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, 2002
--------------------
[ ] 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)
(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 7, 2002)
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, 2002 (UNAUDITED) AND DECEMBER 31, 2001 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4 - 5
THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2001 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED) AND 2001
(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 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULT UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
ASSETS 2002 - UNAUDITED 2001 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,159,615 5,252,689
Federal Funds Sold 10,295,000 28,590,000
Short-Term Interest Bearing Deposits 528,738 57,649
Investments - HTM
(Estimated Market 2002 - $22,766,369 and 2001 - $9,636,374) 22,832,690 9,676,885
Investments - AFS 62,103,912 63,780,481
Loans Held for Sale 602,900 2,548,370
Loans and Leases Receivable 153,939,004 139,090,332
Less: Allowance for Loan and Lease Losses (1,425,816) (1,473,855)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 152,513,188 137,616,477
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,661,955 1,364,280
Land, Buildings & Equip at Cost Less Accum Depr
of $1,504,880 in 2002 and $1,260,895 in 2001 5,536,913 5,319,180
Prepaid Expense and Accounts Receivable 61,250 119,647
Deferred Tax Assets 412,841 709,103
FHLB Stock 2,211,400 2,161,700
Other Real Estate Owned 1,654,849 449,988
Other Assets 212,000 239,000
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 264,787,251 257,885,449
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 9,920,399 18,216,284
Interest-Bearing Deposits 188,410,888 181,920,790
Advances by Borrowers for Taxes and Insurance 288,076 99,414
Accrued Interest on Deposits 184,616 179,897
Accounts Payable and Accrued Expenses 516,657 420,784
Repurchase Agreements 637,959 -
FHLB Long-Term Advances 35,795,386 30,240,995
Deferred Credits on REO 144,338 21,448
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 235,898,319 231,099,612
- -------------------------------------------------------------------------------------------------
Guaranteed Preferred Beneficial Interest in
Subordinated Debentures 8,000,000 8,000,000
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 160,829 ( 368,029)
Retained Earnings 5,994,851 4,526,987
Less: Employee Stock Ownership ( 983,721) ( 1,090,094)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 20,888,932 18,785,837
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 264,787,251 257,885,449
=================================================================================================
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: 2002 - UNAUDITED 2001 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,735,294 2,995,543
Other Interest Income 1,399,930 1,012,694
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 4,135,224 4,008,237
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,412,025 2,186,518
Interest on Repurchase Agreements 79 -
Interest on Short-Term Debt 37 10
Interest on Long-Term Debt 417,938 339,310
Interest on Subordinated Debentures 124,723 -
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,954,801 2,525,838
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 2,180,423 1,482,399
PROVISION FOR LOAN LOSSES (127,500) (306,255)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 2,052,923 1,176,144
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 108,134 107,216
Net Gain on Loans Sold 64,087 64,599
Real Estate Sales Commission Income 56,059 -
Insurance Commission Income 20,376 11,859
Rental Income, Net 23,465 21,578
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 272,120 205,252
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 609,674 479,088
Occupancy Expenses 74,348 63,045
Furniture and Equipment Expense 114,842 86,819
Advertising 58,356 33,123
Data Processing Expense 116,499 108,359
Other 386,458 200,619
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,360,178 971,053
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 964,866 410,343
PROVISION FOR INCOME TAXES (146,529) (48,484)
- ----------------------------------------------------------------------------------------
NET INCOME $ 818,337 361,859
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.59 0.27
DILUTED 0.55 0.25
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,381,617 1,363,995
DILUTED 1,475,742 1,422,311
========================================================================================
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: 2002 - UNAUDITED 2001 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 5,458,005 6,012,147
Other Interest Income 2,654,150 1,988,118
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 8,112,155 8,000,265
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 2,852,930 4,351,361
Interest on Repurchase Agreements 79 -
Interest on Short-Term Debt 38 84,786
Interest on Long-Term Debt 786,705 644,927
Interest on Subordinated Debentures 248,930 -
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 3,888,682 5,081,074
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 4,223,473 2,919,191
PROVISION FOR LOAN LOSSES (275,000) (384,532)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,948,473 2,534,659
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 221,533 213,651
Net Gain on Loans Sold 155,779 92,946
Real Estate Sales Commission Income 56,059 -
Insurance Commission Income 39,334 15,182
Rental Income, Net 46,850 37,815
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 519,555 359,594
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 1,206,500 908,125
Occupancy Expenses 161,054 135,814
Furniture and Equipment Expense 226,378 167,921
Advertising 89,324 56,801
Data Processing Expense 242,944 221,839
Other 778,163 403,817
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 2,704,363 1,894,317
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 1,763,665 999,936
PROVISION FOR INCOME TAXES (295,800) (226,891)
- ----------------------------------------------------------------------------------------
NET INCOME $ 1,467,865 773,045
========================================================================================
EARNINGS PER SHARE:
BASIC $ 1.06 0.57
DILUTED 1.00 0.54
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,379,826 1,365,054
DILUTED 1,472,576 1,423,291
========================================================================================
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, 2002 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2001 (AUDITED)
Accumulated
Other Employee
Common Paid-In Comprehensive Retained Stock
Stock Capital Income Earnings Ownership Total
-------------- ---------- ------------ --------- ----------- ------------
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 -- -- -- -- 61,529 61,529
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $251,218 Income Tax) -- -- (401,015) -- -- (401,015)
Less: Reclassification Adjustment
(Net of $34,746 Income Tax) -- -- (56,691) -- -- (56,691)
------------
(457,706)
Net Income -- -- -- 1,957,411 -- 1,957,411
------------
Total Comprehensive Income -- -- -- -- -- 1,499,705
------------ ---------- --------- --------- ----------- ------------
Balance at December 31, 2001 1,465,512 14,251,461 (368,029) 4,526,987 (1,090,094) 18,785,837
ESOP Shares Allocated -- -- -- -- 106,373 106,373
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $261,228 Income Tax) -- -- 435,081 -- -- 435,081
Less: Reclassification Adjustment
(Net of $57,476 Income Tax) -- -- 93,777 -- -- 93,777
------------
528,858
Net Income -- -- -- 1,467,864 -- 1,467,864
------------
Total Comprehensive Income -- -- -- -- -- 1,996,722
------------ ---------- --------- --------- ---------- ------------
Balance at March 31, 2002 1,465,512 14,251,461 160,829 5,994,851 (983,721) 20,888,932
============ ========== ========= ========= =========== ============
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,
----------------------------------
2002 - UNAUDITED 2001 - UNAUDITED
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,467,865 773,045
Items Not Affecting Cash:
Depreciation 241,328 182,821
(Increase) Decrease in Accrued Interest (297,675) 1,587
Deferred Income Taxes (Benefit) ( 27,640) (116,249)
Provision for Loan and Lease Losses 275,000 384,532
(Increase) Decrease in Prepaid Expenses and Accounts Receivable 58,397 (32,064)
Decrease in Interest Payable 4,719 103
Decrease in Accounts Payable and Accrued Expenses 95,873 49,174
(Increase) Decrease in Deferred Loan Fees, Net 97,907 (13,038)
Discount Accretion (332,200) (185,397)
Earned ESOP Shares 106,373 46,376
FHLB Stock Dividends (49,700) (70,800)
Net (Increase) Decrease in Loans Held for Sale 1,945,470 (837,841)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,585,717 182,249
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments (17,856,308) -
Purchase of Available-for-Sale Investments (3,901,585) (17,131,311)
Proceeds from Maturities of Held-to-Maturity Investments 4,000,000 7,000,000
Proceeds from Maturities of Available-for-Sale Investments 6,350,865 5,925,000
Principal Payments on Mortgage-backed Securities - AFS 1,112,990 -
(Increase) Decrease in Federal Funds Sold 18,295,000 (9,175,000)
(Increase) Decrease in Short-Term Interest Bearing Deposits (471,089) 44,478
(Increase) in Loans Receivable, Net (16,324,828) (1,548,275)
Purchases of Premises and Equipment (459,061) (35,460)
Purchases of Stock in Service Bureau - (108,700)
Purchases of Federal Home Loan Bank Stock -
(500,000)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (9,254,016) (15,529,268)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (1,805,787) 13,891,885
Net Increase in Advances by Borrowers for Taxes and Insurance 188,662 130,547
Net Increase in Repurchase Agreements 637,959 -
Repayment of Debt - (29,081)
Repayment of FHLB Advances (4,269) (15,661,417)
Proceeds from FHLB Advances 5,558,660 16,998,593
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,575,225 15,330,527
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH (1,093,074) (16,492)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 5,252,689 4,715,833
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 4,159,615 4,699,341
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 528,858 218,559
Acquisition of Real Estate Property through Foreclosure of Related Loans $ 1,654,849 427,852
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 1,054,041 299,077
Interest $ 3,883,963 5,080,971
=================================================================================================================
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. (the "Company") was incorporated under the
laws of the State of Tennessee for the purpose of becoming the holding company
of State of Franklin Savings Bank (the "Savings Bank"). The shareholders of the
Savings Bank exchanged their shares for the shares of the Company, whereby the
Savings Bank became a wholly owned subsidiary of the Company. State of Franklin
Leasing Corporation (the "Leasing Corp") was incorporated under the laws of the
State of Tennessee for the purpose of lease financing. In January 2002, State of
Franklin Real Estate, Inc. (the "Real Estate Company") was incorporated for the
purpose of selling real estate. The Real Estate Company and John Sevier Title
Services, Inc. (the "Title Company") are wholly owned subsidiaries of the
Savings Bank. The Leasing Corp is a wholly owned subsidiary of the Company.
NOTE 2 BASIS OF PREPARATION
- ------ ----------------------
The accompanying 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, 2002 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, 2001.
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, 2002 consolidated financial
statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ----- -----------------------------
Fixed assets at June 30, 2002, and December 31, 2001 are summarized as follows:
2002 2001
----------- -----------
Land 1,450,000 1,450,000
Buildings and Leasehold Improvements 3,215,655 3,040,756
Furniture, Fixtures and Equipment 2,376,138 2,091,976
----------- -----------
7,041,793 6,582,732
Less: Accumulated Depreciation 1,504,880 1,263,552
----------- -----------
5,536,913 5,319,180
=========== ===========
8
NOTE 5 LOANS RECEIVABLE
- ------ ----------------
Loans receivable at June 30, 2002 and December 31, 2001, consist of the
following:
2002 2001
-------------- --------------
First Mortgage Loans 60,841,193 54,554,665
Construction Loans 29,670,551 20,163,050
Consumer Loans 13,217,832 12,536,061
Participation Loans, Net 492,668 503,354
Commercial Loans 61,961,488 56,028,216
Credit Line Advances 566,169 710,137
Lease Finance 1,468,191 1,342,242
--------------- ---------------
Gross Loans and Leases Receivable 168,218,092 145,837,725
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 14,040,233) ( 6,606,444)
Net Deferred Loan Origination Fees ( 238,855) ( 140,949)
Accumulated General Loan Loss Allowance ( 1,425,816) ( 1,473,855)
--------------- ---------------
( 15,704,904) ( 8,221,248)
--------------- ---------------
Loans and Leases Receivable, Net 152,513,188 137,616,477
=============== ===============
An analysis of the allowance for loan and lease losses at June 30, 2002 and
December 31, 2001 is as follows:
2002 2001
-------------- --------------
Balance - Beginning of Period 1,473,855 1,062,511
Provision for Loan and Lease Losses 275,000 589,902
Loans and Leases Charged-Off ( 323,382) ( 181,508)
Charged-Off Loan and Lease Recoveries 343 2,950
-------------- --------------
Balance - End of Period 1,425,816 1,473,855
============== ==============
The gross amount of participation loans serviced by State of Franklin Savings
Bank was $984,911 at June 30, 2002 and $1,006,596 at December 31, 2001.
The Bank had $1.5 million in non-performing loans at June 30, 2002 compared to
$2.8 million at December 31, 2001.
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 June 30, 2002:
Total Risk-Based Capital
(to Risk-Weighted Assets) 19,808 11.10% >=17,840 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 18,434 10.33% >=10,704 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 18,434 7.16% >=12,872 5.0%
As of December 31, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 18,680 11.25% >=16,602 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 17,244 10.39% >= 9,961 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 17,244 7.44% >=11,588 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 June 30, 2002:
Total Risk-Based Capital
(to Risk-Weighted Assets) 29,584 16.51% >=17,914 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 26,948 15.04% >=10,748 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 26,948 10.40% >=12,960 5.0%
As of December 31, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) 28,392 17.03% >=16,671 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 25,224 15.13% >=10,003 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 25,224 10.80% >=11,675 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.
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 were $8,218 per month for ten years with a fixed
interest rate of 7.25%. The note balances outstanding at December 31, 2000 and
1999 were $571,637 and $626,615, 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 December 31, 2000
and 1999 were $571,637 and $626,615, 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 were $7,280 per month for ten years
with a fixed interest rate of 8.00%. The note balance outstanding at December
31, 2000 was $579,985. In November 2001, the ESOP loans were consolidated into a
seven year term loan from the Company in the amount of $1,071,093 with a fixed
interest rate of 6.00%. Note payments are $15,218 per month for 83 months plus a
final principal payment of $24,092. The note balance outstanding at June 30,
2002 was $983,720. Also, in November 2001, the Company granted a $300,000 line
of credit to the ESOP for the purchase of additional shares of stock in the
Company as it becomes available. The interest rate for balances outstanding on
the line of credit is 6% with a five year term. Interest is paid monthly with
principal payments made as funds are available. At June 30, 2002, there was no
outstanding amounts advanced on the line of credit.
Shares owned by the ESOP at June 30, 2002 totaled 153,148. 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,
2002 2001
------------- -------------
Number of Shares
Released and Allocated since Inception 49,340 43,654
Committed to be Released 8,088 5,687
Suspense 82,248 88,814
Fair Value
Released and Allocated since Inception 888,120 707,195
Committed to be Released 145,584 92,129
Suspense 1,480,464 1,438,787
Contributions to the ESOP are as follows:
June 30, December 31,
2002 2001
------------- -------------
Compensation Expense 156,000 264,000
Contributions 156,000 264,000
For the purpose of computing earnings per share, all ESOP shares committed to be
released are considered outstanding.
STOCK OPTION PLANS
Weighted
Average
Awarded Exercise
And Price
Unexercised Vested Per
Options Options Share
--------------------------------------------------
Options Granted - Outside Directors January 1, 2002 76,014 54,405 $11.62
During 2002 7,000 7,000 16.20
Options Granted - Management January 1, 2002 182,166 129,518 11.64
During 2002 27,473 -- 16.63
------- -------
Options Outstanding - June 30, 2002 292,653 190,923 $12.21
======= =======
11
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
June 30, 2002 December 31, 2001
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 2.64 56,869,234 28.67 2.60 41,603,020 20.79
Interest-Free Checking -- 9,920,399 5.00 -- 18,216,284 9.10
NOW 1.99 10,447,596 5.27 2.00 8,512,548 4.26
Money Market Deposit 2.20 37,127,567 18.72 2.21 46,020,212 22.99
----------- -------- ----------- --------
114,364,796 57.66 114,352,064 57.14
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 3.66 22,456,288 11.32 4.45 22,237,766 11.11
Balances less than $100,000 3.56 61,510,203 31.02 4.32 63,547,244 31.75
----------- -------- ----------- --------
83,966,491 42.34 85,785,010 42.86
----------- -------- ----------- --------
198,331,287 100.00 200,137,074 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at June 30, 2001 and December
31, 2001, is as follows:
Period Ending June 30, 2002 Year Ending December 31, 2001
---------------------------- -----------------------------
2002 50,624,402 2002 77,330,432
2003 21,413,226 2003 5,968,854
2004 7,705,307 2004 1,323,611
2005 3,702,087 2005 1,162,113
2006 and After 521,469 2006 and After --
---------- ----------
83,966,491 85,785,010
========== ==========
NOTE 9 FEDERAL HOME LOAN BANK ADVANCES
- ------- -------------------------------
Advances from FHLB are summarized as follows for the periods ended June 30, 2002
and December 31, 2001:
Contractual Maturity 2002 2001
-------------------- ----------- -----------
Convertible Fixed Rate (Within 10 Years) 35,000,000 30,000,000
Matched-Funding (30-Year Amortizing) 795,386 240,995
Weighted Average Rate 4.87% 4.95%
The convertible fixed rate advances have an original maturity of 10 years with
an option held by FHLB to convert to a variable rate tied to 3-month LIBOR
beginning 1 to 3 years from the original issue date. If converted to a variable
rate the bank maintains the option to pay off the advance or continue at the
variable rate over the original contractual maturity of the advance.
NOTE 10 INVESTMENT SECURITIES
- ------- ---------------------
The amortized cost and fair value of investment securities held-to-maturity and
available-for-sale at June 30, 2002, 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, 2002:
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 1,995,345 31,699 -- 2,027,044
After fifteen years
but within twenty years 3,500,217 246,046 3,511 3,742,752
After 20 years 1,125,674 -- 2,641 1,123,033
Collateralized Mortgage
Obligations Maturing:
After ten years
but within fifteen years 291,103 15,825 -- 306,928
After fifteen years
but within twenty years 1,478,713 33,227 -- 1,511,940
After 20 years 1,882,585 40,040 -- 1,922,625
Municipal Securities Maturing:
Within one year 125,000 2,316 -- 127,316
After one year
but within five years 550,000 29,299 -- 579,299
After five years
but within ten years 2,676,451 89,668 4,315 2,761,804
After ten years
but within fifteen years 10,632,869 199,208 9,425 10,822,652
After fifteen years
but within twenty years 5,832,934 87,770 56,885 5,863,819
After 20 years 365,405 -- 15,409 349,996
Corporate Securities Maturing:
After five years
but within ten years 5,100,000 86,616 -- 5,186,616
After twenty years 1,736,681 1,527 7,500 1,730,708
Equity Securities
Callable within one year 17,000,000 -- 711,000 16,289,000
Callable after one year
but within five years 4,933,870 113,200 3,870 5,043,200
Callable after five years
but within ten years 1,000,000 25,000 -- 1,025,000
Other
Within one year 799,860 -- -- 799,860
After 15 years 815,009 75,311 -- 890,320
---------- --------- --------- -----------
Total Available-for-Sale 61,841,716 1,076,752 814,556 62,103,912
========== ========= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After five years
but within ten years 834,614 10,392 -- 845,006
After ten years
but within fifteen years 6,524,194 59,140 -- 6,583,334
After 20 years 2,199,082 8,198 865 2,206,415
Collateralized Mortgage
Obligations Maturing:
After five years
but within ten years 2,217,944 23,882 -- 2,241,826
After ten years
but within fifteen years 3,814,215 66,937 -- 3,881,152
After 20 years 2,526,195 18,250 -- 2,544,445
Corporate Securities Maturing:
After one year
but within five years 1,045,619 12,349 -- 1,057,968
After five years
but within ten years 500,518 10,624 -- 511,142
After twenty years 3,170,309 -- 275,228 2,895,081
---------- ------- --------- -----------
Total Held-to-Maturity 22,832,690 209,772 276,093 22,766,369
========== ======= ========= ===========
13
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for three months ended and six months ended June 30, 2002,
compared with the same periods ended June 30, 2001, are as follows:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net Income 818,337 361,859 1,467,865 773,045
Average Basic Shares Outstanding 1,381,617 1,363,995 1,379,826 1,365,054
Basic Earnings Per Share 0.59 0.27 1.06 0.57
========= ========= ========= =========
Net Income 818,337 361,859 1,467,865 773,045
Average Basic Shares Outstanding 1,381,617 1,363,995 1,379,826 1,365,054
Dilutive Effect Due to Stock Options 94,125 58,316 92,750 58,237
--------- --------- --------- ---------
Average Shares Outstanding, as Adjusted 1,475,742 1,422,311 1,472,576 1,423,291
Diluted Earnings Per Share 0.55 0.25 1.00 0.54
========= ========= ========= =========
ITEM 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 (the "Savings Bank") and State of Franklin Leasing
Corporation (the "Leasing Corp") represent 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.
BALANCE SHEET REVIEW
- --------------------
At June 30, 2002, assets of the Company totaled $264.8 million reflecting an
increase of $6.9 million or 3% since December 31, 2001. The growth in assets has
been funded primarily by a $5.6 million increase in Federal Home Loan Bank
advances and a $1.5 million increase in retained earnings.
LOANS
- -----
Loans outstanding totaled $154.5 million at June 30, 2002. This represented an
increase of 9% from the December 31, 2001 outstanding loans of $141.6 million.
Commercial loans increased $5.9 million to $61.9 million at June 30, 2002, an
increase of 11% from $56.0 million at December 31, 2001. Real estate
construction lending totaled $29.7 million compared with $20.2 million at
December 31, 2001, reflecting an increase of $9.5 million or 47%. Consumer loans
of $13.2 million at June 30, 2002 increased $682,000 or 5% from $12.5 million at
December 31, 2001. During the first six months of 2002, first mortgage
residential loans increased to $60.8 million or 12% from $54.6 million at
December 31, 2001. The loan portfolio mix at June 30, 2002 consists of 37%
residential mortgages, 39% commercial, 14% real estate construction, and 9%
consumer loans.
INVESTMENT SECURITIES
- ---------------------
Investment securities totaled $84.9 million at June 30, 2002. The investment
portfolio at quarter end consisted of $28.8 million in debt securities issued by
the U. S. Government or Federal
14
Agencies, $22.4 million in preferred stock issued by Federal Agencies, $20.5
million in securities issued by state, county, or municipalities, and $11.6
million in corporate securities.
At June 30, 2002, securities categorized as available-for-sale totaled $62.1
million while the held-to-maturity securities totaled $22.8 million compared to
$63.8 million in available-for-sale and $9.7 million in held-to-maturity at
December 31, 2001. At June 30, 2002, the available-for-sale portfolio had net
unrealized gains of $262,196 while our held-to-maturity securities had $66,321
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 $131,000 at June 30, 2002 and $881,000 at
December 31, 2001. Nonaccrual loans were $1.5 million at June 30, 2002 compared
with $2.8 million at December 31, 2001. The reserve for loan and lease losses
was $1,425,816 at June 30, 2002, or 0.93% of loans and leases outstanding, net
of unearned income, compared to $1,473,855 or 1.06% at December 31, 2001.
Management believes the allowance for loan losses is adequate to provide for
potential loan losses.
DEPOSITS
- --------
Total deposits at June 30, 2002 of $198.3 million, reflected a decline of $1.8
million or a 1% decrease from $200.1 million at December 31, 2001. Non-interest
bearing demand deposits totaled $9.9 million at June 30, 2002, a decrease of
$8.3 million from December 31, 2001. Interest bearing deposits increased $6.5
million to $188.4 million at June 30, 2002.
CAPITAL
- -------
Tier 1 capital for the Savings Bank at June 30, 2002 was $18.4 million. At June
30, 2002, all capital ratios were in excess of the regulatory minimums, with the
Savings Bank's Tier 1, total risk-based, and leverage ratios of 10.33%, 11.10%
and 7.16%, respectively.
Tier 1 capital for the Company at June 30, 2002, was $26.9 million with Tier 1,
total risk-based, and leverage ratios of 15.04%, 16.51%, and 10.40%,
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 $60 million at June 30, 2002.
EARNINGS REVIEW
- ----------------
The Company had net income of $818,337 for the three months ending June 30,
2002, compared with $361,859 for the same period last year, resulting in an
increase of 126%. For the six months ended June 30, 2002, net income was
$1,467,865 compared with $773,045 for the first six months of 2001 reflecting a
90% increase. For the six months ended June 30, 2002, net income per diluted
share was $1.00 compared to earnings per share of $0.54 for the six months ended
June 30, 2001. Return on average assets was 1.16% and the return on average
equity was 15.49% for the six months ended June 30, 2002, compared with .73% and
8.48%, respectively, for the same period in 2001.
Noninterest income increased $159,961, or 45%, during the six months ended June
30, 2002, compared the same period last year as a result of increases in all
categories included in noninterest income. Gain on loans sold increased mainly
due to a lower interest rate environment and refinancing into the secondary
market. Additional noninterest income was also generated with the creation of
State of Franklin Real Estate during the first half of 2002. Other areas showing
significant increases were other fees and service charges, insurance
commissions, and rental income.
Noninterest expense was $2,704,363 for the six months ending June 30, 2002, an
increase of 43% over the 2001 period, resulting mainly from compensation and
related benefits, furniture and equipment expense, occupancy expense,
advertising, data processing expense, and other operating expenses.
15
NET INTEREST INCOME
- -------------------
Interest income and interest expense both increased from 2001 to 2002 resulting
primarily from increases in both earning assets and interest bearing liabilities
and recent declines in interest rates. Net interest income of $4.2 million for
the six months ended June 30, 2002 reflects an increase of $1.3 million or 45%
over the same period last year. For the six months ending June 30, 2002, average
earning assets increased $41.6 million or 20% while average interest bearing
liabilities increased $38.5 million, or 21%, compared with the same period in
2001. The taxable equivalent yield on earning assets declined 109 basis points
to 6.97% for the first six months of 2002 compared with the same period in 2001
while the cost on interest bearing liabilities declined 200 basis points to
3.47%. Consequently, the taxable equivalent net interest margin based on average
earning assets increased to 3.81% for the six months ending June 30, 2002
compared with 3.09% for the same period in 2001.
PROVISION FOR LOAN LOSSES
- -------------------------
During the six months ended June 30, 2002, the provision for possible loan
losses was $275,000 compared with $384,532 for the same period last year. Loan
charge-offs for the six months ended June 30, 2002, were $323,039 compared with
$51,356 during the same period in 2001. The allowance for possible loan losses
represented .93% of total loans, net of mortgage loans held-for-sale, at June
30, 2002, compared to 1.02% at June 30, 2001. Management considers the allowance
for loan losses to be adequate to cover losses inherent in the loan portfolio.
PROVISION FOR INCOME TAXES
- --------------------------
For the six months ended June 30, 2002, the provision for federal and state
income taxes was $295,800, an increase of $68,909 from 2001. The increase is due
to the net effect of a higher level of pretax income which was partially offset
by higher levels of 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 $519,555 during the six months ended June
30, 2002, an increase of $159,961 or 45% from the comparable 2001 period. The
increase resulted from increases in several areas. Gain on loans sold increased
$62,833, other fees and service charges increased $7,882, insurance commission
income increased $24,152, and rental income increased $9,035. In addition, with
the creation of State of Franklin Real Estate during the first half of 2002,
$56,059 in real estate sales commissions were generated for the six months ended
June 30, 2002.
NONINTEREST EXPENSE
- --------------------
Noninterest expense totaled $2,704,363 for the six month period ending June 30,
2002, an increase of $810,046 or 43%. The increase was result of increases in
compensation and related benefits, occupancy, furniture and equipment expense,
advertising, data processing, and other operating expenses of $298,375, $25,240,
$58,457, $32,523, 21,105, and $374,346, respectively.
16
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 20, 2002, 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 2005
annual meeting of shareholders. Current directors elected to three-year terms
were as follows:
FOR WITHHOLD AUTHORITY
Randal R. Greene 1,067,793 400
Kenneth E. Cutshall, M.D. 1,067,793 440
Cameron E. Perry 1,066,293 1,900
Henry J. Williams, M.D. 1,066,293 1,900
Elected one of its current directors to continue in office until the 2003 annual
meeting of shareholders. Current director elected to a one-year term was as
follows:
FOR WITHHOLD AUTHORITY
Alan R. Hubbard 1,066,993 1,200
Directors continuing to serve include:
Charles E. Allen, Jr. Charles E. Allen, Sr., M.D. Vance W. Cheek
Steven K. Gross Donald R. Jeanes Verrill M. Norwood,Jr.
Richard S. Venable
2. Ratified the appointment of Baylor & Backus as the Company's independent
accountants and auditors for 2002 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
1,055,936 6,475 5,782 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, signed by Randal R. Greene,
President of State of Franklin Bancshares, Inc. on August 8, 2002.
17
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, signed by Charles E. Allen,
Jr., the Chairman of the Board and Chief Executive Officer (Principal
Executive, Financial and Accounting Officer) of State of Franklin
Bancshares, Inc. on August 8, 2002.
b) The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2002
18
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 8, 2002 /s/ Randal R. Greene
- --------------------------- ----------------------------------
(Date) Randal R. Greene, President
August 8, 2002 /s/ Charles E. Allen, Jr.
- --------------------------- ----------------------------------
(Date) Charles E. Allen, Jr.,
Chairman of the Board
and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
19
EXHIBIT 99.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on
Form 10-QSB of State of Franklin Bancshares, Inc. (the "Company") for the
quarter ended June 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), the undersigned, Randal R. Greene,
President of the Company, hereby certifies that (1) the Report fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company. This Certification is signed on August 8, 2002.
/s/ Randal R. Greene
------------------------------------
Randal R. Greene, President
EXHIBIT 99.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on
Form 10-QSB of State of Franklin Bancshares, Inc. (the "Company") for the
quarter ended June 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), the undersigned, Charles E. Allen,
Jr., the Chairman of the Board and Chief Executive Officer (Principal Executive,
Financial and Accounting Officer)of the Company, hereby certifies that (1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
This Certification is signed on August 8, 2002.
/s/ Charles E. Allen
-------------------------------------------
Charles E. Allen
Chairman of the Board and
Chief Executive Officer (Principal
Executive, Financial and Accounting Officer)