U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2004
-------------
OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24675
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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 AUGUST 11, 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
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 (AUDITED) 3
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED) 4
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2003 (AUDITED) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND 2003 (UNAUDITED) 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
ITEM 3. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULT UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
ASSETS 2004 - UNAUDITED 2003 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,865,907 3,764,363
Federal Funds Sold 27,605,000 25,040,000
Short-Term Interest Bearing Deposits 3,564,837 3,336,670
- -------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 36,035,744 32,141,033
- -------------------------------------------------------------------------------------------------
Investments - HTM
(Estimated Market 2004 - $46,125,559 and 2003 - $34,274,290) 47,014,121 34,031,676
Investments - AFS 58,167,233 63,375,496
Loans Held for Sale 909,315 413,179
Loans and Leases Receivable 153,441,885 150,646,605
Less: Allowance for Loan and Lease Losses ( 1,794,949) ( 1,870,279)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 151,646,936 148,776,326
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,432,805 1,366,640
Land, Buildings & Equip at Cost Less Accum Depr
of $2,379,522 in 2004 and $2,091,874 in 2003 7,200,301 6,218,358
Prepaid Expense and Accounts Receivable 160,238 108,260
Deferred Tax Assets 1,597,995 1,141,342
FHLB Stock 2,401,800 2,354,800
Investment in Service Bureau at Cost 815,009 815,009
Other Real Estate Owned 1,139,651 1,152,919
Other Assets 171,926 159,000
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 308,693,074 292,054,038
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 12,949,160 12,114,590
Interest-Bearing Deposits 214,778,981 209,877,896
Advances to Borrowers for Taxes and Insurance 281,704 103,632
Accrued Interest on Deposits 122,422 141,757
Accrued State and Federal Taxes ( 68,160) ( 133,129)
Other Accounts Payable and Accrued Expenses 664,524 537,849
Repurchase Agreements 724,155 536,419
FHLB Long-Term Advances 46,195,467 36,210,071
Deferred Credits on REO 205,034 173,996
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 275,853,287 259,563,081
- -------------------------------------------------------------------------------------------------
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 ( 1,647,304) ( 797,592)
Retained Earnings 11,484,807 10,356,571
Less: Employee Stock Ownership ( 714,689) ( 784,995)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 24,839,787 24,490,957
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 308,693,074 292,054,038
=================================================================================================
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 JUNE 30,
----------------------------------
INTEREST INCOME: 2004 - UNAUDITED 2003 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,353,706 2,693,268
Other Interest Income 1,180,202 832,507
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,533,908 3,525,775
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,014,116 1,145,798
Interest on Repurchase Agreements 2,340 3,303
Interest on Short-Term Debt 690 2,419
Interest on Long-Term Debt 523,498 437,592
Interest on Subordinated Debentures 109,517 110,027
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,650,161 1,699,139
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,883,747 1,826,636
PROVISION FOR LOAN LOSSES (10,000) (113,833)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,873,747 1,712,803
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 146,423 135,588
Net Gain on Loans Sold 98,431 284,673
Real Estate Sales Commission Income 106,201 70,522
Insurance Commission Income 17,823 24,763
Rental Income, Net 25,997 21,336
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 394,875 536,882
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 725,515 679,327
Occupancy Expenses 105,545 108,904
Furniture and Equipment Expense 130,147 107,933
Advertising 72,644 37,928
Data Processing Expense 156,090 147,135
Other 345,676 274,159
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,535,617 1,355,386
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 733,005 894,299
PROVISION FOR INCOME TAXES (157,202) (279,843)
- ----------------------------------------------------------------------------------------
NET INCOME $ 575,803 614,456
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.41 0.44
DILUTED 0.38 0.41
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,397,269 1,387,191
DILUTED 1,533,126 1,481,549
========================================================================================
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: 2004 - UNAUDITED 2003 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 4,797,338 5,509,996
Other Interest Income 2,324,016 1,763,731
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 7,121,354 7,273,727
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 2,074,090 2,244,807
Interest on Repurchase Agreements 4,948 7,154
Interest on Short-Term Debt 650 2,440
Interest on Long-Term Debt 986,626 870,885
Interest on Subordinated Debentures 217,804 218,421
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 3,284,118 3,343,707
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 3,837,236 3,930,020
PROVISION FOR LOAN LOSSES ( 20,000) ( 291,470)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,817,236 3,638,550
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 265,333 259,929
Net Gain on Loans Sold 170,780 458,893
Realized Gain on Securities - 231
Real Estate Sales Commission Income 161,482 139,911
Insurance Commission Income 29,147 44,638
Rental Income, Net 47,011 36,851
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 673,753 940,453
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 1,443,468 1,339,801
Occupancy Expenses 203,969 200,572
Furniture and Equipment Expense 253,895 164,022
Advertising 136,068 71,686
Data Processing Expense 318,205 256,408
Other 673,182 527,324
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 3,028,787 2,559,813
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 1,462,202 2,019,190
PROVISION FOR INCOME TAXES ( 333,968) ( 573,491)
- ----------------------------------------------------------------------------------------
NET INCOME $ 1,128,234 1,445,699
========================================================================================
EARNINGS PER SHARE:
BASIC $ .81 1.04
DILUTED .74 .98
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,396,486 1,384,778
DILUTED 1,522,724 1,479,021
========================================================================================
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, 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 -- -- -- -- 70,306 70,306
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $536,471 Income Tax Benefit)-- -- (864,377) -- -- (864,377)
Less: Reclassification Adjustment
(Net of $9,102 Tax) -- -- 14,665 -- -- 14,665
------------
(849,712)
Net Income -- -- -- 1,128,234 -- 1,128,234
------------
Total Comprehensive Income -- -- -- -- -- 278,522
------------ ---------- --------- ---------- --------- ------------
Balance at June 30, 2004 1,465,512 14,251,461 (1,647,304) 11,484,807 ( 714,689) 24,839,787
============ ========== ========= ========== ========= ============
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,
----------------------------------
2004 - UNAUDITED 2003 - UNAUDITED
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,128,234 1,445,699
Items Not Affecting Cash:
Depreciation 287,648 167,610
(Increase) Decrease in Accrued Interest (66,165) 49,722
Deferred Income Taxes (Benefit) 32,327 (86,957)
Provision for Loan and Lease Losses 20,000 291,470
(Increase) Decrease in Prepaid Expenses and Accounts Receivable (51,978) 45,776
Increase (Decrease) in Interest Payable (19,335) 113,519
Increase in State and Federal Taxes Payable 64,969 -
Increase (Decrease) in Other Accounts Payable and Accrued Expenses 126,675 (428,441)
Increase in Deferred Loan Fees, Net 18,854 22,524
Realized (Gain) on Securities - (231)
Discount Accretion (106,876) (92,866)
Premium Amortization 323,274 246,363
Increase in Deferred Gain on Sale of REO 31,038 -
Earned ESOP Shares 70,306 174,522
FHLB Stock Dividends (47,000) (45,000)
Net (Increase) in Loans Held for Sale (496,136) (1,609,392)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (1,315,835) 294,318
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments (22,697,557) (9,607,148)
Purchase of Available-for-Sale Investments - (6,758,589)
Proceeds from Maturities of Held-to-Maturity Investments 6,405,000 3,495,000
Proceeds from Maturities of Available-for-Sale Investments 2,226,941 3,423,358
Principal Payments on Mortgage-backed Securities - HTM 3,160,002 5,925,765
Principal Payments on Mortgage-backed Securities - AFS 1,563,418 1,747,352
(Increase) Decrease in Loans Receivable, Net (2,896,196) 4,327,547
Purchases of Premises and Equipment (1,269,591) (474,443)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (13,507,983) 2,078,842
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 5,735,655 16,309,741
Net Increase in Advances by Borrowers for Taxes and Insurance 178,072 153,208
Net Increase (Decrease) in Repurchase Agreements 187,736 (731,297)
Repayment of FHLB Advances (14,604) (11,841)
Proceeds from FHLB Advances 10,000,000 -
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,086,859 15,719,811
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,894,711 18,092,971
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 32,141,033 19,822,269
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,035,744 37,915,240
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ (849,712) (350,536)
Acquisition of Real Estate Property through Foreclosure of Related Loans $ 1,139,651 1,120,331
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 242,521 983,151
Interest $ 3,303,453 3,230,188
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
7
STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1 INCORPORATION AND OPERATIONS
- ------ ------------------------------
State of Franklin Bancshares, Inc. (Company) was incorporated under the
laws of the State of Tennessee for the purpose of becoming the holding
company of State of franklin Savings Bank (Savings Bank). The stockholders
of the Savings Bank exchanged their shares for the shares of the Company,
whereby the Savings Bank became 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 June 30, 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 June 30, 2004 consolidated
financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ----- -----------------------------
Fixed assets at June 30, 2004, and December 31, 2003 are summarized as
follows:
2004 2003
----------- -----------
Land 1,580,000 1,580,000
Buildings and Leasehold Improvements 4,822,524 4,030,608
Furniture, Fixtures and Equipment 3,177,299 2,699,624
----------- -----------
9,579,823 8,310,232
Less: Accumulated Depreciation 2,379,522 2,091,874
----------- -----------
7,200,301 6,218,358
=========== ===========
8
NOTE 5 LOANS RECEIVABLE
- ------- ------------------
Loans receivable at June 30, 2004 and December 31, 2003, consist of the
following:
2004 2003
-------------- --------------
First Mortgage Loans 49,791,806 49,702,608
Construction Loans 24,475,605 21,817,058
Consumer Loans 12,839,549 13,070,617
Participation Loans, Net 445,061 458,452
Commercial Loans 63,271,063 63,208,012
Credit Line Advances 1,566,968 1,185,167
Lease Finance 1,434,654 1,550,376
--------------- ---------------
Gross Loans and Leases Receivable 153,824,706 150,992,290
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 120,157) ( 101,875)
Net Deferred Loan Origination Fees ( 262,664) ( 243,810)
Accumulated General Loan Loss Allowance ( 1,794,949) ( 1,870,279)
--------------- ---------------
( 2,177,770) ( 2,215,964)
--------------- ---------------
Loans and Leases Receivable, Net 151,646,936 148,776,326
=============== ===============
An analysis of the allowance for loan and lease losses at June 30, 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 20,000 444,548
Loans and Leases Charged-Off ( 101,330) ( 137,609)
Charged-Off Loan and Lease Recoveries 6,000 20
-------------- --------------
Balance - End of Period 1,794,949 1,870,279
============== ==============
The gross amount of participation loans serviced by State of Franklin
Savings Bank was $890,101 at June 30, 2004 and $916,883 at December 31,
2003.
At June 30, 2004 the Company had non-accrual loans and leases totaling $2.6
million which included $121,000 in impaired loans compared with $3.2
million 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 $115,000 at June 30, 2004 and $66,000 at December 31,
2003. No interest income on impaired loans was recognized for the periods
ending June 30, 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 June 30, 2004.
9
NOTE 6 FEDERAL REGULATION
- ------- ------------------
The capital ratios for State of Franklin Savings Bank are as follows:
For Capital
Adequacy
Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provision
---------------- ----------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
- --------------------------- ---------------- ----------------
As of June 30, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 24,273 12.07% >=20,116 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 22,784 11.33% >=12,069 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 22,784 7.40% >=15,401 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 June 30, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 34,091 16.91% >=20,157 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 32,180 15.96% >=12,094 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 32,180 10.40% >=15,476 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%
10
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 June
30, 2004 was $714,689. 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 June 30, 2004, no balances were outstanding for advances on
the line of credit.
Shares owned by the ESOP at June 30, 2004 totaled 175,488. 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,
2004 2003
------------- -------------
Number of Shares
Released and Allocated since Inception 77,857 77,857
Suspense 67,457 70,811
Fair Value
Released and Allocated since Inception 1,712,854 1,557,140
Suspense 1,484,054 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:
June 30, December 31,
2004 2003
------------- -------------
Compensation Expense 222,000 408,370
Contributions 222,000 408,370
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 83,832 $12.47
During 2004 4,000 4,000 $20.00
Options Granted - Management January 1, 2004 238,211 182,828 $13.05
During 2004 3,553 -- $20.00
------- -------
Options Outstanding - June 30, 2004 335,778 270,660 $13.05
======= =======
11
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
June 30, 2004 December 31, 2003
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 1.75 93,825,352 41.20 1.75 84,622,380 38.12
Interest-Free Checking -- 12,949,160 5.69 -- 12,114,590 5.46
NOW .85 17,556,398 7.71 1.17 18,753,775 8.45
Money Market Deposit 1.00 25,510,574 11.20 1.47 26,308,635 11.85
----------- -------- ----------- --------
149,841,484 65.80 141,799,380 63.88
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 2.75 20,702,041 9.09 2.84 20,284,510 9.14
Balances less than $100,000 2.58 57,184,616 25.11 2.66 59,908,596 26.98
----------- -------- ----------- --------
77,886,657 34.20 80,193,106 36.12
----------- -------- ----------- --------
227,728,141 100.00 221,992,486 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at June 30, 2004 and December
31, 2003, is as follows:
Period Ending June 30, 2004 Year Ending December 31, 2003
-------------------------------- -----------------------------
2004 22,538,547 2004 45,642,644
2005 40,089,122 2005 21,464,822
2006 6,711,066 2006 6,379,826
2007 3,206,369 2007 2,937,998
2008 and After 5,341,553 2008 and After 3,767,816
---------- ----------
77,886,657 80,193,106
========== ==========
NOTE 9 FEDERAL HOME LOAN BANK ADVANCES
- ------- -------------------------------
The contractual maturity of FHLB advances at June 30, 2004 is as follows:
2004 17,469 2009 33,654
2005 30,279 2010 8,034,555
2006 31,090 2011 19,035,480
2007 31,922 2012 5,036,430
2008 3,032,776 2013 and after 10,911,814
Convertible fixed rate advances were $45,000,000 at June 30, 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 $1,195,467 at June 30, 2004 and $1,210,071 at December 31, 2003. The
average rate on FHLB advances was 4.56% at June 30, 2004 and 4.85% at December
31, 2003.
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 June 30, 2004 totaled $66.9 million in
residential mortgage loans and $11.6 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 June 30, 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.
12
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- -----------
Available-for-Sale:
United States Government
Agency Securities Maturing:
Within one year 1,012,599 1,720 -- 1,014,319
Mortgage Backed Securities:
After one year
but within five years 253,439 -- 1,254 252,185
After five years
but within ten years 937,927 15,206 102 953,031
After ten years
but within fifteen years 1,008,147 8,765 -- 1,016,912
After 20 years 196,545 573 -- 197,118
Municipal Securities Maturing:
Within one year 135,000 2,908 -- 137,908
After one year
but within five years 1,423,938 52,776 -- 1,476,714
After five years
but within ten years 5,426,670 199,164 1,506 5,624,328
After ten years
but within fifteen years 9,704,883 345,980 2,393 10,048,470
After fifteen years
but within twenty years 3,078,700 43,218 11,557 3,110,361
After 20 years 1,232,184 -- 57,029 1,175,155
Corporate Securities Maturing:
Within one year 1,355,118 2,710 -- 1,357,828
After five years
but within ten years 4,447,838 33,431 -- 4,481,269
After ten years
but within fifteen years 2,100,000 -- 246 2,099,754
After twenty years 1,730,158 61,893 -- 1,792,051
Equity Securities
Callable within one year 21,061,222 -- 3,330,222 17,731,000
Callable after one year
but within five years 4,414,150 40,000 71,496 4,382,654
Callable after five years
but within ten years 1,000,000 -- 20,000 980,000
Other
After 20 years 318,155 18,021 -- 336,176
---------- --------- --------- -----------
Total Available-for-Sale 60,836,673 826,365 3,495,805 58,167,233
========== ========= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 9,038,489 -- 279,342 8,759,147
After fifteen years
but within twenty years 262,608 -- 3,414 259,194
Mortgage Backed Securities:
After one year
but within five years 2,815,581 -- 16,654 2,798,927
After five years
but within ten years 16,020,124 -- 496,514 15,523,610
After twenty years 5,730,542 59 91,002 5,639,599
Municipal Securities Maturing:
After one year
but within five years 1,274,487 -- 8,284 1,266,203
After ten years
but within fifteen years 429,980 -- 5,523 424,457
After fifteen years
but within twenty years 323,616 -- 19,424 304,192
After twenty years 2,515,898 -- 80,625 2,435,273
13
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- -----------
Corporate Securities Maturing:
Within one year 1,141,136 -- 3,147 1,137,989
After one year
but within five years 1,149,854 27,670 -- 1,177,524
After five years
but within ten years 1,063,409 20,861 8,271 1,075,999
After twenty years 5,248,397 183,466 108,418 5,323,445
---------- ------- --------- ----------
Total Held-to-Maturity 47,014,121 232,056 1,120,618 46,125,559
========== ======= ========= ==========
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 June 30, 2004 and
December 31, 2003 totaled $2,000,000 and $2,030,774, respectively.
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for six months ended June 30, 2004, compared with the
same period in 2003, are as follows:
Six Months Ended
June 30,
2004 2003
--------- ---------
Net Income 1,128,234 1,445,699
Average Basic Shares Outstanding 1,396,486 1,384,778
Basic Earnings Per Share .81 1.04
========= =========
Net Income 1,128,234 1,445,699
Average Basic Shares Outstanding 1,396,486 1,384,778
Dilutive Effect Due to Stock Options 126,238 94,243
--------- ---------
Average Shares Outstanding, as Adjusted 1,522,724 1,479,021
Diluted Earnings Per Share .74 0.98
========= =========
14
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.
BALANCE SHEET REVIEW
--------------------
At June 30, 2004, assets of State of Franklin Bancshares, Inc. totaled
$308.7 million reflecting an increase of $16.6 million or 6% since December
31, 2003. The growth in assets has been funded primarily by a $5.7 million
increase in deposits and a $10 million increase in FHLB advances.
LOANS
-----
Loans outstanding totaled $154.4 million at June 30, 2004 compared with
$151.1 million at December 31, 2003. Commercial and construction loans,
first mortgage loans, and credit line advances increased $2.6 million,
$89,000, and $382,000, respectively. Consumer loans decreased $231,000. The
loan portfolio mix at June 30, 2004 consists of 33% residential mortgages,
43% commercial, 14% real estate construction, and 10% consumer loans.
INVESTMENT SECURITIES
---------------------
Investment securities totaled $105.2 million at June 30, 2004. The
investment portfolio at quarter end consisted of $10.3 million in debt
securities issued by the U. S Government or Federal Agencies, $27.0 million
in mortgage backed securities, $26.1 million in securities issued by state,
county, or municipalities, $18.3 million in corporate securities, $23.1
million in preferred stock issued by Federal Agencies, and $336,000 in
other equity securities.
At June 30, 2004, securities categorized as available-for-sale totaled
$58.2 million while the held-to-maturity securities totaled $47.0 million
compared to $63.4 million in available-for-sale and $34.0 million in
held-to-maturity at December 31, 2003. At June 30, 2004, the
available-for-sale portfolio had net unrealized losses of $2,669,000 while
our held-to-maturity securities had $889,000 in net unrealized losses.
NON-PERFORMING ASSETS
---------------------
At June 30, 2004 the Company had nonaccrual loans totaling $2.6 million
compared with $3.2 million at December 31, 2003. The reserve for loan and
lease losses was $1,795,000 at June 30, 2004, or 1.17% of loans and leases
outstanding, net of unearned income and loans held for sale, compared to
$1,870,000 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 June 30, 2004 of $227.7 million, reflected an increase of
$5.7 million or a 3% increase from $123 million at December 31, 2003.
Non-interest bearing demand deposits totaled $12.9 million at June 30,
2004, an increase of $835,000 from December 31, 2003. Interest bearing
deposits increased $4.9 million to $214.8 million at June 30, 2004.
CAPITAL
-------
Tier 1 capital for the Savings Bank at June 30, 2004 was $22.8 million. At
June 30, 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 11.33%, 12.07% and 7.40%, respectively.
Tier 1 capital for the Company at June 30, 2004, was $32.2 million with
Tier 1, total risk-based, and leverage ratios of 15.96%, 16.91%, and
10.40%, respectively.
15
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 $576,000 for the three months ending June 30,
2004, compared with $614,000 for the same period last year, resulting in a
decrease of 6%. Return on average assets was .75% and the return on average
equity was 9.41% for the three months ended June 30, 2004, compared with
.89% and 10.52%, respectively, for the same period in 2003. For the six
months ending June 30, 2004, net income was $1,128,000 compared with
$1,446,000 for the same period ending June 30, 2003. Return on average
assets and average equity were .75% and 9.17%, respectively, compared with
1.07% and 12.61% for the six month period ended June 30, 2003. For the six
months ended June 30, 2004, net income per diluted share was $.74 compared
to earnings per share of $.98 for the same period in 2003.
Noninterest income decreased $267,000, or 28%, during the six months ended
June 30, 2004, compared to the same period last year as a result of
declines in gains on loans sold, realized gains on securities, and
insurance commissions. Contributing significantly to the decline in
noninterest income were decreases in net gains on loans sold which declined
from the prior year due to a reduction in the number of existing homes
being refinanced.
Noninterest expense was $3,029,000 for the six months ending June 30, 2004,
an increase of $469,000, or 18% 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 $3,837,000 for the six months ended June 30, 2004
reflects a decrease of $93,000 or 2% under the same period last year. For
the six months ending June 30, 2004, average earning assets increased $30.1
million or 12% while average interest bearing liabilities increased $27.6
million, also 12%, compared with the same period in 2003. The taxable
equivalent yield on earning assets declined 67 basis points to 5.19% for
the first six months of 2004 compared with the same period in 2003 while
the cost on interest bearing liabilities declined 35 basis points to 2.49%.
Consequently, the taxable equivalent net interest margin based on average
earning assets decreased to 2.91% for the six months ending June 30, 2004
compared with 3.29% for the same period in 2003.
16
PROVISION FOR LOAN LOSSES
-------------------------
During the six months ended June 30, 2004, the provision for possible loan
losses was $20,000 compared with $291,000 for the same period last year.
There were $95,000 in loan or lease charge-offs net of recoveries for the
six months ended June 30, 2004, compared to $3,000 in loan or lease
charge-offs during the same period in 2003. The allowance for possible loan
losses represented 1.17% of total loans, net of mortgage loans
held-for-sale, at June 30, 2004, compared to 1.20% at June 30, 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 six months ended June 30, 2004, the provision for federal and state
income taxes was $334,000, a decrease of $240,000 from 2003. The decrease
is due to a decline in taxable income compared to the same period in 2003.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $674,000 during the six months ended
June 30, 2004, a decrease of $267,000 or 28% from the comparable 2003
period. During 2004, other fees and service charges, real estate sales
commissions, and net rental income increased $5,000, $22,000, and $10,000,
respectively. Net gain on loans sold declined $288,000, and insurance
commission income declined $15,000.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $3,029,000 for the six month period ending June
30, 2004, an increase of $469,000, or 18%, 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 $104,000, $3,000, $90,000,
$64,000, $62,000, and $146,000, 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.
17
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 24, 2004, 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
2007 annual meeting of shareholders. Current directors elected to
three-year terms were as follows:
FOR WITHHOLD AUTHORITY
----------------------------
Charles E. Allen, Jr. 1,018,737 1,900
Vance W. Cheek 1,015,337 5,300
Stephen K. Gross 1,018,737 1,900
Verrill M. Norwood, Jr. 1,017,237 3,400
Directors continuing to serve include:
Charles E. Allen, Sr., M.D. Alan R. Hubbard Richard S. Venable
Kenneth E. Cutshall, M.D. Donald R. Jeanes Henry J. Williams, M.D.
Randal R. Greene Cameron E. Perry
2. Ratified the appointment of Baylor & Backus as the Company's independent
accountants and auditors for 2004 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
---------------------------------------------------------------------
1,015,062 3,475 2,100 0
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
June 30, 2004
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 11, 2004 /s/ Randal R. Greene
- --------------------------- -----------------------------------
(Date) Randal R. Greene, President
August 11, 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)
19