U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
---------------
OR
--
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-24675
---------
STATE OF FRANKLIN BANCSHARES, INC.
------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1607709
- --------------------------------- --------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1907 NORTH ROAN STREET
JOHNSON CITY, TENNESSEE 37604
---------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(423) 232-4400
-----------------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
------------------------------------------------------------
(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
1,356,670
----------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MARCH 31, 2000)
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES NO X
---- ----
1
STATE OF FRANKLIN BANCSHARES, INC
INDEX
-----
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3
MARCH 31, 2000 (REVIEWED) AND DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (REVIEWED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 5
THREE MONTHS ENDED MARCH 31, 2000 (REVIEWED)
AND YEAR ENDED DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
THERE MONTHS ENDED MARCH 31, 2000 AND 1999 (REVIEWED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (REVIEWED) 7
INDEPENDENT ACCOUNTANT'S REPORT 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULT UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
ASSETS 2000 - REVIEWED 1999 - AUDITED
- -------------------------------------------------------- --------------- ----------------
Cash and Due from Banks $ 3,711,188 2,785,509
Federal Funds Sold 2,299,000 308,000
Short-Term Interest Bearing Deposits 143,313 133,148
Investments - HTM (Estimated Market 2000 - $13,320,249)
(Estimated Market 1999 - $13,301,184) 13,988,778 13,988,346
Investments - AFS 20,936,974 21,440,591
Loans Held for Sale 218,711 453,562
Loans and Leases Receivable 121,074,200 114,439,773
Less: Allowance for Loan and Lease Losses (866,062) (810,303)
- -------------------------------------------------------- --------------- ----------------
Loans and Leases Receivable, Net 120,208,138 113,629,470
- -------------------------------------------------------- --------------- ----------------
Accrued Interest Receivable, Net 1,220,318 1,271,439
Land, Buildings & Equip at Cost Less Accum Depr
of $676,615 in 2000 and $607,618 in 1999 4,741,966 4,058,242
Prepaid Expense and Accounts Receivable 99,862 77,907
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 637,181 599,503
FHLB Stock 1,442,300 1,417,700
Other Real Estate Owned 155,831 -
- -------------------------------------------------------- --------------- ----------------
TOTAL ASSETS $ 169,818,560 160,178,417
- -------------------------------------------------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
LIABILITIES:
Interest-Free Checking $ 8,646,325 7,762,451
Interest-Bearing Deposits 131,423,290 124,475,175
Advances by Borrowers for Taxes and Insurance 162,057 117,372
Accrued Interest on Deposits 123,459 95,734
Accounts Payable and Accrued Expenses 246,975 488,630
FHLB Short-Term Advances 4,980,000 4,045,000
FHLB Long-Term Advances 9,047,413 9,047,707
Deferred Gain on REO 21,448 21,448
Notes Payable 613,188 626,615
- -------------------------------------------------------- ------------------- ------------
TOTAL LIABILITIES $ 155,264,155 146,680,132
- -------------------------------------------------------- ------------------- ------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,356,670 1,301,519
Paid-in Capital 12,909,700 12,243,730
Accumulated Other Comprehensive Income (616,752) (610,238)
Retained Earnings 1,517,975 1,189,889
Unearned Compensation - ESOP (613,188) (626,615)
- -------------------------------------------------------- ------------------- ------------
TOTAL STOCKHOLDERS' EQUITY $ 14,554,405 13,498,285
- -------------------------------------------------------- ------------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 169,818,560 160,178,417
- -------------------------------------------------------- ------------------- ------------
See accompanying notes and accountant's report.
3
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
--------------------------------
INTEREST INCOME: 2000 - REVIEWED 1999 - REVIEWED
-------------------- --------------------
Interest and Fees on Loans $ 2,481,052 1,815,122
Other Interest Income 618,394 399,775
- ---------------------------------------------------- -------------------- --------------------
TOTAL INTEREST INCOME 3,099,446 2,214,897
- ---------------------------------------------------- -------------------- --------------------
INTEREST EXPENSE:
Interest on Deposits 1,628,754 1,202,244
Interest on Short-Term Debt 80,118 -
Interest on Long-Term Debt 124,066 120,353
- ---------------------------------------------------- -------------------- --------------------
TOTAL INTEREST EXPENSE 1,832,938 1,322,597
- ---------------------------------------------------- -------------------- --------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,266,508 892,300
PROVISION FOR LOAN LOSSES (56,938) (48,504)
- ---------------------------------------------------- -------------------- --------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,209,570 843,796
- ---------------------------------------------------- -------------------- --------------------
OTHER INCOME:
Other Fees and Service Charges 90,017 50,249
Net Gain on Loans Sold 8,739 67,762
Insurance Commission Income 10,087 14,383
Rental Income, Net 15,024 27,885
Other - 24
- ---------------------------------------------------- -------------------- --------------------
TOTAL OTHER INCOME 123,867 160,303
- ---------------------------------------------------- -------------------- --------------------
OTHER EXPENSES:
Compensation and Related Benefits 380,166 307,612
Occupancy Expenses 76,095 70,572
Furniture and Equipment Expense 69,866 52,065
Advertising 14,428 35,628
Data Processing Expense 83,894 87,837
Other 222,796 176,411
- ---------------------------------------------------- -------------------- --------------------
TOTAL OTHER EXPENSES 847,245 730,125
- ---------------------------------------------------- -------------------- --------------------
INCOME BEFORE INCOME TAX 486,192 273,974
PROVISION FOR INCOME TAXES (158,106) (94,901)
- ---------------------------------------------------- -------------------- --------------------
NET INCOME $ 328,086 179,073
- ---------------------------------------------------- -------------------- --------------------
EARNINGS PER SHARE:
BASIC $ 0.26 0.16
DILUTED $ 0.25 0.16
- ---------------------------------------------------- -------------------- --------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,271,086 1,124,201
DILUTED 1,307,868 1,145,161
- ---------------------------------------------------- -------------------- --------------------
See accompanying notes and accountant's report.
4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THREE MONTHS ENDED MARCH 31, 2000 (REVIEWED) AND YEAR ENDED DECEMBER 31,
1999 (AUDITED)
Accumulated
Common Other Employee
Common Stock Paid-In Comprehensive Retained Stock
Stock Subscribed Capital Income Earnings Ownership Total
------------- ---------- ---------- ------------- --------- ---------- -----------
Balance at December 31, 1998 1,180,152 6,996 10,905,359 39,820 102,792 (664,820) 11,570,299
-----------
Net Proceeds
from Sale of Stock 121,367 (6,996) 1,338,371 -- -- -- 1,452,742
-----------
ESOP Shares Allocated -- -- -- -- -- 38,205 38,205
-----------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $339,205 Income Tax) -- -- -- (658,456) -- -- (658,456)
Less: Reclassification Adjustment
(Net of $4,326 Income Tax) -- -- -- 8,398 -- -- 8,398
-----------
(650,058)
Net Income -- -- -- -- 1,087,097 -- 1,087,097
-----------
Total Comprehensive Income -- -- -- -- -- -- 437,039
------------- ---------- ---------- ------------- --------- ---------- -----------
Balance at December 31, 1999 1,301,519 -- 12,243,730 (610,238) 1,189,889 (626,615) 13,498,285
-----------
Net Proceeds
from Sale of Stock 55,151 -- 665,970 -- -- -- 721,121
-----------
ESOP Shares Allocated -- -- -- -- -- 13,427 13,427
-----------
Comprehensive Income
Other Comprehensive Income,
Net of Tax:
Unrealized Losses on Securities
Available-For-Sale:
Unrealized Holding Losses
Arising During the Period
(Net of $3,356 Income Tax) -- -- -- (6,514) -- -- (6,514)
Net Income -- -- -- -- 328,086 -- 328,086
-----------
Total Comprehensive Income -- -- -- -- -- -- 321,572
------------- ---------- ---------- ------------- --------- ---------- -----------
Balance at March 31, 2000 1,356,670 -- 12,909,700 (616,752) 1,517,975 (613,188) 14,554,405
============= ========== ========== ============= ========= ========== ===========
See accompanying notes and accountant's report.
5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 - REVIEWED 1999 - REVIEWED
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 328,086 179,073
Items Not Affecting Cash:
Depreciation 68,997 52,398
(Increase) Decrease in Accrued Interest 51,121 (101,833)
Deferred Income Taxes (Benefit) (34,323) (15,387)
Provisions for Loan Losses 56,938 48,504
(Increase) in Prepaid Expenses and Accounts Receivable (21,955) (2,241)
Increase (Decrease) in Interest Payable 27,725 (34,041)
Increase (Decrease) in Accounts Payable and Accrued Expenses (241,655) 12,173
Increase (Decrease) in Deferred Loan Fees, Net 15,281 (920)
Discount Accretion (4,635) (6,932)
Earned ESOP Shares 13,427 22,824
FHLB Stock Dividends (24,600) (8,100)
Net Decrease in Loans Held for Sale 234,851 544,400
- -------------------------------------------------------------------------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 469,258 689,918
- -------------------------------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments - (13,271,647)
Purchase of Available-for-Sale Investments (6,220) -
Proceeds from Maturities of Available-for-Sale Investments - 3,000,000
Proceeds from Sale of Available-for-Sale Investments 504,171 -
Principal Payments on Mortgage Backed Securities - AFS - 27,710
(Increase) in Federal Funds Sold (1,991,000) (4,547,000)
(Increase) Decrease in Short-Term Interest Bearing Deposits (10,165) 5,000,000
(Increase) in Loans Receivable, Net (6,806,718) (5,200,252)
Purchases of Premises and Equipment (752,721) (61,369)
- -------------------------------------------------------------------------------- --------------- ---------------
NET CASH (USED) BY INVESTING ACTIVITIES (9,062,653) (15,052,558)
- -------------------------------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 7,831,989 14,074,793
Net Increase in Advances by Borrowers for Taxes and Insurance 44,685 56,570
Issuance of Common Stock, Net 721,121 111,767
Repayment of Debt (13,427) (12,426)
Proceeds from FHLB Advances 934,706 -
- -------------------------------------------------------------------------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,519,074 14,230,704
- -------------------------------------------------------------------------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH 925,679 (131,936)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,785,509 2,507,173
- -------------------------------------------------------------------------------- --------------- ---------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 3,711,188 2,375,237
- -------------------------------------------------------------------------------- --------------- ---------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ (6,514) 17,157
Acquisition of Real Estate Property through Foreclosure of Related Loans (155,831) -
- -------------------------------------------------------------------------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 427,413 -
Interest $ 1,805,213 1,356,638
- -------------------------------------------------------------------------------- --------------- ---------------
See accompanying notes and accountant's report.
6
STATE OF FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - REVIEWED
NOTE 1 INCORPORATION AND OPERATIONS
- ------- ------------------------------
State of Franklin Bancshares, Inc. (Company) was incorporated under the laws of
the State of Tennessee for the purpose of becoming the holding company of State
of Franklin Savings Bank (Savings Bank). The stockholders of the Savings Bank
exchanged their shares for the shares of the Company, whereby the Savings Bank
became the Company's wholly owned subsidiary. State of Franklin Leasing
Corporation (Leasing Corp) was incorporated under the laws of the State of
Tennessee for the purpose of lease financing. The Leasing Corp is a wholly
owned subsidiary of the Company. John Sevier Title Services, Inc. (Title
Company) is the wholly owned subsidiary of the Savings Bank.
NOTE 2 BASIS OF PREPARATION
- ------- ----------------------
The accompanying reviewed consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-Q SB.
Accordingly, they do not include all disclosures necessary for a complete
presentation of the consolidated statements of financial condition, income, cash
flows, and changes in stockholders' equity in conformity with generally accepted
accounting principles. However, all adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. All such adjustments are of a normal recurring
nature. The statement of comprehensive income for the three months ended March
31, 2000 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, 1999.
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, 2000 consolidated financial
statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ------- -------------------------------
The Savings Bank has purchased additional property near Kingsport, Tennessee in
Sullivan County and will be constructing a fifth branch location scheduled to
open in late summer or early fall. Fixed assets at March 31, 2000, and December
31, 1999 are summarized as follows:
2000 1999
----------- ------------
Land 850,000 850,000
Construction in Process - Colonial Heights Branch 753,644 25,000
Buildings and Leasehold Improvements 2,274,105 2,271,821
Furniture, Fixtures and Equipment 1,540,832 1,519,039
--------- -----------
5,418,581 4,665,860
Less: Accumulated Depreciation 676,615 607,618
--------- -----------
4,741,966 4,058,242
========= ===========
7
NOTE 5 LOANS RECEIVABLE
- ------- -----------------
Loans receivable at March 31, 2000 and December 31, 1999, consist of the
following:
2000 1999
-------------- ---------------
First Mortgage Loans 46,631,324 43,715,282
Construction Loans 26,643,092 23,525,380
Consumer Loans 9,806,810 9,703,102
Participation Loans, Net 533,676 533,676
Commercial Loans 44,865,329 41,919,362
Savings Account Loans 290,399 248,964
Credit Line Advances 333,515 419,062
Lease Finance 955,160 904,705
--------------- ---------------
Gross Loans and Leases Receivable 130,059,305 120,969,533
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 8,897,270) ( 6,457,206)
Net Deferred Loan Origination Fees ( 87,835) ( 72,554)
Accumulated General Loan Loss Allowance ( 866,062) ( 810,303)
--------------- ---------------
( 9,851,167) ( 7,340,063)
--------------- ---------------
Loans and Leases Receivable, Net 120,208,138 113,629,470
=============== ===============
An analysis of the allowance for loan and lease losses at March 31, 2000 and
December 31, 1999 is as follows:
2000 1999
-------- --------
Balance - Beginning of Period 810,303 630,324
Provision for Losses 56,938 181,429
Loans and Leases Charged-Off (1,179) (1,450)
Charged-Off Loan and Lease Recoveries -- --
-------- --------
Balance - End of Period 866,062 810,303
======== ========
The gross amount of participation loans serviced by State of Franklin Savings
Bank was $1,067,240 at March 31, 2000 and also at December 31, 1999.
Non-performing loans at March 31, 2000 totaled $67,906 and $221,781 at
December 31, 1999.
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 Provisions
------------------ -----------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
- ------------------------------- ------------------ -----------------
As of March 31, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 15,171 14.18% >=10,698 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 14,090 13.17% >= 6,419 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 14,090 8.75% >= 8,050 5.0%
As of December 31, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) 13,303 13.12% >=10,140 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 12,222 12.05% >= 6,084 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 12,222 7.91% >= 7,730 5.0%
The capital ratios for State Franklin Bancshares, Inc. are as follows:
For Capital
Adequacy Purposes
And To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
------------------ -----------------
In Thousands (Reviewed) Amount Ratio Amount Ratio
- ------------------------------- ------------------ -----------------
Total Risk-Based Capital
(to Risk-Weighted Assets) 16,037 14.94% >=10,735 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 15,171 14.13% >= 6,441 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 15,171 9.34% >= 8,120 5.0%
As of December 31, 1999:
Total Risk-Based Capital
(to Risk-Weighted Assets) 14,919 14.66% >=10,176 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 14,109 13.86% >= 6,106 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 14,109 9.09% >= 7,769 5.0%
9
NOTE 7 EMPLOYEE AND DIRECTOR BENEFIT PLANS
- ------- ---------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) for those employees who
meet the eligibility requirements of the plan.
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,
2000 1999
--------- ---------
Number of Shares
Released and Allocated 16,054 16,054
Committed to be Released 6,182 5,188
Suspense 58,810 59,804
Fair Value
Released and Allocated 216,729 216,729
Committed to be Released 83,457 70,038
Suspense 793,935 807,354
Contributions to the ESOP are as follows:
March 31, December 31,
2000 1999
--------- ---------
Compensation Expense 40,000 127,272
Contributions 40,000 127,272
For the purpose of computing earnings per share, all ESOP shares committed to be
released will be considered outstanding.
STOCK OPTION PLANS
Weighted
Average
Awarded Exercise
And Price
Unexercised Vested Per
Options Options Share.
-------------------------------------------------
Options Granted - Outside Directors January 1, 2000 55,564 24,993 $ 10.45
Options Granted - Management January 1, 2000 145,128 44,452 $ 11.00
During 2000 -- --
Options Exercised ( 554) -- $ 10.00
Options Expired - Outside Directors ( 4,997) -- $ 10.00
------- ------
Options Outstanding - March 31, 2000 195,141 69,445 $ 10.82
======= ======
10
NOTE 8 DEPOSITS
- ------- --------
Deposit balances are summarized as follows:
March 31, 2000 December 31, 1999
------------------------------- ------------------------
Average Average
Rate Amount Percent Rate Amount Percent
------- ------------ ------- ------- ------ ---------
Passbook 5.00 33,639,262 24.02 4.85 43,579,494 32.96
Interest-Free Checking -- 8,646,325 6.17 -- 7,762,451 5.87
NOW 1.99 6,281,851 4.48 1.99 6,285,555 4.75
Money Market Deposit 4.49 12,613,994 9.01 4.48 13,790,665 10.43
---------- ----------- ---------- ------
61,181,432 43.68 71,418,165 54.01
----------- ---------- ----------- ------
Fixed Term Certificate Accounts
Balances $100,000 or Greater 5.92 19,618,339 14.01 5.65 14,620,826 11.06
Balances Less than $100,000 5.76 59,269,844 42.31 5.12 46,198,635 34.93
---------- ----------- ---------- ------
78,888,183 56.32 60,819,461 45.99
----------- ---------- ----------- ------
140,069,615 100.00 132,237,626 100.00
=========== ========== =========== ======
The contractual maturity of certificate accounts at March 31, 2000 and December
31, 1999, is as follows:
Year Ending Year Ending
March 31, 2000 December 31, 1999
- -------------------------- --------------------------
2001 63,017,189 2000 42,805,186
2002 8,968,090 2001 5,447,698
2003 6,450,311 2002 11,749,728
2004 452,593 2003 789,631
2005 and After -- 2004 and After 27,218
---------- ----------
78,888,183 60,819,461
============= =============
NOTE 9 SHORT-TERM BORROWINGS
- ------- ----------------------
Short-term advances from the Federal Home Loan Bank are summarized as
follows for the periods ended March 31, 2000 and December 31, 1999:
2000 1999
--------- ---------
Cash Management (Rate Floats Daily) 4,980,000 4,045,00
Weighted Average Rate 5.95% 5.49%
11
NOTE 10 INVESTMENT SECURITIES
- -------- ----------------------
The amortized cost and fair value of investment securities held-to-maturity and
available-for-sale at March 31, 2000, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations without call or prepayment
penalties.
March 31, 2000:
- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ---------- -----------
Available-for-Sale:
United States Government
Agency Securities Maturing:
After one year
but within five years 997,892 -- 34,898 962,994
After five years
but within ten years 15,769,381 -- 737,604 15,031,777
Over ten years
but within fifteen years 2,993,355 -- 161,970 2,831,385
Equity Securities
Callable after five years
but within ten years 1,000,000 -- -- 1,000,000
Other
Within one year 1,110,818 -- -- 1,110,818
-------------- ---------- ---------- -----------
Total Available-for-Sale 21,871,446 -- 934,472 20,936,974
============== ========== ========== ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 1,000,000 -- 31,037 968,963
After five years
but within ten years 12,988,778 -- 637,491 12,351,286
-------------- ---------- ---------- -----------
Total Held-to-Maturity 13,988,778 -- 668,528 13,320,249
============== ========== ========== ===========
NOTE 11 EARNINGS PER SHARE
- -------- --------------------
Earnings per share for quarter ending March 31, 2000, compared with quarter
ending March 31, 1999, is as follows:
March 31,
-------------------------
2000 1999
------------- ----------
Net Income Available to Common Shareholders 328,086 179,073
========= =========
Average Shares
Average Shares - Basic 1,271,086 1,124,201
Effect of Dilutive Common Stock Options 36,782 20,960
--------- ---------
Average Shares - Diluted 1,307,868 1,145,161
========= =========
Basic Earnings Per Share 0.26 0.16
========= =========
Diluted Earnings Per Share 0.25 0.16
========= =========
12
BAYLOR AND BACKUS
D.G. LEONARD, CPA CERTIFIED PUBLIC ACCOUNTANTS E.N. BACKUS, CPA (1907-1971)
R.F. VANHOY, CPA 2112 NORTH ROAN STREET T.E. HULSE, CPA (1927-1975)
----------- FIRST TENNESSEE BUILDING, EIGHTH FLOOR E.R. BAYLOR, CPA (1894-1982)
T.S. JOHNSON, CPA JOHNSON CITY, TENNESSEE 37605 W.E. MORELOCK, CPA (1927-1985)
C.J. STAMPFLI, CPA (423) 282-9000 H.L. SIENKNECHT, CPA (1917-1990)
To the Board of Directors
State of Franklin Bancshares, Inc.
P. O. Box 940
Johnson City, Tennessee 37605
We have reviewed the accompanying consolidated statement of financial condition
of State of Franklin Bancshares, Inc. and subsidiaries as of March 31, 2000 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the periods ended March 31, 2000 and 1999, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of State of
Franklin Bancshares, Inc.
A review consists principally of inquiries of State of Franklin Bancshares, Inc.
personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The consolidated statement of financial condition as of December 31, 1999 and
the consolidated statement of changes in retained earnings for the year then
ended were audited by us, and we expressed an unqualified opinion on them in our
report dated March 15, 2000, but we have not performed any auditing procedures
since that date.
BAYLOR AND BACKUS
Certified Public Accountants
Johnson City, Tennessee
May 8, 2000
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
TENNESSEE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
13
ITEM NO. 2 MANAGEMENT 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, 2000, assets of State of Franklin Bancshares, Inc. totaled $169.8
million reflecting an increase of $9.6 million or 6% since December 31, 1999.
The growth in assets has been funded primarily by an $8 million increase in
deposits, a $935,000 increase in Federal Home Loan Bank advances, and a $1.1
million increase in stockholders' equity.
LOANS
- -----
Loans outstanding totaled $121.1 million at March 31, 2000. This represented an
increase of 6% from the December 31, 1999 outstanding loans of $114.4 million.
Commercial loans increased $2.9 million at March 31, 2000, an increase of 7%
from $41.9 million at December 31, 1999. Real estate construction lending
totaled $26.6 million compared with $23.5 million at December 31, 1999,
reflecting an increase of $3.1 million or 13%. Consumer loans of $9.8 million
at March 31, 2000 increased slightly from $9.7 million at December 31, 1999.
During the first three months of 2000, first mortgage residential loans
increased $2.9 million or 7% to $46.6 million at March 31, 2000. The loan
portfolio mix at March 31, 2000 consists of 36% residential mortgages, 35%
commercial, 21% real estate construction, and 8% consumer loans.
INVESTMENT SECURITIES
- ----------------------
Investment securities totaled $34.9 million at March 31, 2000. The majority of
the holdings are backed by U. S. Government or Federal Agency guarantees
limiting the credit risk associated with these securities. At March 31, 2000,
approximately $20.9 million of investment securities were held as
available-for-sale compared to $21.4 million at December 31, 1999. Investments
held-to-maturity remained unchanged at $14 million compared with $14 million at
December 31, 1999.
NON-PERFORMING ASSETS
- ----------------------
Non-performing assets or nonaccrual loans at March 31, 2000 totaled $67,906
compared with $221,781 at December 31, 1999. The allowance for possible loan
losses was $866,062 at March 31, 2000 compared with $810,303 at year end 1999.
Management believes the allowance for possible loan losses is adequate to
provide for potential loan losses.
DEPOSITS
- --------
Total deposits at March 31, 2000 of $140.1 million, represented an increase of
$7.9 million or a 6% increase from $132.2 million at December 31, 1999.
Non-interest bearing demand deposits totaled $8.6 million at March 31, 2000, an
increase of $883,874 from December 31, 1999. Interest bearing deposits
increased $7 million to $131.4 million at March 31, 1999.
CAPITAL
- -------
Equity capital for the Savings Bank at March 31, 2000 was $13.5 million. At
March 31, 2000, all capital ratios were in excess of the regulatory minimums,
with the Savings Bank's Tier 1, total risk-based, and leverage ratios of 13.17%,
14.18% and 8.75%, respectively. The ratios at March 31, 2000, reflect a $1.5
million current quarter increased investment by State of Franklin Bancshares
into the Savings Bank.
14
On October 4, 1999, the Company filed a registration statement on Form SB-1 with
the SEC for the purpose of offering up to 555,555 shares of its common stock at
a per share price of $13.50. This offering became effective November 12, 1999.
At December 31, 1999, 111,092 shares had been sold with proceeds totaling $1.5
million. At March 31, 2000, 166,243 total shares have been sold in the
offering, generating $2.2 million in additional capital. Equity capital for the
Company at March 31, 2000, was $14.6 million.
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 a line of credit with the Federal Home Loan Bank of Cincinnati
totaling $13 million at March 31, 2000.
EARNINGS REVIEW
- ----------------
The Company had net income of $328,086 for the three months ending March 31,
2000, compared with $179,073 for the same period last year, resulting in an
increase of 83%. Net income per diluted share was $0.25 compared to earnings per
share of $0.16 for the first three months ending March 31, 1999. Return on
average assets was .81% and the return on average equity was 9.27% for the three
month period ended March 31, 2000, compared with .57% and 6.14%, respectively,
for the same period in 1999.
Noninterest income declined $36,436, or 23%, during the three months ended March
31, 2000, compared the same period last year due mainly to a $59,023 decline in
income generated by loans sold in the secondary market. Recent increases in
interest rates have slowed the demand for secondary market loans and temporarily
eliminated the refinance market. Insurance commission income and net rental
income also declined in the three months ended March 31, 2000, compared with the
same period a year ago. Partially offsetting the declines was an increase in
service charges and fees on deposit accounts. Noninterest expense was $847,245
for the quarter ending March 31, 2000, an increase of 16% over the 1999 period,
primarily resulting from increased salaries and benefits, furniture and
equipment expense, and other general operating expenses.
NET INTEREST INCOME
- ---------------------
Interest income and interest expense both increased from 1999 to 2000 resulting
primarily from the increases in both earning assets and interest bearing
liabilities. Net interest income of $1.2 million for the three months ended
March 31, 2000 reflected an increase of $374,207 or 42% over the same period a
year ago. For the three months ending March 31, 2000, average earning assets
increased $39 million or 34% while average interest bearing liabilities
increased $36 million, also 34%, compared with the same period in 1999. Average
earning asset yield increased 28 basis points to 8.02% while the cost on
interest bearing liabilities increased 11 basis points. Consequently, the net
interest margin based on average earning assets increased to 3.28% for the three
months ending March 31, 2000 compared with 3.12% for the same period in 1999.
15
PROVISION FOR LOAN LOSSES
- ----------------------------
During the three months ended March 31, 2000, the provision for possible loan
losses was $56,938 compared with $48,504 for the same period last year. Loan
charge-offs for the three months ended March 31, 2000, were $1,179 compared with
no charge-offs during the same period in 1999. The allowance for possible loan
losses represented .72% of total loans, net of mortgage loans held-for-sale, at
March 31, 2000, compared to .75% at March 31, 1999. 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, 2000, the provision for federal and state
income taxes was $158,106, an increase of $63,205 from 1999, primarily due to
the increase in income before income taxes.
NONINTEREST INCOME
- -------------------
The Company's noninterest income was $123,867 during the three months ended
March 31, 2000, a decline of $36,436 or 23% from the comparable 1999 period.
The decline was attributable to declines in net gains on loans sold, insurance
commissions, and rental income of $59,023, $4,296, and $12,861, respectively,
which were partially offset by an increase in other fees and service charges of
$39,768.
NONINTEREST EXPENSE
- --------------------
Noninterest expense totaled $847,245 for the three month period ending March 31,
2000, an increase of $117,120 or 16%. The increases were a result primarily of
growth in the organization. Compensation and related benefits, data processing
expense, and other operating expenses, which include postage, printing and
supplies, and telephone expense, reflect the growth in the customer base and the
general increased size of the organization.
16
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On October 4, 1999, the Company filed a registration statement on
Form SB-1 with the SEC for the purpose of offering up to 555,555
Shares of its common stock at a per share price of $13.50. This
Offering became effective November 12, 1999. At December 31,
1999, 111,092 shares had been sold with proceeds totaling $1.5
million. At March 31, 2000, 166,243 total shares have been
sold in the offering, generating $2.2 million in additional
capital. Equity capital for the Company at March 31, 2000, was
$14.6 million.
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) 27 Financial Data Schedule (for SEC use only)
b) The Company did not file any reports on Form 8-K during the
quarter ended March 31, 2000
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 10, 2000 /s/ Randal R. Greene
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(Date) Randal R. Greene, President and Chief
Executive Officer
(Principal Executive Officer)
May 10, 2000 /s/ Charles E. Allen, Jr.
- ---------------------- ----------------------------------------
(Date) Charles E. Allen, Jr., Chairman of the Board
and Chief Financial Officer
(Principal Executive, Financial
and Accounting Officer)
18