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, 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 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 NOVEMBER 7, 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
SEPTEMBER 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4 - 5
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2000 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NINE MONTHS ENDED SEPTEMBER 30, 2001 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
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 - UNAUDITED 2000 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,775,664 4,715,833
Federal Funds Sold 8,660,000 2,525,000
Short-Term Interest Bearing Deposits 363,925 227,422
Investments - HTM
(Estimated Market 2001 - $4,010,324 and 2000 - $13,792,610) 3,994,961 13,989,368
Investments - AFS 60,909,476 38,714,467
Loans Held for Sale 1,371,302 264,922
Loans and Leases Receivable 136,758,837 136,155,217
Less: Allowance for Loan and Lease Losses (1,344,585) (1,062,511)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 135,414,252 135,092,706
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,340,233 1,542,443
Land, Buildings & Equip at Cost Less Accum Depr
of $1,162,683 in 2001 and $883,607 in 2000 5,322,072 5,395,933
Prepaid Expense and Accounts Receivable 94,465 77,379
Investment in Service Bureau at Cost 815,009 15,000
Deferred Tax Assets 104,391 313,815
FHLB Stock 2,132,200 1,524,500
Other Real Estate Owned 495,129 0
Other Assets 60,000 0
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 225,853,079 204,398,788
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 8,908,536 9,503,943
Interest-Bearing Deposits 171,292,187 152,578,447
Advances by Borrowers for Taxes and Insurance 306,599 107,235
Accrued Interest on Deposits 182,695 188,408
Accounts Payable and Accrued Expenses 307,139 296,388
FHLB Short-Term Advances 0 12,660,000
FHLB Long-Term Advances 25,242,430 11,246,679
Deferred Gain on REO 21,448 21,448
Notes Payable 527,727 571,637
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 206,788,761 187,174,185
- -------------------------------------------------------------------------------------------------
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 535,108 89,678
Retained Earnings 3,892,000 2,569,575
Less: Employee Stock Ownership (1,079,763) (1,151,623)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 19,064,318 17,224,603
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 225,853,079 204,398,788
=================================================================================================
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 SEPTEMBER 30,
----------------------------------
INTEREST INCOME: 2001 - UNAUDUTED 2000 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,697,446 2,838,658
Other Interest Income 1,078,658 765,213
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,776,104 3,603,871
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,976,396 1,941,376
Interest on Short-Term Debt 4 51,193
Interest on Long-Term Debt 318,933 284,620
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,295,333 2,277,189
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,480,771 1,326,682
PROVISION FOR LOAN LOSSES (68,494) (68,811)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,412,277 1,257,871
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 105,523 97,410
Net Gain on Loans Sold 49,526 8,928
Insurance Commission Income 10,249 10,316
Rental Income, Net 18,683 31,329
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 183,981 147,983
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 460,532 399,812
Occupancy Expenses 63,748 59,419
Furniture and Equipment Expense 91,592 64,843
Advertising 23,288 21,193
Data Processing Expense 104,839 91,005
Other 205,873 182,782
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 949,872 819,054
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 646,386 586,800
PROVISION FOR INCOME TAXES (97,006) (190,509)
- ----------------------------------------------------------------------------------------
NET INCOME $ 549,380 396,291
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.40 0.29
DILUTED 0.38 0.28
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,363,616 1,363,784
DILUTED 1,436,403 1,406,615
========================================================================================
See accompanying notes and accountant's report.
4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
INTEREST INCOME: 2001 - UNAUDITED 2000 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 8,709,592 7,954,566
Other Interest Income 3,066,777 2,028,755
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 11,776,369 9,983,321
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 6,327,757 5,309,154
Interest on Short-Term Debt 84,790 206,489
Interest on Long-Term Debt 963,860 585,573
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 7,376,407 6,101,216
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 4,399,962 3,882,105
PROVISION FOR LOAN LOSSES (453,026) (193,986)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,946,936 3,688,119
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 319,174 285,416
Net Gain on Loans Sold 142,473 40,205
Insurance Commission Income 25,431 33,702
Rental Income, Net 56,497 72,262
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 543,575 431,585
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 1,368,657 1,164,101
Occupancy Expenses 199,563 196,271
Furniture and Equipment Expense 259,513 197,238
Advertising 80,088 64,807
Data Processing Expense 326,678 267,084
Other 609,690 582,319
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 2,844,189 2,471,820
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 1,646,322 1,647,884
PROVISION FOR INCOME TAXES (323,897) (548,162)
- ----------------------------------------------------------------------------------------
NET INCOME $ 1,322,425 1,099,722
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.97 0.83
DILUTED 0.93 0.81
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,364,570 1,318,337
DILUTED 1,427,710 1,361,168
========================================================================================
See accompanying notes and accountant's report.
5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 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 -- -- -- -- 71,860 71,860
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $358,435 Income Tax) -- -- 593,682 -- -- 593,682
Less: Reclassification Adjustment
(Net of $90,864 Income Tax) -- -- (148,252) -- -- (148,252)
-------------
445,430
Net Income -- -- -- 1,322,425 -- 1,322,425
-------------
Total Comprehensive Income -- -- -- -- -- 1,767,855
----------- ---------- --------- --------- ---------- -------------
Balance at September 30, 2001 1,465,512 14,251,461 535,107 3,892,001 (1,079,763) 19,064,318
=========== ========== ========= ========= ========== =============
The accompanying notes are an integral part of the consolidated
financial statements.
6
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2001 - UNAUDITED 2000 - UNAUDITED
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,322,425 1,099,722
Items Not Affecting Cash:
Depreciation 281,732 206,992
(Increase) in Accrued Interest 202,210 (118,329)
Deferred Income Taxes (Benefit) (115,714) (47,737)
Provision for Loan and Lease Losses 453,026 193,986
(Increase) in Prepaid Expenses and Accounts Receivable (17,086) (35,857)
Increase (Decrease) in Interest Payable (5,713) 97,834
Increase (Decrease) in Accounts Payable and Accrued Expenses 10,751 (314,234)
Increase in Deferred Loan Fees, Net (8,511) 48,068
Discount Accretion (296,748) (28,499)
Earned ESOP Shares 71,860 40,799
FHLB Stock Dividends (107,700) (78,600)
Net Decrease in Loans Held for Sale (1,106,380) 307,737
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 684,152 1,371,882
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Available-for-Sale Investments (35,624,027) (11,165,995)
Proceeds from Maturities of Held-to-Maturity Investments 10,000,000 -
Proceeds from Maturities of Available-for-Sale Investments 14,490,740 -
Proceeds from Sale of Available-for-Sale Investments - 504,171
(Increase) in Federal Funds Sold (6,135,000) (57,000)
(Increase) Decrease in Short-Term Interest Bearing Deposits (136,503) 4,874
(Increase) in Loans Receivable, Net (1,321,190) (18,797,262)
Purchases of Premises and Equipment (207,870) (1,184,705)
Purchases of Stock in Service Bureau (800,009) -
Purchases of Federal Home Loan Bank Stock (500,000) -
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (20,233,859) (30,695,917)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 18,118,333 18,791,740
Net Increase in Advances by Borrowers for Taxes and Insurance 199,364 220,710
Issuance of Common Stock, Net - 2,171,724
ESOP Shares Purchased - (599,994)
Repayment of Debt (43,910) (40,798)
Repayment of FHLB Advances (15,661,417) -
Proceeds from FHLB Advances 16,997,168 10,340,371
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,609,538 30,883,753
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 59,831 1,559,718
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 4,715,833 2,785,509
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 4,775,664 4,345,227
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 445,430 54,898
Acquisition of Real Estate Property through Foreclosure of Related Loans 495,129 -
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 394,077 992,389
Interest $ 7,382,120 6,003,383
=================================================================================================================
See accompanying notes and accountant's report.
7
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 nine months ended September
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 September 30, 2001
consolidated financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ----- -----------------------------
Fixed assets at September 30, 2001, and December 31, 2000 are summarized as
follows:
2001 2000
----------- -----------
Land 1,450,000 1,450,000
Buildings and Leasehold Improvements 3,040,756 2,941,388
Furniture, Fixtures and Equipment 1,996,655 1,888,152
----------- -----------
6,487,411 6,279,540
Less: Accumulated Depreciation 1,165,339 883,607
----------- -----------
5,322,072 5,395,933
=========== ===========
8
NOTE 5 LOANS RECEIVABLE
- ------- ------------------
Loans receivable at September 30, 2001 and December 31, 2000, consist of
the following:
2001 2000
-------------- --------------
First Mortgage Loans 53,401,201 54,716,151
Construction Loans 21,531,922 24,454,127
Consumer Loans 11,700,705 10,066,638
Participation Loans, Net 508,564 533,676
Commercial Loans 53,703,132 50,931,829
Savings Account Loans 0 138,122
Credit Line Advances 762,454 392,295
Lease Finance 1,531,433 1,461,095
--------------- ---------------
Gross Loans and Leases Receivable 143,139,411 142,693,933
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 6,268,460) ( 6,418,090)
Net Deferred Loan Origination Fees ( 112,114) ( 120,626)
Accumulated General Loan Loss Allowance ( 1,344,585) ( 1,062,511)
--------------- ---------------
( 7,725,159) ( 7,601,227)
--------------- ---------------
Loans and Leases Receivable, Net 135,414,252 135,092,706
=============== ===============
An analysis of the allowance for loan and lease losses at September 30,
2001 and December 31, 2000 is as follows:
2001 2000
-------------- --------------
Balance - Beginning of Period 1,062,511 810,303
Provision for Loan and Lease Losses 453,026 302,609
Loans and Leases Charged-Off (171,852) (50,401)
Charged-Off Loan and Lease Recoveries 900 --
-------------- --------------
Balance - End of Period 1,344,585 1,062,511
============== ==============
The gross amount of participation loans serviced by State of Franklin
Savings Bank was $1,017,128 at September 30, 2001 compared with $1,067,240 at
December 31, 2000.
The Bank had $3.4 million in non-performing loans at September 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 Amount Ratio Amount Ratio
- --------------------------- ---------------- ----------------
As of September 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 18,031 11.22% >=16,064 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 16,620 10.35% >=9,638 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 16,620 7.58% >=10,957 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 Amount Ratio Amount Ratio
- --------------------------- ----------------- -----------------
As of September 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 19,984 12.40% >=16,113 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 18,529 11.50% >=9,668 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 18,529 8.38% >=11,059 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. 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:
September 30, December 31,
2001 2000
------------- -------------
Number of Shares
Released and Allocated 31,985 26,431
Committed to be Released 3,899 5,554
Suspense 101,508 98,957
Fair Value
Released and Allocated 518,157 396,465
Committed to be Released 63,164 83,310
Suspense 1,644,430 1,484,355
Contributions to the ESOP are as follows:
September 30, December 31,
2001 2000
------------- -------------
Compensation Expense 195,000 186,000
Contributions 195,000 186,000
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 - September 30, 2001 255,680 136,779 $11.59
======= =======
11
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
September 30, 2001 December 31, 2000
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 3.77 32,202,018 17.87 4.68 16,657,166 10.28
Interest-Free Checking -- 8,908,536 4.94 -- 9,503,943 5.86
NOW 1.98 7,823,806 4.34 2.00 7,465,557 4.61
Money Market Deposit 3.43 51,044,344 28.33 5.51 31,022,840 19.14
----------- -------- ----------- --------
99,978,704 55.48 64,649,506 39.89
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 5.32 20,038,953 11.12 6.38 23,480,179 14.48
Balances less than $100,000 5.10 60,183,066 33.40 6.36 73,952,705 45.63
----------- -------- ----------- --------
80,222,019 44.52 97,432,884 60.11
----------- -------- ----------- --------
180,200,723 100.00 162,082,390 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at September 30, 2001 and
December 31, 2000, is as follows:
Period Ending September 30, 2001 Year Ending December 31, 2000
-------------------------------- -----------------------------
2001 22,042,200 2001 81,572,541
2002 53,480,455 2002 13,728,541
2003 3,513,599 2003 1,810,104
2004 1,185,765 2004 321,698
2005 and After -- 2005 and After --
---------- ----------
80,222,019 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 September 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 242,430 246,679
Convertible Fixed Rate (Within 10 Years) 25,000,000 11,000,000
---------- ----------
Total Long-Term Borrowings 25,242,430 11,246,679
Weighted Average Rate at End of Period 5.02% 5.31%
Total Federal Home Loan Bank Advances 25,242,430 23,906,679
Weighted Average Rate at End of Period 5.02% 6.07%
12
NOTE 10 INVESTMENT SECURITIES
- ------- ----------------------
The amortized cost and fair value of investment securities held-to-maturity
and available-for-sale at September 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.
September 30, 2001:
-------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- ---------- -----------
Available-for-Sale:
United States Government
Agency Securities Maturing:
After five years
but within ten years 7,885,214 236,988 -- 8,122,202
Over ten years
but within fifteen years 1,927,435 75,540 -- 2,002,975
Over 15 years 4,368,365 204,201 111,113 4,461,453
Municipal Securities Maturing:
Within one year 120,000 1,158 -- 121,158
After one year
but within five years 530,000 22,114 -- 552,114
After five years
but within ten years 1,595,823 56,678 -- 1,652,501
Over ten years
but within fifteen years 8,329,045 155,097 17,596 8,466,546
Over 15 years 5,985,443 79,468 60,683 6,004,228
Equity Securities
Callable after one year
but within five years 21,000,000 265,898 34,582 21,231,316
Callable after five years
but within ten years 1,000,000 13,713 -- 1,013,713
Other
Within one year 6,811,610 -- -- 6,811,610
Over 15 years 493,464 -- 23,804 469,660
---------- --------- --------- -----------
Total Available-for-Sale 60,046,399 1,110,855 247,778 60,909,476
========== ========= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After five years
but within ten years 3,994,961 15,363 -- 4,010,324
---------- --------- --------- -----------
Total Held-to-Maturity 3,994,961 15,363 -- 4,010,324
========== ========= ========= ===========
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for three months ended and six months ended September
30, 2001, compared with the same periods ended September 30, 2000, are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Net Income 549,380 396,291 1,322,425 1,099,722
Average Basic Shares Outstanding 1,363,616 1,363,784 1,364,570 1,318,337
Basic Earnings Per Share 0.40 0.29 0.97 0.83
========= ========= ========= =========
Net Income 549,380 396,291 1,322,425 1,099,722
Average Basic Shares Outstanding 1,363,616 1,363,784 1,364,570 1,318,337
Dilutive Effect Due to Stock Options 72,787 42,831 63,140 42,831
--------- --------- --------- ---------
Average Shares Outstanding, as Adjusted 1,436,403 1,406,615 1,427,710 1,361,168
Diluted Earnings Per Share 0.38 0.28 0.93 0.81
========= ========= ========= =========
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 September 30, 2001, assets of State of Franklin Bancshares, Inc. totaled
$225.9 million reflecting an increase of $21.5 million or 10% since
December 31, 2000. The growth in assets has been funded primarily by an
$18.8 million increase in deposits and a $1.3 million increase in Federal
Home Loan Bank advances.
LOANS
-----
Loans outstanding totaled $136.8 million at September 30, 2001. This
represented a slight increase of .4% from the December 31, 2000 outstanding
loans of $136.2 million.
Commercial loans increased $2.8 million at September 30, 2001, an increase
of 5% from $50.9 million at December 31, 2000. Consumer loans of $11.7
million at September 30, 2001 increased $1.6 million or 16% from $10.1
million at December 31, 2000. During the first nine months of 2001, real
estate related loans declined in part due to the slowing economy and the
lower interest rate environment resulting in less construction spending and
an increase in existing mortgages being refinanced in the secondary market.
Real estate construction lending totaled $21.5 million compared with $24.5
million at December 31, 2000, reflecting a decline of $2.9 million or 12%.
First mortgage residential loans declined $1.3 million or 2% to $53.4
million at September 30, 2001. The loan portfolio mix at September 30, 2001
consists of 38% residential mortgages, 37% commercial, 17% real estate
construction, and 8% consumer loans.
INVESTMENT SECURITIES
---------------------
Investment securities totaled $64.9 million at September 30, 2001. The
investment portfolio at quarter end consisted of $18.6 million in debt
securities issued by the U. S Government or Federal Agencies, $22.2 million
in preferred stock issued by Federal Agencies, $16.8 million in securities
issued by state, county, or municipalities, and $470,000 in corporate
securities.
At September 30, 2001, securities categorized as available-for-sale totaled
$60.9 million while the held-to-maturity securities totaled $4 million
compared to $38.7 million in available-for-sale and $14 million in
held-to-maturity at December 31, 2000. At September 30, 2001, the
available-for-sale portfolio had gross unrealized gains of $1,110,855 and
gross unrealized losses of $247,778. Our held-to-maturity securities had
$15,363 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 $227,000 at September 30, 2001 and $194
thousand at December 31, 2000. Nonaccrual loans were $3,283,000 at
September 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 $1,344,585 at September 30, 2001, or .98% 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 September 30, 2001 of $180.2 million, represented an
increase of $18.1 million or an 11% increase from $162.1 million at
December 31, 2000. Non-interest bearing demand deposits totaled $8.9
million at September 30, 2001, a decrease of $600,000 from December 31,
2000. Interest bearing deposits increased $18.7 million to $171.3 million
at September 30, 2001.
14
CAPITAL
-------
Equity capital for the Savings Bank at September 30, 2001 was $17.1
million. At September 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 10.35%, 11.22% and 7.58%, respectively.
Equity capital for the Company at September 30, 2001, was $19.1 million
with Tier 1, total risk-based, and leverage ratios of 11.50%, 12.40%, and
8.38%, 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 September
30, 2001.
EARNINGS REVIEW
----------------
The Company had net income of $549,380 for the three months ending
September 30, 2001, compared with $396,291 for the same period last year,
resulting in an increase of 39%. For the nine month period ending September
30, 2001, net income was $1,322,425 compared with $1,099,722 the first nine
months of 2000 reflecting an increase of 20%. Net income per diluted share
was $0.93 compared to earnings per share of $0.81 for the first nine months
ending September 30, 2000. Return on average assets was .82% and the return
on average equity was 9.49% for the nine month period ended September 30,
2001, compared with .86% and 9.62%, respectively, for the same period in
2000.
Noninterest income increased $111,990, or 26%, during the nine months ended
September 30, 2001, compared the same period last year as a result of the
net effect several factors. Gain on loans sold increased $102,268 due to
increased activity in income generated by loans sold in the secondary
market. Service charges on deposit accounts increased $33,758 while
insurance commissions and rental income declined $8,271 and $15,765,
respectively for the nine months ended September 30, 2001, compared with
the same period a year ago.
Noninterest expense was $2.8 million for the nine months ending September
30, 2001, an increase of 15% over the 2000 period, primarily resulting from
increased salaries and benefits, occupancy, furniture and equipment, data
processing, and other general operating expenses.
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 $1.5 million for the three
months ended September 30, 2001 reflects an increase of $154,089 or 12%
over the same period last year. For the nine months ending September 30,
2001, net interest income was $4.4 million, reflecting an increase of
$517,857 or 13% over the same period a year ago. For the nine months ending
September 30, 2001, average earning assets increased $43.8 million or 27%
while average interest bearing liabilities increased $40.9 million, or 28%,
compared with the same period in 2000. Average earning asset taxable
equivalent yield declined 28 basis points to 7.85% while the cost on
interest bearing liabilities also declined 28 basis points to 5.21%. The
net interest margin based on average earning assets declined slightly to
3.10% for the nine months ending September 30, 2001 compared with 3.16% for
the same period in 2000.
PROVISION FOR LOAN LOSSES
-------------------------
During the nine months ended September 30, 2001, the provision for possible
loan losses was $453,026 compared with $193,986 for the same period last
year. Loan charge-offs for the nine months ended September 30, 2000, were
$171,852 compared with $50,402 during the same period in 1999. The
allowance for possible loan losses represented .98% of total loans, net of
mortgage loans held-for-sale, at September 30, 2001, compared to .72% at
September 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 nine months ended September 30, 2001, the provision for federal and
state income taxes was $323,897, a decrease of $224,265 from 2000. The
decrease is due primarily to taxfree interest income generated from
purchases of municipal securities and tax exempt dividends from purchases
of preferred stock in federal agencies.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $543,575 during the nine months ended
September 30, 2001, an increase of $111,990 or 26% from the comparable 2000
period. The increase resulted from the net effect of declines in insurance
commissions and rental income of $8,271 and $15,765, respectively, combined
with increases of $33,758 in other fees and service charges and $102,268 in
net gains on loans sold.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $949,873 for the three month period ending
September 30, 2001, an increase of $130,819 or 16%. For the nine month
period ending September 30, 2001, noninterest expense was up $2,844,189 or
15% over the same period in 2000. 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.
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
b) The Company did not file any reports on Form 8-K during the
quarter ended September 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)
November 8, 2001 /s/ Randal R. Greene
- ---------------- ---------------------------------
(Date) Randal R. Greene, President
November 8, 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