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, 2001
--------------------
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 37601
-------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(423) 926-3300
------------------------------------------
(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 AUGUST 8, 2001)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
----
STATE OF FRANKLIN BANCSHARES, INC
INDEX
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
-------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4 - 5
THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2000 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) AND 2000 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULT UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
ASSETS 2001 - UNAUDITED 2000 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,699,341 4,715,833
Federal Funds Sold 11,700,000 2,525,000
Short-Term Interest Bearing Deposits 182,944 227,422
Investments - HTM
(Estimated Market 2001 - $6,971,796 and 2000 - $13,792,610) 6,991,650 13,989,368
Investments - AFS 50,465,176 38,714,467
Loans Held for Sale 1,102,763 264,922
Loans and Leases Receivable 137,285,171 136,155,217
Less: Allowance for Loan and Lease Losses (1,393,535) (1,062,511)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 135,891,636 135,092,706
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,540,856 1,542,443
Land, Buildings & Equip at Cost Less Accum Depr
of $1,066,428 in 2001 and $883,607 in 2000 5,248,572 5,395,933
Prepaid Expense and Accounts Receivable 109,443 77,379
Investment in Service Bureau at Cost 123,700 15,000
Deferred Tax Assets 287,340 313,815
FHLB Stock 2,095,300 1,524,500
Other Real Estate Owned 377,852 0
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 220,816,573 204,398,788
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 8,955,059 9,503,943
Interest-Bearing Deposits 167,019,216 152,578,447
Advances by Borrowers for Taxes and Insurance 237,782 107,235
Accrued Interest on Deposits 188,511 188,408
Accounts Payable and Accrued Expenses 345,562 296,388
FHLB Short-Term Advances 0 12,660,000
FHLB Long-Term Advances 25,243,855 11,246,679
Deferred Gain on REO 21,448 21,448
Notes Payable 542,556 571,637
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 202,553,989 187,174,185
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,465,512 1,465,512
Paid-in Capital 14,251,461 14,251,461
Accumulated Other Comprehensive Income 308,237 89,678
Retained Earnings 3,342,621 2,569,575
Less: Employee Stock Ownership (1,105,247) (1,151,623)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 18,262,584 17,224,603
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 220,816,573 204,398,788
=================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30,
----------------------------------
INTEREST INCOME: 2001 - UNAUDITED 2000 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,995,543 2,634,856
Other Interest Income 1,012,694 645,148
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 4,008,237 3,280,004
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 2,186,518 1,739,024
Interest on Short-Term Debt 10 75,178
Interest on Long-Term Debt 339,310 176,887
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,525,838 1,991,089
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,482,399 1,288,915
PROVISION FOR LOAN LOSSES (306,255) (68,237)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,176,144 1,220,678
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 107,216 97,989
Net Gain on Loans Sold 64,599 22,538
Insurance Commission Income 11,859 13,299
Rental Income, Net 21,578 25,909
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 205,252 159,735
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 479,088 384,123
Occupancy Expenses 63,045 60,757
Furniture and Equipment Expense 86,819 62,529
Advertising 33,123 29,186
Data Processing Expense 108,359 92,185
Other 200,619 176,741
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 971,053 805,521
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 410,343 574,892
PROVISION FOR INCOME TAXES (48,484) (199,547)
- ----------------------------------------------------------------------------------------
NET INCOME $ 361,859 375,345
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.27 0.28
DILUTED 0.25 0.28
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,363,995 1,319,526
DILUTED 1,422,311 1,355,734
========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30,
----------------------------------
INTEREST INCOME: 2001 - UNAUDITED 2000 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 6,012,147 5,115,908
Other Interest Income 1,988,118 1,263,542
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 8,000,265 6,379,450
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 4,351,361 3,367,778
Interest on Short-Term Debt 84,786 155,296
Interest on Long-Term Debt 644,927 300,953
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 5,081,074 3,824,027
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 2,919,191 2,555,423
PROVISION FOR LOAN LOSSES (384,532) (125,175)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 2,534,659 2,430,248
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 213,651 188,006
Net Gain on Loans Sold 92,946 31,277
Insurance Commission Income 15,182 23,386
Rental Income, Net 37,815 40,933
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 359,594 283,602
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 908,125 764,289
Occupancy Expenses 135,814 136,852
Furniture and Equipment Expense 167,921 132,395
Advertising 56,801 43,614
Data Processing Expense 221,839 176,079
Other 403,817 399,537
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,894,317 1,652,766
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 999,936 1,061,084
PROVISION FOR INCOME TAXES (226,891) (357,653)
- ----------------------------------------------------------------------------------------
NET INCOME $ 773,045 703,431
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.57 0.54
DILUTED 0.54 0.53
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,365,054 1,295,363
DILUTED 1,423,291 1,331,571
========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2000 (AUDITED)
Accumulated
Other Employee
Common Paid-In Comprehensive Retained Stock
Stock Capital Income Earnings Ownership Total
-------------- ---------- ------------ --------- ----------- -------------
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 -- -- -- -- 74,986 74,986
-------------
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 $360,563 Income Tax) -- -- 699,915 -- -- 699,915
Net Income -- -- -- 1,379,687 -- 1,379,687
-------------
Total Comprehensive Income -- -- -- -- -- 2,079,603
----------- ---------- --------- --------- ---------- -------------
Balance at December 31, 2000 1,465,512 14,251,461 89,677 2,569,576 (1,151,623) 17,224,603
ESOP Shares Allocated -- -- -- -- 46,376 46,376
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $162,833 Income Tax) -- -- 274,542 -- -- 274,542
Less: Reclassification Adjustment
(Net of $34,312 Income Tax) -- -- (55,982) -- -- (55,982)
-------------
218,560
Net Income -- -- -- 773,045 -- 773,045
-------------
Total Comprehensive Income -- -- -- -- -- 991,605
----------- ---------- --------- --------- ---------- -------------
Balance at June 30, 2001 1,465,512 14,251,461 308,237 3,342,621 (1,105,247) 18,262,584
=========== ========== ========= ========= ========== =============
The accompanying notes are an integral part of the consolidated financial
statements.
6
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
----------------------------------
2001 - UNAUDITED 2000 - UNAUDITED
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 773,045 703,431
Items Not Affecting Cash:
Depreciation 182,821 137,995
Decrease (Increase) in Accrued Interest 1,587 (91,293)
Deferred Income Taxes (Benefit) (116,249) (52,323)
Provision for Loan and Lease Losses 384,532 125,175
(Increase) in Prepaid Expenses and Accounts Receivable (32,064) (53,049)
(Increase) Decrease in Interest Payable 103 62,799
(Increase) Decrease in Accounts Payable and Accrued Expenses 49,174 (350,388)
(Increase) Decrease in Deferred Loan Fees, Net (13,038) 33,104
Discount Accretion (185,397) (7,182)
Earned ESOP Shares 46,376 26,988
FHLB Stock Dividends (70,800) (51,000)
Net (Increase) Decrease in Loans Held for Sale (837,841) 61,423
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 182,249 545,680
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Available-for-Sale Investments (17,131,311) (1,565,582)
Proceeds from Maturities of Held-to-Maturity Investments 7,000,000 -
Proceeds from Maturities of Available-for-Sale Investments 5,925,000 -
Proceeds from Sale of Available-for-Sale Investments 504,171
(Increase) in Federal Funds Sold (9,175,000) (2,025,000)
(Increase) Decrease in Short-Term Interest Bearing Deposits 44,478 (79,582)
(Increase) in Loans Receivable, Net (1,548,276) (11,327,432)
Purchases of Premises and Equipment (35,460) (886,387)
Purchases of Stock in Service Bureau (108,700) -
Purchases of Federal Home Loan Bank Stock (500,000)
- -
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (15,529,268) (15,379,812)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 13,891,885 9,900,313
Net Increase in Advances by Borrowers for Taxes and Insurance 130,547 142,534
Issuance of Common Stock, Net - 2,171,724
ESOP Shares Purchased - (599,994)
Repayment of Debt (29,081) (26,987)
Repayment of FHLB Advances (15,661,417) -
Proceeds from FHLB Advances 16,998,593 7,065,451
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,330,527 18,653,041
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH (16,492) 3,818,909
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 4,715,833 2,785,509
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 4,699,341 6,604,418
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 218,559 (93,272)
Acquisition of Real Estate Property through Foreclosure of Related Loans $ 427,852 (126,000)
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 299,077 807,389
Interest $ 5,080,971 3,761,228
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
7
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 (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-QSB. 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 income for the six months ended June 30, 2001 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, 2000.
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
- ----- -----------------------------
Fixed assets at June 30, 2001, and December 31, 2000 are summarized as
follows:
2001 2000
----------- -----------
Land 1,450,000 1,450,000
Buildings and Leasehold Improvements 2,942,122 2,941,388
Furniture, Fixtures and Equipment 1,922,878 1,888,152
----------- -----------
6,315,000 6,279,540
Less: Accumulated Depreciation 1,066,428 883,607
----------- -----------
5,248,572 5,395,933
=========== ===========
8
NOTE 5 LOANS RECEIVABLE
- ------- ------------------
Loans receivable at June 30, 2001 and December 31, 2000, consist of
the following:
2001 2000
-------------- --------------
First Mortgage Loans 53,392,579 54,716,151
Construction Loans 23,735,724 24,454,127
Consumer Loans 11,674,871 10,066,638
Participation Loans, Net 533,676 533,676
Commercial Loans 52,845,220 50,931,829
Savings Account Loans 0 138,122
Credit Line Advances 724,811 392,295
Lease Finance 1,720,214 1,461,095
--------------- ---------------
Gross Loans and Leases Receivable 144,627,095 142,693,933
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 7,234,337) ( 6,418,090)
Net Deferred Loan Origination Fees ( 107,587) ( 120,626)
Accumulated General Loan Loss Allowance ( 1,393,535) ( 1,062,511)
--------------- ---------------
( 8,735,459) ( 7,601,227)
--------------- ---------------
Loans and Leases Receivable, Net 135,891,636 135,092,706
=============== ===============
An analysis of the allowance for loan and lease losses at six months
ended June 30, 2001 and twelve months ended December 31, 2000 is as
follows:
2001 2000
-------------- --------------
Balance - Beginning of Period 1,062,511 810,303
Provision for Loan and Lease Losses 384,532 302,609
Loans and Leases Charged-Off (53,508) (50,401)
Charged-Off Loan and Lease Recoveries -- -
-------------- --------------
Balance - End of Period 1,393,535 1,062,511
============== ==============
The gross amount of participation loans serviced by State of Franklin
Savings Bank was $1,067,240 at June 30, 2001 and also at December 31,
2000.
The Bank had $1,058,000 in non-performing loans at June 30, 2001
compared to $984,000 at December 31, 2000.
9
NOTE 6 FEDERAL REGULATION
- ------- -------------------
The capital ratios for State of Franklin Savings Bank are as follows:
For Capital
Adequacy
Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provision
---------------- ----------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
- --------------------------- ---------------- ----------------
As of June 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 17,466 11.98% >=14,580 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 16,081 11.03% >=8,748 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 16,081 7.41% >=10,846 5.0%
As of December 31, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 16,355 12.78% >=12,802 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 15,325 11.97% >=7,681 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 15,325 7.93% >=9,665 5.0%
The capital ratios for State of Franklin Bancshares, Inc. are as follows:
For Capital
Adequacy
Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provision
----------------- -----------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
- --------------------------- ----------------- -----------------
As of June 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 19,393 13.24% >=14,646 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 17,954 12.26% >=8,788 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 17,954 8.20% >=10,953 5.0%
As of December 31, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 18,197 14.15% >=12,858 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 17,135 13.33% >=7,715 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 17,135 8.79% >=9,747 5.0%
10
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. The ESOP
was established and funded for 1997. On February 28, 1998, 5,236
shares of the Savings Bank with a fair value of $57,600 were issued
for the 1997 contribution. The Savings Bank stock was exchanged for
Company stock as discussed in Note 1. During the third quarter of
1998, the ESOP borrowed $700,000 from the Company and used the funds
to purchase 63,636 shares of common stock of the Company at $11 per
share. Note payments are $8,218 per month for ten years with a fixed
interest rate of 7.25%. The note balances outstanding at June 30, 2001
and December 31, 2000 were $542,556 and $571,637, respectively. A
related loan was granted for the purpose of leveraging the ESOP in the
amount of $700,000 with similar terms and collaterized with stock. The
note balances outstanding at June 30, 2001 and December 31, 2000 were
$542,556 and $571,637, respectively.
On June 30, 2000, the ESOP borrowed an additional $599,994 from the
Company and used the funds to purchase 44,444 additional shares of
common stock of the Company at $13.50 per share. Note payments are
$7,280 per month for ten years with a fixed interest rate of 8.00%.
The note balance outstanding at June 30, 2001 was $562,691 and
$579,985 at December 31, 2000. Shares owned by the ESOP at June 30,
2001 totaled 137,392.
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,
2001 2000
------------- -------------
Number of Shares
Released and Allocated 26,431 26,431
Committed to be Released 8,514 5,554
Suspense 102,448 98,957
Fair Value
Released and Allocated 428,182 396,465
Committed to be Released 137,927 83,310
Suspense 1,659,658 1,484,355
Contributions to the ESOP are as follows:
June 30, December 31,
2001 2000
------------- -------------
Compensation Expense 120,000 186,000
Contributions 120,000 186,000
For the purpose of computing earnings per share, all ESOP shares committed
to be released will be considered outstanding.
STOCK OPTION PLANS
Weighted
Average
Awarded Exercise
And Price
Unexercised Vested Per
Options Options Share
--------------------------------------------------
Options Granted - Outside Directors January 1, 2001 73,514 43,695 $11.46
Options Granted - Management January 1, 2001 182,166 93,084 $11.64
------- -------
Options Outstanding - June 30, 2001 255,680 136,779 $11.59
======= =======
11
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
June 30, 2001 December 31, 2000
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 4.42 18,526,512 10.52 4.68 16,657,166 10.28
Interest-Free Checking -- 8,955,059 5.09 -- 9,503,943 5.86
NOW 2.02 7,525,189 4.28 2.00 7,465,557 4.61
Money Market Deposit 4.05 53,351,451 30.32 5.51 31,022,840 19.14
----------- -------- ----------- --------
88,358,211 50.21 64,649,506 39.89
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 5.91 21,092,921 11.99 6.38 23,480,179 14.48
Balances less than $100,000 5.84 66,523,143 37.80 6.36 73,952,705 45.63
----------- -------- ----------- --------
87,616,064 49.79 97,432,884 60.11
----------- -------- ----------- --------
175,974,275 100.00 162,082,390 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at June 30, 2001 and December
31, 2000, is as follows:
Period Ending June 30, 2001 Year Ending December 31, 2000
---------------------------- -----------------------------
2001 63,252,786 2001 81,572,541
2002 19,464,174 2002 13,728,541
2003 3,928,639 2003 1,810,104
2004 970,465 2004 321,698
2005 and After -- 2005 and After --
---------- ----------
87,616,064 97,432,884
========== ==========
NOTE 9 FEDERAL HOME LOAN BANK Advances
- ------- ---------------------------------
Advances from the Federal Home Loan Bank are summarized as follows for the
periods ended June 30, 2001 and December 31, 2000:
2001 2000
----------- -----------
Short-Term Borrowings:
Cash Management (Rate Floats Daily) 0 12,660,000
Weighted Average Rate at End of Period 0% 6.75%
Long-Term Borrowings:
Mortgage Match Advances 243,855 246,679
Convertible Fixed Rate (Within 10 Years) 25,000,000 11,000,000
---------- ----------
Total Long-Term Borrowings 25,243,855 11,246,679
Weighted Average Rate at End of Period 5.02% 5.31%
Total Federal Home Loan Bank Advances 25,243,855 23,907,146
Weighted Average Rate at End of Period 5.02% 6.07%
NOTE 10 INVESTMENT SECURITIES
- ------- ---------------------
The amortized cost and fair value of investment securities held-to-maturity and
available-for-sale at June 30, 2001, 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.
12
NOTE 10 CONTINUED
- ------- ---------
June 30, 2001:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- -----------
Available-for-Sale:
United States Government
Agency Securities Maturing:
After one year
but within five years 1,999,767 5,691 -- 2,005,458
After five years
but within ten years 11,875,446 135,383 2,111 12,008,718
Over ten years
but within fifteen years 2,923,030 62,928 11,870 2,974,088
Over 15 years 3,442,494 123,912 87,872 3,478,534
Municipal Securities Maturing:
Within one year 120,000 1,424 -- 121,424
After one year
but within five years 530,000 16,033 -- 546,033
After five years
but within ten years 1,072,515 37,157 -- 1,109,672
Over ten years
but within fifteen years 2,750,496 49,238 -- 2,799,734
Over 15 years 2,206,121 72,391 3,088 2,275,424
Equity Securities
Callable after one year
but within five years 21,000,000 156,955 34,640 21,122,315
Callable after five years
but within ten years 1,000,000 -- 22,600 977,400
Other
Within one year 554,735 -- -- 554,735
Over 15 years 493,415 -- 1,774 491,641
---------- ------- --------- -----------
Total Available-for-Sale 49,968,019 661,112 163,955 50,465,176
========== ======= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After five years
but within ten years 6,991,650 2,006 21,861 6,971,795
---------- ------- --------- -----------
Total Held-to-Maturity 6,991,650 2,006 21,861 6,971,795
========== ======= ========= ===========
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for three months ended and six months ended
June 30, 2001, compared with the same periods ended June 30,
2000, are as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Net Income 361,859 375,345 773,045 703,431
Average Basic Shares Outstanding 1,363,995 1,319,526 1,365,054 1,295,363
Basic Earnings Per Share 0.27 0.28 0.57 0.54
========= ========= ========= =========
Net Income 361,859 375,345 773,045 703,431
Average Basic Shares Outstanding 1,363,995 1,319,526 1,365,054 1,295,363
Dilutive Effect Due to Stock Options 58,316 36,208 58,237 36,208
--------- --------- --------- ---------
Average Shares Outstanding, as Adjusted 1,422,311 1,355,734 1,423,291 1,331,571
Diluted Earnings Per Share 0.25 0.28 0.54 0.53
========= ========= ========= =========
13
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, 2001, assets of State of Franklin Bancshares, Inc. totaled
$220.8 million reflecting an increase of $16.4 million or 8% since December
31, 2000. The growth in assets has been funded primarily by a $13.9 million
increase in deposits and a $1.3 million increase in Federal Home Loan Bank
advances.
LOANS
-----
Loans outstanding totaled $137.3 million at June 30, 2001. This represented
an increase of 1% from the December 31, 2000 outstanding loans of $136.2
million.
Commercial loans increased $1.9 million to $52.8 million at June 30, 2001,
an increase of 4% from $50.9 million at December 31, 2000. Real estate
construction lending totaled $23.7 million compared with $24.5 million at
December 31, 2000, reflecting a decline of $700,000 or 3%. Consumer loans
of $11.7 million at June 30, 2001 increased $1.6 million or 16% from $10.1
million at December 31, 2000. During the first six months of 2001, first
mortgage residential loans declined to $53.4 million or 2% from $54.7
million at December 31, 2000. The loan portfolio mix at June 30, 2001
consists of 37% residential mortgages, 38% commercial, 16% real estate
construction, and 9% consumer loans.
INVESTMENT SECURITIES
---------------------
Investment securities totaled $57.5 million at June 30, 2001. The
investment portfolio at quarter end consisted of $27.5 million in debt
securities issued by the U. S Government or Federal Agencies, $12.1 million
in preferred stock issued by Federal Agencies, $6.9 million in securities
issued by state, county, or municipalities, and $493,000 in corporate
securities.
At June 30, 2001, securities categorized as available-for-sale totaled
$50.5 million while the held-to-maturity securities totaled $7 million
compared to $38.7 million in available-for-sale and $14 million in
held-to-maturity at December 31, 2000. At June 30, 2001, the
available-for-sale portfolio had gross unrealized gains of $497,157 while
our held-to-maturity securities had $19,854 in unrealized losses due to
changes in market rates. Due to the credit quality of these investments, no
realized losses are expected.
NON-PERFORMING ASSETS
---------------------
Loans past due 90 days or more were $1,142,000 at June 30, 2001 and $194
thousand at December 31, 2000. Nonaccrual loans were $1,058,000 at June 30,
2001 compared with $984,000 at December 31, 2000. Additional funding of the
allowance for loan losses have been made to cover anticipated losses
associated with these loans. The reserve for loan and lease losses was
$1,393,535 at June 30, 2001, or 1.02% of loans and leases outstanding, net
of unearned income, compared to $1,062,511 or 0.78% at December 31, 2000.
Management believes the allowance for loan losses is adequate to provide
for potential loan losses.
DEPOSITS
--------
Total deposits at June 30, 2001 of $176 million, represented an increase of
$13.9 million or a 9% increase from $162.1 million at December 31, 2000.
Non-interest bearing demand deposits totaled $9 million at June 30, 2001, a
decrease of $500,000 from December 31, 2000. Interest bearing deposits
increased $14.4 million to $167 million at June 30, 2001.
14
CAPITAL
-------
Equity capital for the Savings Bank at June 30, 2001 was $16.4 million. At
June 30, 2001, all capital ratios were in excess of the regulatory
minimums, with the Savings Bank's Tier 1, total risk-based, and leverage
ratios of 11.03%, 11.98% and 7.41%, respectively.
Equity capital for the Company at June 30, 2001, was $18.3 million with
Tier 1, total risk-based, and leverage ratios of 12.26%, 13.24%, and 8.20%,
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 an unused line of credit with
the Federal Home Loan Bank of Cincinnati totaling $35 million at June 30,
2001.
EARNINGS REVIEW
----------------
The Company had net income of $361,859 for the three months ending June 30,
2001, compared with $375,345 for the same period last year, resulting in a
decline of 4%. The decline was a result of an increase in the provision for
loan losses during second quarter. For the three months ended June 30,
2001, the provision for loan losses was $306,255 compared with $68,237
during the same period last year, an increase of $238,018. For the six
months ended June 30, 2001, net income was $773,045 compared with $703,431
for the first six months of 2000 reflecting a 10% increase. For the six
months ended June 30, 2001, net income per diluted share was $0.54 compared
to earnings per share of $0.53 for the six months ended June 30, 2000.
Return on average assets was .73% and the return on average equity was
8.48% for the six months ended June 30, 2001, compared with .83% and
10.77%, respectively, for the same period in 2000.
Noninterest income increased $75,992, or 27%, during the six months ended
June 30, 2001, compared the same period last year as a result of the net
effect several factors. Gain on loans sold increased $61,669 and other fees
and service charges increased $25,645. Offsetting a portion of the increase
were declines of $3,118 in rental income and $8,204 in insurance commission
income.
Noninterest expense was $1,894,317 for the six months ending June 30, 2001,
an increase of 15% over the 2000 period, resulting mainly from compensation
and related benefits, furniture and equipment expense, advertising, data
processing expense, and other operating expenses. Partially offsetting the
increases was a decline in occupancy expense.
NET INTEREST INCOME
-------------------
Interest income and interest expense both increased from 2000 to 2001
resulting primarily from the increases in both earning assets and interest
bearing liabilities. Net interest income of $2.9 million for the six months
ended June 30, 2001 reflects an increase of $363,768 or 14% over the same
period last year. For the six months ending June 30, 2001, average earning
assets increased $46.7 million or 29% while average interest bearing
liabilities increased $43.6 million, or 30%, compared with the same period
in 2000. The taxable equivalent yield on earning asset remained the same at
8.06% for the first six months of 2001 compared with the same period in
2000 while the cost on interest bearing liabilities increased 12 basis
points to 5.47%. Consequently, the net interest margin based on average
earning assets declined to 3.09% for the six months ending June 30, 2001
compared with 3.23% for the same period in 2000.
PROVISION FOR LOAN LOSSES
-------------------------
During the six months ended June 30, 2001, the provision for possible loan
losses was $384,532 compared with $125,175 for the same period last year.
Loan charge-offs for the six months ended June 30, 2001, were $51,356
compared with $38,682 during the same period in 2000. The allowance for
possible loan losses represented 1.02% of total loans, net of mortgage
loans held-for-sale, at June 30, 2001, compared to .71% at June 30, 2000.
Management considers the allowance for loan losses to be adequate to cover
losses inherent in the loan portfolio.
15
PROVISION FOR INCOME TAXES
---------------------------
For the six months ended June 30, 2001, the provision for federal and state
income taxes was $226,891, a decrease of $130,762 from 2000. The decrease
is due primarily to taxfree interest income generated from recent purchases
of municipal securities and tax exempt dividends from purchases of
preferred stock in federal agencies.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $359,594 during the six months ended
June 30, 2001, an increase of $75,992 or 27% from the comparable 2000
period. The increase resulted from the net effect of increases in service
charges on deposit accounts and gains on loans sold of $25,645 and $61,669,
respectively, combined with decreases of $8,204 in insurance commission
income and $3,118 in rental income. The increase in gains on loans sold was
a result of the increased volume in secondary market activity that has
resulted from recent declines in interest rates.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $1,894,317 for the six month period ending June
30, 2001, an increase of $241,551 or 15%. The increase was result of
increases in compensation and related benefits, furniture and equipment
expense, advertising, data processing, and other operating expenses of
$143,836, $35,526, $13,187, $45,760, and $4,280, respectively. Offsetting
part of the increase was a decline of$1,038 in occupancy expense.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting on May 21, 2001, the shareholders voted on the
following proposals with the results as indicated:
1. Elected four of its current directors to continue in office until the
2004 annual meeting of shareholders. Current directors elected to
four-year terms were as follows:
FOR WITHHOLD AUTHORITY ABSTAIN
--- ------------------ -------
Charles E. Allen, Jr. 981,019 0 2,250
Vance W. Cheek 981,969 0 1,300
Stephen K Gross 983,269 0 0
Verrill M. Norwood, Jr. 983,269 0 0
Directors continuing to serve include:
Charles E. Allen, Sr., M.D. Randal R. Greene Kenneth E. Cutshall, M.D.
Donald R. Jeans Cameron E. Perry Richard S. Venable
Henry J. Williams, M.D.
2. Ratified the appointment of Baylor & Backus as the Company's
independent accountants and auditors for 2001 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
963,340 3,475 16,454 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
b) The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2001
16
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, 2001 /s/ Randal R. Greene
- --------------------------- ----------------------------------
(Date) Randal R. Greene, President
August 10, 2001 /s/ Charles E. Allen, Jr.
- --------------------------- ----------------------------------
(Date) Charles E. Allen, Jr.,
Chairman of the Board
and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
17