<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ---------------
Commission file number 000-24675
STATE OF FRANKLIN BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
TENNESSEE 62-1607709
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
(Address of principal executive offices)
(423) 926-3300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,190,363 SHARES OF COMMON
STOCK AS OF MARCH 31, 1999.
Transitional Small Business Disclosure Format (check one): Yes No x
-- --
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
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STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - UNAUDITED
A S S E T S
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents 13,928,172 13,343,237
Investments - Held-To-Maturity
(Estimated Market 1998 - $-0-)
(Estimated Market 1999 - $12,887,094 -- 12,987,836
Investments - Available-for-Sale 12,248,572 9,477,317
Mortgage Loans Held for Sale 1,627,400 1,083,000
Loans Receivable, Net 84,598,573 89,751,241
Accrued Interest Receivable, Net 685,963 787,796
Land, Buildings and Equipment at Cost Less
Accumulated Depreciation of $347,134 in 1998
and $399,532 in 1999 4,117,351 4,126,322
Prepaid Expense and Accounts Receivable 48,218 48,157
Receivable from ESOP 108,286 10,397
FHLB Stock 471,200 479,300
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 186,946 214,080
----------- -----------
Total Assets 118,035,681 132,323,683
=========== ===========
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 96,364,077 110,438,870
Advances by Borrowers for Taxes and Insurance 98,784 155,354
Accrued Interest 103,769 69,728
Accounts Payable and Accrued Expenses 169,379 201,552
Notes Payable 687,925 675,499
Federal Home Loan Bank Advances 9,000,000 9,000,000
Deferred Gain on REO 21,448 21,448
----------- -----------
Total Liabilities 106,465,382 120,562,451
----------- -----------
Stockholders' Equity:
Common Stock, $1.00 Par Value,
10,000,000 Shares Authorized;
1,180,152 Shares Outstanding at December 31, 1998
and 1,190,363 Shares Outstanding
at March 31, 1999 1,180,152 1,190,363
Common Stock Subscribed 6,996 --
Paid-In Capital 10,905,359 10,936,948
Accumulated Other Comprehensive Income 39,820 17,157
Retained Earnings 102,792 281,865
Less: Employee Stock Ownership Plan (664,820) (665,101)
----------- -----------
Total Stockholders' Equity 11,570,299 11,761,232
----------- -----------
Total Liabilities and Stockholders' Equity 118,035,681 132,323,683
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1999
----------- -----------
<S> <C> <C>
Interest Income
Interest on Loans 1,144,736 1,815,122
Interest on Cash Equivalents and Investments 411,737 399,775
----------- -----------
Total Interest Income 1,556,473 2,214,897
----------- -----------
Interest Expense
Interest on Deposits 974,267 1,202,244
Other Interest -- 120,353
----------- -----------
Total Interest Expense 974,267 1,322,597
----------- -----------
Net Interest Income Before
Provision for Loan Losses 582,206 892,300
Provision for Loan Losses (49,643) (48,504)
----------- -----------
Net Interest Income
After Provision for Loan Losses 532,563 843,796
----------- -----------
Other Income
Other Fees and Service Charges 39,769 50,249
Net Gain on Loans Sold 6,627 67,762
Net Gain on Sale and Maturity of Securities 24,534 --
Insurance Commission Income 7,223 14,383
Rental Income, Net 28,877 27,885
Other 2,144 24
----------- -----------
Total Other Income 109,174 160,303
----------- -----------
Other Expenses
Compensation and Related Benefits 247,097 307,612
Occupancy Expenses 60,943 70,572
Furniture and Equipment Expenses 42,286 52,065
Advertising 24,270 35,628
Data Processing Expense 47,655 87,837
Other 138,091 176,411
----------- -----------
Total Other Expenses 560,342 730,125
----------- -----------
Income (Loss) Before Income Taxes 81,395 273,974
Provision for Income Taxes 41,191 94,901
----------- -----------
Net Income (Loss) 40,204 179,073
Other Comprehensive Income
Net Unrealized Gains (Losses) on Securities
Available-For-Sale, Net of Income Taxes of
$540 and $8,838, Respectively (880) 17,157
----------- -----------
Comprehensive Income 39,324 196,230
=========== ===========
Basic and Diluted Earnings (Loss) Per Share (0.04) 0.16
=========== ===========
Basic Weighted Average
Common Shares Outstanding 1,113,898 1,124,201
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1998 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) 40,204 179,073
Items Not Affecting Cash and Cash Equivalents:
Depreciation 48,282 52,398
(Increase) in Accrued Interest (23,252) (101,833)
Deferred Income Taxes (Benefit) 13,861 (15,386)
Provisions for Loan Losses, Net 49,643 48,504
(Increase) Decrease in Prepaid Expenses and
Accounts Receivable 15,933 (2,241)
(Decrease) in Interest Payable (5,060) (34,041)
Increase in Accounts Payable and Accrued Expenses 32,354 12,173
(Decrease) in Deferred Loan Fees, Net (2,351) (920)
(Gain) on Sale of Investments (24,534) --
Discount Accretion (127) (6,932)
Earned ESOP Shares -- 22,824
FHLB Stock Dividends -- (8,100)
Net (Increase) Decrease in Loans Held for Sale (425,500) 544,400
----------- -----------
Net Cash Provided (Used) by Operating Activities (280,547) 689,919
=========== ===========
Cash Flows from Investing Activities
Purchase of Investments (10,558,283) (13,271,647)
Proceeds from Maturities of Held-to-Maturity Investments 10,000,000 --
Proceeds from Sale of Available-for-Sale Investments 1,768,359 --
Proceeds from Maturities of Available-for-Sale Investments 1,000,000 3,000,000
Principal Payments on Mortgage-Backed Securities Available-
for-Sale 30,767 27,710
Increase in Loan Receivable, Net (6,919,605) (5,200,252)
Purchases of Premises and Equipment (602,926) (61,369)
----------- -----------
Net Cash (Used) by Investing Activities (5,281,688) (15,505,558)
----------- -----------
Cash Flows from Financing Activities
Net Increase in Deposits 9,129,346 14,074,793
Net Increase in Advances by Borrowers for Taxes and Insurance 47,407 56,570
Issuance of Common Stock, Net 57,596 111,767
Repayments of Debt -- (12,426)
----------- -----------
Net Cash Provided by Financing Activities 9,234,349 14,230,704
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 3,672,114 (584,935)
Cash and Cash Equivalents at Beginning of Period 12,415,800 13,928,172
----------- -----------
Cash and Cash Equivalents at End of Period 16,087,914 13,343,237
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized Gain on Securities Available-for-Sale,
Net of Deferred Tax Liability (880) 17,157
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Income Taxes -- --
=========== ===========
Interest 995,769 1,356,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 1998 AND 1999
NOTE 1 INCORPORATION AND OPERATION
State of Franklin Bancshares, Inc. (the "Company") was incorporated
under the laws of the State of Tennessee for the purpose of becoming
the holding company of State of Franklin Savings Bank ("Savings Bank").
The stockholders of the Savings Bank exchanged their shares for the
shares of the Company, whereby the Savings Bank became the Company's
wholly owned subsidiary. State of Franklin Leasing Corporation
("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.
NOTE 2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These
financial statements were prepared in accordance with generally
accepted accounting principles for interim financial information in
accordance with the instructions for Form 10-QSB. Accordingly, they do
not include all disclosures necessary for a complete presentation of
the consolidated statements of financial condition, comprehensive
income, and cash flows in conformity with generally accepted accounting
principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim
financial statements have been included. All such adjustments are of a
normal recurring nature. The statement of comprehensive income for the
three months ended March 31, 1999, is not necessarily indicative of the
results which may be expected for the entire year.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
for the Company for the year ended December 31, 1998.
NOTE 3 RECLASSIFICATIONS
In instances where required, amounts reported in prior year's financial
statements included herein have been reclassified to put them on a
comparable basis to the amounts reported in the December 31, 1998
consolidated financial statements.
5
<PAGE> 7
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 1998 AND 1999
NOTE 4 LOANS RECEIVABLE
Loans receivable at December 31, 1998 and March 31, 1999, consist of
the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
First Mortgage Loans 35,195,869 36,553,675
Construction Loans 22,024,861 24,059,382
Consumer Loans 7,726,136 8,261,208
Participation Loans, Net 863,162 846,776
Commercial Loans 26,603,529 29,225,910
Savings Account Loans 545,011 421,859
Credit Line Advances 396,618 357,911
Lease Finance 120,999 189,547
----------- -----------
Gross Loans Receivable 93,476,185 99,916,268
----------- -----------
Less:
Undisbursed Portion of Loans in Process (8,179,727) (9,419,558)
Net Deferred Loan Origination Fees (67,561) (66,641)
Accumulated General Loan Loss Reserves (630,324) (678,828)
----------- -----------
(8,877,612) (10,165,027)
----------- -----------
Loans Receivable as Determined in Accordance
with Generally Accepted Accounting Principles 84,598,573 89,751,241
=========== ===========
An analysis of the allowance for loan losses is as follows:
1998 1999
----------- -----------
Balance - Beginning of Period 355,474 630,324
Provision for Losses 275,127 48,504
Net Charge-Offs (277) (--)
----------- -----------
Balance - End of Period 630,324 678,828
=========== ===========
</TABLE>
NOTE 5 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
The Employee Stock Ownership Plan and Trust (ESOP) was established and
funded for 1997 although it was not leveraged until September 1998. A
contribution of $57,600 was contributed to the plan for 1997. At
February 28, 1998, 5,236 shares were issued to the plan for the 1997
contribution. The Savings Bank stock was exchanged for Company stock as
discussed in Note 1. The ESOP borrowed $700,000 from the Company and
used the funds to purchase 63,636 shares of common stock of the
Company. At March 31, 1999, the ESOP had 78,529 shares of which
approximately 15,990 shares were released and allocated, 2,075 shares
were considered committed to be released and 60,464 shares were
unallocated. The stock will be allocated to employees based on their
salaries. All employees who work over 1,000 hours are immediately
eligible for the plan. Employees will be fully vested after seven years
of service. This plan has a 401k feature that began in 1998, which
allows employees to defer up to 6% of their salary and is matched by
the Savings Bank up to the maximum allowed amount. For the three months
ended March 31, 1999, compensation related to the ESOP of approximately
$28,500 was expensed.
6
<PAGE> 8
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 1998 AND 1999
NOTE 6 STOCK OPTION PLANS
On December 21, 1996, the Company's Board of Directors approved the
Stock Option Plan for Directors and the Stock Option Plan for
Management. A total of 15% of the original stock offering (91,500
shares) was reserved for these plans. These plans were retroactively
amended after year end.
Under the amended stock option plan for the outside directors,
one-third of the total shares were granted to the outside directors as
compensation for directors' fees over the next five years. Beginning
when the Company had annual profitability, the options began vesting at
20% per year to each director. This will total 2,346 shares per
director. The exercise price of the options is $10.00 per share. The
vested portion of the options may be exercised at any time. There is no
termination date on the options, but in the event of death, the estate
must exercise the options within twelve months. If the Company is sold
or merged, the options become 100% vested.
Under the stock option plan for management, the remaining 61,000 shares
were granted to management as an incentive in the Savings Bank's
performance. The options retroactively began to vest after three
consecutive quarters of profitability. The options will vest at 20% per
year for five years. The exercise price of the options is $10.00 per
share. The vested portion of the options may be exercised at any time.
There is no termination date on the options, but in the event of death,
the estate must exercise the options within twelve months. If the
individual leaves the service of the Savings Bank, the options must be
exercised within three months, although this requirement may be waived
by the board. If the Savings Bank is sold or merged, the options become
100% vested.
The stock option plans for outside directors and for management were
amended again, effective April 17, 1998, for 15% of the secondary
offering (75,192 shares). One-third of these shares was allocated to
outside directors and the remainder to management. Exercise price of
these options was set at $11.00 per share. The other terms of these
options are the same as the terms of the original options.
NOTE 7 FEDERAL HOME LOAN BANK
In the second quarter of 1998, the Savings Bank became a member of the
Federal Home Loan Bank of Cincinnati (FHLB of Cincinnati). The Savings
Bank, as a member of the FHLB of Cincinnati, is required to own capital
stock in the FHLB of Cincinnati. The Savings Bank received $9,000,000
in advances from the FHLB of Cincinnati.
NOTE 8 OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the
periods ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Other Noninterest Expense:
Seminars and Education Expenses 9,342 15,789
Insurance Expense 10,060 13,370
Professional Expenses and Supervisory Examinations 31,667 34,682
Office Supplies and Postage 37,412 39,857
Telephone 17,955 21,783
Other 31,655 50,930
------- -------
138,091 176,411
======= =======
</TABLE>
7
<PAGE> 9
STATE OF FRANKLIN BANCSHARES, INC.
JOHNSON CITY, TENNESSEE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 1998 AND 1999
NOTE 9 ORGANIZATION EXPENSE
There were no miscellaneous organization expenses of the Company netted
against paid-in capital for the three month period ended March 31,
1999. Miscellaneous organization expenses of $11,355 were netted
against paid-in capital in 1998.
NOTE 10 COMPREHENSIVE INCOME
In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, (SFAS No. 130),
"Reporting Comprehensive Income". This new statement establishes
standards for reporting and displaying comprehensive income and its
components in a basic set of financial statements. The purpose of
reporting comprehensive income is to report a measure of all changes in
equity of an enterprise that results from recognized transactions and
other economic events of the period other than transactions with owners
in their capacity as owners.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners.
Reclassification adjustments are made to avoid counting in
comprehensive income items that are displayed as part of net income for
a period that also had been displayed as part of other comprehensive
income in that period or earlier periods. For example, gains on
investment securities that were realized and included in net income of
the current period that also had been included in other comprehensive
income as unrealized holding gains in the period in which they arose
must be deducted through other comprehensive income of the period in
which they are included in net income to avoid including them in
comprehensive income twice.
The Savings Bank adopted SFAS No. 130 effective December 31, 1997 and
restated the previous year's financial statements to comply with the
new reporting requirements.
NOTE 11 EARNINGS PER SHARE
Basic earnings per share amounts are based on the average number of
shares outstanding through the period. Basic and dilutive earnings per
share amounts are equal for the three month periods ended March 31,
1998 and 1999. Unallocated ESOP shares are not considered as
outstanding for purposes of this calculation.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
STATE OF FRANKLIN BANCSHARES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THE THREE MONTHS ENDED MARCH 31,1998
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.
EARNINGS REVIEW
Total net income of the Company for the three months ended March 31, 1999 was
$179,000, an increase of $139,000 over the three months ended March 31, 1998
total net income of $40,000. Net income per common share was $0.16 compared to
per share income of $0.04 in 1998. Return on average assets was .57% and the
return on average equity was 6.14% for the three month period ended March 31,
1999.
Operating results in 1999 reflected higher net interest income and noninterest
income. Net interest income of $892,000 for the three months ended March 31,
1999 was up 53% over the 1998 period. Loans increased 62% and deposits increased
35%. The 1999 provision for possible loan losses was $49,000. Noninterest income
increased $51,000, or 47%, with other fees and service charges, net gains on
loans sold and insurance commissions responsible for most of the increase over
the three months ended March 31, 1998. Noninterest expense was $730,000 for the
1999 period, an increase of 30% over the 1998 period, primarily resulting from
increased salaries and benefits.
NET INTEREST INCOME
Net interest income increased $310,000 or 53% for the three months ended March
31, 1999 to $892,000 compared to $582,000 in the first three months of 1998.
Average loans outstanding increased $33.6 million or 62% over average loans at
March 31, 1998.
Average deposits increased by 35% or $26.6 million to $103.4 million in 1999
compared to $76.8 million in the first three months of 1998. The rate paid on
average interest-bearing liabilities decreased 38 basis points during the three
months ended March 31, 1999 to 4.68%.
PROVISION FOR LOAN LOSSES
During the three months ended March 31, 1999, the provision for possible loan
losses was $49,000. There were no charge-offs during the three months ended
March 31, 1999 and 1998. The allowance for possible loan losses represented .75%
of total loans, net of mortgage loans held-for-sale, at March 31, 1999, compared
to .7% at March 31, 1998.
PROVISION FOR INCOME TAXES
For the three months ended March 31, 1999, the provision for federal and state
income taxes was $95,000, an increase of $54,000 from 1998, primarily due to the
increase in income before income taxes.
NONINTEREST INCOME
The Company's noninterest income was $160,000 during the three months ended
March 31, 1999, an increase of $51,000 or 47% over the comparable 1998 period.
The increase was attributable to increases in other fees and service charges,
net gains on loans sold and insurance commissions of $10,000, $61,000 and
$7,000, respectively, which were offset by decreases in net gain on sale and
maturity of securities, net rental income and other income of $24,000, $1,000
and $2,000, respectively.
9
<PAGE> 11
STATE OF FRANKLIN BANCSHARES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSE
Noninterest expense totaled $730,000 for the period ending March 31, 1999, an
increase of $170,000. Salaries and wages of $308,000 accounted for 42% of the
total compared to $247,000 or 44% for the first three months of 1998.
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 $22.5 million at March 31, 1999. The majority of
the holdings are backed by U. S. Government or Federal Agency guarantees
limiting the credit risk associated with these securities. At March 31, 1999,
approximately $9.8 million of investment securities were held as
available-for-sale compared to $13.2 million at March 31, 1998. This $3.4
million decrease was offset by a $12 million increase in investments
held-to-maturity.
LOANS
Loans outstanding totaled $90.5 million at March 31, 1999. This represented an
increase of 56% from the March 31, 1998 outstanding loans of $57.9 million.
Consumer loans increased to $8.3 million at March 31, 1999, an increase of 261%
from $2.3 million at March 31, 1998. Real estate construction lending totaled
$14.7 million and $24.1 million at March 31, 1998 and 1999, respectively.
Commercial loans of $29.2 million at March 31, 1999 increased 96% from $14.9
million at March 31, 1998. During the first three months of 1999, commercial
loans serviced increased to $847,000 from $838,000 at March 31, 1998.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at March 31, 1999 and
March 31, 1998. The allowance for possible loan losses was $679,000 and $405,000
at March 31, 1999 and 1998, respectively. Management believes the allowance for
possible loan losses is adequate to provide for potential loan losses.
DEPOSITS
Total deposits at March 31, 1999 of $110.4 million, represented an increase of
$29 million or a 36% increase from $81.4 million at March 31, 1998. Non-interest
bearing demand deposits totaled $6.4 million at March 31, 1999, an increase of
$2.6 million from March 31, 1998. Interest bearing deposits increased $26.4
million to $104 million at March 31, 1999.
CAPITAL
Equity capital at March 31, 1999 was $11.7 million, an increase of $700,000 from
$11 million at March 31, 1998.
At March 31, 1999, all capital ratios were in excess of the regulatory minimums,
with the Company's Tier 1, total risk-based and leverage ratio of 14.05%, 15.30%
and 9.15%, respectively.
10
<PAGE> 12
STATE OF FRANKLIN BANCSHARES, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 with the Federal Home Loan Bank of Cincinnati
totaling $10.9 million at March 31, 1999.
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.
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.
11
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
None.
ITEM 2.
CHANGES IN SECURITIES
None
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 -- Financial Data Schedule (For SEC Use Only)
(b) There have been no Current Reports on Form 8-K filed during the quarter
ended March 31, 1999.
12
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STATE OF FRANKLIN BANCSHARES, INC.
(Registrant)
Date: May 13, 1999 /s/ Randal R. Greene
--------------------------------------------------------
Randal R. Greene, President and Chief Executive
Officer (principal executive officer)
Date: May 13, 1999 /s/ Charles E. Allen, Jr.,
--------------------------------------------------------
Charles E. Allen, Jr., Chairman of the Board and Chief
Financial Officer (principal financial and accounting
officer)
<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 THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,343,237
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,477,317
<INVESTMENTS-CARRYING> 12,887,094
<INVESTMENTS-MARKET> 12,987,836
<LOANS> 89,751,241
<ALLOWANCE> 678,828
<TOTAL-ASSETS> 132,323,683
<DEPOSITS> 110,438,870
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,123,581
<LONG-TERM> 0
0
0
<COMMON> 1,190,363
<OTHER-SE> 10,570,869
<TOTAL-LIABILITIES-AND-EQUITY> 132,323,683
<INTEREST-LOAN> 1,815,122
<INTEREST-INVEST> 399,775
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,214,897
<INTEREST-DEPOSIT> 1,202,244
<INTEREST-EXPENSE> 1,322,597
<INTEREST-INCOME-NET> 892,300
<LOAN-LOSSES> 48,504
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 730,125
<INCOME-PRETAX> 273,974
<INCOME-PRE-EXTRAORDINARY> 273,974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,073
<EPS-PRIMARY> 0.16
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<YIELD-ACTUAL> 2.97
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<ALLOWANCE-OPEN> 630,324
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<ALLOWANCE-CLOSE> 678,828
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