U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
--------------
OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24675
---------
STATE OF FRANKLIN BANCSHARES, INC.
------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1607709
--------------------------------- --------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
-------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(423) 232-4400
------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
------------------------------------------
(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----
1,465,512
------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF JUNE 30, 2000)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
----
<PAGE>
STATE OF FRANKLIN BANCSHARES, INC
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
-------
<S> <C>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
JUNE 30, 2000 (REVIEWED) AND DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4 - 5
THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (REVIEWED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (REVIEWED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
SIX MONTHS ENDED JUNE 30, 2000 (REVIEWED)
AND YEAR ENDED DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (REVIEWED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (REVIEWED) 8
INDEPENDENT ACCOUNTANT'S REPORT 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 19
ITEM 3. DEFAULT UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
ASSETS 2000 - REVIEWED 1999 - AUDITED
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks $ 6,604,418 2,785,509
Federal Funds Sold 2,333,000 308,000
Short-Term Interest Bearing Deposits 212,730 133,148
Investments - HTM
(Estimated Market 2000 - $13,212,971 and 1999 - $13,301,184) 13,988,847 13,988,346
Investments - AFS 22,334,258 21,440,591
Loans Held for Sale 392,139 453,562
Loans and Leases Receivable 125,602,523 114,439,773
Less: Allowance for Loan and Lease Losses (896,796) (810,303)
-------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 124,705,727 113,629,470
-------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,362,732 1,271,439
Land, Buildings & Equip at Cost Less Accum Depr
of $745,613 in 2000 and $607,618 in 1999 4,806,634 4,058,242
Prepaid Expense and Accounts Receivable 130,957 77,907
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 699,873 599,503
FHLB Stock 1,468,700 1,417,700
Other Real Estate Owned 126,000 0
--------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 179,181,015 160,178,417
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
==================================================================================================
LIABILITIES:
Interest-Free Deposits $ 9,386,431 7,762,451
Interest-Bearing Deposits 132,751,508 124,475,175
Advances by Borrowers for Taxes and Insurance 259,906 117,372
Accrued Interest on Deposits 158,533 95,734
Accounts Payable and Accrued Expenses 138,242 488,630
FHLB Short-Term Advances 13,960,000 4,045,000
FHLB Long-Term Advances 6,198,158 9,047,707
Deferred Gain on REO 21,448 21,448
Notes Payable 599,628 626,615
--------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 163,473,854 146,680,132
--------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,465,512 1,301,519
Paid-in Capital 14,251,461 12,243,730
Accumulated Other Comprehensive Income (703,510) (610,238)
-
Retained Earnings 1,893,320 1,189,889
Less: Employee Stock Ownership (1,199,622) (626,615)
-------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 15,707,161 13,498,285
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,181,015 160,178,417
==================================================================================================
</TABLE>
See accompanying notes and accountant's report.
3
<PAGE>
<TABLE>
<CAPTION>
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
-------------------------------------
INTEREST INCOME: 2000 - REVIEWED 1999 - REVIEWED
-------------------- ---------------
<S> <C> <C>
Interest and Fees on Loans $ 2,634,856 1,915,139
Other Interest Income 645,148 587,942
------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,280,004 2,503,081
------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,739,024 1,384,986
Interest on Short-Term Debt 75,178 -
Interest on Long-Term Debt 176,887 124,331
Other Interest Expense - -
------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,991,089 1,509,317
------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,288,915 993,764
PROVISION FOR LOAN LOSSES (68,237) (70,642)
------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,220,678 923,122
------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 97,989 55,196
Net Gain on Loans Sold 22,538 18,137
Net Gain on Sale and Maturity of Securities - 12,724
Insurance Commission Income 13,299 12,060
Rental Income, Net 25,909 31,269
Other - (24)
------------------------------------------------------------------------------------
TOTAL OTHER INCOME 159,735 129,362
------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 384,123 306,873
Occupancy Expenses 60,757 56,360
Furniture and Equipment Expense 62,529 77,972
Advertising 29,186 28,589
Data Processing Expense 92,185 65,973
Other 176,741 198,044
------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 805,521 733,811
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 574,892 318,673
PROVISION FOR INCOME TAXES (199,547) (102,967)
------------------------------------------------------------------------------------
NET INCOME $ 375,345 215,706
====================================================================================
EARNINGS PER SHARE:
BASIC $ 0.28 0.19
DILUTED 0.28 0.19
====================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,319,526 1,126,149
DILUTED 1,355,734 1,138,830
====================================================================================
</TABLE>
See accompanying notes and accountant's report.
4
<PAGE>
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------
INTEREST INCOME: 2000 - REVIEWED 1999 - REVIEWED
-------------------- ---------------
<S> <C> <C>
Interest and Fees on Loans $ 5,115,908 3,730,261
Other Interest Income 1,263,541 987,717
------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 6,379,449 4,717,978
------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 3,367,778 2,587,230
Interest on Short-Term Debt 155,296 -
Interest on Long-Term Debt 300,953 244,684
Other Interest Expense - -
------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 3,824,027 2,831,914
------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 2,555,422 1,886,064
PROVISION FOR LOAN LOSSES (125,175) (119,146)
------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 2,430,247 1,766,918
------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 188,006 105,445
Net Gain on Loans Sold 31,278 85,899
Net Gain on Sale and Maturity of Securities - 12,724
Insurance Commission Income 23,386 26,443
Rental Income, Net 40,933 59,154
Other - -
------------------------------------------------------------------------------------
TOTAL OTHER INCOME 283,603 289,665
------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 764,289 614,485
Occupancy Expenses 136,852 126,932
Furniture and Equipment Expense 132,395 130,037
Advertising 43,614 64,217
Data Processing Expense 176,079 153,810
Other 399,537 374,455
------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,652,766 1,463,936
------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 1,061,084 592,647
PROVISION FOR INCOME TAXES (357,653) (197,868)
------------------------------------------------------------------------------------
NET INCOME $ 703,431 394,779
====================================================================================
EARNINGS PER SHARE:
BASIC $ 0.54 0.35
DILUTED 0.53 0.35
====================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,295,363 1,125,012
DILUTED 1,331,571 1,136,479
====================================================================================
</TABLE>
See accompanying notes and accountant's report.
5
<PAGE>
<TABLE>
<CAPTION>
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2000 (REVIEWED) AND YEAR ENDED DECEMBER 31, 1999 (AUDITED)
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>
Balance at December 31, 1998 1,180,152 6,996 10,905,359 39,820 102,792 (664,820) 11,570,299
--------------
Net Proceeds
from Sale of Stock 121,367 (6,996) 1,338,371 -- -- -- 1,452,742
--------------
ESOP Shares Allocated -- -- -- -- -- 38,205 38,205
--------------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $339,205 Income Tax) -- -- -- (658,456) -- -- ( 658,456)
Less: Reclassification Adjustment
(Net of $4,326 Income Tax) -- -- -- 8,398 -- -- 8,398
--------------
( 650,058)
Net Income -- -- -- -- 1,087,097 -- 1,087,097
--------------
Total Comprehensive Income -- -- -- -- -- -- 437,039
-------------- --------- ---------- --------- --------- ----------- --------------
Balance at December 31, 1999 1,301,519 -- 12,243,730 (610,238) 1,189,889 (626,615) 13,498,285
--------------
Net Proceeds
from Sale of Stock 163,993 -- 2,007,731 -- -- -- 2,171,724
--------------
ESOP Shares Allocated -- -- -- -- -- 26,987 26,987
--------------
Additional ESOP Shares Issued (599,994) (599,994)
--------------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $48,049 Income Tax) -- -- -- (93,272) -- -- (93,272)
Net Income -- -- -- -- 703,431 -- 703,431
--------------
Total Comprehensive Income -- -- -- -- -- -- 610,159
-------------- --------- ---------- --------- --------- ----------- --------------
Balance at June 30, 2000 1,465,512 -- 14,251,461 (703,510) 1,893,320 (1,199,622) 15,707,161
============== ========= ========== ========= ========= =========== ==============
See accompanying notes and accountant's report.
</TABLE>
6
<PAGE>
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 - REVIEWED 1999 - REVIEWED
------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 703,431 394,779
Items Not Affecting Cash:
Depreciation 137,995 125,862
(Increase) in Accrued Interest (91,293) (478,092)
Deferred Income Taxes (Benefit) (52,323) 42,872
Provision for Loan and Lease Losses 125,175 118,130
(Increase) in Prepaid Expenses and Accounts Receivable (53,049) (54,012)
(Increase) Decrease in Interest Payable 62,799 (31,604)
(Increase) Decrease in Accounts Payable and Accrued Expenses (350,388) 63,804
Increase (Decrease) in Deferred Loan Fees, Net 33,104 (972)
(Gain) on Sale of Investments - (12,724)
Discount Accretion (7,182) (3,033)
Earned ESOP Shares 26,988 35,335
FHLB Stock Dividends (51,000) (26,300)
Net Decrease in Loans Held for Sale 61,423 1,190,587
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 545,680 1,364,632
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Available-for-Sale Investments (1,565,582) (27,907,489)
Proceeds from Sale of Available-for-Sale Investments 504,171 -
Proceeds from Maturities of Available-for-Sale Investments - 6,595,000
Principal Payments on Mortgage Backed Securities - AFS - 35,965
(Increase) Decrease in Federal Funds Sold (2,025,000) 2,617,000
(Increase) Decrease in Short-Term Interest Bearing Deposits (79,582) 5,000,000
(Increase) in Loans Receivable, Net (11,327,432) (13,129,550)
Purchases of Premises and Equipment (886,387) (85,239)
Purchases of Federal Home Loan Bank Stock - (870,700)
--------------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (15,379,812) (27,745,013)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 9,900,313 26,546,797
Net Increase in Advances by Borrowers for Taxes and Insurance 142,534 116,366
Issuance of Common Stock, Net 2,171,724 35,576
ESOP Shares Purchased (599,994) -
Repayment of Debt (26,987) (35,335)
Proceeds from FHLB Advances 7,065,451 -
--------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,653,041 26,663,404
--------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 3,818,909 283,023
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,785,509 2,507,173
--------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 6,604,418 2,790,196
====================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ (93,272) 17,157
Acquisition of Real Estate Property through Foreclosure of Related Loans $ (126,000) -
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 807,389 -
Interest $ 3,761,228 1,356,638
====================================================================================================================
</TABLE>
See accompanying notes and accountant's report.
7
<PAGE>
STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - REVIEWED
NOTE 1 INCORPORATION AND OPERATIONS
------- ------------------------------
State of Franklin Bancshares, Inc. (Company) was incorporated under the
laws of the State of Tennessee for the purpose of becoming the holding
company of State of Franklin Savings Bank (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 reviewed 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 and in accordance with the instructions
for Form 10-Q SB. Accordingly, they do not include all disclosures
necessary for a complete presentation of the consolidated statements of
financial condition, income, cash flows, and changes in stockholders'
equity 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 June 30, 2000
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, 1999.
NOTE 3 RECLASSIFICATIONS
------- -----------------
In instances where required, amounts reported in prior period's financial
statements included herein have been reclassified to put them on a
comparable basis to the amounts reported in the June 30, 2000 consolidated
financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
------ -------------------------------
The Savings Bank has purchased additional property near Kingsport,
Tennessee in Sullivan County and will be constructing a fifth branch
location scheduled for completion in November of the current year. Fixed
assets at June 30, 2000, and December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Land 850,000 850,000
Construction in Process - Colonial Heights Branch 753,644 25,000
Buildings and Leasehold Improvements 2,298,899 2,271,821
Furniture, Fixtures and Equipment 1,649,704 1,519,039
----------- -----------
5,552,247 4,665,860
Less: Accumulated Depreciation 745,613 607,618
----------- -----------
4,806,634 4,058,242
=========== ===========
</TABLE>
8
<PAGE>
NOTE 5 LOANS RECEIVABLE
------- -----------------
Loans receivable at June 30, 2000 and December 31, 1999, consist of the
following:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
First Mortgage Loans 50,266,088 43,715,282
Construction Loans 27,183,740 23,525,380
Consumer Loans 10,287,668 9,703,102
Participation Loans, Net 533,676 533,676
Commercial Loans 45,670,196 41,919,362
Savings Account Loans 346,694 248,964
Credit Line Advances 394,973 419,062
Lease Finance 1,145,712 904,705
--------------- ---------------
Gross Loans and Leases Receivable 135,828,747 120,969,533
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 10,120,566) ( 6,457,206)
Net Deferred Loan Origination Fees ( 105,657) ( 72,554)
Accumulated General Loan Loss Allowance ( 896,796) ( 810,303)
--------------- ---------------
( 11,123,020) ( 7,340,063)
--------------- ---------------
Loans and Leases Receivable, Net 124,705,727 113,629,470
=============== ===============
</TABLE>
An analysis of the allowance for loan and lease losses at June 30, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
-------------- --------------
<S> <C> <C>
Balance - Beginning of Period 810,303 630,324
Provision for Loan and Lease Losses 125,175 181,429
Loans and Leases Charged-Off (38,682) (1,450)
Charged-Off Loan and Lease Recoveries -- --
-------------- --------------
Balance - End of Period 896,796 810,303
============== ==============
</TABLE>
The gross amount of participation loans serviced by State of Franklin
Savings Bank was $1,067,240 at June 30, 2000 and also at December 31, 1999.
The Bank had no non-performing loans at June 30, 2000 compared to $221,781
at December 31, 1999.
9
<PAGE>
NOTE 6 FEDERAL REGULATION
------- -------------------
The capital ratios for State of Franklin Savings Bank are as follows:
<TABLE>
<CAPTION>
For Capital
Adequacy
Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provision
---------------- ---------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
--------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
As of June 30, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 15,569 14.02% >=11,021 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 14,527 13.08% >=6,661 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 14,527 8.60% >=8,446 5.0%
As of December 31, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) 13,303 13.12% >=10,140 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 12,222 12.05% >=6,084 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 12,222 7.91% >=7,730 5.0%
</TABLE>
The capital ratios for State of Franklin Bancshares, Inc. are as follows:
For Capital
<TABLE>
<CAPTION>
For Capital
Adequacy
Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provision
---------------- ---------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
--------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
As of June 30, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 17,307 15.53% >=11,144 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 16,411 14.73% >=6,687 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 16,411 9.63% >=8,524 5.0%
As of December 31, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) 14,919 14.66% >=10,176 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 14,109 13.86% >=6,106 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 14,109 9.09% >=7,769 5.0%
</TABLE>
10
<PAGE>
NOTE 7 EMPLOYEE AND DIRECTOR BENEFIT PLANS
------- ---------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) for those employees
who meet the eligibility requirements of the plan. During 2000 the ESOP
purchased 44,444 additional shares at $13.50 with financing by a loan from
the Company.
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:
June 30, December 31,
2000 1999
--------- ---------
Number of Shares
Released and Allocated 26,431 16,054
Committed to be Released 1,999 5,188
Suspense 102,312 59,804
Fair Value
Released and Allocated 356,819 216,729
Committed to be Released 26,986 70,038
Suspense 1,381,212 807,354
Contributions to the ESOP are as follows:
June 30, December 31,
2000 1999
--------- ---------
Compensation Expense 90,000 127,272
Contributions 90,000 127,272
For the purpose of computing earnings per share, all ESOP shares committed
to be released will be considered outstanding.
STOCK OPTION PLANS
<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, 2000 55,564 24,993 $10.45
Options Granted - Management January 1, 2000 145,128 56,652 $11.00
During 2000 68,546 -- $13.50
Options Exercised (554) -- $10.00
Options Expired - Outside Directors (4,997) -- $10.00
--------- ------
Options Outstanding - June 30, 2000 263,687 81,645 $11.56
======= ======
</TABLE>
11
<PAGE>
NOTE 8 DEPOSITS
------- --------
Deposit balances are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------- --------------------------------
Rate Amount Percent Rate Amount Percent
--------- ---------- ------------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Passbook 4.72 20,851,712 14.67 4.85 43,579,494 32.96
Interest-Free Checking -- 9,386,431 6.60 -- 7,762,451 5.87
NOW 2.00 7,058,685 4.97 1.99 6,285,555 4.75
Money Market Deposit 5.29 22,640,106 15.93 4.48 13,790,665 10.43
---------- ----------- ---------- -----------
59,936,934 42.17 71,418,165 54.01
---------- ----------- ---------- -----------
Fixed Term Certificate Accounts
Balances $100,000 or greater 6.05 20,035,468 14.10 5.65 14,620,826 11.06
Balances less than $100,000 5.91 62,165,537 43.74 5.12 46,198,635 34.93
---------- ----------- ---------- -----------
82,201,005 57.83 60,819,461 45.99
---------- ----------- ---------- -----------
142,137,939 100.00 132,237,626 100.00
========== =========== ========== ===========
</TABLE>
The contractual maturity of certificate accounts at June 30, 2000 and December
31, 1999, is as follows:
Period Ending June 30, 2000 Year Ending December 31, 1999
------------------------------- ------------------------------
2001 66,772,139 2000 42,805,186
2002 12,976,530 2001 5,447,698
2003 1,994,728 2002 11,749,728
2004 457,607 2003 789,631
2005 and After -- 2004 and After 27,218
---------- ----------
82,201,005 60,819,461
========== ==========
NOTE 9 SHORT-TERM BORROWINGS
------- ----------------------
Short-term advances from the Federal Home Loan Bank are summarized as
follows for the periods ended June 30, 2000 and
December 31, 1999:
2000 1999
---------- ---------
Cash Management (Rate Floats Daily) 13,960,000 4,045,000
Weighted Average Rate 6.76% 5.49%
12
<PAGE>
NOTE 10 INVESTMENT SECURITIES
-------- ----------------------
The amortized cost and fair value of investment securities held-to-maturity
and available-for-sale at June 30, 2000, 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.
June 30, 2000:
---------------
<TABLE>
<CAPTION>
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 997,932 -- 38,338 959,594
After five years
but within ten years 16,774,201 -- 826,617 16,947,584
Over ten years
but within fifteen years 2,993,473 -- 200,969 2,792,504
Equity Securities
Callable after five years
but within ten years 1,000,000 -- -- 1,000,000
Other
Within one year 1,634,576 -- -- 1,634,576
--------- ------- --------- -----------
Total Available-for-Sale 23,400,182 -- 1,065,924 22,334,258
========== ======= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 1,000,000 -- 30,277 969,723
After five years
but within ten years 12,988,847 -- 745,598 12,243,249
--------- ------- --------- -----------
Total Held-to-Maturity 13,988,847 -- 775,875 13,212,972
========= ======= ========= ===========
</TABLE>
NOTE 11 EARNINGS PER SHARE
-------- --------------------
Earnings per share for quarter ended June 30, 2000, compared with quarter
ended June 30, 1999, is as follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
--------- ---------
<S> <C> <C>
Net Income Available to Common Shareholders 375,345 215,706
========= =========
Average Shares
Average Shares - Basic 1,319,526 1,126,149
Effect of Dilutive Common Stock Options 36,208 12,681
--------- ---------
Average Shares - Diluted 1,355,734 1,138,830
========= =========
Basic Earnings Per Share 0.28 0.19
========= =========
Diluted Earnings Per Share 0.28 0.19
========= =========
</TABLE>
13
<PAGE>
Earnings per share for six months ended June 30, 2000, compared with six
months ended June 30, 1999, is as follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
--------- ---------
<S> <C> <C>
Net Income Available to Common Shareholders 703,431 394,779
========= =========
Average Shares
Average Shares - Basic 1,295,363 1,125,012
Effect of Dilutive Common Stock Options 36,208 11,467
--------- ---------
Average Shares - Diluted 1,331,571 1,136,479
========= =========
Basic Earnings Per Share 0.54 0.35
========= =========
Diluted Earnings Per Share 0.53 0.35
========= =========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
BAYLOR AND BACKUS
<S> <C> <C>
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)
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>
To the Board of Directors
State of Franklin Bancshares, Inc.
P. O. Box 940
Johnson City, Tennessee 37605
We have reviewed the accompanying consolidated statement of financial condition
of State of Franklin Bancshares, Inc. and subsidiaries as of June 30, 2000 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the periods ended June 30, 2000 and 1999, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of State of
Franklin Bancshares, Inc.
A review consists principally of inquiries of State of Franklin Bancshares, Inc.
personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The consolidated statement of financial condition as of December 31, 1999 and
the consolidated statement of changes in retained earnings for the year then
ended were audited by us, and we expressed an unqualified opinion on them in our
report dated March 15, 2000, but we have not performed any auditing procedures
since that date.
BAYLOR AND BACKUS
Certified Public Accountants
Johnson City, Tennessee
August 8, 2000
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS TENNESSEE SOCIETY
OF CERTIFIED PUBLIC ACCOUNTANTS
15
<PAGE>
ITEM NO. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------ -----------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
GENERAL
-------
The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations of the
Company. State of Franklin Savings Bank (Savings Bank) and State of
Franklin Leasing Corporation (Leasing Corp) represents virtually all of the
assets of State of Franklin Bancshares, Inc. (Company). The Company places
an emphasis on an integrated approach to its balance sheet management.
Significant balance sheet components of investment securities, loans and
sources of funds are managed in an integrated manner with the management of
interest rate risk, liquidity, and capital. These components are examined
below.
BALANCE SHEET REVIEW
----------------------
At June 30, 2000, assets of State of Franklin Bancshares, Inc. totaled
$179.2 million reflecting an increase of $19.0 million or 12% since
December 31, 1999. The growth in assets has been funded primarily by an
$9.9 million increase in deposits, a $7.1 million increase in Federal Home
Loan Bank advances, and a $2.2 million increase in stockholders' equity.
LOANS
-----
Loans outstanding totaled $125.6 million at June 30, 2000. This represented
an increase of 9.8% from the December 31, 1999 outstanding loans of $114.4
million.
Commercial loans increased $3.8 million at June 30, 2000, an increase of
9.0% from $41.9 million at December 31, 1999. Real estate construction
lending totaled $27.2 million compared with $23.5 million at December 31,
1999, reflecting an increase of $3.7 million or 15.6%. Consumer loans of
$10.3 million at June 30, 2000 increased $585,000 or 6.0% from $9.7 million
at December 31, 1999. During the first six months of 2000, first mortgage
residential loans increased $6.6 million or 15% to $50.3 million at June
30, 2000. The loan portfolio mix at June 30, 2000 consists of 37%
residential mortgages, 34% commercial, 20% real estate construction, and 9%
consumer loans.
INVESTMENT SECURITIES
----------------------
Investment securities totaled $36.3 million at June 30, 2000. The majority
of the holdings are backed by U. S. Government or Federal Agency guarantees
limiting the credit risk associated with these securities. At June 30,
2000, approximately $22.3 million of investment securities were held as
available-for-sale compared to $21.4 million at December 31, 1999.
Investments held-to-maturity remained unchanged at $14 million.
NON-PERFORMING ASSETS
----------------------
The bank had no non-performing assets or nonaccrual loans at June 30, 2000
compared with $221,781 at December 31, 1999. The allowance for possible
loan losses was $896,796 at June 30, 2000 compared with $810,303 at year
end 1999. Management believes the allowance for possible loan losses is
adequate to provide for potential loan losses.
DEPOSITS
--------
Total deposits at June 30, 2000 of $142.1 million, represented an increase
of $9.9 million or a 7.5% increase from $132.2 million at December 31,
1999. Non-interest bearing demand deposits totaled $9.4 million at June 30,
2000, an increase of $1.6 million from December 31, 1999. Interest bearing
deposits increased $8.3 million to $132.8 million at June 30, 2000.
16
<PAGE>
CAPITAL
-------
Equity capital for the Savings Bank at June 30, 2000 was $14 million. At
June 30, 2000, all capital ratios were in excess of the regulatory
minimums, with the Savings Bank's Tier 1, total risk-based, and leverage
ratios of 13.08%, 14.02% and 8.60%, respectively.
On October 4, 1999, the Company filed a registration statement on Form SB-1
with the SEC for the purpose of offering up to 555,555 shares of its common
stock at a per share price of $13.50. This offering became effective
November 12, 1999. At December 31, 1999, 111,092 shares had been sold with
proceeds totaling $1.5 million. At June 30, 2000, closing date of the
offering, 275,085 total shares have been sold, generating $3.7 million in
additional capital. Equity capital for the Company at June 30, 2000, was
$15.7 million.
LIQUIDITY
---------
The purpose of liquidity management is to ensure that there is sufficient
cash flow to satisfy demands for credit, deposit withdrawals, and other
corporate needs. Traditional sources of liquidity include asset maturities
and growth in core deposits. Other sources of funds such as securities sold
under agreements to repurchase, negotiable certificates of deposit and
other liabilities are sources of liquidity that the Company has not
significantly used. The Company had unused sources of liquidity in the form
of unused federal funds lines of credit and a line of credit with the
Federal Home Loan Bank of Cincinnati totaling $25 million at June 30, 2000.
EARNINGS REVIEW
----------------
The Company had net income of $375,345 for the three months ending June 30,
2000, compared with $215,706 for the same period last year, resulting in an
increase of 74%. For the six month period ending June 30, 2000, net income
was $703,431 compared with $394,779 the first six months of 1999 reflecting
an increase of 78%. Net income per diluted share was $0.53 compared to
earnings per share of $0.35 for the first six months ending June 30, 1999.
Return on average assets was .83% and the return on average equity was
10.77% for the six month period ended June 30, 2000, compared with .60% and
6.81%, respectively, for the same period in 1999.
Noninterest income declined $6,062, or 2%, during the six months ended June
30, 2000, compared the same period last year due to several factors. Gain
on loans sold declined $54,621 due to a decline in income generated by
loans sold in the secondary market. Recent increases in interest rates have
slowed the demand for secondary market loans and temporarily eliminated the
refinance market. Insurance commission income, rental income, and gains on
security sales also declined in the six months ended June 31, 2000,
compared with the same period a year ago. Partially offsetting the declines
was an increase in service charges and fees on deposit accounts.
Noninterest expense was $1.7 million for the six months ending June 30,
2000, an increase of 13% over the 1999 period, primarily resulting from
increased salaries and benefits, furniture and equipment expense, and other
general operating expenses.
NET INTEREST INCOME
---------------------
Interest income and interest expense both increased from 1999 to 2000
resulting primarily from the increases in both earning assets and interest
bearing liabilities. Net interest income of $2.6 million for the six months
ending June 30, 2000 reflects an increase of $669,358 or 36% over the same
period a year ago. For the six months ending June 30, 2000, average earning
assets increased $34.7 million or 28% while average interest bearing
liabilities increased $31.7 million, also 28%, compared with the same
period in 1999. Average earning asset yield increased 36 basis points to
8.06% while the cost on interest bearing liabilities increased 7 basis
points. Consequently, the net interest margin based on average earning
assets increased to 3.23% for the six months ending June 30, 2000 compared
with 3.08% for the same period in 1999.
17
<PAGE>
PROVISION FOR LOAN LOSSES
----------------------------
During the six months ended June 30, 2000, the provision for possible loan
losses was $125,175 compared with $119,146 for the same period last year.
Loan charge-offs for the six months ended June 30, 2000, were $38,682
compared with $1,016 during the same period in 1999. The allowance for
possible loan losses represented .71% of total loans, net of mortgage loans
held-for-sale, at June 30, 2000, compared to .76% at June 30, 1999.
Management considers the allowance for loan losses to be adequate to cover
losses inherent in the loan portfolio.
PROVISION FOR INCOME TAXES
-----------------------------
For the six months ended June 30, 2000, the provision for federal and state
income taxes was $357,653, an increase of $159,785 from 1999, primarily due
to the increase in income before income taxes.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $283,603 during the six months ended
June 30, 2000, a decline of $6,062 or 2% from the comparable 1999 period.
The decline was attributable to declines in net gains on loans sold, net
gain on sale of securities, insurance commissions, and rental income of
$54,621, $12,724, $3,057, and $18,221, respectively, which were partially
offset by an increase in other fees and service charges of $82,561.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $805,521 for the three month period ending June
30, 2000, an increase of $71,710 or 10%. For the six month period ending
June 30, 2000, noninterest expense was up $188,830 or 32% over the same
period in 1999. The increases were a result primarily of growth in the
organization. Compensation and related benefits, data processing expense,
and other operating expenses, which include postage, printing and supplies,
and telephone expense, reflect the growth in the customer base and the
general increased size of the organization.
18
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On October 4, 1999, the Company filed a registration statement on Form SB-1
with the SEC for the purpose of offering up to 555,555 shares of its common
stock at a per share price of $13.50. This offering became effective
November 12, 1999. At December 31, 1999, 111,092 shares had been sold with
proceeds totaling $1.5 million. At June 30, 2000, closing date of the
offering, 275,085 total shares have been sold, generating $3.7 million in
additional capital. Equity capital for the Company at June 30, 2000, was
$15.7 million.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting on April 25, 2000, the shareholders voted on the
following proposals with the results as indicated:
1. Elected three of its current directors to continue in office until the
2003 annual meeting of shareholders. Current directors elected to
three-year terms were as follows:
FOR WITHHOLD AUTHORITY ABSTAIN
----------------------------------------
Charles E. Allen, Sr., M.D. 835,439 1,500 500
Donald R. Jeans 835,439 1,500 500
Richard S. Venable 835,439 1,500 500
Directors continuing to serve include:
Charles E. Allen, Jr. Randal R. Greene Vance W. Cheek
Kenneth E. Cutshall, M.D. Stephen K. Gross Verrill M. Norwood, Jr.
Cameron Perry Henry J. Williams, M.D.
2. Ratified the appointment of Baylor & Backus as the Company's independent
accountants and auditors for 1999 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------------------------------------------------------------------
824,858 1,900 10,681 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 27 Financial Data Schedule (for SEC use only)
b) The Company did not file any reports on Form 8-K during the
quarter ended June 30, 2000
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STATE OF FRANKLIN BANCSHARES, INC.
--------------------------------------
(Registrant)
August 10, 2000 / s / Randal R. Greene
--------------------------- -------------------------
(Date) Randal R. Greene, President
August 10, 2000 / s / Charles E. Allen, Jr.
--------------------------- -------------------------
(Date) Charles E. Allen, Jr.,
Chairman of the Board
and Chief Financial Officer
(Principal Executive,
Financial and Accounting Officer)
20
<PAGE>
