1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
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OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24675
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STATE OF FRANKLIN BANCSHARES, INC.
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(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
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(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
1,190,427
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF SEPTEMBER 30, 1999)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES [ ] NO [X]
2
STATE OF FRANKLIN BANCSHARES, INC
INDEX
PART I. FINANCIAL INFORMATION
PAGE
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ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
CONSOLIDATED STATEMENTS OF INCOME 4-5
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 7
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULT UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
Consolidated Balance Sheets - Unaudited
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 3,381,044 2,507,173
Federal Funds Sold 1,364,000 6,421,000
Short-Term Interest Bearing Deposits -- 5,000,000
Investments - HTM 12,988,280 0
Investments - AFS 21,345,240 12,248,572
Loans Held for Sale 258,074 1,627,400
Loans and Leases Receivable 106,576,081 85,228,897
Less: Allowance for Loan Loss (818,380) (630,324)
- ----------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 105,757,701 84,598,573
- ----------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,137,773 685,963
Land, Buildings & Equip at Cost Less Accum Depr
of $535,873 in 1999 and $347,134 in 1998 4,043,649 4,117,351
Prepaid Expense and Accounts Receivable 97,381 48,218
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 501,523 186,946
FHLB Stock 1,393,200 471,200
Cash due from ESOP -- 108,286
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 152,282,865 118,035,681
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
Interest-free Checking $ 7,425,521 5,539,590
Interest-bearing Deposits 122,609,322 90,824,486
Advances by borrowers for Taxes and Insurance 293,155 98,784
Accrued Interest on Deposits 85,121 103,769
Accounts Payable and Accrued Expenses 370,438 189,379
FHLB Advances 9,048,000 9,000,000
Deferred Gain on REO 21,449 21,449
Notes Payable 639,782 687,925
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TOTAL LIABILITIES $ 140,492,788 106,465,382
- ----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,190,427 1,180,152
Common Stock Subscribed -- 6,996
Paid-in Capital 10,935,571 10,905,359
Accumulated Other Comprehensive Income (446,254) 39,820
Retained Earnings 750,115 102,792
Unearned Compensation - ESOP (639,782) (664,820)
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 11,790,077 11,570,299
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 152,282,865 118,035,681
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
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STATE OF FRANKLIN BANCSHARES, INC.
Consolidated Statements of Income - Unaudited
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
INTEREST INCOME: 1999 1998
----------- ---------
Interest and Fees on Loans $ 2,147,155 1,563,631
Other Interest Income 596,621 523,739
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 2,743,776 2,087,370
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INTEREST EXPENSE:
Interest on Deposits 1,487,732 1,187,979
Other Interest Expense 123,182 123,028
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TOTAL INTEREST EXPENSE 1,610,914 1,311,007
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,132,862 776,363
PROVISION FOR LOAN LOSSES (70,361) (85,655)
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,062,501 690,708
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OTHER INCOME:
Other Fees and Service Charges 71,424 43,005
Net Gain on Loans Sold 9,199 7,443
Net Gain on Sale and Maturity of Securities -- --
Insurance Commission Income 6,354 8,472
Rental Income, Net 29,838 25,828
Other -- 2,440
- ---------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 116,815 87,188
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OTHER EXPENSES:
Compensation and Related Benefits 326,467 317,109
Occupancy Expenses 60,549 59,543
Furniture and Equipment Expense 62,286 47,041
Advertising 35,393 25,844
Data Processing Expense 87,492 56,122
Other 193,778 154,990
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TOTAL OTHER EXPENSES 765,965 660,649
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INCOME BEFORE INCOME TAX 413,351 117,247
PROVISION FOR INCOME TAXES (160,925) (51,817)
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NET INCOME $ 252,426 65,430
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EARNINGS PER SHARE:
BASIC $ 0.22 0.06
DILUTED 0.22 0.06
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,131,803 1,122,506
DILUTED 1,138,786 1,122,506
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
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STATE OF FRANKLIN BANCSHARES, INC.
Consolidated Statements of Income - Unaudited
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
INTEREST INCOME: 1999 1998
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Interest and Fees on Loans $ 5,877,416 4,049,605
Other Interest Income 1,584,338 1,384,578
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 7,461,754 5,434,183
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INTEREST EXPENSE:
Interest on Deposits 4,074,962 3,256,088
Other Interest Expense 367,865 165,046
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TOTAL INTEREST EXPENSE 4,442,827 3,421,134
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NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 3,018,927 2,013,049
PROVISION FOR LOAN LOSSES (189,507) (213,034)
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 2,829,420 1,800,015
- ---------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 176,869 122,965
Net Gain on Loans Sold 95,098 41,881
Net Gain on Sale and Maturity of Securities 12,724 38,769
Insurance Commission Income 32,796 26,769
Rental Income, Net 88,992 71,633
Other -- 7,747
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TOTAL OTHER INCOME 406,479 309,764
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OTHER EXPENSES:
Compensation and Related Benefits 940,952 799,617
Occupancy Expenses 187,481 170,704
Furniture and Equipment Expense 192,323 134,353
Advertising 99,610 78,978
Data Processing Expense 241,302 154,105
Other 568,233 430,142
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TOTAL OTHER EXPENSES 2,229,901 1,767,899
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INCOME BEFORE INCOME TAX 1,005,998 341,880
PROVISION FOR INCOME TAXES (358,793) (119,569)
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NET INCOME $ 647,205 222,311
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EARNINGS PER SHARE:
BASIC $ 0.58 0.20
DILUTED 0.57 0.20
- ---------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,124,931 1,122,506
DILUTED 1,129,607 1,122,506
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
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STATE OF FRANKLIN BANCSHARES, INC.
Consolidated Statements of Cash Flows - Unaudited
NINE MONTHS ENDED SEPTEMBER 30,
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 647,205 222,311
Items Not Affecting Cash:
Depreciation 188,739 144,846
(Increase) in Accrued Interest (451,811) (368,072)
Deferred Income Taxes (Benefit) 84,692 41,584
Provisions for Loan Losses 189,507 213,034
(Increase) Decrease in Prepaid Expenses and Accounts Receivable (49,163) 32,156
(Decrease) in Interest Payable (18,648) 59,336
Increase in Accounts Payable and Accrued Expenses 181,060 29,279
(Decrease) in Deferred Loan Fees, Net 7,344 15,489
(Gain) on Sale of Investments -- (38,770)
Discount Accretion (3,033) (1,951)
Increase in Deferred Gain on Sale of REO -- 21,448
Earned ESOP Shares 48,143 --
FHLB Stock Dividends (51,300) (8,300)
Net (Increase) Decrease in Loans Held for Sale 1,369,326 123,700
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,142,061 486,090
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments (16,536,456) --
Purchase of Available-for-Sale Investments (12,986,406) (19,855,339)
Proceeds from Maturities of Held-to-Maturity Investments -- 11,606,525
Proceeds from Sale of Available-for-Sale Investments 9,662 6,151,155
Proceeds from Maturities of Available-for-Sale Investments 6,595,000 --
Principal payments on Mortgage Backed Securities - AFS 35,965 108,610
(Increase) Decrease in Federal Funds Sold 5,057,000 4,495,000
(Increase) Decrease in Short-Term Interest Bearing Deposits 5,000,000 (5,000,000)
Increase in Loans Receivable, Net (21,355,702) (28,633,125)
Purchases of Premises and Equipment (115,036) (702,223)
Purchases of Federal Home Loan Bank Stock (870,700) (454,800)
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NET CASH (USED) BY INVESTING ACTIVITIES (35,166,673) (32,284,197)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 33,670,766 23,294,406
Net Increase in Advances by Borrowers for Taxes and Insurance 194,371 132,191
Issuance of Common Stock, Net 33,491 55,276
Proceeds from Loan -- 700,000
Repayment of Debt (48,143) --
Organization Costs -- (10,407)
Proceeds from FHLB Advances 48,000 9,000,000
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 33,898,485 33,171,466
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 873,872 1,373,359
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,507,173 2,321,800
- ---------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 3,381,044 3,695,159
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized Gain on Securities Available-For-Sale,
Net of Deferred Tax Liability $ (486,074) 60,170
- ---------------------------------------------------------------------------------------------------------------
REO Sold in Exchange for Loan Receivable $ -- 245,681
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 222,710 --
Interest $ 4,461,475 3,361,797
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
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STATE OF FRANKLIN BANCSHARES, INC.
Consolidated Statements of Comprehensive Income - Unaudited
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
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NET INCOME $ 252,426 65,430
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OTHER COMPREHENSIVE INCOME, BEFORE TAX:
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:
UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD (153,379) 108,184
RECLASSIFICATION ADJUSTMENT FOR LOSSES (GAINS) INCLUDED
IN NET INCOME -- 1
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OTHER COMPREHENSIVE INCOME (LOSS) (153,379) 108,185
INCOME TAXES (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME (52,149) 36,783
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 151,196 136,832
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
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NET INCOME $ 647,205 222,311
- ---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, BEFORE TAX:
UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE FOR SALE:
UNREALIZED HOLDINGS GAIN (LOSS) ARISING DURING THE PERIOD (723,751) 52,709
RECLASSIFICATION ADJUSTMENT FOR LOSSES (GAINS) INCLUDED
IN NET INCOME (12,724) 38,458
- ---------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) (736,475) 91,167
INCOME TAXES (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME (250,402) 30,997
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 161,132 282,481
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
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STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1 INCORPORATION AND OPERATIONS
State of Franklin Bancshares, Inc. (Company) was incorporated under
the laws of the State of Tennessee for the purpose of becoming the
holding company of State of Franklin Savings Bank. The stockholders
of the Savings Bank exchanged their shares for the shares of the
Company, whereby the Savings Bank became the Company's wholly owned
subsidiary. State of Franklin Leasing Corporation was incorporated
under the laws of the state of Tennessee for the purpose of lease
financing. The Leasing Corp is a wholly owned subsidiary of the
Company. John Sevier Title Services, Inc. is the wholly owned
subsidiary of the Savings Bank.
NOTE 2 BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These
financial statements were prepared in accordance with generally
accepted accounting principles for interim financial information in
accordance with the instructions for Form 10-Q SB. Accordingly, they
do not include all disclosures necessary for a complete presentation
of the consolidated statements of financial condition, income, cash
flows, and comprehensive income 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 nine months ended September 30, 1999,
is not necessarily indicative of the results which may be expected
for the entire year.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto for the Company for the year ended December 31, 1998.
NOTE 3 RECLASSIFICATIONS
In instances where required, amounts reported in prior year's
financial statements included herein have been reclassified to put
them on a comparable basis to the amounts reported in the December
31, 1998 consolidated financial statements.
NOTE 4 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
At September 30, 1999, the ESOP had 78,593 shares of which
approximately 16,054 shares were released and allocated, 4,376
shares were considered committed to be released and 58,163 shares
were unallocated. For the nine months ended September 30, 1999,
compensation related to the ESOP of approximately $93,800 was
expensed. Unallocated ESOP shares are not considered outstanding for
the earnings per share calculation.
NOTE 5 COST TO ISSUE STOCK
There were no miscellaneous organization expenses of the Company
netted against paid-in capital for the nine month period ended
September 30, 1999. During 1998, $11,355 which was the cost of
issuing additional stock was netted against paid-in capital.
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NOTE 6 LOANS RECEIVABLE
Loans receivable at September 30, 1999 and December 31, 1998,
consist of the following:
1999 1998
----------- ----------
First Mortgage Loans 41,757,195 35,195,869
Construction Loans 25,244,269 22,024,861
Consumer Loans 9,937,877 7,726,136
Participation Loans, Net 533,676 863,162
Commercial Loans 35,741,345 26,603,529
Savings Account Loans 309,665 545,011
Credit Line Advances 335,031 396,618
Lease Finance 636,557 120,999
----------- ----------
Gross Loans Receivable 114,495,616 93,476,185
----------- ----------
Less:
Undisbursed Portion of Loans in Process (7,844,629) (8,179,727)
Net Deferred Loan Origination Fees (74,905) (67,561)
Accumulated General Loan Loss Allowance (818,380) (630,324)
----------- ----------
(8,737,915) (8,877,612)
----------- ----------
Loans Receivable, Net 105,757,701 84,598,573
=========== ==========
An analysis of the allowance for loan losses at September 30, 1999
and December 31, 1998 is as follows:
1999 1998
----------- ----------
Balance - Beginning of Period 630,324 355,474
Provision for Losses 189,507 275,127
Net Charge-Offs (1,450) (277)
--------- --------
Balance - End of Period 818,380 630,324
========= ========
ITEM NO. 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations of
the Company. State of Franklin Savings Bank (the "Bank") and State of
Franklin Leasing Corporation (the "Leasing Company") represents
virtually all of the assets of State of Franklin Bancshares, Inc. (the
"Company"). The Company places an emphasis on an integrated approach
to its balance sheet management. Significant balance sheet components
of investment securities, loans and sources of funds are managed in an
integrated manner with the management of interest rate risk,
liquidity, and capital. These components are examined below.
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BALANCE SHEET REVIEW
At September 30, 1999, assets of State of Franklin Bancshares, Inc.
totaled $152.3 million reflecting an increased $34.2 million or 29%
since December 31, 1998. The growth in assets has been funded
primarily by a $33.7 million increase in deposits.
LOANS
Loans outstanding totaled $106.6 million at September 30, 1999. This
represented an increase of 25% from the December 31, 1998 outstanding
loans of $85.2 million.
Commercial loans increased $9.1 million at September 30, 1999, an
increase of 34.4% from $26.6 million at December 31, 1998. Real estate
construction lending totaled $25.2 million compared with $22 million
at December 31, 1998, reflecting an increase of $3.2 million or 14.6%.
Consumer loans of $9.9 million at September 30, 1999 increased 28.6%
from $7.7 million at December 31, 1998. During the first nine months
of 1999, first mortgage residential loans increased $6.6 million or
18.6% to $41.8 million at September 30, 1999. The loan portfolio mix
at September 30, 1999 consists of 36% residential mortgages, 31%
commercial, 22% real estate construction, and 9% consumer loans.
INVESTMENT SECURITIES
Investment securities totaled $34.3 million at September 30, 1999. The
majority of the holdings are backed by U. S. Government or Federal
Agency guarantees limiting the credit risk associated with these
securities. At September 30, 1999, approximately $21.3 million of
investment securities were held as available-for-sale compared to
$12.2 million at December 31, 1998. This $9.1 million increase, in
addition to a $13 million increase in investments held-to-maturity,
was funded in part from a $10.1 million reduction in fed funds and
short-term interest bearing deposits.
NON-PERFORMING ASSETS
There were no non-performing assets or nonaccrual loans at September
30, 1999 and December 31, 1998. The allowance for possible loan losses
was $818,000 at September 30, 1999 compared with $630,000 at year end
1998. Management believes the allowance for possible loan losses is
adequate to provide for potential loan losses.
DEPOSITS
Total deposits at September 30, 1999 of $130 million, represented an
increase of $33.6 million or a 34.9% increase from $96.4 million at
December 31, 1998. Non-interest bearing demand deposits totaled $7.4
million at September 30, 1999, an increase of $1.9 million from
December 31, 1998. Interest bearing deposits increased $31.8 million
to $122.6 million at September 30, 1999.
CAPITAL
Equity capital at September 30, 1999 was $11.8 million. At September
30, 1999, all capital ratios were in excess of the regulatory
minimums, with the Bank's Tier 1, total risk-based, and leverage
ratios of 12.50%, 13.64% and 8.02%, respectively.
LIQUIDITY
The purpose of liquidity management is to ensure that there is
sufficient cash flow to satisfy demands for credit, deposit
withdrawals, and other corporate needs. Traditional sources of
liquidity include asset maturities and growth in core deposits. Other
sources of funds such as securities sold under agreements to
repurchase, negotiable certificates of deposit and other liabilities
are sources of liquidity that the Company has not significantly used.
The Company had unused sources of liquidity in the form of unused
federal funds lines of credit and a line of credit with the Federal
Home Loan Bank of Cincinnati totaling $22 million at September 30,
1999.
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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 will
begin only after the SEC has declared the registration statement
effective.
EARNINGS REVIEW
The Company had net income of $252,000 for the three months ending
September 30, 1999, compared with $65,430 for the same period last
year, resulting in an increase of 286%. Net income of the nine months
ended September 30, 1999 was $647,000, an increase of $425,000 or 191%
over the six months ended September 30, 1998 total net income of
$222,000. Net income per diluted share was $0.57 compared to earnings
per share of $0.20 in 1998. Return on average assets was .63% and the
return on average equity was 7.46% for the nine month period ended
September 30, 1999.
Noninterest income increased $97,000, or 31.2%, with other fees and
service charges, net gains on loans sold and insurance commissions
responsible for most of the increase over the nine months ended
September 30, 1998. Noninterest expense was $2.2 million for the 1999
period, an increase of 26.1% over the 1998 period, primarily resulting
from increased salaries and benefits, data processing, and furniture
and equipment expense.
NET INTEREST INCOME
Interest income and interest expense both increased from 1998 to 1999
resulting primarily from the increases in both earning assets and
interest bearing liabilities. Net interest income of $1.1 million for
the three months ending September 30, 1999 reflects an increase of
$356,000 or 45.9% over the same period a year ago. Net interest income
of $3 million for the nine months ended September 30, 1999 was up $1
million or 50% over the same period in 1998. For the nine months
ending September 30, 1999, average earning assets increased $37.5
million or 40% while average interest bearing liabilities increased
$30.1 million or 34% compared with the same period in 1998. Average
earning asset yield declined 23 basis points to 7.63% while the cost
on interest bearing liabilities declined 18 basis points.
Consequently, the net interest margin based on average earning assets
increased to 3.09% for the nine months ending September 30, 1999
compared with 2.95% for the same period in 1998.
PROVISION FOR LOAN LOSSES
During the nine months ended September 30, 1999, the provision for
possible loan losses was $190,000 compared with $213,000 for the same
period last year. Loan charge-offs for the nine months ended September
30, 1999, were $1,000 compared with no charge-offs in 1998. The
allowance for possible loan losses represented .77% of total loans,
net of mortgage loans held-for-sale, at September 30, 1999, compared
to .74% at September 30, 1998. Management considers the allowance for
loan losses to be adequate to cover losses inherent in the loan
portfolio.
PROVISION FOR INCOME TAXES
For the nine months ended September 30, 1999, the provision for
federal and state income taxes was $359,000, an increase of $239,000
from 1998, primarily due to the increase in income before income
taxes.
NONINTEREST INCOME
The Company's noninterest income was $406,000 during the nine months
ended September 30, 1999, an increase of $97,000 or 31.2% over the
comparable 1998 period. The increase was attributable to increases in
other fees and service charges, net gains on loans sold, insurance
commissions, and rental income of $54,000, $53,000, $6,000, and
$17,000, respectively, which were offset by decreases in net gain on
sale and maturity of securities and other income of $26,000 and
$8,000, respectively.
NONINTEREST EXPENSE
Noninterest expense totaled $766,000 for the three month period ending
September 30, 1999, an increase of $105,000 or
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16%. For the nine month period ending September 30, 1999, noninterest
expense was up $462,000 or 26% over the same period in 1998. The
increases were a result primarily of growth in both the loan and
deposit functions of the organization. Compensation and related
benefits, data processing expense, and other operating expenses, which
include postage, printing and supplies, and telephone expense, reflect
the growth in the customer base and the general increased size of the
organization.
YEAR 2000 COMPLIANCE
The Year 2000 poses 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; its corporate customers and other debtors.
We have been assessing our state of readiness by evaluating our
information technology ("IT") and non-IT systems. IT systems commonly
include data processing, accounting and telephone systems. With
respect to our IT systems, we estimate that our Year 2000
identification, assessment and remediation efforts are substantially
complete. During 1999, further testing will be carried out in order to
ensure that all systems are working properly. We have assessed our
Year 2000 status in regard to non-IT systems and have determined that
no material risk exists.
We have communicated with our 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. We have 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, we do not
anticipate any material Year 2000 issues.
We require all commercial loan applicants to complete a Year 2000
questionnaire prior to our approval of loan requests. We believe the
most reasonable likely worst-case Year 2000 scenario would be a
failure of our data processing, accounting and telephone systems. We
have contingency plans in place in the event these systems fail. Our
employees have engaged in practice drills which include manual
procedures to complete most system functions.
The Company anticipates total expenses relating to Year 2000 issues
not to exceed $25,000 with approximately $4,000 remaining for staff
training and customer awareness.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 September 30, 1999
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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)
November 15, 1999 /s/ RANDAL R. GREENE
- ----------------- ------------------------------------------------------
(Date) Randal R. Greene, President and Chief
Executive Officer
(Principal Executive Officer)
November 15, 1999 /s/ CHARLES E. ALLEN, JR.
- ----------------- -------------------------------------------------------
(Date) Charles E. Allen, Jr., Chairman of the Board
and Chief Financial Officer
(Principal Executive, Financial and Accounting Officer)
14