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: MARCH 31, 2005
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
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
----
1,481,462
------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 10, 2005)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
----
STATE OF FRANKLIN BANCSHARES, INC
INDEX
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
-------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 5
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 2004 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED) AND 2004 (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. CONTROLS AND PROCEDURES 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULT UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
ASSETS 2005 - UNAUDITED 2004 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 5,423,877 5,564,907
Federal Funds Sold 150,000 7,130,000
Short-Term Interest Bearing Deposits 6,463,994 2,279,711
- -------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 12,037,871 14,974,618
- -------------------------------------------------------------------------------------------------
Investments - HTM
(Estimated Market 2005 - $47,987,392 and 2004 - $49,864,335) 48,418,121 49,702,867
Investments - AFS 52,519,998 53,650,416
Loans Held for Sale - 374,700
Loans and Leases Receivable 172,186,889 164,458,145
Less: Allowance for Loan and Lease Losses ( 1,662,695) ( 1,601,332)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 170,524,194 162,856,813
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,564,443 1,490,634
Land, Buildings & Equip at Cost Less Accum Depr
of $2,779,578 in 2005 and $2,643,828 in 2004 7,832,812 7,468,710
Prepaid Expense and Accounts Receivable 145,916 175,816
Deferred Tax Assets 1,637,514 1,727,642
FHLB Stock 2,480,500 2,453,300
Investment in Service Bureau at Cost 815,009 815,009
Other Real Estate Owned 884,656 891,413
Other Assets 98,958 124,241
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 298,959,992 296,706,179
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 16,087,550 15,371,046
Interest-Bearing Deposits 199,629,711 198,784,547
Advances to Borrowers for Taxes and Insurance 200,445 110,328
Accrued Interest on Deposits 211,732 136,476
Accrued State and Federal Taxes ( 9,291) ( 149,118)
Other Accounts Payable and Accrued Expenses 595,568 784,704
Repurchase Agreements 507,218 1,024,608
FHLB Long-Term Advances 46,173,200 46,180,671
Deferred Credits on REO 189,384 189,384
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 263,585,517 262,432,646
- -------------------------------------------------------------------------------------------------
Guaranteed Preferred Beneficial Interest in
Subordinated Debentures 8,000,000 8,000,000
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,481,462 1,465,512
Paid-in Capital 14,598,374 14,251,461
Accumulated Other Comprehensive Income ( 1,859,999) ( 2,005,925)
Retained Earnings 13,759,842 13,204,732
Less: Employee Stock Ownership ( 605,204) ( 642,247)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 27,374,475 26,273,533
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 298,959,992 296,706,179
=================================================================================================
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: 2005 - UNAUDITED 2004 - UNAUDITED
---------------- ----------------
Interest and Fees on Loans $ 2,719,054 2,443,632
Other Interest Income 1,157,193 1,143,814
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,876,247 3,587,446
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 928,320 1,059,974
Interest on Repurchase Agreements 2,082 2,588
Interest on Short-Term Debt 403 (20)
Interest on Long-Term Debt 519,084 463,128
Interest on Subordinated Debentures 135,731 108,287
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,585,620 1,633,957
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 2,290,627 1,953,489
PROVISION FOR LOAN LOSSES (60,000) (10,000)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 2,230,627 1,943,489
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 149,033 118,910
Net Gain on Loans Sold 54,905 72,349
Realized Gain on Securities - -
Real Estate Sales Commission Income 100,670 55,281
Insurance Commission Income 9,527 11,324
Rental Income, Net 14,909 21,014
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 329,044 278,878
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 869,491 717,953
Occupancy Expenses 122,062 98,424
Furniture and Equipment Expense 118,879 123,748
Advertising 113,260 63,424
Data Processing Expense 165,418 162,115
Other Operating Expenses 439,987 327,506
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 1,829,097 1,493,170
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 730,574 729,197
PROVISION FOR INCOME TAXES (175,463) (176,766)
- ----------------------------------------------------------------------------------------
NET INCOME $ 555,111 552,431
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.39 0.40
DILUTED 0.35 0.37
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,424,947 1,395,814
DILUTED 1,568,311 1,512,433
========================================================================================
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, 2005 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2004 (AUDITED)
Accumulated
Other Employee
Common Paid-In Comprehensive Retained Stock
Stock Capital Income Earnings Ownership Total
-------------- ---------- ------------ --------- ----------- ------------
Balance at December 31, 2003 1,465,512 14,251,461 ( 797,592) 10,356,572 ( 784,995) 24,490,958
ESOP Shares Allocated -- -- -- -- 142,748 142,748
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $764,826 Income Tax) -- -- (1,232,308) -- -- (1,232,308)
Less: Reclassification Adjustment
(Net of $14,880 Tax Benefit) -- -- 23,975 -- -- 23,975
------------
(1,208,333)
Net Income -- -- -- 2,848,159 -- 2,848,159
------------
Total Comprehensive Income -- -- -- -- -- 1,639,826
------------ ---------- --------- ---------- ---------- ------------
Balance at December 31, 2004 1,465,512 14,251,461 (2,005,925) 13,204,731 ( 642,247) 26,273,532
Net Proceeds
From Sale of Stock 15,950 346,913 -- -- -- 362,863
ESOP Shares Allocated -- -- -- -- 37,043 37,043
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Gains on Securities
Available-For-Sale:
Unrealized Holding Gains
Arising During the Period
(Net of $90,422 Income Tax) -- -- 145,691 -- -- 145,691
Less: Reclassification Adjustment
(Net of $146 Income Tax) -- -- 235 -- -- 235
------------
145,926
Net Income -- -- -- 555,111 -- 555,111
------------
Total Comprehensive Income -- -- -- -- -- 701,037
------------ ---------- --------- ---------- --------- ------------
Balance at March 31, 2005 1,481,462 14,598,374 (1,859,999) 13,759,842 ( 605,204) 27,374,475
============ ========== ========= ========== ========== ============
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,
----------------------------------
2005 - UNAUDITED 2004 - UNAUDITED
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 555,111 552,431
Items Not Affecting Cash:
Depreciation 135,750 144,488
(Increase) Decrease in Accrued Interest (73,809) (116,331)
Deferred Income Taxes (Benefit) 13,134 24,716
Provision for Loan and Lease Losses 60,000 10,000
(Increase) Decrease in Prepaid Expenses and Accounts Receivable 29,900 (67,734)
Increase (Decrease) in Interest Payable 75,256 (5,219)
Increase in State and Federal Taxes Payable 139,827 102,644
Increase (Decrease) in Other Accounts Payable and Accrued Expenses (189,136) 44,475
Increase Decrease) in Deferred Loan Fees, Net 9,699 (5,898)
Realized (Gain) on Securities - -
Discount Accretion (68,723) (48,389)
Premium Amortization 163,680 141,098
Increase in Deferred Gain on Sale of REO - 25,783
Earned ESOP Shares 37,043 34,890
FHLB Stock Dividends (27,200) (23,400)
Net (Increase) Decrease in Loans Held for Sale 374,700 (982,062)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,235,232 (168,508)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments - (17,103,992)
Purchase of Available-for-Sale Investments - -
Proceeds from Maturities of Held-to-Maturity Investments 100,000 4,405,000
Proceeds from Maturities of Available-for-Sale Investments 1,135,000 130,000
Principal Payments on Mortgage-backed Securities - HTM 1,081,145 959,790
Principal Payments on Mortgage-backed Securities - AFS 252,534 613,547
(Increase) in Loans Receivable, Net (7,730,593) (478,065)
Purchases of Premises and Equipment (499,852) (682,947)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (5,661,766) (12,156,667)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 1,561,668 7,626,128
Net Increase in Advances by Borrowers for Taxes and Insurance 90,117 76,290
Net Increase in Repurchase Agreements (517,390) 559,164
Issuance of Common Stock 362,863 -
Repayment of FHLB Advances (7,471) (7,359)
Proceeds from FHLB Advances - 10,000,000
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,489,787 18,254,223
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,936,747) 5,929,048
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 14,974,618 32,141,033
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,037,871 38,070,081
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase in Unrealized Gain on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 145,926 355,736
Acquisition of Real Estate Property through Foreclosure of Related Loans $ 32,857 31,848
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 58,180 99,525
Interest $ 1,510,364 1,639,176
=================================================================================================================
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, 2005 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, 2004.
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, 2005 consolidated
financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ----- -----------------------------
Fixed assets at March 31, 2005, and December 31, 2004 are summarized as
follows:
2005 2004
----------- -----------
Land 1,580,000 1,580,000
Buildings and Leasehold Improvements 5,349,356 5,082,535
Furniture, Fixtures and Equipment 3,683,034 3,450,003
----------- -----------
10,612,390 10,112,538
Less: Accumulated Depreciation 2,779,578 2,643,828
----------- -----------
7,832,812 7,468,710
=========== ===========
7
NOTE 5 LOANS RECEIVABLE
- ------- ------------------
Loans receivable at March 31, 2005 and December 31, 2004, consist of the
following:
2005 2004
-------------- --------------
First Mortgage Loans 52,168,456 51,639,109
Construction Loans 31,514,176 27,146,299
Consumer Loans 14,755,099 14,407,548
Commercial Loans 71,155,461 69,267,247
Credit Line Advances 1,514,337 870,529
Lease Finance 1,343,529 1,381,883
--------------- ---------------
Gross Loans and Leases Receivable 172,451,058 164,712,615
--------------- ---------------
Less:
Net Deferred Loan Origination Fees ( 264,169) ( 254,470)
Accumulated General Loan Loss Allowance ( 1,662,695) ( 1,601,332)
--------------- ---------------
( 1,926,864) ( 1,855,802)
--------------- ---------------
Loans and Leases Receivable, Net 170,524,194 162,856,813
=============== ===============
An analysis of the allowance for loan and lease losses at March 31, 2005 and
December 31, 2004 is as follows:
2005 2004
-------------- --------------
Balance - Beginning of Period 1,601,332 1,870,279
Provision for Loan and Lease Losses 60,000 ( 62,000)
Loans and Leases Charged-Off - ( 212,947)
Charged-Off Loan and Lease Recoveries 1,363 6,000
-------------- --------------
Balance - End of Period 1,662,695 1,601,332
============== ==============
At March 31, 2005 the Company had non-accrual loans and leases totaling
$1,209,000 which included $18,000 in impaired loans compared with $1,261,000 and
$18,000, respectively, at December 31, 2004. 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 $14,000 at March 31,
2005 and December 31, 2004. No interest income on impaired loans was recognized
for the periods ending March 31, 2005 and December 31, 2004. The Company had no
loans or leases 90 days or more past due and still accruing and no restructured
loans at March 31, 2005.
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, 2005:
Total Risk-Based Capital
(to Risk-Weighted Assets) 26,269 12.20% >=21,540 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 24,803 11.51% >=12,924 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 24,803 8.41% >=14,746 5.0%
As of December 31, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 25,178 12.08% >=20,850 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 23,772 11.40% >=12,510 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 23,772 7.98% >=14,891 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, 2005:
Total Risk-Based Capital
(to Risk-Weighted Assets) 36,374 16.84% >=21,601 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 34,711 16.07% >=12,961 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 34,711 11.74% >=14,788 5.0%
As of December 31, 2004:
Total Risk-Based Capital
(to Risk-Weighted Assets) 34,938 16.71% >=20,908 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 33,337 15.94% >=12,545 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 33,337 11.16% >=14,935 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, 2005 was $605,204. 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, 2005, no balances were outstanding for advances on
the line of credit.
Shares owned by the ESOP at March 31, 2005 totaled 186,829. 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,
2005 2004
------------- -------------
Number of Shares
Released and Allocated since Inception 46,073 46,073
Suspense 44,641 44,641
Fair Value
Released and Allocated since Inception 1,163,343 1,013,606
Suspense 1,127,185 982,102
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,
2005 2004
------------- -------------
Compensation Expense 111,000 444,000
Contributions 111,000 444,000
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, 2005 94,014 88,323 $12.79
During 2005 7,000 7,000 $25.25
Options Granted - Management January 1, 2005 249,423 193,011 $13.43
During 2005 9,279 5,384 $25.25
------- -------
Options Outstanding - March 31, 2005 359,716 293,718 $13.80
======= =======
10
NOTE 8 DEPOSITS
- ------- ----------
Deposit balances are summarized as follows:
March 31, 2005 December 31, 2004
----------------------------- -----------------------------
Rate Amount Percent Rate Amount Percent
------- ----------- -------- ------- ----------- --------
Passbook 1.26 56,049,919 25.98 1.13 72,157,046 33.69
Interest-Free Checking -- 16,087,550 7.46 -- 15,371,046 7.18
NOW .25 17,536,005 8.13 .25 20,439,053 9.54
Money Market Deposit 1.17 20,476,991 9.49 1.07 22,156,509 10.35
----------- -------- ----------- --------
110,150,465 51.06 130,123,654 60.76
----------- -------- ----------- --------
Fixed Term Certificate Accounts
Balances $100,000 or greater 3.17 30,715,176 14.24 2.84 22,745,289 10.62
Balances less than $100,000 2.95 74,851,620 34.70 2.66 61,286,650 28.62
----------- -------- ----------- --------
105,566,796 48.94 84,031,939 39.24
----------- -------- ----------- --------
215,717,261 100.00 214,155,593 100.00
=========== ======== =========== ========
The contractual maturity of certificate accounts at March 31, 2005 and December
31, 2004, is as follows:
Period Ending March 31, 2005 Year Ending December 31, 2004
-------------------------------- -----------------------------
2005 42,862,714 2005 52,996,714
2006 38,930,372 2006 20,586,376
2007 17,981,269 2007 4,800,025
2008 4,263,265 2008 4,138,797
2009 and After 1,529,176 2009 and After 1,510,027
----------- ----------
105,566,796 84,031,939
=========== ==========
NOTE 9 FEDERAL HOME LOAN BANK ADVANCES
- ------- -------------------------------
The contractual maturity of FHLB advances at March 31, 2005 is as follows:
2005 22,710 2010 8,034,555
2006 31,091 2011 19,035,481
2007 31,923 2012 5,036,431
2008 3,032,777 2013 10,037,879
2009 33,654 2014 and after 876,699
Convertible fixed rate advances were $45,000,000 at March 31, 2005 and at
December 31, 2004. 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 $1,173,200 at March 31, 2005 and $1,180,671 at December 31, 2004. The
average rate on FHLB advances was 4.56% at both March 31, 2005 and December 31,
2004.
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, 2005 totaled $66.9 million in
residential mortgage loans and $8.7 million in securities. At December 31, 2004
there were approximately $66.9 million in mortgage loans and $9.4 million in
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, 2005, by contractual maturity, are shown below.
Expected maturities differ from contractual maturities because issuers may have
the right to call or prepay obligations without call or prepayment penalties.
Maturities for mortgage backed securities with scheduled contractual payments
are based on the weighted average life of the remaining payments.
11
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- ---------- -----------
Available-for-Sale:
Mortgage Backed Securities:
After one year
but within five years 723,404 3,404 358 726,450
After five years
but within ten years 998,386 729 194 998,921
Municipal Securities Maturing:
Within one year 140,000 2,730 -- 142,730
After one year
but within five years 1,454,128 45,497 -- 1,499,625
After five years
but within ten years 8,822,194 374,422 -- 9,196,616
After ten years
but within fifteen years 6,208,255 352,038 -- 6,560,293
After fifteen years
but within twenty years 3,093,801 163,030 -- 3,256,831
After 20 years 1,243,269 31,347 16,089 1,258,527
Corporate Securities Maturing:
Within one year 1,318,699 3,462 -- 1,322,161
After one year
but within five years 3,000,000 -- 132,402 2,867,598
After twenty years 1,730,325 117,300 -- 1,847,625
Equity Securities: (Preferred
Stock in US Government Agencies)
Callable within one year 21,069,339 -- 3,820,139 17,249,200
Callable after one year
but within five years 4,414,150 -- 165,453 4,248,697
Callable after five years
but within ten years 1,000,000 -- 11,800 988,200
Other Equity Stock:
After 20 years 318,155 38,369 -- 356,524
---------- --------- --------- -----------
Total Available-for-Sale 55,534,105 1,132,328 4,146,435 52,519,998
========== ========= ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 7,024,508 -- 234,926 6,789,582
Mortgage Backed Securities:
After one year
but within five years 5,136,380 -- 39,341 5,097,039
After five years
but within ten years 11,740,619 -- 152,683 11,587,936
After fifteen years
but within twenty years 474,224 2,671 -- 476,895
After twenty years 3,835,047 6,295 65,780 3,775,562
Municipal Securities Maturing:
After one year
but within five years 1,231,106 11,716 361 1,242,461
After five years
but within ten years 429,982 2,602 -- 432,584
After ten years
but within fifteen years 335,828 -- 4,112 331,716
After twenty years 2,587,741 3,226 8,833 2,582,134
12
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------- ---------- -----------
Corporate Securities Maturing:
Within one year 2,142,577 11,877 677 2,153,777
After one year
but within five years 7,276,348 2,720 88,217 7,190,851
After five years
but within ten years 995,289 87 4,656 990,720
After twenty years 5,208,472 132,171 4,508 5,336,135
---------- ------- --------- -----------
Total Held-to-Maturity 48,418,121 173,365 604,094 47,987,392
========== ======= ========= ===========
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, 2005 and
December 31, 2004 totaled $2,043,124 and $2,005,365, respectively.
Information pertaining to securities with gross unrealized losses at March
31, 2005, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, follows:
Less than Twelve Months Over Twelve Months
----------------------- -----------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
-------- ---------- ----------- ----------
Available-for-Sale
Mortgage Backed Securities 552 999,511 - -
Municipal Securities - - 16,089 804,176
Corporate Securities 132,402 2,867,598 - -
Marketable Equity Securities 146,404 3,794,400 3,850,988 16,691,697
-------- --------- --------- ----------
Total Available-for-Sale 279,358 7,661,509 3,867,077 17,495,873
Held-to-Maturity
US Government Agencies 97,818 3,945,306 137,108 2,844,276
Mortgage Backed Securities 111,365 7,616,764 151,094 12,163,917
Municipal Securities 4,472 486,446 8,834 471,254
Corporate Securities 93,403 9,570,911 - -
-------- --------- --------- ----------
Total Held-to-Maturity 307,058 21,619,427 297,036 15,479,447
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for three months ended March 31, 2005, compared with the
same period in 2004, are as follows:
Three Months Ended
March 31,
2005 2004
--------- ---------
Net Income 555,111 552,431
Average Basic Shares Outstanding 1,424,947 1,395,814
Basic Earnings Per Share .39 .40
========= =========
Net Income 555,111 552,431
Average Basic Shares Outstanding 1,424,947 1,395,814
Dilutive Effect Due to Stock Options 143,364 116,619
--------- ---------
Average Shares Outstanding, as Adjusted 1,568,311 1,512,433
Diluted Earnings Per Share .35 0.37
========= =========
13
NOTE 12 SUBSEQUENT EVENTS
- ------- -----------------
On April 6, 2005, the Company's Board of Directors announced that it has
approved a proposed going private transaction by merging the Company with a
newly formed subsidiary of the Company. The proposed transaction would
reduce the number of stockholders of record from approximately 1,200 to
approximately 250. Following the proposed merger, the surviving entity
would continue operations of the Company as a privately held corporation
that would not be required to file periodic public reports with the
Securities and Exchange Commission.
The terms of the proposed merger are expected to provide that each
stockholder of record of the Company beneficially owning 3,000 or less
common shares will receive cash for shares at a price equal to $25.25 per
share of the common stock, which is the price the Board of Directors has
established based on an independent valuation by a qualified valuation firm
and other factors. Each stockholder of record beneficially owning more than
3,000 common shares will continue to hold the same number of shares of the
surviving corporation after the merger and will not receive any cash for
shares. The Company intends to finance the proposed merger with $8 million
of Company cash in hand from a trust preferred offering completed in 2001
and a $5 million upstream dividend payment from the Bank to the Company.
Consummation of the proposed going private transaction is conditioned upon
the filing of the requisite reports with the SEC, review by and consent of
the Federal Reserve, approval of the Company's stockholders, and other
conditions. Therefore, there is no assurance that the transaction will be
consummated on the terms described or at all.
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 March 31, 2005, assets of State of Franklin Bancshares, Inc. totaled
$299 million reflecting an increase of $2 million since December 31, 2004.
The growth in assets has been funded primarily by a $2 million increase in
deposits.
LOANS
-----
Loans outstanding totaled $172.2 million at March 31, 2005 compared with
$164.8 million at December 31, 2004. First mortgage loans increased
$117,000, consumer loans increased $991,000, and commercial and
construction loans increased $6.3 million. The loan portfolio mix at March
31, 2005 consists of 32% residential mortgages, 43% commercial, 16% real
estate construction, and 9% consumer loans.
INVESTMENT SECURITIES
---------------------
Investment securities totaled $100.9 million at March 31, 2005. The
investment portfolio at quarter end consisted of $7.0 million in debt
securities issued by the U. S Government or Federal Agencies, $22.9 million
in mortgage backed securities, $26.5 million in securities issued by state,
county, or municipalities, $21.7 million in corporate securities, $22.5
million in preferred stock issued by Federal Agencies, and $357,000 in
other equity securities.
At March 31, 2005, securities categorized as available-for-sale totaled
$52.5 million while the held-to-maturity securities totaled $48.4 million
compared to $53.7 million in available-for-sale and $49.7 million in
held-to-maturity at December 31, 2004. At March 31, 2005, the
available-for-sale portfolio had net unrealized losses of $3.0 million
while our held-to-maturity securities had $431,000 in net unrealized
losses.
14
NON-PERFORMING ASSETS
---------------------
At March 31, 2005 the Company had nonaccrual loans totaling $1.2 million
compared with $1.2 million at December 31, 2004. The reserve for loan and
lease losses was $1,662,695 at March 31, 2005, or .97% of loans and leases
outstanding, net of unearned income and loans held for sale, compared to
$1,601,332 or .97% at December 31, 2004. Management believes the allowance
for loan losses is adequate to provide for potential loan losses.
DEPOSITS
--------
Total deposits at March 31, 2005 of $215.7 million, reflected an increase
of $1.6 million or a 1% increase from $214.2 million at December 31, 2004.
Non-interest bearing demand deposits totaled $16.1 million at March 31,
2005, an increase of $717,000 from December 31, 2004. Interest bearing
deposits increased $845,000 million to $199.6 million at March 31, 2005.
CAPITAL
-------
Tier 1 capital for the Savings Bank at March 31, 2005 was $22.8 million. At
March 31, 2005, all capital ratios were in excess of the regulatory
minimums, with the Savings Bank's Tier 1, total risk-based, and leverage
ratios of 11.51%, 12.20% and 8.41%, respectively.
Tier 1 capital for the Company at March 31, 2005, was $34.7 million with
Tier 1, total risk-based, and leverage ratios of 16.07%, 16.84%, and
11.74%, 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 $555,000 for the three months ending March
31, 2005, compared with $552,000 for the same period last year, an increase
of $3,000. Return on average assets and average equity was .76% and 8.59%,
respectively, compared with .75% and 8.90% for the three month period ended
March 31, 2004. For the three months ended March 31, 2005, net income per
diluted share was $.35 compared to earnings per share of $.37 for the same
period in 2004.
Noninterest income increased $50,000, or 18%, during the three months ended
March 31, 2005, compared to the same period last year as a result of
increases in other fees and service charges and real estate sales
commissions. Partially offsetting the increases were declines in net gains
on loans sold, insurance commissions, and rental income.
Noninterest expense was $1,829,000 for the three months ending March 31,
2005, an increase of $336,000, or 23% over the 2004 period, resulting from
increases in compensation and related benefits, occupancy expense,
advertising, data processing, and other operating expenses.
15
NET INTEREST INCOME
-------------------
Interest income increased while interest expense declined from 2004 to
2005. Net interest income of $2.3 million for the three months ended March
31, 2005 reflects an increase of $289,000 or 8% over the same period last
year. For the three months ending March 31, 2005, average earning assets
declined $3.2 million or 1% while average interest bearing liabilities
declined $5.9 million, or 2%, compared with the same period in 2004. The
taxable equivalent yield on earning assets increased 53 basis points to
5.87% for the first three months of 2005 compared with the same period in
2004 while the cost on interest bearing liabilities declined 12 basis
points to 2.89%. Consequently, the taxable equivalent net interest margin
based on average earning assets increased to 3.58% for the three months
ending March 31, 2005 compared with 2.89% for the same period in 2004.
PROVISION FOR LOAN LOSSES
-------------------------
During the three months ended March 31, 2005, the provision for possible
loan losses was $60,000 compared with $10,000 for the same period last
year. There was $1,000 in loan and lease recoveries with no charge-offs for
the three months ended March 31, 2005, compared to $9,000 in net loan and
lease charge-offs during the same period in 2004. The allowance for
possible loan and lease losses represented .97% of total loans and leases,
net of mortgage loans held-for-sale, at March 31, 2005, compared to 1.24%
at March 31, 2004. 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 $175,000, compared to $177,000 for the first three
months ended March 31, 2004.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $329,000 during the three months ended
March 31, 2005, an increase of $50,000 or 18% from the comparable 2004
period. During 2005, other fees and service charges increased $30,000 and
real estate sales commissions increased $45,000. Net gain on loans sold,
insurance commission income, and net rental income declined $17,000,
$2,000, and $6,000, respectively.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $1,829,000 for the three month period ending
March 31, 2005, an increase of $336,000, or 23%, over the same period in
2004. The increase was the result of increases in compensation and
benefits, occupancy expense, advertising, data processing, and other
operating expenses of $152,000, $24,000, $50,000, $3,000, and $112,000,
respectively. During the first three months of 2005, furniture and
equipment expense declined $5,000.
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 March 31,
2005. 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.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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, 2005
17
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 12, 2005 /s/Randal R. Greene
- --------------------------- ----------------------------------
(Date) Randal R. Greene, President
May 12, 2005 /s/Charles E. Allen, Jr.
- --------------------------- ----------------------------------
(Date) Charles E. Allen, Jr.,
Chairman of the Board
and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
18