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: SEPTEMBER 30, 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
----
1,465,512
------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF SEPTEMBER 30, 2000)
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
SEPTEMBER 30, 2000 (REVIEWED) AND DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF INCOME 4 - 5
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (REVIEWED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (REVIEWED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 6
NINE MONTHS ENDED SEPTEMBER 30, 2000 (REVIEWED)
AND YEAR ENDED DECEMBER 31, 1999 (AUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (REVIEWED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (REVIEWED) 8
INDEPENDENT ACCOUNTANT'S REPORT 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
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
2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 - REVIEWED 1999 - AUDITED
- -------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 4,345,227 2,785,509
Federal Funds Sold 365,000 308,000
Short-Term Interest Bearing Deposits 128,274 133,148
Investments - HTM
(Estimated Market 2000 - $13,382,537 and 1999 - $13,301,184) 13,989,295 13,988,346
Investments - AFS 32,213,144 21,440,591
Loans Held for Sale 145,825 453,562
Loans and Leases Receivable 133,138,565 114,439,773
Less: Allowance for Loan and Lease Losses (953,887) (810,303)
- -------------------------------------------------------------------------------------------------
Loans and Leases Receivable, Net 132,184,678 113,629,470
- -------------------------------------------------------------------------------------------------
Accrued Interest Receivable, Net 1,389,768 1,271,439
Land, Buildings & Equip at Cost Less Accum Depr
of $814,610 in 2000 and $607,618 in 1999 5,035,955 4,058,242
Prepaid Expense and Accounts Receivable 113,764 77,907
Investment in Service Bureau at Cost 15,000 15,000
Deferred Tax Assets 618,958 599,503
FHLB Stock 1,496,300 1,417,700
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 192,041,188 160,178,417
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
=================================================================================================
LIABILITIES:
Interest-Free Deposits $ 9,820,147 7,762,451
Interest-Bearing Deposits 141,209,219 124,475,175
Advances by Borrowers for Taxes and Insurance 338,082 117,372
Accrued Interest on Deposits 193,568 95,734
Accounts Payable and Accrued Expenses 174,396 488,630
FHLB Short-Term Advances 17,185,000 4,045,000
FHLB Long-Term Advances 6,248,078 9,047,707
Deferred Gain on REO 21,448 21,448
Notes Payable 585,817 626,615
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 175,775,755 146,680,132
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 Par Value 1,465,512 1,301,519
Paid-in Capital 14,251,461 12,243,730
Accumulated Other Comprehensive Income (555,340) (610,238)
Retained Earnings 2,289,611 1,189,889
Less: Employee Stock Ownership (1,185,811) (626,615)
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 16,265,433 13,498,285
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 192,041,188 160,178,417
=================================================================================================
See accompanying notes and accountant's report.
3
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
INTEREST INCOME: 2000 - REVIEWED 1999 - REVIEWED
----------------- ---------------
Interest and Fees on Loans $ 2,838,658 2,147,155
Other Interest Income 765,213 596,621
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,603,871 2,743,776
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 1,941,376 1,487,732
Interest on Short-Term Debt 51,193 -
Interest on Long-Term Debt 284,620 123,182
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,277,189 1,610,914
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 1,326,682 1,132,862
PROVISION FOR LOAN LOSSES (68,811) (70,361)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 1,257,871 1,062,501
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 97,410 71,424
Net Gain on Loans Sold 8,928 9,199
Insurance Commission Income 10,316 6,354
Rental Income, Net 31,329 29,838
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 147,983 116,815
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 399,812 326,467
Occupancy Expenses 59,419 60,549
Furniture and Equipment Expense 64,843 62,286
Advertising 21,193 35,393
Data Processing Expense 91,005 87,492
Other 182,782 193,778
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 819,054 765,965
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 586,800 413,351
PROVISION FOR INCOME TAXES (190,509) (160,925)
- ----------------------------------------------------------------------------------------
NET INCOME $ 396,291 252,426
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.29 0.22
DILUTED 0.28 0.22
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,363,784 1,131,803
DILUTED 1,406,615 1,138,786
========================================================================================
See accompanying notes and accountant's report.
4
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
INTEREST INCOME: 2000 - REVIEWED 1999 - REVIEWED
----------------- ---------------
Interest and Fees on Loans $ 7,954,566 5,877,416
Other Interest Income 2,028,755 1,584,338
- ----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 9,983,321 7,461,754
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits 5,309,154 4,074,962
Interest on Short-Term Debt 206,489 -
Interest on Long-Term Debt 585,574 367,866
- ----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 6,101,217 4,442,828
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSS 3,882,104 3,018,926
PROVISION FOR LOAN LOSSES (193,986) (189,507)
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 3,688,118 2,829,419
- ----------------------------------------------------------------------------------------
OTHER INCOME:
Other Fees and Service Charges 285,416 176,869
Net Gain on Loans Sold 40,206 95,098
Net Gain on Sale and Maturity of Securities - 12,724
Insurance Commission Income 33,702 32,796
Rental Income, Net 72,262 88,992
- ----------------------------------------------------------------------------------------
TOTAL OTHER INCOME 431,586 406,479
- ----------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and Related Benefits 1,164,101 940,952
Occupancy Expenses 196,270 187,481
Furniture and Equipment Expense 197,238 192,323
Advertising 64,807 99,610
Data Processing Expense 267,084 241,302
Other 582,320 568,233
- ----------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 2,471,820 2,229,901
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 1,647,884 1,005,997
PROVISION FOR INCOME TAXES (548,162) (358,793)
- ----------------------------------------------------------------------------------------
NET INCOME $ 1,099,722 647,204
========================================================================================
EARNINGS PER SHARE:
BASIC $ 0.83 0.58
DILUTED 0.81 0.57
========================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 1,318,337 1,124,931
DILUTED 1,361,168 1,129,607
========================================================================================
See accompanying notes and accountant's report.
5
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 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 163,993 -- 2,007,731 -- -- -- 2,171,724
-----------
ESOP SHARES ALLOCATED -- -- -- -- -- 40,798 40,798
-----------
ADDITIONAL ESOP SHARES ISSUED (599,994) (599,994)
-----------
COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
UNREALIZED GAINS ON SECURITIES
AVAILABLE-FOR-SALE:
UNREALIZED HOLDING GAINS
ARISING DURING THE PERIOD
(NET OF $28,281 INCOME TAX) -- -- -- 54,898 -- -- 54,898
NET INCOME -- -- -- -- 1,099,722 -- 1,099,722
-----------
TOTAL COMPREHENSIVE INCOME -- -- -- -- -- -- 1,154,620
------------ ----------- ---------- -------------- --------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 1,465,512 -- 14,251,461 (555,340) 2,289,611 (1,185,811) 16,265,433
============ =========== ========== ============== ========= =========== ===========
See accompanying notes and accountant's report.
6
STATE OF FRANKLIN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 - REVIEWED 1999 - REVIEWED
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,099,722 647,204
Items Not Affecting Cash:
Depreciation 206,992 188,739
(Increase) in Accrued Interest (118,329) (451,811)
Deferred Income Taxes (Benefit) (47,737) 84,692
Provision for Loan and Lease Losses 193,986 189,507
(Increase) in Prepaid Expenses and Accounts Receivable (35,857) (49,163)
Increase (Decrease) in Interest Payable 97,834 (18,648)
Increase (Decrease) in Accounts Payable and Accrued Expenses (314,234) 181,060
Increase in Deferred Loan Fees, Net 48,068 7,344
Discount Accretion (28,499) (3,033)
Earned ESOP Shares 40,799 48,143
FHLB Stock Dividends (78,600) (51,300)
Net Decrease in Loans Held for Sale 307,737 1,369,326
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,371,882 2,142,060
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Held-to-Maturity Investments - (16,536,456)
Purchase of Available-for-Sale Investments (11,165,995) (12,986,406)
Proceeds from Sale of Available-for-Sale Investments 504,171 9,662
Proceeds from Maturities of Available-for-Sale Investments - 6,595,000
Principal Payments on Mortgage Backed Securities - AFS - 35,965
(Increase) Decrease in Federal Funds Sold (57,000) 5,057,000
Decrease in Short-Term Interest Bearing Deposits 4,874 5,000,000
(Increase) in Loans Receivable, Net (18,797,262) (21,355,702)
Purchases of Premises and Equipment (1,184,705) (115,036)
Purchases of Federal Home Loan Bank Stock - (870,700)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (30,695,917) (35,166,673)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 18,791,740 33,670,766
Net Increase in Advances by Borrowers for Taxes and Insurance 220,710 194,371
Issuance of Common Stock, Net 2,171,724 33,491
ESOP Shares Purchased (599,994) -
Repayment of Debt (40,798) (48,143)
Proceeds from FHLB Advances 10,340,371 48,000
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,883,753 33,898,485
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,559,718 873,872
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 2,785,509 2,507,173
- -----------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 4,345,227 3,381,045
=================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Increase (Decrease) in Unrealized Gain (Loss) on Securities Available-For-Sale,
Net of Deferred Tax Liability $ 54,898 (486,074)
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income Taxes $ 992,389 -
Interest $ 6,003,383 4,461,475
=================================================================================================================
See accompanying notes and accountant's report.
7
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 nine months ended September 30,
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 September 30, 2000
consolidated financial statements.
NOTE 4 LAND BUILDINGS AND EQUIPMENT
- ------ ----------------------------
The Savings Bank has purchased additional property near Kingsport,
Tennessee in Sullivan County and is in the process of constructing a fifth
branch location that will open in November of the current year. Fixed
assets at September 30, 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 2,542,903 2,271,821
Furniture, Fixtures and Equipment 1,704,018 1,519,039
----------- -----------
5,850,565 4,665,860
Less: Accumulated Depreciation 814,610 607,618
----------- -----------
5,035,955 4,058,242
=========== ===========
8
NOTE 5 LOANS RECEIVABLE
- ------- -----------------
Loans receivable at September 30, 2000 and December 31, 1999, consist of
the following:
2000 1999
-------------- --------------
First Mortgage Loans 54,252,566 43,715,282
Construction Loans 27,193,063 23,525,380
Consumer Loans 10,156,901 9,703,102
Participation Loans, Net 533,676 533,676
Commercial Loans 48,926,360 41,919,362
Savings Account Loans 269,078 248,964
Credit Line Advances 445,985 419,062
Lease Finance 1,407,185 904,705
--------------- ---------------
Gross Loans and Leases Receivable 143,184,815 120,969,533
--------------- ---------------
Less:
Undisbursed Portion of Loans in Process ( 9,925,628) ( 6,457,206)
Net Deferred Loan Origination Fees ( 120,622) ( 72,554)
Accumulated General Loan Loss Allowance ( 953,887) ( 810,303)
--------------- ---------------
( 11,000,137) ( 7,340,063)
--------------- ---------------
Loans and Leases Receivable, Net 132,184,678 113,629,470
=============== ===============
An analysis of the allowance for loan and lease losses at September 30,
2000 and December 31, 1999 is as follows:
2000 1999
-------------- --------------
Balance - Beginning of Period 810,303 630,324
Provision for Loan and Lease Losses 193,986 181,429
Loans and Leases Charged-Off (50,402) (1,450)
Charged-Off Loan and Lease Recoveries -- --
-------------- --------------
Balance - End of Period 953,887 810,303
============== ==============
The gross amount of participation loans serviced by State of Franklin
Savings Bank was $1,067,240 at September 30, 2000 and also at December 31,
1999.
The Bank had no non-performing loans at September 30, 2000 compared to
$221,781 at December 31, 1999.
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 September 30, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 15,966 13.09% >=12,972 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 14,936 12.25% >=7,318 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 14,936 8.22% >=9,084 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 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 September 30, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 17,775 14.50% >=12,255 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 16,821 13.73% >=7,353 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 16,821 9.23% >=9,107 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%
10
NOTE 7 EMPLOYEE AND DIRECTOR BENEFIT PLANS
- ------ -----------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan (ESOP) for those employees
who meet the eligibility requirements of the plan. During 2000 the ESOP
purchased 44,444 additional shares at $13.50 with financing by a loan from
the Company.
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:
September 30, December 31,
2000 1999
------------- -------------
Number of Shares
Released and Allocated 26,431 16,054
Committed to be Released 2,985 5,188
Suspense 101,326 59,804
Fair Value
Released and Allocated 356,819 216,729
Committed to be Released 40,298 70,038
Suspense 1,367,901 807,354
Contributions to the ESOP are as follows:
September 30, December 31,
2000 1999
------------- -------------
Compensation Expense 138,000 127,272
Contributions 138,000 127,272
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 56,652 $11.00
During 2000 68,546 -- $13.50
Options Exercised (554) -- $10.00
Options Expired - Outside Directors (4,997) -- $10.00
---------- --------
Options Outstanding - September 30, 2000 263,687 81,645 $11.56
========== ========
11
NOTE 8 DEPOSITS
- ------ --------
Deposit balances are summarized as follows:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------ ---------------------------
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
----------- ---------- ----------- ------ ---------- -------
PASSBOOK 4.69 17,234,815 11.41 4.85 43,579,494 32.96
INTEREST-FREE CHECKING -- 9,820,147 6.50 -- 7,762,451 5.87
NOW 2.00 6,942,939 4.60 1.99 6,285,555 4.75
MONEY MARKET DEPOSIT 5.50 28,115,634 18.62 4.48 13,790,665 10.43
---------- ----------- ---------- -------
62,113,535 41.13 71,418,165 54.01
---------- ----------- ---------- -------
FIXED TERM CERTIFICATE ACCOUNTS
BALANCES $100,000 OR GREATER 6.32 21,813,551 14.44 5.65 14,620,826 11.06
BALANCES LESS THAN $100,000 6.28 67,102,280 44.43 5.12 46,198,635 34.93
---------- ----------- ----------- -------
88,915,831 58.87 60,819,461 45.99
---------- ----------- ----------- -------
151,029,366 100.00 132,237,626 100.00
=========== =========== =========== =======
The contractual maturity of certificate accounts at September 30, 2000 and
December 31, 1999, is as follows:
Period Ending September 30, 2000 Year Ending December 31, 1999
-------------------------------- ------------------------------
2001 21,347,660 2000 42,805,186
2002 55,233,374 2001 5,447,698
2003 11,798,498 2002 11,749,728
2004 536,299 2003 789,631
2005 and After -- 2004 and After 27,218
---------- ----------
88,915,831 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 September 30, 2000 and December 31, 1999:
2000 1999
---------- ---------
Cash Management (Rate Floats Daily) 17,185,000 4,045,000
Weighted Average Rate 6.70% 5.49%
12
NOTE 10 INVESTMENT SECURITIES
- ------- ----------------------
The amortized cost and fair value of investment securities held-to-maturity
and available-for-sale at September 30, 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.
September 30, 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 998,122 -- 28,065 970,057
After five years
but within ten years 19,771,424 -- 716,229 19,055,195
Over ten years
but within fifteen years 2,903,164 6,283 60,913 2,848,534
Equity Securities
Callable after one year
but within five years 1,000,000 -- 60,000 940,000
Callable after five years
but within ten years 7,000,000 17,500 -- 7,017,500
Other
Within one year 1,381,858 -- -- 1,381,858
--------- ------ --------- -----------
Total Available-for-Sale 33,054,568 23,783 865,207 32,213,144
========== ====== ========= ===========
Held-to-Maturity:
United States Government
Agency Securities Maturing:
After one year
but within five years 1,000,000 -- 22,371 977,629
After five years
but within ten years 12,989,295 -- 584,388 12,404,907
--------- ------- --------- -----------
Total Held-to-Maturity 13,989,295 -- 606,759 13,382,536
========= ======= ========= ===========
NOTE 11 EARNINGS PER SHARE
- ------- ------------------
Earnings per share for quarter ended September 30, 2000, compared with
quarter ended September 30, 1999, is as follows:
September 30,
2000 1999
---------- ----------
Net Income Available to Common Shareholders 396,291 252,426
========== ==========
Average Shares
Average Shares - Basic 1,363,784 1,131,803
Effect of Dilutive Common Stock Options 42,831 6,983
---------- ----------
Average Shares - Diluted 1,406,615 1,138,786
========== ==========
Basic Earnings Per Share 0.29 0.22
========== ==========
Diluted Earnings Per Share 0.28 0.22
========== ==========
13
Earnings per share for nine months ended September 30, 2000, compared with
nine months ended September 30, 1999, is as follows:
September 30,
2000 1999
---------- ----------
Net Income Available to Common Shareholders 1,099,722 647,204
========== ==========
Average Shares
Average Shares - Basic 1,318,337 1,124,931
Effect of Dilutive Common Stock Options 42,831 4,676
---------- ----------
Average Shares - Diluted 1,361,168 1,129,607
========== ==========
Basic Earnings Per Share 0.83 0.58
========== ==========
Diluted Earnings Per Share 0.81 0.57
========== ==========
14
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)
J.F. RODGERS, 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 September 30, 2000
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the periods ended September 30, 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 i s 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
November 6, 2000
MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS & TENNESSEE
SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
15
ITEM NO. 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
source s 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 September 30, 2000, assets of State of Franklin Bancshares, Inc. totaled
$192.0 million reflecting an increase of $31.9 million or 20% since
December 31, 1999. The growth in assets has been funded primarily by an
$18.8 million increase in deposits, a $10.3 million increase in Federal
Home Loan Bank advances, and a $2.8 million increase in stockholders'
equity.
LOANS
-----
Loans outstanding totaled $133.1 million at September 30, 2000. This
represented an increase of 16.3% from the December 31, 1999 outstanding
loans of $114.4 million.
Commercial loans increased $7.0 million at September 30, 2000, an increase
of 17% from $41.9 million at December 31, 1999. Real estate construction
lending totaled $27.2 million compared with $23.5 million at December 31,
1999, reflecting an increase of $3.7 million or 16%. Consumer loans of
$10.2 million at September 30, 2000 increased $454,000 or 5% from $9.7
million at December 31, 1999. During the first nine months of 2000, first
mortgage residential loans increased $10.5 million or 24% to $54.3 mil lion
at September 30, 2000. The loan portfolio mix at September 30, 2000
consists of 38% residential mortgages, 36% commercial, 19% real estate
construction, and 7% consumer loans.
INVESTMENT SECURITIES
---------------------
Investment securities totaled $46.2 million at September 30, 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
September 30, 2000, approximately $32.2 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.
NON-PERFORMING ASSETS
---------------------
The bank had no non-performing assets or nonaccrual loans at September 30,
2000 compared with $221,781 at December 31, 1999. The allowance for
possible loan losses was $953,887 at September 30, 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 September 30, 2000 of $151.0 million, represented an
increase of $18.8 million or a 14.2% increase from $132.2 million at
December 31, 1999. Non-interest bearing demand deposits totaled $9.8
million at September 30, 2000, an increase of $2.1 million from December
31, 1999. Interest bearing deposits increased $16.7 million to $141.2
million at September 30, 2000.
16
CAPITAL
-------
Equity capital for the Savings Bank at September 30, 2000 was $14.5
million. At September 30, 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 12.25%, 13.09% and 8.22%, respectively.
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 June 30, 2000, closing date of the
offering, 275,085 total shares have been sold, generating $3.7 million in
additional capital. Equity capital for the Company at September 30, 2000,
was $16.3 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 for
m of unused federal funds lines of credit and a line of credit with the
Federal Home Loan Bank of Cincinnati totaling $22 million at September 30,
2000.
EARNINGS REVIEW
----------------
The Company had net income of $396,291 for the three months ending
September 30, 2000, compared with $252,426 for the same period last year,
resulting in an increase of 57%. For the nine month period ending September
30, 2000, net income was $1,099,722 compared with $647,204 the first nine
months of 1999 reflecting an increase of 70%. Net income per diluted share
was $0.81 compared to earnings per share of $0.57 for the first nine months
ending September 30, 1999. Return on average assets was .86% and th e
return on average equity was 9.62% for the nine month period ended
September 30, 2000, compared with .63% and 7.46%, respectively, for the
same period in 1999.
Noninterest income increased $25,107, or 6%, during the nine months ended
September 30, 2000, compared the same period last year as a result of the
net effect several factors. Gain on loans sold declined $54,621 due to a
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. Rental income and
gains on security sales also declined in the nine months ended Septem ber
30, 2000, compared with the same period a year ago. Offsetting the declines
were an increase in service charges and fees on deposit accounts and a
slight increase in insurance commissions.
Noninterest expense was $2.5 million for the nine months ending September
30, 2000, an increase of 11% over the 1999 period, primarily resulting from
increased salaries and benefits, occupancy, furniture and equipment, data
processing, and other general operating expenses. Partially offsetting the
increases was a $34,803, or 35%, decline in advertising expense.
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 $1.3 million for the three
months ended September 30, 2000 reflects an increase of $193,820 or 17%
over the same period last year. For the nine months ending September 30,
2000, net interest income was $3.9 million, reflecting an increase of
$863,178 or 29% over the same period a year ago. For the nine months ending
Sep tember 30, 2000, average earning assets increased $33.9 million or 26%
while average interest bearing liabilities increased $30.7 million, or 26%,
compared with the same period in 1999. Average earning asset yield
increased 45 basis points to 8.13% while the cost on interest bearing
liabilities increased 44 basis points to 5.49%. Consequently, the net
interest margin based on average earning assets increased slightly to 3.16%
for the nine months ending September 30, 2000 compared with 3.11% for the
same period in 1999.
17
PROVISION FOR LOAN LOSSES
-------------------------
During the nine months ended September 30, 2000, the provision for possible
loan losses was $193,986 compared with $189,507 for the same period last
year. Loan charge-offs for the nine months ended September 30, 2000, were
$50,402 compared with $1,016 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 September 30, 2000, compared to .77% at September
30, 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 nine months ended September 30, 2000, the provision for federal and
state income taxes was $548,162, an increase of $189,369 from 1999,
primarily due to the increase in income before income taxes.
NONINTEREST INCOME
-------------------
The Company's noninterest income was $431,586 during the nine months ended
September 30, 2000, an increase of $25,107 or 6% from the comparable 1999
period. The increase resulted from the net effect of declines in net gain
on loans sold, net gain on sale of securities, and rental income of
$54,892, $12,724, and $16,730, respectively, combined with an increase of
$108,547 in other fees and service charges and a slight increase of $906 on
insurance commissions.
NONINTEREST EXPENSE
--------------------
Noninterest expense totaled $819,054 for the three month period ending
September 30, 2000, an increase of $53,089 or 7%. For the nine month period
ending September 30, 2000, noninterest expense was up $241,919 or 11% over
the same period in 1999. 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.
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) 27 Financial Data Schedule (for SEC use only)
b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2000
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)
November 7, 2000 /s/ Randal R. Greene
- --------------------------- ----------------------------------
(Date) Randal R. Greene, President
November 7, 2000 /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