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: MARCH 31, 2004
--------------------
[ ] 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 62-1749121
- --------------------------------- --------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1907 NORTH ROAN
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 MAY 10, 2004)
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
MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AUDITED) 3
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED) AND 2003 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2003 (AUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED) AND 2003 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3. CONTROLS AND PROCEDURES 15
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
MARCH 31, DECEMBER 31,
ASSETS 2004 - UNAUDITED 2003 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,570,558 3,764,363
Federal Funds Sold 30,475,000 25,040,000
Short-Term Interest Bearing Deposits 3,024,523 3,336,670
- -------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 38,070,081 32,141,033
- -------------------------------------------------------------------------------------------------
Investments - HTM
(Estimated Market 2004 - $46,113,852 and 2003 - $34,274,290) 45,709,476 34,031,676
Investments - AFS 63,189,106 63,375,496
Loans Held for Sale 1,395,241 413,179
Loans and Leases Receivable 151,213,425 150,646,605
Less: Allowance for Loan and Lease Losses ( 1,871,073) ( 1,870,279)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 149,342,352 148,776,326
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,482,971 1,366,640
Land, Buildings & Equip at Cost Less Accum Depr
of $2,235,698 in 2004 and $2,091,874 in 2003 6,756,817 6,218,358
Prepaid Expense and Accounts Receivable 175,994 108,260
Deferred Tax Assets 888,231 1,141,342
FHLB Stock 2,378,200 2,354,800
Investment in Service Bureau at Cost 815,009 815,009
Other Real Estate Owned 1,060,856 1,152,919
Other Assets 154,669 159,000
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 311,419,003 292,054,038
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 14,756,560 12,114,590
Interest-Bearing Deposits 214,862,054 209,877,896
Advances to Borrowers for Taxes and Insurance 179,922 103,632
Accrued Interest on Deposits 136,538 141,757
Accrued State and Federal Taxes ( 30,485) ( 133,129)
Other Accounts Payable and Accrued Expenses 582,324 537,849
Repurchase Agreements 1,095,583 536,419
FHLB Long-Term Advances 46,202,712 36,210,071
Deferred Credits on REO 199,779 173,996
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 277,984,987 259,563,081
- -------------------------------------------------------------------------------------------------
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 ( 441,856) ( 797,592)
Retained Earnings 10,909,004 10,356,571
Less: Employee Stock Ownership ( 750,105) ( 784,995)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 25,434,016 24,490,957
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,419,003 292,054,038
=================================================================================================
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 MARCH 31,
----------------------------------
INTEREST INCOME: 2004 - UNAUDITED 2003 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,443,632 2,816,728
Other Interest Income 1,143,814 931,224
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,587,446 3,747,952
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,059,974 1,099,008
Interest on Repurchase Agreements 2,568 3,851
Interest on Short-Term Debt - 21
Interest on Long-Term Debt 463,128 433,293
Interest on Subordinated Debentures 108,287 108,394
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,633,957 1,644,567
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,953,489 2,103,385
PROVISION FOR LOAN LOSSES (10,000) (177,637)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,943,489 1,925,748
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 118,910 124,341
Net Gain on Loans Sold 72,349 174,220
Realized Gain on Securities - 231
Real Estate Sales Commission Income 55,281 69,389
Insurance Commission Income 11,324 19,875
Rental Income, Net 21,014 15,515
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 278,878 403,571
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 717,953 660,474
Occupancy Expenses 98,424 91,668
Furniture and Equipment Expense 123,748 56,089
Advertising 63,424 33,758
Data Processing Expense 162,115 109,273
Other Operating Expenses 327,506 253,167
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,493,170 1,204,429
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 729,197 1,124,890
PROVISION FOR INCOME TAXES (176,766) (293,648)
- ----------------------------------------------------------------------------------------
NET INCOME $ 552,431 831,242
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.40 0.60
DILUTED 0.37 0.56
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,395,814 1,382,339
DILUTED 1,512,433 1,476,464
========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003 (AUDITED)
Accumulated
Other Employee
Common Paid-In Comprehensive Retained Stock
Stock Capital Income Earnings Ownership Total
-------------- ---------- ------------ --------- ----------- ------------
Balance at December 31, 2002 1,465,512 14,251,461 252,106 7,711,128 (1,058,450) 22,621,757
ESOP Shares Allocated -- -- -- -- 273,455 273,455
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $656,269 Income Tax Benefit) -- -- (1,057,399) -- -- (1,057,399)
Less: Reclassification Adjustment
(Net of $4,780 Income Tax) -- -- 7,701 -- -- 7,701
------------
(1,049,698)
Net Income -- -- -- 2,645,445 -- 2,645,445
------------
Total Comprehensive Income -- -- -- -- -- 1,595,747
------------ ---------- --------- ---------- --------- ------------
Balance at December 31, 2003 1,465,512 14,251,461 ( 797,592) 10,356,573 ( 784,995) 24,490,959
ESOP Shares Allocated -- -- -- -- 34,890 34,890
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $214,819 Income Tax) -- -- 346,122 -- -- 346,122
Less: Reclassification Adjustment
(Net of $5,967 Tax Benefit) -- -- 9,614 -- -- 9,614
------------
355,736
Net Income -- -- -- 552,431 -- 552,431
------------
Total Comprehensive Income -- -- -- -- -- 908,167
------------ ---------- --------- ---------- ---------- ------------
Balance at March 31, 2004 1,465,512 14,251,461 ( 441,856) 10,909,004 ( 750,105) 25,434,016
============ ========== ========= ========== ========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------------
2004 - UNAUDITED 2003 - UNAUDITED
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 552,431 831,242
Items Not Affecting Cash:
Depreciation 144,488 57,107
(Increase) Decrease in Accrued Interest (116,331) 13,056
Deferred Income Taxes (Benefit) 24,716 (52,450)
Provision for Loan and Lease Losses 10,000 177,637
(Increase) Decrease in Prepaid Expenses and Accounts Receivable (67,734) 135,941
Increase (Decrease) in Interest Payable (5,219) 4,728
Increase in State and Federal Taxes Payable 102,644 -
Increase (Decrease) in Other Accounts Payable and Accrued Expenses 44,475 (236,079)
Increase (Decrease) in Deferred Loan Fees, Net (5,898) 28,943
Realized (Gain) on Securities - (231)
Discount Accretion (48,389) (59,073)
Premium Amortization 141,098 120,055
Increase in Deferred Gain on Sale of REO 25,783 -
Earned ESOP Shares 34,890 86,663
FHLB Stock Dividends (23,400) (22,300)
Net (Increase) in Loans Held for Sale (982,062) (1,445,008)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (168,508) (359,769)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments (17,103,992) -
Purchase of Available-for-Sale Investments - (4,625,899)
Proceeds from Maturities of Held-to-Maturity Investments 4,405,000 2,495,000
Proceeds from Maturities of Available-for-Sale Investments 130,000 2,274,532
Principal Payments on Mortgage-backed Securities - HTM 959,790 3,217,121
Principal Payments on Mortgage-backed Securities - AFS 613,547 501,254
(Increase) Decrease in Loans Receivable, Net (478,065) 1,169,235
Purchases of Premises and Equipment (682,947) (261,709)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (12,156,667) 4,769,534
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 7,626,128 5,088,179
Net Increase in Advances by Borrowers for Taxes and Insurance 76,290 86,924
Net Increase in Repurchase Agreements 559,164 68,953
Repayment of FHLB Advances (7,359) (7,089)
Proceeds from FHLB Advances 10,000,000 -
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,254,223 5,236,967
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,929,048 9,646,732
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 32,141,033 19,822,269
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,070,081 29,469,001
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 355,736 440,218
Acquisition of Real Estate Property through Foreclosure of Related Loans $ 1,060,856 1,147,276
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 99,525 725,300
Interest $ 1,639,176 1,639,839
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
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 a wholly owned subsidiary of the Company.
State of Franklin Leasing Corporation (Leasing Corp) was incorporated under
the laws of the State of Tennessee for the purpose of lease financing.
State of Franklin Real Estate, Inc. (Real Estate Company) was incorporated
for the purpose of selling real estate. The Real Estate Company and John
Sevier Title services, Inc. (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 three months ended March 31, 2004 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, 2003.
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 March 31, 2004 consolidated
financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ----- -----------------------------
Fixed assets at March 31, 2004, and December 31, 2003 are summarized as
follows:
2004 2003
----------- -----------
Land 1,580,000 1,580,000
Buildings and Leasehold Improvements 4,339,071 4,030,608
Furniture, Fixtures and Equipment 3,073,444 2,699,624
----------- -----------
8,992,515 8,310,232
Less: Accumulated Depreciation 2,235,698 2,091,874
----------- -----------
6,756,817 6,218,358
=========== ===========
7
NOTE 5 LOANS RECEIVABLE
- ------- ------------------
Loans receivable at March 31, 2004 and December 31, 2003, consist of the
following:
2004 2003
-------------- --------------
First Mortgage Loans 48,688,897 49,702,608
Construction Loans 21,636,425 21,817,058
Consumer Loans 13,412,121 13,070,617
Participation Loans, Net 452,204 458,452
Commercial Loans 64,539,592 63,208,012
Credit Line Advances 1,347,751 1,185,167
Lease Finance 1,530,897 1,550,376
--------------- ---------------
Gross Loans and Leases Receivable 151,607,887 150,992,290
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 156,550) ( 101,875)
Net Deferred Loan Origination Fees ( 237,912) ( 243,810)
Accumulated General Loan Loss Allowance ( 1,871,073) ( 1,870,279)
--------------- ---------------
( 2,265,535) ( 2,215,964)
--------------- ---------------
Loans and Leases Receivable, Net 149,342,352 148,776,326
=============== ===============
An analysis of the allowance for loan and lease losses at March 31, 2004 and
December 31, 2003 is as follows:
2004 2003
-------------- --------------
Balance - Beginning of Period 1,870,279 1,563,320
Provision for Loan and Lease Losses 10,000 444,548
Loans and Leases Charged-Off ( 9,206) ( 137,609)
Charged-Off Loan and Lease Recoveries - 20
-------------- --------------
Balance - End of Period 1,871,073 1,870,279
============== ==============
The gross amount of participation loans serviced by State of Franklin Savings
Bank was $904,388 at March 31, 2004 and $916,883 at December 31, 2003.
At March 31, 2004 the Company had non-accrual loans and leases totaling
$2,810,000 which included $121,000 in impaired loans compared with $3,213,000
and $121,000, respectively, at December 31, 2003. A loan is impaired when, based
on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual agreement. The
total allowance for loan losses allocated to impaired loans was $66,000 at March
31, 2004 and December 31, 2003. No interest income on impaired loans was
recognized for the periods ending March 31, 2004 and December 31, 2003. The
Company had no loans or leases 90 days or more past due and still accruing and
no restructured loans at March 31, 2004.
8
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 March 31, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 23,933 12.24% >=19,548 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 22,363 11.44% >=11,729 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 22,363 7.58% >=14,747 5.0%
As of December 31, 2003:
Total Risk-Based Capital
(to Risk-Weighted Assets) 23,498 12.35% >=19,021 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 21,923 11.53% >=11,413 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 21,923 7.48% >=14,649 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 March 31, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 33,799 17.25% >=19,592 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 31,800 16.23% >=11,755 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 31,800 10.71% >=14,843 5.0%
As of December 31, 2003:
Total Risk-Based Capital
(to Risk-Weighted Assets) 33,361 17.52% >=19,066 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 31,351 16.46% >=11,440 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 31,351 10.63% >=14,744 5.0%
9
NOTE 7 EMPLOYEE AND DIRECTOR BENEFIT PLANS
- ------ ------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The company has an employee stock ownership plan (the "ESOP") for those
employees who meet the eligibility requirements of the plan. The ESOP was
established in 1997. The ESOP currently has two loans established for the
purpose of purchasing shares in the Company for the plan.
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 March 31, 2004 was $750,105.
In November 2001, the Company also 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 March 31, 2004, no balances were outstanding for
advances on the line of credit.
Shares owned by the ESOP at March 31, 2004 totaled 175,148. 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:
March 31, December 31,
2004 2003
------------- -------------
Number of Shares
Released and Allocated since Inception 77,857 77,857
Suspense 68,873 70,811
Fair Value
Released and Allocated since Inception 1,557,140 1,557,140
Suspense 1,377,460 1,416,220
The expense recorded by the Company is based on cash contributed to the ESOP
during the year in amounts determined by the Board of Directors, plus the excess
of fair value of shares released and allocated over the ESOP's cost of those
shares. The Company's contributions to the ESOP are as follows:
March 31, December 31,
2004 2003
------------- ------------
Compensation Expense 111,000 408,370
Contributions 111,000 408,370
No dividends have been declared on the Company's stock. If dividends are paid,
the ESOP administrators will determine whether dividends on allocated and
unallocated shares will be used for debt service. Any allocated dividends used
will be replaced with common stock of equal value. For the purpose of computing
earnings per share, all ESOP shares committed to be released are considered
outstanding.
The released Company stock will be allocated to employees based on their
salaries. Generally, all employees who work over 1,000 hours are eligible for
the plan after one year of service. Employees will be vested after seven years
of service. This plan includes a 401(k) feature that began in 1998, which allows
employees to defer up to 15% of their salary and is matched by the Company up to
6%. In addition, the Company may make a discretionary contribution to the ESOP.
STOCK OPTION PLANS
Weighted
Average
Awarded Exercise
And Price
Unexercised Vested Per
Options Options Share
--------------------------------------------------
Options Granted - Outside Directors January 1, 2004 90,014 82,833 $12.47
During 2004 -- --
Options Granted - Management January 1, 2004 238,211 172,935 $13.05
During 2004 -- --
------- -------
Options Outstanding - March 31, 2004 328,225 255,768 $12.89
======= =======
10
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
March 31, 2004 December 31, 2003
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 1.73 89,097,324 38.80 1.75 84,622,380 38.12
Interest-Free Checking -- 14,756,560 6.43 -- 12,114,590 5.46
NOW 1.08 19,536,233 8.51 1.17 18,753,775 8.45
Money Market Deposit 1.47 25,248,290 10.99 1.47 26,308,635 11.85
----------- -------- ----------- --------
148,638,407 64.73 141,799,380 63.88
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 2.76 21,174,959 9.22 2.84 20,284,510 9.14
Balances less than $100,000 2.61 59,805,248 26.05 2.66 59,908,596 26.98
----------- -------- ----------- --------
80,980,207 35.27 80,193,106 36.12
----------- -------- ----------- --------
229,618,614 100.00 221,992,486 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at March 31, 2004 and December
31, 2003, is as follows:
Period Ending March 31, 2004 Year Ending December 31, 2003
-------------------------------- -----------------------------
2004 37,490,354 2004 45,642,644
2005 28,904,925 2005 21,464,822
2006 6,827,328 2006 6,379,826
2007 2,910,015 2007 2,937,998
2008 and After 4,847,585 2008 and After 3,767,816
---------- ----------
80,980,207 80,193,106
========== ==========
NOTE 9 FEDERAL HOME LOAN BANK ADVANCES
- ------- -------------------------------
The contractual maturity of FHLB advances at March 31, 2004 is as follows:
2004 27,278 2009 33,654
2005 30,280 2010 8,034,555
2006 31,091 2011 19,035,481
2007 31,923 2012 5,036,431
2008 3,032,777 2013 and after 10,909,242
Convertible fixed rate advances were $45,000,000 at March 31, 2004 and
35,000,000 at December 31, 2003. 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. CRA mortgage match advances are amortized over a
30-year period and totaled $1,202,712 at March 31, 2004 and $1,210,071 at
December 31, 2003. The average rate on FHLB advances was 4.85% at both December
31, 2003 and 2002.
The Savings Bank pledges as collateral for these borrowings selected qualifying
mortgage loans and securities (as defined) under an agreement with the FHLB.
Loans and securities pledged at March 31, 2004 totaled $66.9 million in
residential mortgage loans and $2 million in securities. At December 31, 2003
there were approximately $54.3 million in mortgage loans and no securities
pledged for FHLB borrowings.
NOTE 10 INVESTMENT SECURITIES
- ------- ---------------------
The amortized cost and fair value of investment securities held-to-maturity and
available-for-sale at March 31, 2004, by contractual maturity, are as follows.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations without call or prepayment
penalties.
11
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- --------- -----------
Available-for-Sale:
United States Government
Agency Securities Maturing:
Within one year 2,013,355 3,595 -- 2,016,950
After one year
but within five years 1,017,383 8,994 -- 1,026,377
Mortgage Backed Securities:
After one year
but within five years 314,986 1,740 -- 316,726
After five years
but within ten years 1,042,885 24,730 -- 1,067,615
After ten years
but within fifteen years 1,214,455 15,963 -- 1,230,418
After 20 years 784,118 6,480 -- 790,598
Municipal Securities Maturing:
Within one year 135,000 4,427 -- 139,427
After one year
but within five years 1,423,874 96,216 -- 1,520,090
After five years
but within ten years 5,146,665 443,972 -- 5,590,637
After ten years
but within fifteen years 9,662,127 927,305 -- 10,589,432
After fifteen years
but within twenty years 2,674,350 204,119 -- 2,878,469
After 20 years 2,026,132 85,298 28,304 2,083,126
Corporate Securities Maturing:
After one year
but within five years 1,357,550 36,432 -- 1,393,982
After five years
but within ten years 4,471,335 151,935 -- 4,623,270
After ten years
but within fifteen years 2,100,000 102,404 -- 2,202,404
After twenty years 1,730,103 148,864 -- 1,878,967
Equity Securities
Callable within one year 21,058,517 36,717 3,338,934 17,756,300
Callable after one year
but within five years 4,414,150 240,000 14,081 4,640,069
Callable after five years
but within ten years 1,000,000 90,000 -- 1,090,000
Other
After 20 years 318,155 36,094 -- 354,249
---------- --------- --------- -----------
Total Available-for-Sale 63,905,140 2,665,285 3,381,319 63,189,106
========== ========= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 7,064,805 28,236 11 7,093,030
After five years
but within ten years 1,978,936 -- 38,246 1,940,690
After fifteen years
but within twenty years 261,819 -- 7,089 254,730
Mortgage Backed Securities:
After one year
but within five years 2,650,156 18,040 -- 2,668,196
After five years
but within ten years 5,982,535 20,694 4,324 5,998,905
After ten years
but within fifteen years 1,831,859 12,360 2,140 1,842,079
After twenty years 16,361,543 12,377 156,231 16,217,689
12
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- -----------
Municipal Securities Maturing:
After one year
but within five years 1,288,947 7,486 -- 1,296,433
After ten years
but within fifteen years 429,980 20,613 -- 450,593
After fifteen years
but within twenty years 319,645 1,942 -- 321,587
After twenty years 455,431 -- 4,501 450,930
Corporate Securities Maturing:
After one year
but within five years 2,307,165 57,865 -- 2,365,030
After five years
but within ten years 1,075,138 41,942 8,385 1,108,695
After twenty years 3,701,517 420,749 17,001 4,105,265
---------- ------- --------- -----------
Total Held-to-Maturity 45,709,476 642,304 237,928 46,113,852
========== ======= ========= ===========
Securities sold under agreement to repurchase are offered to cash management
customers as an automated, collateralized investment account. Under these
transactions, securities are delivered to the counterparty's custody account.
Securities held in custody accounts at March 31, 2004 and December 31, 2003
totaled $2,013,355 and $2,030,774, respectively.
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for three months ended March 31, 2004, compared with the same
period in 2003, are as follows:
Three Months Ended
March 31,
2004 2003
--------- ---------
Net Income 552,431 831,242
Average Basic Shares Outstanding 1,395,814 1,382,339
Basic Earnings Per Share .40 .60
========= =========
Net Income 552,431 831,242
Average Basic Shares Outstanding 1,395,814 1,382,339
Dilutive Effect Due to Stock Options 116,619 94,125
--------- ---------
Average Shares Outstanding, as Adjusted 1,512,433 1,476,464
Diluted Earnings Per Share .37 0.56
========= =========
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 (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.
13
BALANCE SHEET REVIEW
- --------------------
At March 31, 2004, assets of State of Franklin Bancshares, Inc. totaled $311
million reflecting an increase of $19 million or 7% since December 31, 2003. The
growth in assets has been funded primarily by an $8 million increase in deposits
and a $10 million increase in FHLB advances.
LOANS
- -----
Loans outstanding totaled $151.6 million at March 31, 2004 compared with $151.0
million at December 31, 2003. First mortgage loans decreased $1.0 million,
consumer loans increased $504,000, and commercial and construction loans
increased $1.1 million. The loan portfolio mix at March 31, 2004 consists of 33%
residential mortgages, 43% commercial, 14% real estate construction, and 10%
consumer loans.
INVESTMENT SECURITIES
- ---------------------
Investment securities totaled $108.9 million at March 31, 2004. The investment
portfolio at quarter end consisted of $12.3 million in debt securities issued by
the U. S Government or Federal Agencies, $30.2 million in mortgage backed
securities, $25.3 million in securities issued by state, county, or
municipalities, $17.2 million in corporate securities, $23.5 million in
preferred stock issued by Federal Agencies, and $354,000 in other equity
securities.
At March 31, 2004, securities categorized as available-for-sale totaled $63.2
million while the held-to-maturity securities totaled $45.7 million compared to
$63.4 million in available-for-sale and $34.0 million in held-to-maturity at
December 31, 2003. At March 31, 2004, the available-for-sale portfolio had net
unrealized losses of $716,034 while our held-to-maturity securities had $404,376
in net unrealized gains.
NON-PERFORMING ASSETS
- ---------------------
At March 31, 2004 the Company had nonaccrual loans totaling $2.8 million
compared with $3.2 million at December 31, 2003. The reserve for loan and lease
losses was $1,871,073 at March 31, 2003, or 1.24% of loans and leases
outstanding, net of unearned income and loans held for sale, compared to
$1,870,279 or 1.24% at December 31, 2003. Management believes the allowance for
loan losses is adequate to provide for potential loan losses.
DEPOSITS
- --------
Total deposits at March 31, 2004 of $229.6 million, reflected an increase of
$7.6 million or a 3% increase from $123 million at December 31, 2003.
Non-interest bearing demand deposits totaled $14.8 million at March 31, 2004, an
increase of $2.6 million from December 31, 2003. Interest bearing deposits
increased $5.0 million to $214.9 million at March 31, 2004.
CAPITAL
- -------
Tier 1 capital for the Savings Bank at March 31, 2004 was $22.4 million. At
March 31, 2004, all capital ratios were in excess of the regulatory minimums,
with the Savings Bank's Tier 1, total risk-based, and leverage ratios of 11.44%,
12.24% and 7.58%, respectively.
Tier 1 capital for the Company at March 31, 2004, was $31.8 million with Tier 1,
total risk-based, and leverage ratios of 16.23%, 17.25%, and 10.71%,
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.
EARNINGS REVIEW
- ----------------
The Company had net income of $552,431 for the three months ending March 31,
2004, compared with $831,242 for the same period last year, resulting in a
decrease of 34%. Return on average assets and average equity was .75% and 8.90%,
respectively, compared with 1.27% and 14.77% for the three month period ended
March 31, 2003. For the three months ended March 31, 2004, net income per
diluted share was $.37 compared to earnings per share of $.56 for the same
period in 2003.
Noninterest income decreased $124,693, or 31%, during the three months ended
March 31, 2004, compared to the same period last year as a result of declines in
other fees and service charges, gains on loans sold, realized gains on
securities, real estate sales commission, and insurance commissions.
Contributing significantly to the decline in noninterest income were decreases
in net gains on loans sold and realestate sales commission income which declined
from the prior year as a result of declines in both refinancing of existing
homes and decreased activity in the housing market.
14
Noninterest expense was $1,493,170 for the three months ending March 31, 2004,
an increase of $288,741, or 24% over the 2003 period, resulting from increases
in compensation and related benefits, occupancy expense, furniture and equipment
expense, advertising, data processing, and other operating expenses.
NET INTEREST INCOME
- -------------------
Interest income and interest expense both decreased from 2003 to 2004 primarily
resulting from assets and liabilities repricing at lower rates. Net interest
income of $1,953,489 for the three months ended March 31, 2004 reflects a
decrease of $149,896 or 7% under the same period last year. For the three months
ending March 31, 2004, average earning assets increased $28.6 million or 11%
while average interest bearing liabilities increased $26.4 million, also 11%,
compared with the same period in 2003. The taxable equivalent yield on earning
assets declined 92 basis points to 5.34% for the first three months of 2004
compared with the same period in 2003 while the cost on interest bearing
liabilities declined 36 basis points to 2.01%. Consequently, the taxable
equivalent net interest margin based on average earning assets decreased to
2.89% for the three months ending March 31, 2004 compared with 3.48% for the
same period in 2003.
PROVISION FOR LOAN LOSSES
- -------------------------
During the three months ended March 31, 2004, the provision for possible loan
losses was $10,000 compared with $177,637 for the same period last year. There
were $9,206 in loan or lease charge-offs net of recoveries for the three months
ended March 31, 2004, and no loan or lease charge-offs during the same period in
2003. The allowance for possible loan losses represented 1.24% of total loans,
net of mortgage loans held-for-sale, at March 31, 2004, compared to 1.11% at
March 31, 2003. Management considers the allowance for loan losses to be
adequate to cover losses inherent in the loan portfolio.
PROVISION FOR INCOME TAXES
- ---------------------------
For the three months ended March 31, 2004, the provision for federal and state
income taxes were $176,766, a decrease of $293,648 from 2003. The decrease is
due to the decline in taxable income compared to the same period in 2003.
NONINTEREST INCOME
- -------------------
The Company's noninterest income was $278,878 during the three months ended
March 31, 2004, a decrease of $124,693 or 31% from the comparable 2003 period.
During 2004, other fees and service charges, net gain on loans sold, realized
gain on securities, real estate sales commissions, and insurance commission
income declined $5,431, $101,871, $231, $14,108, and $8,551, respectively. Net
rental income increased $5,499.
NONINTEREST EXPENSE
- --------------------
Noninterest expense totaled $1,493,170 for the three month period ending March
31, 2004, an increase of $288,741, or 24%, over the same period in 2003. The
increase was the result of increases in compensation and benefits, occupancy
expense, furniture and equipment expense, advertising, data processing, and
other operating expenses of $57,479, $6,756, $67,659, $29,666, $52,842, and
$74,339, respectively.
ITEM 3 CONTROLS AND PROCEDURES
- ------ -----------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company's President
and its Chief Executive Officer have evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)) as of a date within 90 days of the filing date of
this quarterly report. Based on that evaluation, the President and the Chief
Executive Officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries is made known to such
officers by others within these entities, particularly during the period this
quarterly report was prepared, in order to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Controls. There have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Randal R. Greene, President of State of Franklin
Bancshares, Inc. pursuant to Section 301 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Charles E. Allen, Jr., the Chairman of the Board
and Chief Executive Officer of State of Franklin Bancshares, Inc.
pursuant to Section 301 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Randal R. Greene, President of State of Franklin
Bancshares, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Charles E. Allen, Jr., the Chairman of the Board
and Chief Executive Officer of State of Franklin Bancshares, Inc.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2004
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)
May 13, 2004 /s/ Randal R. Greene
- --------------------------- -------------------------------------
(Date) Randal R. Greene, President
May 13, 2004 /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