits .............................. 4.48% 13,730 4.31% 6,102
Time deposits....................................... 5.65% 66,312 5.89% 53,158
Interest-bearing and non interest-bearing
demand deposits 1.64% 5,849 1.79% 3,040
------- -------
Total deposits............................. $96,364 $72,244
======= =======
</TABLE>
At December 31, 1998 and 1997, time deposits greater than $100,000
aggregated approximately $16.7 million and $12.9 million, respectively. The
following table indicates, as of December 31, 1998 and 1997, the dollar amount
of $100,000 or more deposits by the time remaining until maturity (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ---------------------------------------------
1 Year 1 Year
3 Months 3 to 12 through 3 Months 3 to 12 through
or less Months 5 years Total or less Months 5 years Total
------- ------ ------- ----- ------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Time certificates $6,271 $5,670 $4,784 $16,725 $2,786 $6,495 $3,571 $12,852
</TABLE>
ASSETS
Management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest earning assets by category at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------- -------
(In Thousands)
<S> <C> <C>
Investment securities:
Available for sale .......... $ 12,249 $ 6,463
Held to maturity ............ 10,000
Federal funds sold ............ 6,421 10,094
Loans:
Real estate ................. 51,311 32,456
Commercial and other ........ 35,494 18,326
-------- -------
Total loans ............... 86,805 50,782
Less unearned income ....... 68 53
-------- -------
Loans, net of unearned income 86,737 50,729
-------- -------
Interest earning assets ....... $105,407 $77,286
======== =======
</TABLE>
INVESTMENT PORTFOLIO
For a description of the composition of the carrying value of the
Company's investment portfolio at December 31, 1998 and 1997, see Note 13 to the
Notes to Consolidated Financial Statements attached hereto.
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<PAGE> 8
The following table presents the maturity distribution of the amortized
cost and estimated market value of the Company's investment portfolio at
December 31, 1998 and 1997. The weighted average yields on these instruments are
presented based on final maturity. Yields on obligations of states and political
subdivisions have not been adjusted to a fully-taxable equivalent basis.
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Estimated Weighted Estimated Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Obligations of U.S. Government agencies:
Due after 1 year but within 5 years .. $ 2,300 $ 2,295 6.88%
Due after 5 years but within 10 years 7,700 7,728 7.27%
------- -------
Total ............................. $10,000 $10,023 6.71%
======= =======
Available for sale:
Obligations of U.S. Government agencies:
Due within 1 year .................... $ 36 $ 36 7.20% $ 68 $ 73 7.13%
Due after 1 year but within 5 years .. 1,858 1,857 6.76%
Due after 5 years but within 10 years 10,555 10,613 6.68% 3,500 3,467 7.31%
Due after 10 years ................... 999 1,001 7.06% 1,000 1,004 8.02%
------- ------- ------ ------ ----
Total ............................. $11,590 $11,650 6.71% $6,426 $6,401 7.22%
======= ======= ====== ====== ====
</TABLE>
INVESTMENT POLICY
The Company's investment portfolio policy is designed to provide
guidelines by which the funds not otherwise needed to meet loan demand of the
Company's market area can best be invested to meet fluctuations in the loan
demand and deposit structure. The Company's investment officer, Chairman Allen,
seeks to balance the market and credit risk against the potential investment
return, make investments compatible with the pledging requirements of the
Company's deposits of public funds, maintain compliance with regulatory
investment requirements and assist the various local public entities with their
financing needs. The Investment Policy is reviewed annually by the Directors.
Chairman Allen reports monthly to the Directors.
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan
portfolio at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 2,013 $ 551
Secured by residential properties 51,821 34,176
Commercial real estate loans .... 9,104 6,447
------- -------
Total real estate loans ...... 62,938 41,174
Commercial and industrial loans ... 13,784 6,193
Installment loans ................. 9,424 3,176
Other consumer loans .............. 396 239
All other loans ................... 17 4
------- -------
Total loans ................... $86,559 $50,786
======= =======
</TABLE>
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<PAGE> 9
The following table sets forth the maturities of the loan portfolio and
the sensitivity to interest rate changes of that portion of the Company's loan
portfolio that matures after one year.
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------
Maturity Range
----------------------------------------------------------------
One Year One Through Over
(In Thousands) or Less Five Years Five Years Total
- -------------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Real estate construction loans $1,024 $ 989 $ -- $ 2,013
Commercial and industrial loans 5,452 6,943 1,389 13,734
All other loans ............... 1,558 17,555 51,649 70,762
------ ------- ------- -------
Total loans ................. $8,034 $25,487 $53,038 $86,559
====== ======= ======= =======
</TABLE>
The sensitivity to interest rate changes of that portion of the
Company's loan portfolio that matures after one year is set forth below.
Real estate and commercial and industrial loans maturing after one year as of
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Fixed rate ................................. $ 8,863
Floating rate .............................. 51,719
Other loans maturing after one year:
Fixed rate ................................. 16,398
Floating rate .............................. 1,545
-------
Total loans maturing after one year $78,525
=======
</TABLE>
LENDING POLICY
While the ultimate authority to approve loans rests with the Board of
Directors of the Company, lending authority is delegated by the Directors to
loan officers and loan committees of the Company, each of whom is limited as to
the amount of secured and unsecured loans that he or she can make to a single
borrower or related group of borrowers. Lending limits of individual officers
are documented in the respective personnel files and are reviewed annually by
the Directors. Loan officers discuss with a senior officer any loan request
which exceeds their individual lending limit. The loan must have the joint
approval from the originating officer and a senior officer. The president/CEO of
the Company has the authority to approve first mortgages for one-to-four family
residential loans which conform to the guidelines of the Farmers Home
Administration ("FHA"), the Veterans Administration ("VA"), and the Tennessee
Housing Development Authority ("THDA"), and other conventional investors in any
amount.
The Company's Lending Policy provides written guidelines for lending
activities and is reviewed at least annually by the Directors. The Directors
recognize that, from time to time, it is in the best interest of the Company to
deviate from the established, written credit policy and have established
guidelines for granting exceptions to the policy. Situations in which such
exceptions might be granted include the waiving of requirements for independent
audited financial statements when a comfort level with respect to the financial
statements of the borrower can be otherwise obtained; and when it is desirable
to meet the terms offered by a competitor. All exceptions granted are documented
in the loan committee's minutes.
The Company's primary business lies in making real estate mortgage
loans in the market area. Real estate loans made outside the market area must be
in compliance with the exception-to-policy guidelines. Lending activities in the
real estate area tend to fall into the four general categories of (i)
acquisition and development, (ii) construction, (iii) permanent financing, and
(iv) home equity. As a general rule, the Company seeks to maintain
loan-to-collateral value ratios of at least 80% of the actual purchase price or
the appraised value, whichever is less. This limit is reduced for certain types
of real estate loans in
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<PAGE> 10
conformity to industry and regulatory guidelines. The following
standards, established by inter-agency guidelines by the federal bank
regulators, including the FDIC, went into effect on March 19, 1993:
<TABLE>
<CAPTION>
Maximum Allowable
Loan Category Loan-to-Value Ratio
------------- -------------------
<S> <C>
Land.................................................................... 65%
Land development........................................................ 75%
Owner-occupied land development......................................... 75%
Construction
Commercial, multifamily and other nonresidential............... 80%
1-4 family residential......................................... 85%
Improved property....................................................... 85%
Owner-occupied 1-4 family and home equity............................... 85%
</TABLE>
- ----------
(1) Multifamily construction includes condominiums and cooperatives.
(2) A loan-to-value limit has not been established for permanent mortgage
or home equity loans or owner-occupied, 1-4 family residential
property. However, for any such loan with a loan-to-value ratio that
equals or exceeds 90% at origination, appropriate credit enhancement in
the form of either mortgage insurance or readily marketable collateral
is required.
LOAN REVIEW AND NONPERFORMING ASSETS
The Company has an internal loan review system to determine
deficiencies and corrective action to be taken. Loans are graded as follows:
CLASS A. Prime loans based upon liquid collateral with
adequate margin or supported by strong financial statement of recent date.
Character and repayment ability of borrower are excellent and unquestioned.
Position of company in its industry and in its community is excellent. High
liquidity, minimum risk, good ratios, low handling cost.
CLASS B. Desirable loans of somewhat less stature than Class
A, but with strong financial statements, and/or secured by strong collateral
position. Probability of serious financial deterioration is unlikely.
CLASS C. Satisfactory loans of average or mediocre strength;
having some deficiency or vulnerability to changing economic or industry
conditions, but currently collectible. Secured loans lacking in margin or
liquidity. Loans to individuals, perhaps supported in dollars of net worth but
whose supporting assets are illiquid. Sometimes used as a temporary
classification for untested borrowers or where information is incomplete.
CLASS O. First classification that has relevancy to bank
examiners. A warning classification which portrays one or more deficiencies that
cannot be tolerated even in the short run. Regulatory classification "Other
Assets Especially Mentioned ("OAEM").
CLASS D. Substandard credits for their steadiness or other
deficient nature. Company or individual loans with no evident future, which are
unfavorable, affecting loan-to-deposit ratio or cost of funds. Heavy leveraged
accounts, with no immediate relief or compensating features. Accounts requiring
attention of loan officer due to lack of borrower cooperation.
CLASS E. Doubtful credits with weaknesses demanding full
attention of loan officer. Collection or liquidation in full is highly
questionable. Serious problems exist to the point where a partial loss of
principal is likely.
CLASS F. Loans where an element of probable loss is present.
Critical credits requiring immediate and drastic action. Loan should probably be
charged off. Bank examiners will probably classify such loans as "Loss."
Loans graded "D", "E" or "F" will automatically be referred to
management for inclusion on the Company's "watch list." The Company also employs
an outside bank consulting firm to perform an independent annual loan review.
- 10 -
<PAGE> 11
Nonperforming loans are placed on non-accrual basis of accounting if
(i) there is deterioration in the financial condition of the borrower; (ii)
payment in full of principal or interest is not expected; or (iii) principal or
interest has been in default for 90 days or more, unless the obligation is well
secured and in the process of collection. The three categories of nonperforming
loans are non-accrual status loans, renegotiated debt, and loans in Chapter 13
bankruptcy unless a repayment schedule is adopted that pays out the loan.
CREDIT RISK MANAGEMENT AND RESERVE FOR LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards is to
manage the risk of loss and provide for income generation through pricing
policies. To effectuate this policy, management meets weekly to review and
approve loans and meets monthly to review investments.
The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as the Company's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.
The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time they are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting reserve
for loan losses is viewed by management as a single, unallocated reserve
available for all loans and, in management's opinion, is adequate to provide for
reasonably foreseeable potential loan losses. Rules and formulas relative to the
adequacy of the reserve, although useful as guidelines to management, are not
rigidly applied. The reserve for loan losses was $630,000 at year end 1998, or
0.7% of loans outstanding, net of unearned income, compared to $355,000 or 0.7%
at year end 1997. The following table presents data related to the Company's
reserve for loan losses for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period .......................................................... $355 $130
Charge offs:
Commercial ............................................................................ -- --
Real estate mortgage .................................................................. -- --
Installment loans to individuals ...................................................... -- 1
---- ----
Recoveries:
Commercial ............................................................................ -- --
Real estate mortgage .................................................................. -- --
Installment loans to individuals ...................................................... -- --
---- ----
Net charge offs
Additions to reserve charged to operations .............................................. 275 226
---- ----
Balance at end of period ................................................................ $630 $355
==== ====
Ratio of net charge offs during the period to average loans outstanding during the period 0.0% 0.0%
Average allowance for loan losses to average total loans ................................ 0.7% 0.7%
</TABLE>
- 11 -
<PAGE> 12
At December 31, 1998 and 1997, the allowance for loan losses was
allocated as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997
------------------------------------- ---------------------------------------
Percent of loans in each Percent of loans in each
Amount category to total loans Amount category to total loans
------ ----------------------- ------ -----------------------
<S> <C> <C> <C> <C>
Commercial ......... $ 15 2% $ 12 12%
Real estate mortgage 460 73% 288 81%
All other .......... 155 25% 55 7%
---- --- ---- ---
Total ........... $630 100% $355 100%
==== === ==== ===
</TABLE>
The allocation of the allowance is presented based in part on
evaluations of past history and composition of the loan portfolio. Since these
factors are subject to change, the current allocation of the allowance is not
necessarily indicative of the breakdown of future losses.
The following table sets forth information with respect to
nonperforming loans of the Company on the dates indicated. Accrual of interest
is discontinued when there is reasonable doubt as to the full, timely
collections of interest or principal. When a loan becomes contractually past due
90 days with respect to interest or principal, it is reviewed and a
determination is made as to whether it should be placed on nonaccrual status.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in accordance
with the new terms.
<TABLE>
<CAPTION>
Nonperforming assets (Dollars in thousands): December 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Nonaccrual loans...................................................................... -- --
Restructured loans.................................................................... -- --
Other loans past due 90 days or more to principal or interest payments................ $ 2 $242
Nonperforming loans as a percentage of net loans before allowance for loan losses..... 0.00% 0.48%
Allowance for loan losses as a percentage of nonperforming loans...................... 31,500% 248%
</TABLE>
CAPITAL RESOURCES/LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. The Company's liquidity, represented by cash and
cash due from banks, is a result of its operating, investing and financing
activities. In order to insure funds are available at all times, the Company
devotes resources to projecting on a monthly basis the amount of funds which
will be required and maintains relationships with a diversified customer base so
funds are accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets which are generally matched
to correspond to the maturity of liabilities.
Although the Company has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Neither the Company
nor the Company is subject to any specific liquidity requirements imposed by
regulatory orders. Management believes its liquidity ratios meet or exceed
regulatory guidelines. Management does not know of any trends or demands which
are reasonably likely to result in liquidity increasing or decreasing in any
material manner.
The following table sets forth liquidity ratios for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------
<S> <C> <C>
Average loans to average deposits........ 81.5% 63.7%
</TABLE>
Impact of Inflation and Changing Prices. The consolidated financial
statements and related consolidated financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the
- 12 -
<PAGE> 13
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time and due to inflation. The impact of inflation on operations of
the Company is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of the Company's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures used
by management to monitor the results of these efforts are the ratios of average
equity to average assets, average tangible equity to average tangible assets,
and average equity to net loans.
Capital guidelines require the maintenance of an amount of capital
based on risk-adjusted assets so that categories of assets with potentially
higher credit risk will require more capital backing than assets with lower
risk. In addition, financial institutions and their holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common stockholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires financial institutions
to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital and
prepare a leveraged computation comparing Tier I capital to total average assets
less goodwill.
The Company's consolidated capital ratios are set forth below.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Stockholders' common equity ............................................. $ 11,570 $10,554
Less unrealized (loss) gain in securities ............................... 40 25
Less disallowed intangibles ............................................. -- --
-------- -------
Total Tier I capital ........................................... 11,530 10,529
Tier II capital:
Qualifying allowance for loan losses .................................... 919 566
-------- -------
Total capital .................................................. 12,449 11,095
Risk-adjusted assets ............................................................. 74,160 45,237
Quarterly average assets ......................................................... 108,452 77,462
RATIOS:
Tier I capital to risk-adjusted assets ........................................... 15.55% 23.28%
Tier II capital to risk-adjusted assets .......................................... 1.24% 1.25%
Total capital to risk-adjusted assets ............................................ 16.79% 24.53%
Leverage--Tier I capital to quarterly average assets less disallowed intangibles 10.63% 13.60%
</TABLE>
On December 31, 1998, the Company exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.
- 13 -
<PAGE> 14
SUPERVISION AND REGULATION
GENERAL
As a Tennessee-chartered, federally-insured savings bank, the Savings
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Savings Bank is regularly
examined by the FDIC and the Department and files periodic reports concerning
its activities and financial conditions with its regulators. The Savings Bank's
relationship with depositors and borrowers is also regulated to a great extent
by both federal law and the laws of the State of Tennessee, especially in such
matters as the ownership of accounts and the form and content of mortgage
documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Savings Bank, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice. Both the Department and the FDIC have
the authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
TENNESSEE SUPERVISION AND REGULATION
As a Tennessee-chartered savings bank, the Savings Bank is subject to
various state laws and regulations which limit the amount that can be loaned to
a single borrower, the type of permissible investments, and geographic
expansion, among other things. The Savings Bank must submit an application and
receive the approval of the Department before opening a new branch office or
merging with another financial institution. The Commissioner of the Department
("Commissioner") has the authority to enforce state laws and regulations by
ordering a director, officer or employee of the Savings Bank to cease and desist
from violating a law or regulation and from engaging in unsafe or unsound
banking practices.
The Savings Bank is chartered under the Savings Bank Chartering Act of
1991 ("Savings Bank Act"). The Department has not yet promulgated any
regulations governing the operation of savings banks. However, the Savings Bank
Act contains a "parity provision" that authorizes the Department to promulgate
regulations authorizing savings banks to make any investment or engage in any
activity that is permissible for federally-chartered savings banks, subject to
the same limitations applicable to federally-chartered savings bank, upon the
Commissioner's determination that Tennessee-chartered savings banks would be at
a competitive disadvantage absent such authorization.
FEDERAL REGULATION
Deposit Insurance. The Company's deposit accounts are insured by the
FDIC up to applicable limits by the BIF. The BIF was designated as an insurance
fund pursuant to the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"). As insurer, the FDIC issues regulations, conducts
examinations, requires the filing of reports and generally supervises and
regulates the operations of state-chartered banks that are not members of the
Federal Reserve System. FDIC approval is required prior to any merger or
consolidation involving state, nonmember banks, or the establishment or
relocation of an office facility thereof. FDIC supervision and regulation is
intended primarily for the protection of depositors and the FDIC insurance
funds.
Pursuant to the Federal Deposit Insurance Act ("FDIA"), as amended by
FIRREA, all BIF-insured banks must pay semiannual insurance assessments to
recapitalize the BIF to a 1.25% of insured deposits ratio. In August 1995, the
FDIC substantially reduced deposit insurance premiums for well-capitalized,
well-managed BIF-insured institutions to the lowest assessment rate of 4 basis
points per $100 of assessable deposits. The BIF premium reduction became
effective in September 1995. Any insured bank which does not operate in
accordance with or conform to FDIC regulations, policies and directives may be
sanctioned for non-compliance. For example, proceedings may be instituted
against any insured bank or any director, officer or employee of such bank who
engages in unsafe and unsound practices, including the violation of applicable
laws and regulations. The FDIC has the authority to terminate deposit insurance
pursuant to procedures established for that purpose.
At December 31, 1997, the Company's deposit base for purposes of FDIC
premiums was $72,245,000. The Company paid FDIC insurance premiums of $0 in
1996; and $4,552 in 1997.
- 14 -
<PAGE> 15
Prompt Corrective Action. Under Section 38 of the FDIA, as amended by
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution shall
be deemed to be: (i) "well capitalized" if it has a total risk-based capital
ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more,
has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to
specified requirements to met and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio that is less
than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well-capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as it were in the next lower
category if the institution is an unsafe or unsound condition or engaging in an
unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which set forth various mandatory and discretionary
restrictions on its operations.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies have adopted
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required by
the FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
adopted asset quality and earnings standards which are part of the Guidelines.
Under the regulations, if the FDIC determines that the Company fails to meet any
standards prescribed by the Guidelines, the agency may require the Company to
submit to the agency an acceptable plan to achieve compliance with the standard,
as required by the FDIA. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable
to FDIC-regulated banks and savings bank require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3.0% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100-200 basis points about
the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio
of not less than 4% for banks that are not highly rated or are anticipating or
experiencing significant growth.
FDIC capital regulations require higher capital levels for banks which
exhibit more than a moderate degree of risk or exhibit other characteristics
which necessitate that higher than minimum levels of capital be maintained. Any
insured bank with a Tier 1 capital to total assets ratio of less than 2% is
deemed to be operating in an unsafe and unsound condition pursuant to Section
8(a) of the FDIA unless the insured bank enters into a written agreement, to
which the FDIC is a party, to correct its capital deficiency. Insured banks
operating with Tier 1 capital levels below 2% (and which have not entered into a
written agreement) are subject to an insurance removal action. Insured banks
operating with lower than the prescribed
- 15 -
<PAGE> 16
minimum capital levels generally will not receive approval of applications
submitted to the FDIC. Also, inadequately capitalized state nonmember banks will
be subject to such administrative action as the FDIC deems necessary.
FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of
total capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk- weighted assets, all assets,
plus certain off balance sheet items, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset or
item. The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage requirement. The components of mandatory convertible
securities, term subordinated debt, intermediate-term preferred stock and
allowance for possible loan and lease losses. Allowance for possible loan and
lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of Tier 1 capital. The FDIC includes in
its evaluation of a bank's capital adequacy an assessment of risk-based capital
focusing principally on broad categories of credit risk. No measurement
framework for assessing the level of a bank's interest rate risk exposure has
been codified but, effective board and senior management oversight of the banks
tolerance for interest rate risk is required.
The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Specifically, the agencies determined that net unrealized
holding gains or losses on available for sale debt and equity securities should
not be included when calculating core and risk-based capital ratios.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weakness.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
The Company believes that, under the current regulations, the Savings
Bank has sufficient capital to meet its minimum capital requirements. However,
events beyond the control of the Savings Bank, such as a downturn in the economy
in areas where the Savings Bank has most of its loans, could adversely affect
future earnings and, consequently, the ability of the Savings Bank to meet its
capital requirements.
Activities and Investments of Insured State-Chartered Banks. Section 24
of the FDIA, as amended by the FDICIA, generally limits the activities and
equity investments of FDIC-insured, state-chartered banks so those that are
permissible for national banks. Under regulations dealing with equity
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (ir) acquiring or retaining majority interest in a
subsidiary, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investment may not exceed 2% of the bank's total
assets, (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. State law also provides
that the Savings Bank may invest in any investment permissible by federally
chartered savings banks, subject to the restrictions for such entities.
In addition, an insured state bank (i) that is located in a state which
authorized as September 30, 1991 investment in common or preferred stock listed
on a national securities exchange ("listed stock") or shares of a registered
investment company ("registered shares"), and (ii) which during the period
beginning September 30, 1990 through November 26, 1991 ("measurement period")
made or maintained investments in listed stocks and registered shares, may
retain whatever shares that were lawfully acquired or held prior to December 19,
1991 and continue to acquire listed stock and registered shares, provided that
the bank does not convert its charter to another form or undergo a change in
control. In order to acquire or retain any listed stock or registered shares,
however, the bank must file a one-time notice with the FDIC which meets
- 16 -
<PAGE> 17
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the banks is a member.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank or savings bank directly or indirectly engaged in any activity that is not
permitted for a national bank must cease the impermissible activity.
Loans-to-One-Borrower. The aggregate amount of loans that the Company
is permitted to make under applicable regulations to any one borrower, including
related entities, is the greater of 25% of unimpaired capital with Board
approval. Based on the Company's current capitalization of $11.6 million, the
Company's loans-to-one borrower limit is approximately $2.9 million.
Federal Reserve System. In 1980, Congress enacted legislation which
imposed Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or non-personal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits with
the regional Federal Reserve Bank. NOW accounts and other types of accounts that
permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any non-personal time deposits at a bank.
Community Reinvestment Act. The Company is also subject to the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a bank, to assess the bank's record in meeting the credit needs
of the community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution. As a component of its Community Reinvestment Act outreach, the
Company has instituted an affordable home loan program for first-time home
buyers and low to moderate income borrowers.
Interstate Banking. On September 29, 1994, the Federal government
enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "1994 Act"). The provisions of the 1994 Act became effective on September
29, 1995, at which time eligible bank holding companies in any state were
permitted, with Federal Reserve approval, to acquire organizations in any other
state. As such, all existing regional compacts and substantially all existing
regional limitations on interstate acquisitions of banking organizations have
been eliminated.
The 1994 Act also removed substantially all of the existing
prohibitions on interstate branching by banks. On and after June 1, 1997, a bank
operating in any state may establish one or more branches within any other state
without, as currently required, the establishment of a separate banking
structure within the other state. Interstate branching is allowed earlier than
the automatic phase-in date of June 1, 1997, as long as the legislatures of both
states involved have adopted statutes expressly permitting such branching to
take place at an earlier date.
Under the Tennessee Bank Reform Act of 1996 that amended the Tennessee
Banking Act, the acquisition of Tennessee banks and bank holding companies by,
and mergers with, out-of-state banks and bank holding companies is permitted
with the prior approval of the Department subject to the requirements of the
Act. An amendment to the Bank Reform Act of 1996, effective June 1, 1997, also
permits Tennessee state banks and savings banks, with prior approval of the
Department, to operate branches outside the state of Tennessee. Although this
legislation has the potential to increase the number of competitors in the
market place of the Company, the Company cannot predict the actual impact of
such legislation on the competitive position of the Company. Out-of-state banks
may not, under current Tennessee law, branch de novo into Tennessee nor may
out-of-state banks or bank holding companies enter Tennessee through
"branch-only" acquisition.
- 17 -
<PAGE> 18
CHANGE IN CONTROL RESTRICTIONS
Statutory Provisions. The Change in Bank Control Act requires the
written consent of the FDIC be obtained prior to any person or company acquiring
"control" of a state-chartered savings bank. Tennessee law also requires the
prior written consent of the Department to acquire control of a
Tennessee-chartered savings bank. Upon acquiring control, a company will be
deemed to be a bank holding company and must register with the Federal Reserve.
Conclusive control is presumed to exist if, among other things, an individual or
company acquires more than 25% of any class of voting stock of the Company.
Rebuttable control is presumed to exist if, among other things, a person
acquires more than 10% of any class of voting stock and the issuer's securities
are registered under Section 12 of the Exchange Act (the Common Stock is not
expected to be so registered) or the person would be the single largest
stockholder. Restrictions applicable to the operations of a bank holding company
and conditions that may be imposed by the Federal Reserve in connection with its
approval of a company to become a bank holding company may deter companies from
seeking to obtain control of the Company.
Other. While not directly restricting efforts to acquire control of the
Company, certain other characteristics of the Company's organization may
discourage attempts to acquire control of the Company. The Company's By-Laws
provide that approximately one-third of its Board of Directors are elected each
year (see "MANAGEMENT--Classification of Directors"), thereby making it more
difficult for a potential acquirer of control of the Company to replace the
members of the Board of Directors than it would be if directors were elected at
more frequent intervals or if a greater percentage of directors were elected at
any one time.
The restrictions contained in the Change of Bank Control Act and the
regulations promulgated thereunder will apply to acquisitions of the Common
Stock in the Offering. In addition, as a result of all of the foregoing
restrictions on acquisitions, the Company is a less attractive target for a
"takeover" attempt than other less-highly regulated companies generally.
Accordingly, these restrictions might deter offers to purchase the Company which
stockholders may consider to be in their best interests, and may make it more
difficult to remove incumbent management.
REGULATION OF BANK HOLDING COMPANIES
The Company is subject to regulation by the Federal Reserve and is
required to file with the Federal Reserve annual reports and other information
regarding its business operations and the business operations of its
subsidiaries. It is also subject to examination by the Federal Reserve and is
required to obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of voting shares of any bank if, after such
acquisition, it will own or control, directly or indirectly, more than 5% of the
voting stock of such bank. In addition, pursuant to the provisions of the Bank
Holding Company Act of 1956, as amended, and regulations promulgated by the
Federal Reserve thereunder, the bank holding company is only able to engage in,
or own or control companies that engage in, activities deemed by the Federal
Reserve to be so closely related to banking as to be a proper incident thereto.
DIVIDENDS
During the first three years of the Savings Bank's operation it has
been precluded from declaring and paying dividends in accordance with the
requirements of the Department. Earnings generated from the operation of the
Savings Bank have been used to finance the growth of the Savings Bank and have
not been paid to shareholders. Following the mandatory initial three-year
moratorium on the payment of dividends imposed by regulatory authorities, the
Directors will determine whether dividends on the Common Stock will be declared
and paid, taking into consideration the Company's operating results, financial
condition, tax considerations, future capital requirements and other relevant
factors. The Directors may declare a no-cash dividend if, after considering the
above factors, it appears prudent to do so. The Directors are not, however,
obligated to pay any such dividend and will only do so if it appears to be in
the best interest of the Company.
Tennessee law requires that dividends be paid only from retained
earnings (or undivided profits), except that dividends may be paid from capital
surplus with the prior, written consent of the Department. Tennessee laws
regulating savings banks require certain charges against and transfers from an
institution's undivided profits account before undivided profits can be made
available for the payment of dividends. The Department generally prohibits a
newly chartered institution from paying dividends during its first three years
of operation without the Department's prior approval.
- 18 -
<PAGE> 19
MONETARY POLICY
The Company, like other depository institutions, is affected by the
monetary policies implemented by the Federal Reserve. The Federal Reserve has
the power to restrict or expand the money supply through open market operations,
including the purchase and sale of government securities and the adjustment of
reserve requirements. These actions may result in significant fluctuations in
market interest rates, which could adversely affect the operations of the
Company, such as its ability to make loans and attract deposits, as well as
market demand for loans.
CAPITAL ADEQUACY
See "Capital Adequacy" above for a discussion of bank regulatory
agencies' capital adequacy requirements.
RECENT LEGISLATION
Bills are presently pending before the United States Congress, and
additional bills may be introduced in the future in the Congress and the
Tennessee General Assembly, to alter the structure, regulation and competitive
relationships of the nation's financial institutions. On December 19, 1991,
President Bush signed the Federal Deposit Insurance Corporation's Improvement
Act of 1991 ("FDICIA"), the principal initial effect of which was to permit the
Bank Insurance Fund (the "BIF") to borrow up to $30 billion from the U.S.
Treasury (to be repaid through deposit insurance premiums over 15 years) and to
permit the BIF to borrow working capital from the Federal Financing Bank in an
amount up to 90 percent of the value of the assets the FDIC has acquired from
failed banks, which it is estimated would yield approximately $40 billion in
working capital. The bill followed a year-long effort initiated by the Bush
Administration to enact major banking legislation. Virtually none of the
Administration's major systemic proposals, including nationwide interstate
banking and branching or ownership of financial institutions by commercial
entities, were included in the final bill. However, a number of additional
pervasive supervisory measures, some of which are described below, were included
in the FDICIA. The effect of these measures will be to a great extent dependent
on the manner in which bank regulatory authorities choose to enforce regulations
which have been recently issued pursuant to the FDICIA.
The additional supervisory powers and regulations mandated by the
FDICIA, include a "prompt corrective action" program based upon five regulatory
zones for banks, in which all banks are placed, largely based on their capital
positions. Regulators are permitted to take increasingly harsh action as a
bank's financial condition declines. Regulators are also empowered to place in
receivership or require the sale of a bank to another depository institution
when a bank's capital leverage ratio reaches two percent. Better capitalized
institutions are generally subject to less onerous regulation and supervision
than banks with lesser amounts of capital. The FDIC has adopted regulations
implementing the prompt corrective action provisions of the FDICIA, which place
financial institutions in the following five categories based upon
capitalization ratios: (1) a "well capitalized" institution has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least
6% and a leverage ratio of at least 5%; (2) an "adequately capitalized"
institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based
ratio of at least 4% and a leverage ratio of at least 4%; (3) an
"undercapitalized" institution has a total risk-based capital ratio of under 8%,
a Tier 1 risk-based capital ratio of under 4% or a leverage ratio of under 4%;
(4) a "significantly undercapitalized" institution has a total risk-based
capital ratio of under 6%, a Tier 1 risk-based ratio of under 3% or a leverage
ratio of under 3%; and (5) a "critically undercapitalized" institution has a
leverage ratio of 2% or less. Institutions in any of the three undercapitalized
categories would be prohibited from declaring dividends or making capital
distributions. The proposed regulations also establish procedures for
"downgrading" an institution to a lower capital category based on supervisory
factors other than capita. At March 31, 1998, under these regulations the
Company would be deemed to be a "well-capitalized" institution if solely viewed
on the basis of capital ratios. Various other sections of the FDICIA will impose
substantial new audit and reporting requirements and will increase the role of
independent accountants and outside directors. Set forth below is a list
containing certain significant provisions of the FDICIA:
(i) annual on-site examinations by regulators (except for smaller,
well-capitalized banks with high management ratings, which must be examined
every 18 months);
(ii) mandated annual independent audits by independent public
accountants and an independent audit committee of outside directors for
institutions with more than $500,000,000 in assets;
- 19 -
<PAGE> 20
(iii) new uniform disclosure requirements for interest rates and terms
of deposit accounts;
(iv) a requirement that the FDIC establish a risk-based deposit
insurance assessment system by 1994;
(v) authorization for the FDIC to impose one or more special
assessments on its insured banks to recapitalize the BIF;
(vi) a requirement that each institution submit to its primary
regulators an annual report on its financial condition and management, which
report will be available to the public;
(vii) a ban on the acceptance of brokered deposits except by well
capitalized institutions and by adequately capitalized institutions with the
permission of the FDIC and the regulation of the brokered deposit market by the
FDIC;
(viii) restrictions on the activities engaged in by state banks and
their subsidiaries as principal, including insurance underwriting, to the same
activities permissible for national banks and their subsidiaries unless the
state bank is well capitalized and a determination is made by the FDIC that the
activities do not pose a significant risk to the insurance fund;
(ix) a review by each regulatory agency of accounting principles
applicable to reports or statements required to be filed with federal banking
agencies and a mandate to devise uniform requirements for all such filings;
(x) the institution by each regulatory agency of noncapital safety and
soundness standards for each institution it regulates which cover (1) internal
controls, (2) loan documentation, (3) credit underwriting, (4) interest rate
expense, (5) asset growth, (6) compensation, fees and benefits paid to
employees, officers and directors, (7) operational and managerial standards, and
(8) asset quality, earnings and stock valuation standards for preserving a
minimum ratio of market value to book value for publicly traded shares (if
feasible);
(xi) uniform regulations regarding real estate lending; and
(xii) a review by each regulatory agency of the risk-based capital
rules to ensure they take into account adequate interest rate risk,
concentration of credit risk, and the risks of non-traditional activities.
EMPLOYEES
At December 31, 1998, the Company had a total of 44 employees with 29
of those employed on a full-time basis.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal office is located at 1907 North Roan Street,
Johnson City, Washington County, Tennessee. The Savings Bank owns the land and
the approximately 36,000 square foot building, 18,000 feet of which is leasable
space. This property serves as the main office of the Savings Bank. The Savings
Bank also operates branch offices at 3300 Browns Mill Road and 612 West Walnut
Street, Johnson City, Tennessee; and 240 West Center Street, Kingsport, Sullivan
County, Tennessee. The Savings Bank owns the land and the buildings in
Kingsport. The Savings Bank leases the Browns Mill Road office from Allen
Properties, Inc. Charles E. Allen, Jr., chairman and chief financial officer of
the Savings Bank is a principal of Allen Properties, Inc. The lease was
negotiated at arm's length and was approved by the Department and the FDIC. Rent
for the 2,625 square foot building for the first three years is $30,600
annually. This amount includes taxes, insurance and maintenance costs. The West
Walnut branch is owned by the Savings Bank.
All facilities have improvements including drive-through tellers,
vaults, night depository and certain facilities have safe deposit boxes.
- 20 -
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
the Savings Bank is a party or of which any of their properties are subject; nor
are there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
- 21 -
<PAGE> 22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the shares.
Management of the Company is aware that isolated transactions in the Common
Stock occur from time to time. To the best of the knowledge of the Company the
most recent transactions in the Common Stock were in February 1998 and were for
prices ranging from $11.00 to $12.00 per share.
There were 938 holders of record of the Common Stock as of March 15,
1999.
The Company currently intends to retain its earnings, if any, for use
in the business and does not anticipate paying any cash dividends in the
foreseeable future. The board of directors cannot predict when such dividends,
if any, will ever be made. The payment of dividends, if any, shall at all times
be subject to the payment of the Company's expenses, the maintenance of
reasonable working capital and risk reserves, and minimum capitalization
requirements for banks.
ITEM 6. 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 YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
EARNINGS REVIEW
Total net income of the Company for the year ended December 31, 1998 was
$496,489, an increase of $439,454 over the year ended December 31, 1997 total
net income of $57,035. Net income per common share was $0.44 compared to per
share income of $0.05 in 1997. Return on average assets was 0.49% and the return
on average equity was 4.42% for the year period ended December 31, 1998.
Operating results in 1998 reflected higher net interest income and noninterest
income. Net interest income of $2.8 million for the year ended December 31, 1998
was up 66% over the 1997 period. Loans increased 71% and deposits increased 33%.
The 1998 provision for possible loan losses was $275,127. Noninterest income
increased $71,556, or 21%, with other fees and service charges and net rental
income responsible for most of the increase over the year ended December 31,
1997. Noninterest expense was $2.4 million for the 1998 period, an increase of
36% over the 1997 period, primarily resulting from increased salaries and
benefits, data processing and other expenses as a result of the opening of an
additional location and the overall growth of the Company.
NET INTEREST INCOME AND MARGIN
Net interest income increased $1.1 million or 66% for the year ended December
31, 1998 to $2.8 million compared to $1.7 million for the year ended December
31, 1997. Total loans outstanding increased $35.7 million or 71% over total
loans at December 31, 1997.
Average deposits increased by 54% or $28.6 million to $81.8 million in 1998
compared to $53.2 million in 1997. The rate paid on average interest-bearing
liabilities decreased 16 basis points during the year ended December 31, 1998 to
5.44%.
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1998, the provision for possible loan losses
was $275,127. There were $277 in charge-offs during the year ended December 31,
1998 and $1,335 for the year ended December 31, 1997. The allowance
- 22 -
<PAGE> 23
for possible loan losses represented 0.73% of total loans, net of mortgage loans
held-for-sale, at December 31, 1998, compared to 0.70% at December 31, 1997. A
mortgage loan of $246,000 was made on the sale of real estate owned.
PROVISION FOR INCOME TAXES
For the year ended December 31, 1998, the provision for federal income taxes was
$52,206, an increase of $57,283 from 1997, primarily due to the increase in
income before income taxes.
NONINTEREST INCOME
The Company's noninterest income was $411,155 during the year ended December 31,
1998, an increase of $71,556 or 21% over the comparable 1997 period. The
increase was attributable to increases in other fees and service charges, net
gain on loans sold, insurance commission and income, and net rental income of
$89,217, $31,042, $2,344, and $65,491, respectively, which were offset by
decreases in other income and net gain on sale and maturity of securities of
$7,262 and $109,276, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $2.4 million for the period ending December 31,
1998, an increase of $642,298. Compensation and related benefits of $1.0 million
accounted for 44% of the total compared to $782,029 or 44% for the year ended
December 31, 1997.
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FEBRUARY 13, 1996
(DATE OF INCEPTION) TO DECEMBER 31, 1996
EARNINGS REVIEW
Total net income of the Company for the year ended December 31, 1997 was $57,035
compared to a loss of $(450,732) for the period from inception to December 31,
1996. Net income per common share was $0.05 compared to $(0.74) in 1996. Return
on average assets was 0.09% and the return on average equity was 0.70% for the
year ended December 31, 1997.
Operating results in 1997 reflected higher net interest income and noninterest
income. Net interest income of $1.7 million for the year ended December 31, 1997
was up 231% over the 1996 period. The 1997 provision for possible loan losses
was $226,095. Noninterest income increased $255,844, or 305%, with significant
increases in all categories of other income including other fees and service
charges, net gain on sale and maturity of securities, insurance commission
income and rental income. Noninterest expense was $1.8 million for the 1997
period, an increase of 80% over the 1996 period, primarily resulting from
increased salaries and benefits. Expenses also increased due to the opening of
an additional location.
NET INTEREST INCOME AND MARGIN
Net interest income increased $1.2 million or 231% for the year ended December
31, 1997 to $1.7 million compared to $512,773 in the period ended December 31,
1996.
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1997, the provision for possible loan losses
was $226,095. There were $1,335 charge-offs during the year ended December 31,
1997 and no charge-offs for the period ended December 31, 1996. The allowance
for possible loan losses represented .70% of total loans, net of mortgage loans
held-for-sale, at December 31, 1997, compared to .76% at December 31, 1996.
- 23 -
<PAGE> 24
PROVISION FOR INCOME TAXES
For the year ended December 31, 1997, the provision for federal income taxes was
($5,077,) an increase of $58,366 from ($63,443) in 1996, primarily due to an
increased effective tax rate in 1997 and the use of the NOL carryforward.
NONINTEREST INCOME
The Company's noninterest income was $339,599 during the year ended December 31,
1997, an increase of $255,844 or 305% over the comparable 1996 period. The
increase was attributable to increases in all categories of noninterest income.
NONINTEREST EXPENSE
Noninterest expense totaled $1.8 million for the year ended December 31, 1997,
an increase of $780,680. Compensation and related benefits of $782,029 accounted
for 44% of the total compared to $482,684 or 49% for the period ended December
31, 1996.
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 $12.2 million at December 31, 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 December 31, 1998,
all of the investment securities were held as available-for-sale compared to
$6.5 million at December 31, 1997.
LOANS
Loans outstanding totaled $86.1 million at December 31, 1998. This represented
an increase of 71% from the December 31, 1997 outstanding loans of $50.3
million.
Consumer loans increased to $7.7 million at December 31, 1998, an increase of
62% from $4.8 million at December 31, 1997. Real estate construction lending
totaled $22.0 million and $11.9 million at December 31, 1998 and 1997,
respectively. Commercial loans of $26.6 million at December 31, 1998 increased
117% from $12.3 million at December 31, 1997.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at December 31, 1998 and
December 31, 1997. The allowance for possible loan losses was $630,324 and
$355,474 at December 31, 1998 and 1997, respectively. Management believes the
allowance for possible loan losses is adequate to provide for potential loan
losses.
DEPOSITS
Total deposits at December 31, 1998 of $96.4 million, represented an increase of
$24.1 million or a 33% increase from $72.2 million at December 31, 1997.
Non-interest bearing demand deposits totaled $5.6 million at December 31, 1998,
a decrease of $1.5 million from December 31, 1997. Interest bearing demand and
money market deposits increased $9.7 million to $18.4 million at December 31,
1998. Savings deposits increased $2.8 million to $6.1 million at December 31,
1998. Time deposits of $66.3 million increased from $53.2 million at December
31, 1997.
- 24 -
<PAGE> 25
CAPITAL
Equity capital at December 31, 1998 was $11.6 million, an increase of $0.7
million from $10.9 million at December 31, 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 December 31, 1998, all capital ratios were in excess of the regulatory
minimums, with the Company's Tier 1, total risk-based and leverage ratio of
16.24%, 14.98% and 9.44%, 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 and a line of credit for the Federal Home Loan Bank of Cincinnati
totaling $12.9 million at December 31, 1998.
EFFECTS OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation. In the current interest rate
environment, the liquidity and maturity structures of the Company's assets and
liabilities are critical to maintenance of acceptable performance levels.
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 a 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.
- 25 -
<PAGE> 26
The Company has been assessing its state of readiness by evaluating its
information technology ("IT") and non- IT systems. IT systems commonly include
data processing, accounting and telephone systems. with respect to its IT
systems, the Company estimates that its Year 2000 identification, assessment and
remediation efforts are substantial complete. during 1999, further testing will
be carried out in order to ensure that all systems are working properly. the
company has assessed its Year 2000 status in regard to non-IT systems and has
determined that no material risk exists.
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 assurance from these vendors that they expect to address all their
significant Year 2000 issues on a timely basis. With respect to significant
borrowers and depositors, the Company does not anticipate any material Year 2000
issues.
The Company has expended $15,000 in connection with its Year 2000
readiness and believes the cost of its further Year 2000 identification,
assessment, remediation and testing efforts will not exceed $10,000.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are set forth
below.
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<PAGE> 27
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
INDEX TO AUDIT REPORT
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS: PAGES
-----
<S> <C>
Independent Auditor's Report 7
Consolidated Statements of Financial Condition 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in Stockholders' Equity 30
Consolidated Statements of Cash Flows 31-32
Notes to Consolidated Financial Statements 33-35
Statement of Management Responsibility 56
</TABLE>
<PAGE> 28
<TABLE>
<S> <C> <C>
BAYLOR AND BACKUS
D.G. LEONARD, CPA CERTIFIED PUBLIC ACCOUNTANTS E.N. BACKUS, CPA (1907-1971)
R.F. VANHOY, CPA 2112 NORTH ROAN STREET T.E. HULSE, CPA (1927-1975)
------------ FIRST TENNESSEE BUILDING, EIGHTH FLOOR E.R. BAYLOR, CPA (1894-1982)
P.O. BOX 1736 A.C. NICKELL, CPA (1921-1983)
T.S. JOHNSON, CPA JOHNSON CITY, TENNESSEE 37605 W.E. MORELOCK, CPA (1927-1985)
C.J. STAMPFLI, CPA (423) 282-9000 H.L. SIENKNECHT, CPA (1917-1990)
</TABLE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
the Board of Directors
State of Franklin Bancshares, Inc.
Johnson City, Tennessee
We have audited the accompanying consolidated statements of financial condition
of State of Franklin Bancshares, Inc. (a Tennessee corporation) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the years ended
December 31, 1998 and 1997, and the period February 15, 1996 (date of inception)
to December 31, 1996. These consolidated financial statements are the
responsibility of State of Franklin Bancshares, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of State of Franklin
Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998 and 1997, and the period February 15, 1996 (date of inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
BAYLOR AND BACKUS
Certified Public Accountants
Johnson City, Tennessee
February 26, 1999
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS & TENNESSEE
SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
- 27 -
<PAGE> 29
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
A S S E T S
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash and Cash Equivalents 13,928,172 12,415,800
Investments - Held-To-Maturity
(Estimated Market 1998 - $-0-)
(Estimated Market 1997 - $10,023,214) -- 10,000,000
Investments - Available-for-Sale 12,248,572 6,462,901
Loans Receivable, Net 86,104,974 50,374,093
Accrued Interest Receivable, Net 685,963 400,760
Land, Buildings and Equipment at Cost Less
Accumulated Depreciation of $347,134 in 1998
and $146,286 in 1997 4,117,351 3,568,281
Prepaid Expense and Accounts Receivable 48,218 80,110
Receivable from ESOP 108,286 --
FHLB Stock 471,200 --
Leases Receivable, Net 120,999 --
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 186,946 55,445
----------- -----------
Total Assets 118,035,681 83,372,390
=========== ===========
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 96,364,077 72,243,884
Advances by Borrowers for Taxes and Insurance 98,784 59,911
Accrued Interest on Deposits 103,769 43,469
Accounts Payable and Accrued Expenses 189,379 122,026
Notes Payable 687,925 --
FHLB Advances 9,000,000 --
Deferred Gain on REO 21,448 --
----------- -----------
Total Liabilities 106,465,382 72,469,290
----------- -----------
Stockholders' Equity:
Common Stock, $1.00 Par Value,
Authorized: 3,000,000 Shares; Issued: 1,180,152
Shares at December 31, 1998 and 1,111,280
Shares at December 31, 1997 1,180,152 1,111,280
Common Stock Subscribed 6,996 --
Paid-In Capital 10,905,359 10,160,136
Accumulated Other Comprehensive Income 39,820 25,381
Retained Earnings 102,792 (393,697)
Less: Employee Stock Ownership (664,820) --
----------- -----------
Total Stockholders' Equity 11,570,299 10,903,100
----------- -----------
Total Liabilities and Stockholders'
Equity 118,035,681 83,372,390
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 28 -
<PAGE> 30
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND
THE PERIOD FEBRUARY 15, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest Income
Interest on Loans 5,756,736 2,729,255 570,212
Interest on Cash Equivalents and Investments 1,820,032 1,946,194 629,918
--------- --------- ---------
Total Interest Income 7,576,768 4,675,449 1,200,130
--------- --------- ---------
Interest Expense
Interest on Deposits 4,457,203 2,975,541 687,357
Other Interest 303,932 786 --
--------- --------- ---------
Total Interest Expense 4,761,135 2,976,327 687,357
--------- --------- ---------
Net Interest Income Before Provision for Loan Losses 2,815,633 1,699,122 512,773
Provision for Loan Losses (275,127) (226,095) (130,715)
--------- --------- ---------
Net Interest Income After Provision for Loan Losses 2,540,506 1,473,027 382,058
--------- --------- ---------
Other Income
Other Fees and Service Charges 176,455 87,238 17,557
Net Gain on Loans Sold 46,180 15,138 --
Net Gain on Sale and Maturity of Securities 38,769 148,045 58,125
Insurance Commission Income 37,120 34,776 --
Rental Income, Net 102,330 36,839 --
Other 10,301 17,563 8,073
--------- --------- ---------
Total Other Income 411,155 339,599 83,755
--------- --------- ---------
Other Expenses
Compensation and Related Benefits 1,048,393 782,029 482,684
Occupancy Expenses 246,437 190,762 45,658
Furniture and Equipment Expenses 183,905 98,439 45,740
Advertising 118,102 132,316 100,342
Data Processing Expense 218,251 121,240 53,107
Other 587,878 435,882 252,457
--------- --------- ---------
Total Other Expenses 2,402,966 1,760,668 979,988
--------- --------- ---------
Income (Loss) Before Income Taxes 548,695 51,958 (514,175)
Provision for Income Taxes (52,206) 5,077 63,443
--------- --------- ---------
Net Income (Loss) 496,489 57,035 (450,732)
========= ========= =========
Basic and Diluted Earnings (Loss) Per Share 0.44 0.05 (0.74)
==== ==== ====
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 29 -
<PAGE> 31
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND
THE PERIOD FEBRUARY 15, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Accumulated
Common Other Employee
Common Stock Paid-In Comprehensive Retained Stock
Stock Subscribed Capital Income Earnings Ownership Total
--------- ---------- ---------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Proceeds
from Initial Stock Offering 610,000 -- 5,230,415 -- -- -- 5,840,415
----------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period -- -- -- 58,997 -- -- 58,997
Net Loss -- -- -- -- (450,732) -- (450,732)
----------
Total Comprehensive Income -- -- -- -- -- -- (391,735)
--------- ----- ---------- ------ ------- -------- ----------
Balance at December 31, 1996 610,000 -- 5,230,415 58,997 (450,732) -- 5,448,680
----------
Net Proceeds
from Secondary Stock Offering 501,280 -- 4,929,721 -- -- -- 5,431,001
----------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $61,152
Income Tax) -- -- -- 59,709 -- -- 59,709
Less:
Reclassification Adjustment
(Net of $48,076
Income Tax) -- -- -- (93,325) -- -- (93,325)
----------
-- -- -- -- -- -- (33,616)
Net Income -- -- -- -- 57,035 -- 57,035
----------
Total Comprehensive Income -- -- -- -- -- -- 23,419
--------- ----- ---------- ------ ------- -------- ----------
Balance at December 31, 1997 1,111,280 -- 10,160,136 25,381 (393,697) -- 10,903,100
----------
Net Proceeds
from Sale of Stock 68,872 6,996 745,223 -- -- (700,000) 121,091
----------
ESOP Shares Allocated -- -- -- -- -- 35,180 35,180
----------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $20,496
Income Tax) -- -- -- 39,820 -- -- 39,820
Less:
Reclassification Adjustment
(Net of $14,520
Income Tax) -- -- -- (25,381) -- -- (25,381)
----------
-- -- -- -- -- -- 14,439
Net Income -- -- -- -- 496,489 -- 496,489
----------
Total Comprehensive Income -- -- -- -- -- -- 510,928
--------- ----- ---------- ------ ------- -------- ----------
Balance at December 31, 1998 1,180,152 6,996 10,905,359 39,820 102,792 (664,820) 11,570,299
========= ===== ========== ====== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 30 -
<PAGE> 32
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND
THE PERIOD FEBRUARY 15, 1996 (DATE OF INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) 496,489 57,035 (450,732)
Items Not Affecting Cash and Cash Equivalents:
Depreciation 200,848 107,624 38,662
(Increase) in Accrued Interest (285,203) (238,330) (162,430)
Deferred Tax Assets (139,229) (5,077) (63,443)
Provisions for Loan Losses, Net 274,850 224,759 130,715
(Increase) Decrease in Prepaid Expenses
and Accounts Receivable 568 (44,510) (35,600)
Increase in Interest Payable 60,300 21,845 21,623
Increase (Decrease) in Accounts Payable
and Accrued Expenses 67,353 (180,007) 302,033
Increase in Deferred Loan Fees, Net 14,873 35,042 17,647
(Gain) on Sale of Investments (38,769) (148,045) (58,125)
Discount Accretion (9,097) (23,559) --
Earned ESOP Shares 35,180 -- --
FHLB Stock Dividends (20,359) -- --
(Increase) in Leases Receivable, Net (120,999) -- --
----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities 536,805 (193,223) (259,650)
----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of Investments (20,233,390) (16,284,843) (20,095,654)
Proceeds from Maturities of Held-to-Maturity Investments 10,000,000 -- 2,166,002
Proceeds from Sale of Available-for-Sale Investments 6,874,235 12,683,359 3,514,062
Proceeds from Maturities of Available-for-Sale Investments 7,500,000 1,500,000 250,000
Principal Payments on Mortgage-Backed Securities
Available-for-Sale 143,676 72,359 --
Increase in Loans Receivable, Net (35,999,155) (33,680,751) (17,101,505)
Purchases of Premises and Equipment (749,918) (2,068,063) (1,646,504)
Investment in Service Bureau -- -- (15,000)
Purchase of FHLB Stock (451,000) -- --
----------- ----------- -----------
Net Cash Used by Investing Activities (32,915,552) (37,777,939) (32,928,599)
----------- ----------- -----------
</TABLE>
- 31 -
<PAGE> 33
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net Increase in Deposits 24,120,193 38,026,675 34,217,209
Net Increase in Advances by Borrowers
for Taxes and Insurance 38,873 40,303 19,608
Issuance of Common Stock, Net 55,483 5,431,001 6,100,000
Organization Costs (11,355) -- (259,585)
Proceeds from Debt 10,300,000 -- --
Repayments of Debt (612,075) -- --
----------- ---------- -----------
Net Cash Provided by Financing Activities 33,891,119 43,497,979 40,077,232
----------- ---------- -----------
Net Increase in Cash and Cash Equivalents 1,512,372 5,526,817 6,888,983
Cash and Cash Equivalents at Beginning of Period 12,415,800 6,888,983 --
----------- ---------- -----------
Cash and Cash Equivalents at End of Period 13,928,172 12,415,800 6,888,983
=========== ========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities:
Acquisition of Operating Equipment for Contributed Capital -- 16,500 --
Acquisition of Real Estate Property through Foreclosure
of Related Loan 241,600 -- --
Origination of Mortgage Loan to Finance the Sale
of Foreclosed Real Estate 270,000 -- --
=========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Taxes 170,415 -- --
Interest 4,700,835 2,954,482 665,733
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
- 32 -
<PAGE> 34
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (Savings Bank). The
stockholders of the Savings Bank exchanged their shares for the
shares of the Company, whereby the Savings Bank became a wholly owned
subsidiary of the Company. State of Franklin Leasing Corporation
(Leasing Corp) 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. (Title Company) is the wholly owned subsidiary of the Savings
Bank.
The State of Franklin Savings Bank (Savings Bank), headquartered in
Johnson City, Tennessee, was incorporated on February 15, 1996, and
was the first Tennessee Chartered Stock Savings Bank under the
Savings Bank Chartering Act of 1991 (Savings Bank Act). The Savings
Bank's application to the Federal Deposit Insurance Corporation
(FDIC) to obtain federal deposit insurance for the Savings Bank's
deposit accounts under the Bank Insurance Fund (BIF) was approved on
February 9, 1996. The Tennessee Department of Financial Institutions
(Department) approved the Savings Bank's registration on February 15,
1996.
The Savings Bank's initial stock offering of 610,000 shares was
completely subscribed. All shares were purchased as of March 31,
1996, the end of the initial offering period.
A private placement offering was conducted in 1997 with 501,280
shares of subscribed common stock sold for $11 per share. The date of
the offering was April 7, 1997, expiring on September 30, 1997. Total
proceeds received related to the offering were $5,495,380 and a
receivable of $18,700 was due from Individual Retirement Account
transfers at December 31, 1997. Expenses relating to the offering
were $83,079. The net proceeds of $5,431,001 were used to provide
capital to support future operations.
The State of Franklin Savings Bank's primary market area is
Washington and Sullivan Counties and their immediate vicinity in
Tennessee. The Savings Bank has three branches in Johnson City,
Tennessee, and one branch in Kingsport, Tennessee.
The principal business of the Savings Bank is to accept savings
deposits from the general public and to invest such funds in
residential mortgage loans and, to a lesser extent, consumer and
commercial loans. The Savings Bank provides a wide variety of
financial services to its customers.
A summary of significant accounting policies of the Company follows:
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated. The consolidated financial
statements of the Company have been prepared in conformity with
generally accepted accounting principles and reflect the accrual
method of accounting. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on
loans.
- 33 -
<PAGE> 35
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 Continued
A substantial portion of the Savings Bank's loans are secured by real
estate in local markets. Accordingly, the ultimate collectibility of
a substantial portion of the Savings Bank's loan portfolio is
susceptible to changes in local market conditions.
Management believes the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process,
periodically review the Saving Bank's allowances for losses on loans.
Such agencies may require the Savings Bank to recognize additions to
the allowance based on their judgments about information available to
them at the time of their examination.
LAND, BUILDINGS AND EQUIPMENT
Land is carried at cost. Buildings and equipment, including leasehold
improvements, are carried at cost and are being depreciated over
their estimated useful lives on the straight line method. Repairs and
maintenance items are expensed and improvements are capitalized. Upon
retirement or sale, any gain or loss will be charged to operations.
CASH EQUIVALENTS
For the purposes of the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
unearned discounts.
Unearned discounts on installment loans are recognized as income over
the term of the loans using a method that approximates the interest
method.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment
over the lives of the related loans using the interest method.
Amortization of deferred loan fees is discontinued when a loan is
placed on nonaccrual status.
Loans are placed on nonaccrual when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income, and thereafter
interest is recognized only to the extent of payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. Management's periodic evaluation of the
adequacy of the allowance is based on the Savings Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and current economic conditions.
The allowance for loan losses is increased by a provision for loan
losses, which is charged to expense, and decreased by charge-offs
(net of recoveries).
- 34 -
<PAGE> 36
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 Continued
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company is subject to Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, investment and mortgage-backed securities
are categorized as either held-to-maturity, trading account or
available-for-sale securities.
Held-to-maturity securities are bonds, notes and debentures for which
the Savings Bank has the positive intent and ability to hold to
maturity and are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest
method over the period to maturity.
Trading account securities are investments held principally for
resale in the near term and mortgage-backed securities held for sale
in conjunction with mortgage banking activities. Trading account
securities would be recorded at their fair values. Unrealized gains
and losses on trading account securities would be included
immediately in other income. The Savings Bank has no securities in
this classification at year end.
Available-for-sale securities consist of bonds, notes, debentures,
and certain equity securities not classified as trading securities or
as held-to-maturity securities. The change in unrealized holding
gains and losses, net of tax, on available-for-sale securities are
reported as a separate component of other comprehensive income until
realized. Realized gains (losses) on available-for-sale securities
are included in other income (expense) and, when applicable, are
reported as a reclassification adjustment, net of tax, in other
comprehensive income. Gains and losses on the sale of
available-for-sale securities are determined using the
specific-identification method. The amortization of premiums and the
accretion of discounts are recognized in interest income using
methods approximating the interest method over the period of
maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary would have resulted in write-downs of the individual
securities to their fair value. No write-downs have been included in
earnings as realized losses.
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required investment for
institutions that are members of the Federal Home Loan Bank system.
The required investment in the common stock is based on a
predetermined formula and is carried at cost on the statement of
financial condition.
FORECLOSED REAL ESTATE
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties
are those properties for which the institution has taken physical
possession, regardless of whether formal foreclosure proceedings have
taken place.
At the time of foreclosure, foreclosed real estate is recorded at the
lower of the carrying amount or fair value less cost to sell, which
becomes the property's new basis. Any write-downs based on the
asset's fair value at date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are
carried at the lower of their new cost basis or fair value less cost
to sell. Costs incurred in maintaining foreclosed real estate and
subsequent adjustments to the carrying amount of the property are
included in income (loss) on foreclosed real estate.
- 35 -
<PAGE> 37
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 Continued
INCOME TAXES
Income taxes are provided for the tax effects of the transactions
reported in the consolidated financial statements and consist of
taxes currently due plus deferred taxes related primarily to
differences between the basis of available-for-sale securities and
allowance for loan losses for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
DIVIDENDS
As was anticipated, for at least the first three years of operations,
all earnings which were generated from the operations of the Savings
Bank were used to finance the growth of the Savings Bank and were not
available to be paid to outside stockholders as dividends. Hereafter,
in determining whether dividends will be declared on the Common
Stock, the Board of Directors will take into account the Company's
operating results, financial constitution, tax considerations, future
capital and cash flow requirements, and other relevant factors.
Tennessee law requires that dividends be paid only from retained
earnings (or undivided profits), except that dividends may be paid
from capital surplus with the prior written consent of the Tennessee
Department of Financial Institutions. Tennessee laws regulating
savings banks require certain charges against and transfers from an
institution's undivided profits account before undivided profits can
be made available for the payment of dividends. In addition, the
Department generally prohibits a newly chartered institution from
paying dividends during its first three years of operations without
the Department's prior approval.
On August 21,1998, the Savings Bank paid a special one-time dividend
of $5,000 to the Company. This dividend was used to pay expenses
related to the formation of the Holding Company. The Savings Bank had
received approval from the State of Tennessee Department of Financial
Institutions.
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 2 CASH AND CASH EQUIVALENTS
At December 31, 1998, 1997 and 1996, cash and cash equivalents were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash Working Funds 314,605 319,216 182,648
Federal Funds Sold 6,421,000 10,094,000 5,224,956
Due from Banks 2,192,567 2,002,584 1,481,379
Short-Term Interest Bearing
Deposits 5,000,000 -- --
---------- ---------- ---------
13,928,172 12,415,800 6,888,983
========== ========== =========
</TABLE>
- 36 -
<PAGE> 38
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 3 LAND, BUILDINGS AND EQUIPMENT
Fixed assets at December 31, 1998, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Land 850,000 850,000 100,000
Buildings and Leasehold Improvements 2,213,345 1,964,431 1,007,406
Furniture, Fixtures and Equipment 1,401,140 900,136 539,098
--------- --------- ---------
4,464,485 3,714,567 1,646,504
Less: Accumulated Depreciation 347,134 146,286 38,662
--------- --------- ---------
4,117,351 3,568,281 1,607,842
========= ========= =========
</TABLE>
NOTE 4 LOANS RECEIVABLE
Loans receivable at December 31, 1998, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
First Mortgage Loans 36,823,269 24,984,570 11,356,572
Construction Loans 22,024,861 11,859,068 4,217,400
Consumer Loans 7,726,136 4,764,911 2,107,552
Participation Loans, Net 863,162 873,263 --
Commercial Loans 26,603,529 12,256,079 2,439,451
Savings Account Loans 545,011 193,130 81,178
Credit Line Advances 396,618 239,115 14,324
----------- ----------- -----------
Gross Loans Receivable 94,982,586 55,170,136 20,216,477
----------- ----------- -----------
Less:
Undisbursed Portion of Loans in Process (8,179,727) (4,387,881) (3,114,972)
Net Deferred Loan Origination Fees (67,561) (52,688) (17,647)
Accumulated General Loan Loss Reserves (630,324) (355,474) (130,715)
----------- ----------- -----------
(8,877,612) (4,796,043) (3,263,334)
----------- ----------- -----------
Loans Receivable as Determined in
Accordance with Generally Accepted
Accounting Principles 86,104,974 50,374,093 16,953,143
=========== =========== ===========
An analysis of the allowance for loan losses
is as follows:
Balance - Beginning of Period 355,474 130,715 --
Provision for Losses 275,127 226,094 130,715
Actual Loan Losses (277) (1,335) --
----------- ----------- -----------
Balance - End of Period 630,324 355,474 130,715
=========== =========== ===========
</TABLE>
The gross amount of participation loans serviced by State of
Franklin Savings Bank is $1,220,000.
- 37 -
<PAGE> 39
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 SUPERVISION AND REGULATION
GENERAL
As a Tennessee-chartered federally insured savings bank, the Savings
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The
Savings Bank is regularly examined by the FDIC and the Tennessee
Department of Financial Institutions and files periodic reports
concerning its activities and financial condition with its
regulators. The Savings Bank's relationship with depositors and
borrowers also is regulated to a great extent by both federal law and
the laws of the State of Tennessee, especially in such matters as the
ownership of savings accounts and the form and content of mortgage
documents.
Federal and state banking laws and regulations govern all areas of
the operation of the Savings Bank, including reserves, loans,
mortgages, capital, issuance of securities, payment of dividends and
establishment of branches. Federal and state bank regulatory agencies
also have the general authority to limit the dividends paid by
insured banks if such payments should be deemed to constitute an
unsafe and unsound practice. The primary federal regulator of the
Savings Bank, the FDIC, has authority to impose penalties, initiate
civil and administrative actions and take other steps intended to
prevent banks from engaging in unsafe or unsound practices.
Tennessee law permits the Savings Bank to become a member of the
Federal Reserve System or the Federal Home Loan Bank System. The
Savings Bank is a member of the Federal Home Loan Bank of Cincinnati.
The FHLB of Cincinnati functions as a central reserve bank which
provides credit for member institutions. The Savings Bank, as a
member of the FHLB of Cincinnati, is required to own capital stock in
the FHLB of Cincinnati. Provided certain standards related to
creditworthiness continue to be met, the Savings Bank will be
authorized to apply for additional advances on the security of such
stock and on certain of its residential mortgage loans and other
assets (principally, securities which are obligations of, or
guaranteed by, the United States). The Savings Bank's current
advances from FHLB are disclosed in Note 10.
TENNESSEE SUPERVISION AND REGULATION
As a Tennessee-chartered savings bank, the Savings Bank is subject to
various state laws and regulations which limit the amount that can be
loaned to a single borrower, the type of permissible investments, and
geographic expansion, among other things. The Savings Bank must
submit an application and receive the approval of the Department
before opening a new branch office or merging with another financial
institution. The Commissioner of the Department (Commissioner) has
the authority to enforce state laws and regulations by ordering a
director, officer or employee of the Savings Bank to cease and desist
from violating a law or regulation and unsafe and unsound banking
practices.
FEDERAL REGULATION
The Savings Bank was approved by the FDIC to have its deposit
accounts insured up to applicable limits by the Bank Insurance Fund.
The BIF was designated as an insurance fund pursuant to the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).
As insurer, the FDIC issues regulations, conducts examinations,
requires the filing of reports and generally supervises and regulates
the operations of state-chartered banks that are not members of the
Federal Reserve System. FDIC approval is required prior to any merger
or consolidation involving state, nonmember banks, or the
establishment or relocation of an office facility thereof. FDIC
supervision and regulation is intended primarily for the protection
of depositors and the FDIC insurance funds.
- 38 -
<PAGE> 40
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 Continued
Any insured bank which does not operate in accordance with or conform
to FDIC regulations, policies and directives may be sanctioned for
noncompliance. For example, proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank who
engages in unsafe and unsound practices, including the violation of
applicable laws and regulations. The FDIC has the authority to
terminate deposit insurance pursuant to procedures established for
that purpose. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Savings Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Savings Bank must meet specific capital
guidelines that involve quantitative measures of the Savings Bank's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and
Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Savings Bank as well-capitalized under the regulatory
framework for prompt corrective action. The "prompt corrective
action" regulations established five categories of depository
institutions: (1) well-capitalized, (2) adequately capitalized, (3)
under-capitalized, (4) significantly under-capitalized, and (5)
critically under-capitalized. Each category relates to the level of
capital for the depository institution. A "well-capitalized"
institution meets the minimum level required by regulation (i.e.,
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or
greater). To be categorized as well-capitalized, the Savings Bank
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
<TABLE>
<CAPTION>
For Capital
Adequacy Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
----------------- -----------------
In Thousands (Unaudited) Amount Ratio Amount Ratio
------------------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
As of December 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) 11,908 16.24% >7,334 10.0%
-
Tier 1 Capital
(to Risk-Weighted Assets) 10,989 14.98% >4,400 6.0%
-
Tier 1 Capital
(to Adjusted Total Assets) 10,989 9.44% >5,823 5.0%
-
As of December 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) 11,095 24.5% >4,524 10.0%
-
Tier 1 Capital
(to Risk-Weighted Assets) 10,529 23.3% >2,714 6.0%
-
Tier 1 Capital
(to Adjusted Total Assets) 10,529 13.6% >3,873 5.0%
-
</TABLE>
- 39 -
<PAGE> 41
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 6 MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers
of the securities. Mortgage-backed securities are classified as
available-for-sale securities and carried at fair value. Premiums and
discounts are amortized using methods approximating the interest
method over the remaining period to contractual maturity, adjusted
for anticipated prepayments. Expected maturities will differ from
contractual maturities because borrowers may have the right to call
or prepay obligations without call or prepayment penalties.
NOTE 7 EMPLOYEE AND DIRECTOR BENEFIT PLANS
RETIREMENT PLAN
The Savings Bank had a noncontributory retirement plan for all
eligible employees. The benefits were funded by an annual payment
into each employee's Individual Retirement Account. The cost of the
plan was $0, $0 and $36,557 for the periods ended December 31, 1998,
1997 and 1996, respectively. The employees were 100% vested in the
plan. The plan was terminated as of January 1, 1997.
EMPLOYEE STOCK OWNERSHIP PLAN
The company has an employee stock ownership plan (ESOP) for those
employees who meet the eligibility requirements of the plan. The ESOP
was established and funded for 1997. On February 28, 1998, 5,236
shares of the Savings Bank with a fair value of $57,600 were issued
for the 1997 contribution. The Savings Bank stock was exchanged for
Company stock as discussed in Note 1. During the third quarter of
1998, the ESOP borrowed $700,000 from the Company and used the funds
to purchase 63,636 shares of common stock of the Company at $11 per
share. This increased the ESOP's shares from 5,236 to 68,872. Note
payments are $8,218 per month for ten years with a fixed interest
rate of 7.25%. The note balances outstanding at December 31, 1998,
1997 and 1996 were $692,022, $0 and $0, respectively.
A related loan was obtained for the purpose of leveraging the ESOP in
the amount of $700,000 with similar terms and collaterized with
stock. The note balances outstanding at December 31, 1998, 1997 and
1996 were $687,925, $0 and $0, respectively.
ESOP shares are maintained in a suspense account until released and
allocated to participants' accounts. The release of shares from the
suspense account is based on the principal paid in the year in
proportion to the total of current year and remaining outstanding
debt. Allocation of released shares to participants' accounts is done
as of December 31. Shares allocated and remaining in suspense were as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
------- -------
<S> <C> <C>
Number of Shares
Released and allocated 6,333 --
Committed to be Released 2,101 5,236
Suspense 60,438 --
Fair Value
Released and allocated 69,663 --
Committed to be Released 23,111 57,600
Suspense 664,820 --
</TABLE>
- 40 -
<PAGE> 42
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 Continued
The expense recorded by the Company is based on cash contributed to
the ESOP during the year in amounts determined by the Board of
Directors, plus the excess of fair value of shares released and
allocated over the ESOP's cost of those shares. The Company's ESOP
compensation costs exclude interest which is classified as such on
the statement of income. Contributions to the ESOP are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
------ ------
<S> <C> <C>
Compensation Expense 76,222 57,600
Contributions 76,222 57,600
</TABLE>
No dividends have been declared on the Company's stock. If dividends
are paid, the ESOP administrators will determine whether dividends on
allocated and unallocated shares will be used for debt service. Any
allocated dividends used will be replaced with common stock of equal
value. For the purpose of computing earnings per share, all ESOP
shares committed to be released will be considered outstanding.
The released Company stock will be allocated to employees based on
their salaries. Generally, all employees who work over 1,000 hours
are eligible for the plan after one year of service. Employees will
be vested after seven years of service. This plan includes a 401(k)
feature that began in 1998, which allows employees to defer up to 6%
of their salary and is matched by the Company up to the maximum
allowed amount.
In connection with the 401(k) provision and the Company contribution,
there were 6,996 shares of common stock subscribed at December 31,
1998.
STOCK OPTION PLANS
On December 21, 1996, the Savings Bank'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 Savings Bank had annual profitability, the options
will vest at 20% per year to each director. This will total 2,346
shares per director. The exercise price of the options is $10 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 Savings Bank 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
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.
- 41 -
<PAGE> 43
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 Continued
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 per share. The other terms of these
options are the same as the terms of the original options.
<TABLE>
<CAPTION>
Weighted
Average
Awarded Exercise
And Price
Unexercised Vested Per
Options Options Share
------------------------------------
<S> <C> <C> <C> <C>
Options Granted - Outside Directors January 1, 1998 30,500 5,630 $10
During 1998 25,064 5,012 $11
Options Granted - Management January 1, 1998 61,000 12,200 $10
During 1998 50,128 10,025 $11
Options Expired - Outside Directors (2,346) --
------- ------
Options Outstanding - December 31, 1998 164,346 32,867 $10.46
======= ======
</TABLE>
The State of Franklin Savings Bank accounts for these plans under APB
Opinion No. 25, Accounting for Stock Issued to Employees, under which
no compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with Statement of Financial
Accounting Standard No. 123, Accounting for Stock-based Compensation,
(SFAS No. 123), the Savings Bank's net income and earnings per share
would not have changed. SFAS No. 123 requires compensation cost to be
calculated by the fair value based method. However, it is not
possible to estimate the fair value of the options at the grant date.
Therefore, the estimates of compensation cost have been determined by
the intrinsic value based method.
- 42 -
<PAGE> 44
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 DEPOSITS
Savings deposit balances are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------- --------------------------------------
Average Average
Rate Amount Percent Rate Amount Percent
------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Passbook 4.25 6,083,930 6.31 4.25 3,285,536 4.55
Commercial Checking 0.00 4,365,719 4.53 0.00 6,653,254 9.21
Christmas Club 4.25 24,198 0.03 4.25 5,048 0.01
NOW 1.64 5,848,650 6.07 1.79 3,040,127 4.21
Money Market Deposit 4.48 13,730,025 14.25 4.31 6,102,285 8.44
---------- ------- ----------- ------
30,052,522 31.19 19,086,250 26.42
---------- ------- ----------- ------
Fixed Term Certificate Accounts
365 Day IRA 5.27 832,859 0.86 5.75 914,838 1.27
18 Month IRA 5.34 8,058 0.01 5.97 46,188 0.06
30 Month IRA 5.12 384,998 0.40 6.04 357,024 0.49
30 Month IRA (and Keogh) 6.09 3,446,063 3.58 6.12 2,542,476 3.52
30 Month 6.04 10,566,996 10.97 6.08 10,241,112 14.18
12 Month Roth IRA 4.3 99,665 0.10 -- -- --
18 Month Roth IRA 4.9 32,773 0.03 -- -- --
30 Month Roth IRA 5.69 6,866 0.01 -- -- --
7 Month 5.5 10,396,334 10.79 -- -- --
30 Month Educational IRA 5.5 79 0.00 -- -- --
9 Month 5.49 3,195,279 3.31 -- -- --
1 Year 5.39 11,280,906 11.71 5.83 15,543,368 21.52
3 Year 6.15 3,256,713 3.38 6.12 1,133,764 1.57
Jumbo 5.83 9,481,823 9.84 5.98 8,241,110 11.41
2 Year 5.8 6,059,613 6.29 6.07 3,368,326 4.66
4 Year 6.14 459,645 0.48 6.18 334,226 0.46
5 Year 5.92 372,264 0.38 6.09 140,270 0.19
18 Month 5.44 2,331,932 2.42 6.05 2,170,999 3.00
182 Day Money Market 4.67 4,078,315 4.23 5.44 8,104,350 11.22
90 Day Money Market 3.4 20,374 0.02 4.00 19,583 0.03
---------- ------ ---------- ------
66,311,555 68.81 53,157,634 73.58
---------- ------ ---------- ------
96,364,077 100.00 72,243,884 100.00
========== ====== ========== ======
</TABLE>
The contractual maturity of certificate accounts at December 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Year Ending December 31, 1998 Year Ending December 31, 1997
----------------------------- -----------------------------
<S> <C> <C> <C>
1999 47,393,530 1998 34,415,114
2000 13,584,484 1999 11,801,483
2001 4,341,244 2000 6,422,470
2002 355,992 2001 285,217
2003 and After 636,305 2002 and After 233,350
---------- ----------
66,311,555 53,157,634
========== ==========
</TABLE>
- 43 -
<PAGE> 45
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9 ACCRUED INTEREST RECEIVABLE, NET
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Loans (net of allowance for uncollected interest of $0) 471,133 251,986
Mortgage Backed Securities 210 1,048
Investment Securities 206,606 147,726
Cash and Due from Banks 8,014 --
------- -------
685,963 400,760
======= =======
</TABLE>
NOTE 10 FEDERAL HOME LOAN BANK ADVANCES
Advances from FHLB are summarized as follows for the periods
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Contractual Maturity 1998 1997
-------------------- --------- ---------
<S> <C> <C>
Within 10 Years:
Fixed Rate 9,000,000 --
========= =========
Weighted Average Rate 5.42% --%
</TABLE>
The Savings Bank pledges as collateral for these borrowings
selected qualifying mortgage loans (as defined) under an
agreement with the FHLB. Loans pledged at December 31, 1998 and
1997 were approximately $13,500,000 and $0, respectively.
NOTE 11 OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for
the periods ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Other Noninterest Expense:
Seminars and Education Expenses 36,343 24,308 15,218
Insurance Expense 32,241 32,322 21,213
Professional Expenses and Supervisory Examinations 99,748 61,133 48,304
Office Supplies and Postage 149,478 144,851 98,719
Telephone 82,512 43,638 17,703
Other 187,556 129,630 51,300
------- ------- --------
587,878 435,882 252,457
======= ======= =======
</TABLE>
- 44 -
<PAGE> 46
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 ORGANIZATION EXPENSE
The following organization expenses were netted against paid-in
capital:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Compensation and Related Benefits -- -- 147,984
Supplies -- -- 15,535
Telephone -- -- 3,199
Advertising -- -- 3,954
Other 11,355 -- 88,913
------ ------ -------
11,355 -- 259,585
====== ====== =======
</TABLE>
NOTE 13 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities
held-to-maturity and Available-for-Sale at December 31, 1998 and
1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have
the right to call or prepay obligations without call or prepayment
penalties.
<TABLE>
<CAPTION>
December 31, 1998:
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-Sale:
United States Government
Agency Securities Maturing:
After one year
but within five years 5,989,785 20,515 -- 6,010,300
After five years
but within ten years 5,564,386 39,557 -- 5,603,943
Mortgage Backed Securities:
Corporate issue 35,947 211 -- 36,158
Other
Within one year 598,171 -- -- 598,171
---------- ------ --------- ----------
Total 12,188,289 60,283 -- 12,248,572
========== ====== ========= ==========
</TABLE>
- 45 -
<PAGE> 47
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 CONTINUED
December 31, 1997:
------------------
<TABLE>
<CAPTION> Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 2,300,000 -- 4,656 2,295,344
After five years
but within ten years 7,700,000 27,870 -- 7,727,870
---------- ------ ----- ----------
Total 10,000,000 27,870 4,656 10,023,214
========== ====== ===== ==========
Available-for-Sale:
United States Government
Agency Securities Maturing:
After one year
but within five years 1,500,000 -- 981 1,499,019
After five years
but within ten years 3,739,063 35,890 -- 3,774,953
After ten years 1,000,000 4,330 -- 1,004,330
Mortgage Backed Securities:
Corporate issue 179,304 1,407 -- 180,711
Other
Within one year 3,888 -- -- 3,888
---------- ------ ----- ----------
Total 6,422,255 41,627 981 6,462,901
========== ====== ===== ==========
</TABLE>
Gross proceeds from sales of investment securities
available-for-sale for the period ended December 31, 1998, 1997 and
1996 were $14,374,235, $14,183,359 and $3,764,062, respectively,
resulting in gross gains of $38,769, $148,045 and $58,125,
respectively.
NOTE 14 LEGAL PROCEEDINGS
The Company and its subsidiaries are periodically involved in legal
proceedings that are generally incidental to their businesses. At
December 31, 1998, there were no legal proceedings that were
expected to have a material impact on the Company's financial
statements.
- 46 -
<PAGE> 48
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 RELATED PARTY TRANSACTIONS
The Savings Bank has granted loans to its officers and directors.
Management believes that such loans were made in the ordinary
course of business with normal credit terms, including interest
rates and collateral and do not represent more than a normal risk
of collection. Activity with related parties during 1998, 1997 and
1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Loan Balances at the Beginning of the Period 2,046,056 555,432 --
New Loans 2,514,787 1,656,131 580,362
Repayments (442,278) (165,507) (24,930)
---------- --------- -------
Loan Balances at the End of the Period 4,118,565 2,046,056 555,432
========= ========= =======
</TABLE>
Officers and directors have unsecured lines of credit that have not
been used in the amount of $49,501, $56,500 and $6,781 at December
31, 1998, 1997 and 1996, respectively.
Officers and directors also have unsecured overdraft protection
accounts with available balances in the amount of $83,892, $26,518
and $34,641 at December 31, 1998, 1997 and 1996, respectively.
Secured home-equity lines of credit for officers and directors have
an available amount of $39,579, $15,170 and $199,468 at December
31, 1998, 1997 and 1996, respectively.
Two individuals, one a director and the other an officer and
director, are also partners in a partnership in which the following
significant transaction occurred:
The Savings Bank leases the Browns Mill Office in Johnson City from
the partnership. The monthly lease payments were $2,550 per month
in both 1998 and 1997 and $3,400 per month in 1996.
NOTE 16 COMMITMENTS
In the normal course of business, State of Franklin Savings Bank
has various outstanding commitments and contingent liabilities that
are not reflected in the accompanying consolidated financial
statements. The principal commitments of the Savings Bank are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------------- -------------------------------------
Fixed Variable Fixed Variable
Rate Rate Total Rate Rate Total
------- --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans
to Originate -- 294,400 294,400 -- 1,008,200 1,008,200
Unsecured Lines
of Credit -- 511,287 511,287 -- 673,794 673,794
Overdraft Protection
Accounts 260,595 -- 260,595 89,091 -- 89,091
Home Equity
Lines of Credit -- 2,498,854 2,498,854 -- 1,633,350 1,633,350
Commercial -- 2,451,831 2,451,831 -- 1,377,724 1,377,724
------- --------- --------- ------ --------- ---------
260,595 5,756,372 6,016,967 89,091 4,693,068 4,782,159
======= ========= ========= ====== ========= =========
</TABLE>
Commitments under standby letters of credit totaled approximately
$292,133 and $965,000 at December 31, 1998 and 1997, respectively.
- 47 -
<PAGE> 49
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 Continued
At December 31, 1998, the Savings Bank had unused lines of credit
for funds purchases and daylight overdrafts with two banks. The
lines total $1,500,000 each and have variable interest rates based
on the lending bank's daily federal funds rate. The Savings Bank
also has unused lines of credit with FHLB in the amount of
$7,902,000.
The Savings Bank is engaged in the sale of mortgage loans on the
secondary market. These loans are sold outright and are not
serviced by the Savings Bank. There were no loan sales in the year
of 1996. The gain on the sale of these mortgage loans is as
follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Selling Price 5,083,213 1,161,502
Less: Carrying Value 5,016,375 1,140,479
Loan Cost 20,658 5,885
--------- ---------
Net Gain on Loans Sold 46,180 15,138
========= =========
</TABLE>
At December 31, 1998 and 1997, the Savings Bank had mortgage loans
committed to be sold totaling $1,627,400 and $180,300,
respectively. Commitments to originate loans to be sold on the
secondary market were $1,758,740 and $62,400 at December 31, 1998
and 1997, respectively.
The Savings Bank leases office space at the Browns Mill Road,
Johnson City, branch location under an operating lease expiring on
August 31, 1999 with an option to renew and extend for another
three years. The Savings Bank has two automobile leases that expire
on June 15, 2000. The Savings Bank also leases storage space at the
Browns Mill Road, Johnson City, branch location under a
month-to-month operating lease.
Management expects as operating leases expire in the normal course
of business, they will be renewed or replaced by leases on other
properties at current market rental rates at the time of renewal.
Approximate minimum future rentals to be paid under the cancelable
and noncancelable leases for five years subsequent to December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Noncancelable Cancelable
Years Ended Leases- Leases -
December 31, Building & Auto Building
-----------------------------------------------------------------------------------
<S> <C> <C>
1999 49,426 1,560
2000 40,013 1,560
2001 30,600 1,560
2002 30,600 1,560
2003 30,600 1,560
------- -----
Total Minimum Future Rentals 181,239 7,800
======= =====
</TABLE>
- 48 -
<PAGE> 50
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is disclosed to comply with
SFAS No. 107, Disclosure about Fair Value of Financial Instruments.
The following tables present estimates of fair value for the Saving
Bank's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998:
------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Financial Assets:
Cash and Cash Equivalents 13,928,172 13,928,172
Investment Securities 12,248,572 12,248,572
Loans 86,104,974 86,876,374
Accrued Interest Receivable 685,963 685,963
Leases Receivable, Net 120,999 120,999
Financial Liabilities:
Deposits 96,364,077 96,684,783
Advance Payments by Borrowers
for Taxes and Insurance (Escrows) 98,784 98,784
Accrued Interest on Deposits 103,769 103,769
Notes Payable 687,925 673,283
FHLB Advances 9,000,000 9,000,000
<CAPTION>
December 31, 1997:
------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Financial Assets:
Cash and Cash Equivalents 12,415,800 12,415,800
Investment Securities 16,462,901 16,486,116
Loans 50,374,093 50,449,261
Accrued Interest Receivable 400,760 400,760
Financial Liabilities:
Deposits 72,243,884 72,271,957
Advance Payments by Borrowers
for Taxes and Insurance (Escrows) 59,911 59,911
Accrued Interest on Deposits 43,469 43,469
</TABLE>
The carrying amounts in the preceding table are included in the
consolidated statements of financial condition under the applicable
captions. The contract or notional amounts of the Company's
financial instruments with off-balance-sheet risk are disclosed in
Note 16. No derivatives were held by the Company. It is not
practicable to estimate the fair value of Federal Home Loan Bank
stock because it is not marketable. The carrying amount of that
investment is reported at cost in the consolidated statements of
financial condition.
- 49 -
<PAGE> 51
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17 Continued
The following describes the assumptions and methodologies used to
calculate the fair value for financial instruments.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates
of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
FLOATING RATE LOANS: Floating rate 1-4 family residential mortgage
loans reprice periodically and will lag movements in market rates.
The fair value for floating rate mortgage loans is calculated by
discounting future cash flows to their present value. Future cash
flows, consisting of principal payments, interest payments, and
repricings, are discounted with current Savings Bank prices for
similar instruments applicable to the remaining maturity.
Prepayment assumptions based on historical prepayment speeds have
been applied to the 1-4 family residential floating rate mortgage
portfolio.
FIXED RATE LOANS AND LEASES: The fair value for fixed rate loans
and leases is calculated by discounting future cash flows to their
present value. Future cash flows, consisting of both principal and
interest payments, are discounted with current Savings Bank prices
for similar instruments applicable to the remaining maturity.
Prepayment assumptions based on historical prepayment speeds have
been applied to the fixed rate mortgage and installment loan
portfolios.
ALLOWANCE FOR LOAN LOSSES: The fair value of the allowance for loan
losses is approximated by the book value. Additionally, the credit
exposure known to exist in the loan portfolio is embodied in the
allowance for loan losses.
CASH AND CASH EQUIVALENTS: The fair value of cash and cash
equivalents are approximated by the book value.
- 50 -
<PAGE> 52
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17 Continued
INVESTMENT SECURITIES: Market quotes, when available, are used for
the fair value of investment securities.
DEFINED MATURITY DEPOSITS: The fair value for defined maturity
deposits is calculated by discounting future cash flows to their
present value. Future cash flows, consisting of both principal and
interest payments, are discounted with Savings Bank prices for
similar instruments applicable to the remaining maturity. For the
purpose of this disclosure, defined maturity deposits include all
certificates of deposit and other time deposits.
UNDEFINED MATURITY DEPOSITS: The fair value of undefined maturity
deposits is required by the statement to equal the book value. For
the purpose of this disclosure, undefined maturity deposits include
demand deposits, checking interest accounts, savings accounts, and
money market accounts.
LONG-TERM DEBT: The fair value of long-term debt instruments and
Federal Home Loan Bank advances is estimated using a discounted
cash flow calculation, based on current rates for similar debt.
LIMITATIONS: The foregoing fair value estimates are made at a
specific point in time, based on pertinent market data and relevant
information on the financial instrument. These estimates do not
include any premium or discount that could result from an offer to
sell, at one time, the Savings Bank's entire holdings of a
particular financial instrument or category thereof. Since no
market exists for a substantial portion of the Savings Bank's
financial instruments, fair value estimates were necessarily based
on judgments with respect to future expected loss experience,
current economic conditions, risk assessments of various financial
instruments involving a myriad of individual borrowers, and other
factors. Given the innately subjective nature of these estimates,
the uncertainties surrounding them and the matters of significant
judgment that must be applied, these fair value estimations cannot
be calculated with precision. Modifications in such assumptions
could meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and
off-balance sheet financial instruments, no attempt was made to
estimate the value of anticipated future business and the value of
nonfinancial statement assets and liabilities. Other important
elements which are not deemed to be financial assets or liabilities
include the value of the Savings Bank's existing core deposit base,
premises and equipment, and goodwill. Further, certain tax
implications related to the realization of the unrealized gains and
losses could have a substantial impact on these fair value
estimates and have not been incorporated into any of the estimates.
- 51 -
<PAGE> 53
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18 FEDERAL INCOME TAX
A reconciliation between the effective income tax expense or
benefit and the amount computed by multiplying the projected
statutory federal income tax rate for the period ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Computed "Expected" Tax (Expense) Benefit (186,556) (7,794) 77,126
Bad Debt Deduction 110,492 (73,785) (19,607)
Amortization of Organization Expense 17,845 16,943 6,489
Other (855) 1,101 (565)
Reversal of Allowance for Deferred Tax Assets -- 68,612 --
FHLB Dividends 6,868 -- --
------- ------ -------
Provision for Income Taxes (52,206) 5,077 63,443
======= ====== =======
Current Income Tax (Expense) Benefit (183,707) 13,075 --
Deferred Income Tax (Expense) Benefit 131,501 (7,998) 63,443
------- ------ -------
Provision for Income Taxes (52,206) 5,077 63,443
======= ====== =======
Deferred Tax Assets:
Due to Net Operating Loss Carryforward -- 68,521 132,055
Due to Unrealized Gains on Investments (20,496) (13,076) --
Due to FHLB Dividends (6,868) -- --
Due to Reserve for Loan Losses 214,310 -- --
------- ------ -------
186,946 55,445 132,055
------- ------ -------
Reserve for Deferred Tax Assets:
Beginning Balance -- (68,612) --
Amount Reserved -- -- (68,612)
Reversal of Reserved Amount -- 68,612 --
------- ------ -------
Ending Balance -- -- (68,612)
------- ------ -------
Deferred Tax Assets - Net 186,946 55,445 63,443
======= ====== =======
</TABLE>
The Savings Bank had a net operating loss carryforward of $195,157
which was used to offset federal taxable income in 1998.
In assessing the realizability of the related deferred tax asset,
management considers whether it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
existence of, or generation of, taxable income in the periods which
those temporary differences are deductible. Management considers
the projected future taxable income and tax planning strategies in
making this assessment. Based upon the projection for future
taxable income over the periods which the deferred tax asset is
deductible, at December 31, 1998, management believes it is more
likely than not that the Savings Bank will realize the benefits of
these deductible differences.
NOTE 19 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.
- 52 -
<PAGE> 54
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19 CONTINUED
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.
State of Franklin 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 20 EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
Earnings Per Share, is effective for fiscal years ending after
December 15, 1997. This statement presents standards for computing
and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. SFAS No.
128 simplifies previous standards for computing EPS and makes them
comparable to international EPS standards. It replaces the
presentation of primary EPS with the presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS.
The Savings Bank adopted SFAS No. 128 effective January 1, 1997 and
restated the previous year's financial statements to comply with
the new reporting requirements.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Net Income Available to Common Shareholders 496,489 57,035 (450,733)
========= ========= =======
Average Shares
Average Shares - Basic 1,117,270 1,111,280 610,000
Effect of Dilutive Common Stock Options 6,484 8,316 --
--------- --------- -------
Average Shares - Diluted 1,123,754 1,119,596 610,000
========= ========= =======
Basic Earnings (Loss) Per Share 0.44 0.05 (0.74)
==== ==== ====
Diluted Earnings (Loss) Per Share 0.44 0.05 (0.74)
==== ==== ====
</TABLE>
- 53 -
<PAGE> 55
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 21 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Assets:
Cash and Cash Equivalents 897
Investments - Available-for-Sale 593,164
Receivable from ESOP 108,286
Investments in Subsidiaries 11,565,733
----------
Total Assets 12,268,080
==========
Liabilities:
Short Term Borrowings - Subsidiary 2,743
Notes Payable 687,925
----------
Total Liabilities 690,668
----------
Stockholders' Equity:
Common Stock, $1.00 Par Value,
Authorized: 3,000,000 Shares; Issued: 1,180,152 Shares 1,180,152
Common Stock Subscribed 6,996
Paid-In Capital 10,907,472
Accumulated Other Comprehensive Income 39,820
Retained Earnings 107,792
Less: Employee Stock Ownership (664,820)
----------
Total Stockholders' Equity 11,577,412
----------
Total Liabilities and Stockholders' Equity 12,268,080
==========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Period Ended
December 31,
1998
------------
<S> <C>
Interest Income 8,634
Dividends from Banking Subsidiary 5,000
-------
Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiaries 13,634
Provision for Income Taxes (2,743)
-------
Income before Equity in Undistributed Earnings of Subsidiaries 10,891
Equity in undistributed Earnings of Subsidiaries 485,598
-------
Net Income 496,489
=======
</TABLE>
- 54 -
<PAGE> 56
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 21 Continued
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended
December 31,
1998
------------
<S> <C>
Cash Flows from Operating Activities
Net Income 496,489
Items Not Affecting Cash and Cash Equivalents:
Equity in Undistributed Earnings of Subsidiaries (485,598)
Increase in Payable to Subsidiary 2,743
-------
Net Cash Provided by Operating Activities 13,634
-------
Cash Flows from Investing Activities
Purchase of Investments (707,634)
Proceeds from Sale of Available-for-Sale Investments 114,470
Investment in Subsidiary (100,000)
-------
Net Cash Used by Investing Activities (693,164)
-------
Cash Flows from Financing Activities
Issuance of Common Stock, Net 3,857
Organization Costs (11,355)
Proceeds from Debt 700,000
Repayments of Debt (12,075)
-------
Net Cash Provided by Financing Activities 680,427
-------
Net Increase in Cash and Cash Equivalents 897
Cash and Cash Equivalents at Beginning of Period --
-------
Cash and Cash Equivalents at End of Period 897
=======
</TABLE>
- 55 -
<PAGE> 57
STATE OF FRANKLIN BANCSHARES, INC.
STATEMENT OF MANAGEMENT RESPONSIBILITY
The management of State of Franklin Bancshares, Inc. and its subsidiaries is
responsible for the preparation, content and integrity of the consolidated
financial statements and all other information included in this annual report.
The consolidated financial statements, which include management's best estimates
where judgment is required, are prepared in accordance with generally accepted
accounting principles applied on a consistent basis and meet the requirements of
the appropriate regulatory agencies.
The Company has established and maintains a system of internal controls designed
to provide reasonable assurance as to the integrity and reliability of the
consolidated financial statements and related information, the protection of
assets and customer deposits from material loss or misuse, and the detection of
fraudulent financial reporting. The Company's system of internal controls
includes written policies and procedures, proper delegation of authority and
organizational division of responsibilities, and the careful selection and
training of qualified personnel. In addition, independent certified public
accountants periodically test the system of internal controls.
Management recognizes that the cost of a system of internal controls should not
exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the system of internal controls provides reasonable assurances
that financial transactions are recorded properly to permit the preparation of
reliable consolidated financial statements.
Management also recognizes its responsibility for conducting the Company's
affairs in an ethical and socially responsible manner. This responsibility is
characterized and reflected in key policy statements covering, among other
subjects, proper conduct of business practices. The Company maintains a
systematic program to communicate, review and assess compliance with these
policies.
The Audit Committee of the Board of Directors, composed solely of outside
directors, has the responsibility for the recommendation of the independent
certified public accountants for the Company. The Board of Directors, through
its audit committee, is responsible for ensuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the financial statements. The independent
certified public accountants have free access to the Audit Committee.
The Company's consolidated financial statements have been audited by Baylor and
Backus. Their responsibility is to express an opinion on the Company's
consolidated financial statements and, in performing their audit, to evaluate
the Company's internal control system to the extent they deem necessary in order
to issue an opinion on the Company's consolidated financial statements. As
described further in their report, their opinion is based on their audits, which
were conducted in accordance with generally accepted auditing standards and is
believed by them to provide a reasonable basis for their opinion.
Charles E. Allen, Jr. Randal R. Greene
Chairman of the Board of Directors President and
and Chief Financial Officer Chief Executive Officer
- 56 -
<PAGE> 58
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
This item is incorporated by reference to Pages 2 through 4 of the Company's
Proxy Statement related to its Annual Meeting.
ITEM 10.
EXECUTIVE COMPENSATION.
This item is incorporated by reference to Pages 5 and 6 of the Company's Proxy
Statement related to its Annual Meeting.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to Pages 6 and 7 of the Company's Proxy
Statement related to its Annual Meeting.
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to Page 7 of the Company's Proxy
Statement related to its Annual Meeting.
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Charter of State of Franklin Bancshares, Inc.
3.2 Bylaws of State of Franklin Bancshares, Inc.
21.1 List of subsidiaries
27 Financial Data Schedule (For SEC use only)
(2) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
<PAGE> 59
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STATE OF FRANKLIN BANCSHARES, INC.
By: /s/ Charles E. Allen, Jr.
Chairman of the Board and Chief
Financial Officer
Date: March 19, 1999
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Charles E. Allen, Jr. Chairman of the Board, Chief Financial Officer and March 19, 1999
Director (principal executive, financial and
accounting officer)
/s/ Randal R. Greene President, Chief Executive Office and Director March 19, 1999
(principal executive officer)
Stephen Gross Director March __, 1999
Donald R. Jeanes Director March __, 1999
/s/ Henry J. Williams, M.D. Director March 19, 1999
/s/ Kenneth E. Cutshall, M.D. Director March 19, 1999
/s/ Charles E. Allen, Sr. Director March 19, 1999
/s/ Richard S. Venable Director March 19, 1999
/s/ Verrill M. Norwood, Jr. Director March 19, 1999
/s/ Cameron E. Perry Director March 19, 1999
/s/ Vance W. Cheek Director March 19, 1999
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CHARTER
OF
STATE OF FRANKLIN BANCSHARES, INC.
Pursuant to the Tennessee Business Corporation Act, the
undersigned corporation hereby adopts the following as its Charter:
1. The name of the Corporation is:
STATE OF FRANKLIN BANCSHARES, INC.
2. The number of shares the Corporation is authorized to
issue is ten million (10,000,000) shares of Common Stock, one dollar ($1.00) par
value.
Except as otherwise limited by law, the Board of Directors
shall be empowered to issue such stock in one or more series, and with such
rights and preferences and upon such terms, including convertibility, as the
Board shall determine.
3. The street address of the registered office of the
Corporation shall be 1907 North Roan Street, Johnson City, Washington County,
Tennessee 37601. The name of the Corporation's initial registered agent at its
registered office is Charles E. Allen, Jr.
4. The address of the principal office of the Corporation is
1907 North Roan Street, Johnson City, Washington County, Tennessee 37601.
5. The Corporation is a for profit corporation.
6. The Corporation shall have and exercise all of the powers
and rights conferred by the Tennessee Business Corporation Act as amended from
time to time or any successor provisions thereto.
7. (a) To the fullest extent that the Tennessee Business
Corporation Act as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of Directors, a
Director of the Corporation shall not be personally liable to the Corporation or
its shareholders for monetary damages for a breach of fiduciary duty as a
Director, except for liability (i) for any breach of the Director's duty of
loyalty to the Corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, or (iii) under Section 48-18-304 of the Tennessee Business Corporation Act,
as the same exists or hereafter may be amended. If the Tennessee Business
Corporation Act is amended after approval by the shareholders of this provision
to authorize corporate action further eliminating or limiting the personal
liability of Directors, the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Tennessee Business
Corporation Act, as so amended from time to time. Any repeal or modification of
this paragraph by the shareholders of the Corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
Director of the Corporation existing at the time of such repeal or modification.
1
<PAGE> 2
(b) The Corporation shall have the power to
indemnify any Director, officer, employee, agent of the Corporation, or any
other person who is serving at the request of the Corporation in any such
capacity with another corporation, partnership, joint venture, trust, or other
enterprise (including, without limitation, any employee benefit plan) to the
fullest extent permitted by the Tennessee Business Corporation Act as it exists
on the date hereof or as it may hereafter be amended, and any such
indemnification may continue as to any person who has ceased to be a Director,
officer, employee, or agent and may inure to the benefit of the heirs,
executors, and administrators of such a person.
(c) By action of its Board of Directors,
notwithstanding any interest of the Directors in the action, the Corporation may
purchase and maintain insurance, in such amounts as the Board of Directors deems
appropriate, to protect any Director, officer, employee, or agent of the
Corporation or any other person who is serving at the request of the Corporation
in any such capacity with another corporation, partnership, joint venture,
trust, or other enterprise (including, without limitation, any employee benefit
plan) against any liability asserted against him or her or incurred by him or
her in any such capacity or arising out of his or her status as such (including,
without limitation, expenses, judgments, fines, and amounts paid in settlement)
to the fullest extent permitted by the Tennessee Business Corporation Act as it
exists on the date hereof or as it may hereafter be amended, and whether or not
the Corporation would have the power or would be required to indemnify such
person under the terms of any agreement or by-law of the Tennessee Business
Corporation Act. For the purposes of this paragraph (c), "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit plan.
Kathryn Reed Edge, Incorporator
2
<PAGE> 1
EXHIBIT 3.2
BYLAWS OF
STATE OF FRANKLIN BANCSHARES, INC.
A BANK HOLDING COMPANY
ARTICLE I - HOME OFFICE; OTHER OFFICES
The home office of State of Franklin Bancshares, Inc. ("the Company"),
shall be located at 1907 North Roan Street, Johnson City, Washington County,
Tennessee 37601. The Company may maintain other offices at such other places as
may be determined by the Board of Directors, subject to the approval of the
appropriate regulatory authorities.
ARTICLE II - SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the home office of the Company or at such other
place as the Board of Directors may determine.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the Company
for the election of Directors and for the transaction of any other business of
the Company shall be held annually within 120 days after the end of the
Company's fiscal year at such date and time within such 120-day period as the
Board of Directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Tennessee Commissioner of Financial Institutions ("Commissioner") or the Federal
Reserve Board ("FRB") may be called at any time by the Chairman of the Board,
the President, a majority of the Board of Directors, the Commissioner or the
FRB, and shall be called by the Chairman of the Board, the President, or the
Secretary upon the written request of the holders of not less than ten percent
(10%) of all of the outstanding capital stock of the Company entitled to vote at
the meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Company addressed to
the Chairman of the Board, the President, or the Secretary.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with procedures adopted by the Board of Directors. The
Board of Directors shall designate, when present, either the Chairman or the
President to preside at such meetings.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 10 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, the President, or the Secretary, or the Directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail
addressed to the stockholder at the address as it appears on the stock transfer
books or records of the Bank as of the record date prescribed in Section 6 of
this Article II with postage
1
<PAGE> 2
prepaid. When any shareholders' meeting, either annual or special, is adjourned
for 30 days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give any notice of the
time and place of any meeting adjourned for less than 30 days or of the business
to be transacted at the meeting, other than an announcement at the meeting at
which such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in the case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this section
such determination shall apply to any adjournment.
SECTION 7. VOTING LISTS. After fixing a record date for a meeting, the
officer or agent having charge of the stock transfer books for shares of the
Company shall make a complete list of the shareholders entitled to vote at such
meeting, or any adjournment, arranged in alphabetical order, with the address
and the number of shares held by each. This list of shareholders shall be kept
on file at the home office of the Company and shall' be available for inspection
by any shareholder at any time during usual business hours, beginning two (2)
business days after notice of the meeting is given for which the list was
prepared and continuing through the meeting, at the Company's principal office
or at a place identified in the meeting notice in the city where the meeting
will be held. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to inspection by any shareholder
during the entire time of the meeting. The original stock transfer book shall
constitute prima facie evidence of the shareholders entitled to examine such
list or transfer books or to vote at any meeting of shareholders.
SECTION 8. QUORUM. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present are represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid more
than eleven months from the date of its execution. except for a proxy coupled
with an interest.
SECTION 10. VOTING POWERS. At all meetings of the shareholders, each
shareholder shall be entitled to cast one vote for each share of stock recorded
in the shareholder's name on the books of the
2
<PAGE> 3
Company as of the record date on any issue brought before the meeting; provided,
however, that in electing the Board of Directors, each shareholder shall be
entitled to cast one vote per share for each office of Director to be filled.
There shall be no cumulative voting.
SECTION 11. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, m the absence of written
directions to the Company to the contrary, at any meeting of the shareholders of
the Company any one or more of such shareholders may cast, in person or by
proxy, all votes to which such ownership is entitled. In the event an attempt is
made to cast conflicting votes, in person or by proxy, by the several persons
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such shares
and present in person or by proxy at such meeting, but no votes shall be cast
for such stock if a majority cannot agree.
SECTION 12. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation, may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer into his or her name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company, if
authorized by law, nor shares held by another corporation, if a majority of the
shares entitled to vote for the election of Directors of such other corporation
are held by the Company, shall be voted at any meeting or counted in determining
the total number of outstanding shares at any given time for purposes of any
meeting.
SECTION 13. NOMINATIONS FOR DIRECTOR. The Board of Directors shall act
as a nominating committee for selecting the management nominees for election as
Directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the Secretary at least twenty (20) days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Company. No nominations for
Directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Company at least five (5) days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Company. Ballots bearing the names
of all persons nominated by the nominating committee and by shareholders shall
be provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least twenty (20) days prior to the
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annual meeting, nominations for Directors may be made at the annual meeting by
any shareholder entitled to vote and shall be voted upon.
SECTION 14. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Company
at least five (5) days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
five (5) days before the meeting, such proposal shall be laid over for action at
an adjourned, special, or annual meeting of the shareholders taking place thirty
(30) days or more thereafter. This provision shall not prevent the consideration
and approval or disapproval at the annual meeting of reports of officers,
Directors, and committees, but in connection with such reports, no new business
shall be acted upon at such annual meeting unless stated and filed as herein
provided.
SECTION 15. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Company
shall be under the direction of its Board of Directors. The Board of Directors
shall elect a Chairman of the Board, a President, and a Secretary annually and
shall designate, when present, either the Chairman of the Board or the President
to preside at its meetings.
SECTION 2. NUMBER AND TERM.
(a) The Board of Directors shall consist of no fewer than five (5) nor
more than twenty-five (25) members, the precise number of which members may be
fixed or changed by the Board of Directors, including an increase or decrease in
the number of Directors. The number so fixed by the Board of Directors shall be
divided into three (3) classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three (3) years and until
their successors are elected and qualified. The terms of Directors in the first
group shall expire at the first annual shareholders' meeting after their
election; the terms of the second group shall expire at the second annual
shareholders' meeting after their election; and the terms of the third group
shall expire at the third annual shareholders meeting after their election. At
each annual shareholders' meeting held thereafter, the Directors shall be chosen
for a term of three (3) years to succeed those whose terms expire.
(b) The initial number of Directors shall be twelve (12).
SECTION 3. MEETINGS.
(a) Organizational Meeting. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of shareholders.
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(b) Regular Meetings.
(i) The Board of Directors may provide, by
resolution, the time and place for the holding of regular
meetings without other notice than such resolution.
(ii) Meetings may be held as determined by the
Directors or may be called by the Chairman, the President,
one-third of the Directors, the Commissioner or the FRB.
Notice of such meetings, other than the organizational meeting
or other regular meetings set by resolution pursuant to this
Section 3, may be by telegram, telephone, facsimile
transmission, letter or in person.
(iii) The Board of Directors may, with the approval
of two-thirds (2/3) of the Directors, change the location,
date and time of any meeting of the Board.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or one-third of the Directors. The persons authorized to call special meetings
of the Board of Directors may fix any place as the place for holding any special
meeting of the Board of Directors called by such persons.
Members of the Board of Directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 11 of this Article.
SECTION 5. NOTICE. Written notice of any special meeting shall be given
to each Director at least two (2) days prior thereto when delivered personally
or by telegram or at least five (5) days prior thereto when delivered by mail at
the address at which the Director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the mail so addressed, with
postage prepaid if mailed or when delivered by the telegraph company if sent by
telegram. Any Director may waive notice of any meeting by a writing filed with
the Secretary. The attendance of a Director at a meeting shall constitute a
waiver of notice of such meeting, except where a Director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice of waiver of notice of such meeting.
SECTION 6. QUORUM. A majority of the number of Directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 5 of this Article III.
SECTION 7. MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by regulation of the FRB or
by these Bylaws.
SECTION 8. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all the Directors.
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SECTION 9. RESIGNATION. Any Director may resign at any time by sending
a written notice of such resignation to the home office of the Company addressed
to the Chairman of the Board or the President. Unless otherwise specified, such
resignation shall take effect upon receipt by the Chairman of the Board or the
President. More than three consecutive absences from regular meetings of the
Board of Directors, unless excused by resolution of the Board of Directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the Board of Directors.
SECTION 10. VACANCIES. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining Directors
although less than a quorum of the Board of Directors. A Director elected to
fill a vacancy shall be elected to serve until the next election of Directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of Directors may be filled by election by the Board of Directors for a
term of office continuing only until the next election of Directors by the
shareholders.
SECTION 11. COMPENSATION. Directors, as such, may receive a stated
salary for their services. By resolution of the Board of Directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the Board of Directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the Board of
Directors may determine.
SECTION 12. PRESUMPTION OF ASSENT. A Director of the Company who is
present at a meeting of the Board of Directors at which action on any Company
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file a written dissent to such action with the person
acting as the Secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary of the Company within
five (5) days after the date a copy of the minutes of the meeting is received.
Such right to dissent shall not apply to a Director who voted in favor of such
action.
SECTION 13. REMOVAL OF DIRECTORS. At a meeting of Shareholders called
expressly for that purpose, any Director may be removed with or without cause by
a vote of the holders of a majority of the shares then entitled to vote at an
election of Directors. If less than the entire board is to be removed, no one of
the Directors may be removed if the votes cast against the removal would be
sufficient to elect a Director if then cumulatively voted at an election of the
class of Directors of which such Director is a part. Whenever the holders of the
shares of any class are entitled to elect one or more Directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a Director or Directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
SECTION 14. DIVIDENDS. The Board of Directors may, in its discretion,
declare and pay dividends in cash or in capital stock from time to time, but no
more frequently than once in each calendar quarter and subject to the other
requirements of Tennessee Business Corporation Act and such other laws or
regulatory approval as may be applicable.
SECTION 15. ADDITIONAL POWERS. In addition to the powers and authority
conferred upon them by these Bylaws, the Board of Directors may exercise all
such powers and do such acts and things as it
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may be authorized or required to do by statute or by rule or regulation of
applicable regulatory authorities, or by the Charter of the Company, or by the
Shareholders of the Company.
ARTICLE IV - OFFICERS AND EMPLOYEES
SECTION 1. ELECTION OF OFFICERS, OFFICIALS AND COMMITTEES. At their
meetings immediately following the annual shareholders' meetings each year, or
at any other regular or special meeting, the Board of Directors shall elect a
Chairman of the Board, a President and a Secretary. They shall elect such other
officers as they shall deem necessary from time to time, and shall prescribe the
duties to which such officers shall be assigned. The Chairman of the Board or
President may recommend and the Board of Directors may appoint any Committees,
as they may deem necessary or proper.
SECTION 2. REMOVAL OF OFFICERS. Any or all officers and members of
Committees may be removed at any regular or special meeting of the Board of
Directors without the necessity of any specification thereof in the call of the
meeting. Any officer or Committee member may be suspended by the Chairman of the
Board or the President until the next meeting of the Board of Directors.
SECTION 3. ONE PERSON MAY HOLD ONE OR MORE OFFICES. Any number of
offices not inconsistent with each other may be held by the same person;
provided, however, that the same person may not hold the offices of President
and Secretary.
SECTION 4. APPOINTMENT OF AGENTS AND EMPLOYEES. All agents and
employees shall be appointed by the Chairman of the Board or the President or by
some other person employed by the Company and designated by the Chairman of the
Board or the President for that purpose; provided, however, that the Board of
Directors may require that all such appointments be made subject to approval by
the Board.
SECTION 5. FIDELITY BONDS AND OTHER INSURANCE.
(a) The Board of Directors shall direct and require good and sufficient
fidelity bonds on all active officers and employees, whether or not they draw
salary or compensation, which bonds shall provide for indemnity to such Company
on account of any losses sustained by it as the result of any dishonest,
fraudulent or criminal act or omission committed or omitted by them acting
independently or in collusion or combination with any person or persons. At the
discretion of the Board, such bond may be in individual schedule or blanket
form, and the premiums therefor shall be paid by the Company.
(b) The Board of Directors shall direct and require suitable insurance
protection to the Company against burglary, robbery, theft, liability and other
similar insurable hazards to which the Company may be exposed in the operations
of its business on the premises or elsewhere.
(c) At least once in each year, the Board of Directors shall prescribe
the amount or penal sum of such bonds or policies and the sureties or
underwriters thereon, after giving due and careful consideration to all known
elements and factors constituting such risk or hazard. Such action shall be
recorded in the minutes of the Board and be subject to approval of the FRB.
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ARTICLE V - POWERS AND DUTIES OF OFFICERS
SECTION 1. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be an
ex-officio member of all Standing Committees, except the Auditing Committee. The
Chairman, together with the President and the Executive Committee, if any, shall
decide upon the general policy to be followed by the Company, and to be carried
out by its officers. The Chairman of the Board and the President may be the same
person.
SECTION 2. PRESIDENT. The President may be the Chief Executive Officer
of the Company and shall be an ex-officio member of all Standing Committees,
except the Auditing Committee. The President shall have general management and
supervision of all of the affairs and business of the Company, including but not
limited to the operation of the home office and any other offices, including
supervision of all officers and employees engaged in such operations, and shall
have such other duties and authority as may be conferred by these Bylaws or by
the Board of Directors. The President, together with the Chairman of the Board
and the Executive Committee, if any, shall determine the general policy to be
followed by the Company, and to be carried out by its officers. The offices of
the Chairman of the Board and the President may be held by the same person.
SECTION 3. SECRETARY. The Secretary shall attend and keep minutes of
all meetings of the shareholders and the Board of Directors. The Secretary shall
issue notices of all meetings of shareholders, Directors, Committees or other
meetings where notice is required. The Secretary shall preserve the
organizational papers, the corporate Charter, the Bylaws, minutes of the
proceedings of meetings of shareholders, Directors, and reports of the Board and
the Committees. The minutes of each meeting shall be signed by the Chairman of
the Board or the President and attested by the Secretary.
SECTION 4. OTHER OFFICERS. The other officers of the Company shall have
such authority and perform such duties as may from time to time be delegated to
them by the Board of Directors, the Executive Committee, the Chairman of the
Board or the President.
ARTICLE VI - EXECUTION OF INSTRUMENTS
SECTION 1. SALE AND TRANSFER OF SECURITIES. The Chairman, the
President, and the Secretary are authorized to sell and assign or endorse for
transfer or exchange any stock, bond, United States security, or other security,
or to request payment or reissue of any and all such securities now or hereafter
registered in the name of the Company and owned by it or held by it in any
fiduciary capacity; to sell and assign any such securities which the Company is,
or shall be, authorized or empowered to sell and assign as attorney for, or
other representative of, the owner thereof, and to use one or more attorneys for
such purpose.
SECTION 2. DEEDS AND CONTRACTS. The Chairman, the President, the
Executive Vice President, and the Secretary are authorized to purchase and sell
real estate and to execute all contracts of the Company.
SECTION 3. NOTES, SECURITY AGREEMENTS AND PLEADINGS. The Chairman, the
President, and the Secretary, may be authorized by resolution of the Board of
Directors, which may also require the signature of any other officer of the
Company, to endorse all notes or bills of exchange to borrow money on behalf of
the Company and to pledge collateral belonging to the Company as security
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for such loans and to execute such notes and security agreements as may be
necessary or proper therefor; to execute pleadings, releases of claims and other
papers for and on behalf of the Company; and to place securities belonging to
the Company as security for public funds deposited in the Company.
SECTION 4. RELEASE OF LIENS. The Chairman, the President, or the
Secretary are severally authorized to execute release of liens on real property
and on tangible and intangible personal property securing indebtedness owing the
Company.
ARTICLE VII - COMMITTEES OF THE BOARD
A. THE EXECUTIVE COMMITTEE
SECTION 1. MEETINGS AND DUTIES. The Executive Committee, if any, shall
be composed of the Chairman, the President and at least three (3) other
Directors. The Chairman of the Board or the President shall serve as its
Chairman. The Executive Committee shall meet when called by the Chairman of the
Board, President or any three (3) Executive Committee members. In the absence of
a member of the Executive Committee, the Chairman may appoint another Director
to serve in the absent member's place. The Executive Committee shall have
supervision of the current business of the Company and of the management and
investment of its funds and assets. It shall direct and supervise the duties and
functions of the officers. It shall consider and pass on any loans to be made by
the Company, shall recommend to the Board of Directors the salaries of all
officers of the Company and shall have general supervision of all expenses. The
Committee may recommend reasonable compensation for Directors, advisors to the
Board, and Committee members for attendance at meetings, subject to the approval
of the Board. A majority of the Executive Committee shall constitute a quorum,
and resolutions may be adopted by a majority vote of a quorum. An employee of
the Company as designated by the Chairman of the Board or the President shall
act as Secretary of the Executive Committee and record all minutes of the
Executive Committee.
SECTION 2. ELECTION OF OFFICERS. The Executive Committee may elect
officers subject to approval by the Board of Directors.
SECTION 3. ADDITIONAL AUTHORITY. At any time occurring between regular
meetings of the Board of Directors, the Executive Committee shall have the power
to adopt resolutions which shall be of like force and effect as though regularly
adopted by the Board of Directors, except that the Executive Committee may not
declare dividends, amend the Bylaws, elect Directors or approve extensions of
credit by the Company to a Director or Directors or to any firm in which any
Director owns an interest. Any such actions thus taken by the Executive
Committee shall be subject to review by the Board of Directors; provided,
however, that such review shall not affect the rights of other persons who may
have relied on the same.
B. THE AUDITING COMMITTEE
SECTION 1. MEETINGS AND DUTIES. The Auditing Committee, none of whom
shall be active officers of the Company, shall consist of at least three (3)
members of the Board of Directors, recommended by the President or the Chairman
of the Board, and appointed by the Board. The Auditing Committee shall meet at
least annually and at the call of the Chairman of the Board or the
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Chairman of the Auditing Committee. In the absence of a member of the Committee,
the Chairman may appoint another Director to serve in the absent member's place;
provided, however, that neither the President nor the Chief Executive Officer
may serve on the Auditing Committee. The Committee shall examine such books,
assets and securities of the Company as it deems necessary or proper, or as it
may be directed to examine, comparing and verifying the same. A record shall be
kept of all such examinations, which shall be certified to by the members of the
Auditing Committee serving, and presented to the Board of Directors at its next
meeting. The Auditing Committee shall report to the Board of Directors the
results of the examination relating to whether the Company is in a sound and
solvent condition, whether adequate internal audit controls and procedures are
being maintained, and recommending to the Board such changes as shall be deemed
advisable.
SECTION 2. EMPLOYMENT OF CERTIFIED PUBLIC ACCOUNTANTS. The Auditing
Committee, upon its own recommendation and with the approval of the Board of
Directors and the shareholders, may employ a qualified firm of Certified Public
Accountants to make the examination and audit of the Company. If such a
procedure is followed, the one annual examination and audit of such firm of
accountants and the presentation of its reports to the Board of Directors, will
be deemed sufficient to comply with the requirements of this Article of these
Bylaws.
C. OTHER COMMITTEES
The Board of Directors may appoint other committees, from time to time,
as recommended by the President or the Chairman of the Board, for such purposes
and with such powers as the Board may determine. Unless otherwise specified by
the Board or these Bylaws, a majority of the Committee members will constitute a
quorum of any Board-appointed Committee.
ARTICLE VIII - CERTIFICATES OF STOCK
SECTION 1. ISSUANCE. Certificates of the capital stock of the Company
shall be issued for one or more full shares only and shall be numbered
consecutively. Each certificate shall be personally signed by those officers who
may, from time to time, be named by the Board of Directors or the Executive
Committee. Two signatures, of any combination of the President, Chairman of the
Board or Secretary, shall be required, and the seal of the Company or a
facsimile thereof, shall be impressed or printed on each certificate.
Certificates shall meet the requirements of the laws of the State of
Tennessee and shall state upon the face thereof that the stock is transferable
only upon the books of the Company.
SECTION 2. TRANSFER. Capital stock shall be transferable only on the
books of the Company, subject to these Bylaws, by the owner in person or by an
attorney or legal representative, written evidence of whose authority shall be
filed with the Company, and no transfer of stock shall be required except upon
surrender or cancellation of the certificate representing same. Certificates of
shares of stock shall state upon the face thereof that the stock is transferable
only upon the books of the Company. The Company shall not be required to
transfer any certificate of shares of stock to another when the transferror
thereof is indebted to the Company. A stock certificate book or other suitable
record shall be maintained of all assignments and transfers of stock.
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When stock is transferred, the returned certificates shall be canceled
and preserved for record purposes for such a period of time as the Board of
Directors deems advisable or as otherwise required by applicable law.
SECTION 3. LOST CERTIFICATE. Duplicate certificates may be issued in
lieu of lost certificates upon proof of loss and indemnification satisfactory
to the Company.
ARTICLE IX - INDEMNIFICATION
(a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director, officer or employee
of the Company or is or was serving at the request of the Company as a Director,
officer or employee of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, officer or employee or in
any other capacity while serving as a Director, officer or employee, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the Tennessee Business Corporation Act, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
such law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA fines, excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a Director, officer or employee and shall inure to the benefit of
the indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in paragraph) hereof with respect to proceedings to enforce
rights to indemnification, the Company shall indemnify only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Company. The
right to indemnification conferred in this Article X shall be a contract right
and shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition hereinafter an
"advancement of expenses"); provided, however, that if the Tennessee Business
Corporation Act requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director, officer or employee (and not in any other
capacity in which service was or is rendered by such indemnitee, including
without limitation, service to any employee benefit plan) shall be made only
upon delivery to the Company of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this Article X or otherwise (hereinafter an "undertaking").
(b) if a claim under paragraph (a) of this Article X is not paid in
full by the Company within thirty (30) days after a written claim has been
received by the Company, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be ten (10) days the
indemnitee may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim. If successful in whole or in part in any such
suit or in a suit brought by the Company to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to
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enforce a right of indemnification hereunder but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses), it shall be a
defense that, and (ii) any suit brought by the Company to recover an advancement
of expenses pursuant to the terms of an undertaking the Company shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met the applicable standard of conduct set forth in the Tennessee
Business Corporation Act. Neither the failure of the Company (including its
Board of Directors, independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Tennessee Business Corporation
Act, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its shareholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met such applicable standard of conduct or, in the case
of such suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the Company to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this Article X or otherwise shall be on the
Company.
(c) The rights to indemnification and to the advancement of expenses
conferred in this Article X shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, these Bylaws, agreement,
vote of shareholders or disinterested Directors or otherwise.
(d) The Company may, to the extent authorized form time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses, to any agent of the Company to the fullest extent of the provisions of
this Article X with respect to the indemnification and advancement of expenses
of Directors, officers, and employees of the Company.
ARTICLE X - FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Company shall end on the 31st day of December of
each year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the Board of Directors. The appointment of such accountants shall be subject to
annual ratification by the Shareholders.
ARTICLE XI - DIVIDENDS
Subject to the terms of the Company's Charter, the laws of the State of
Tennessee, and the regulations and orders of the FRB, the Board of Directors
may, from time to time, declare, and the Company may pay, dividends on its
outstanding classes of capital stock.
ARTICLE XII - AMENDMENTS
(a) These Bylaws may be changed or amended by the vote of a majority of
the Directors at any regular or special meeting of the Board; provided, however,
that the Directors shall have been given ten (10) days notice of intention to
change or offer an amendment thereto.
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(b) Only by a vote of the holders of a majority of the outstanding
voting shares voted at a meeting of the Shareholders may these Bylaws be amended
to affect the duties, term of office or indemnification of a Director.
ARTICLE XIII - RECORDS
The Charter, the Bylaws and the proceedings of all meetings of the
shareholders, the Board of Directors, and any Standing Committees of the Board,
shall be recorded in appropriate minute books provided for the purpose. The
minutes of each meeting shall be signed by the Chairman of the Board, the
President or the Secretary, or other officer appointed to act as Secretary of
the meeting.
ARTICLE XIV - SEAL
The Company shall have a corporate seal which shall have inscribed
thereon,
"STATE OF FRANKLIN BANCSHARES, INC."
The Chairman of the Board or the President and Secretary shall have
authority to affix the corporate seal of the Company and to attest the same.
No document other than the certificates of capital stock of the Company
shall be required to have the corporate seal. A facsimile of the corporate seal
printed on the certificates of capital stock shall be fully effective as the
corporate seal of the Company.
13
<PAGE> 1
EXHIBIT 21.1
State of
Subsidiary Incorporation
- ---------- -------------
State of Franklin Savings Bank Tennessee
State of Franklin Leasing Corporation Tennessee
<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 YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,928,172
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,248,572
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 86,104,974
<ALLOWANCE> 630,324
<TOTAL-ASSETS> 118,035,681
<DEPOSITS> 96,364,077
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,101,305
<LONG-TERM> 0
0
0
<COMMON> 1,180,152
<OTHER-SE> 10,390,147
<TOTAL-LIABILITIES-AND-EQUITY> 118,035,681
<INTEREST-LOAN> 5,756,736
<INTEREST-INVEST> 1,820,032
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,756,768
<INTEREST-DEPOSIT> 4,457,203
<INTEREST-EXPENSE> 4,761,135
<INTEREST-INCOME-NET> 2,540,506
<LOAN-LOSSES> 275,127
<SECURITIES-GAINS> 38,769
<EXPENSE-OTHER> 2,402,966
<INCOME-PRETAX> 548,695
<INCOME-PRE-EXTRAORDINARY> 548,695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496,489
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 2.79
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 355,474
<CHARGE-OFFS> 277
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 630,324
<ALLOWANCE-DOMESTIC> 630,324
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
