================================================================================

                                   FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549

  [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                   For the fiscal year ended December 31, 1999
                                       OR
  [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                        Commission file number 000-24675

                       STATE OF FRANKLIN BANCSHARES, INC.
                 (Name of small business issuer in its charter)

               TENNESSEE                                     62-1607709
     (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                      Identification No.)


                             1907 NORTH ROAN STREET
                         JOHNSON CITY, TENNESSEE  37604
              (Address of principal executive offices and Zip Code)

                    Issuer's telephone number (423) 926-3300


Securities  registered  under  Section  12(b)  of  the  Exchange  Act:  NONE
Securities  registered  under  Section  12(g)  of the Exchange Act: COMMON STOCK

     Check  whether  the  issuer  (1)  filed all reports required to be filed by
Section  13  or 15(d) of the Exchange Act during the past 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
                                                             ----           ----

     Check  if  there  is no disclosure of delinquent filers in response to Item
405  of  Regulation  S-B  contained  in  this  form,  and  no disclosure will be
contained,  to  the  best  of  registrant's  knowledge,  in  definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or  any  amendment  to  this  Form  10-KSB.      [X]

   THE REGISTRANT'S REVENUES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 WERE
                                  $10,974,084.

     THE  AGGREGATE  MARKET  VALUE  OF  THE  SHARES  OF  COMMON  STOCK  HELD  BY
NONAFFILIATES  OF  THE  REGISTRANT  AS  OF MARCH 15, 2000 IS APPROXIMATELY $13.1
MILLION.  (For  purposes  of  this  calculation only, all executive officers and
directors  are  classified  as  affiliates.)

Indicate  the  number  of shares outstanding of each of the registrant's classes
of  common  stock,  as  of the latest practicable date. OUTSTANDING AT MARCH 15,
2000,  COMMON  STOCK,  $1.00  PAR  VALUE,  1,345,465  SHARES.

Documents  Incorporated  by  Reference:  PROXY  STATEMENT RELATED TO 2000 ANNUAL
MEETING  OF  SHAREHOLDERS.

================================================================================
<PAGE>
                                     PART I

ITEM  1.       DESCRIPTION  OF  BUSINESS

THE  COMPANY

     State of Franklin Bancshares, Inc. (State of Franklin) is a registered bank
holding  company  organized  under  the  laws  of Tennessee and headquartered in
Johnson City, Tennessee.  State of Franklin Savings Bank (The Savings Bank) is a
wholly  owned  subsidiary  through  which we conduct our banking operations.  On
December  31,  1999,  we  had  consolidated  total  assets of approximately $160
million.  State  of Franklin Leasing Corporation is a wholly owned subsidiary of
State  of Franklin which engages in equipment lease financing.  The Savings Bank
offers  title  services  through  its  wholly owned subsidiary John Sevier Title
Services,  Inc.

     We  believe  we  can  present  an  alternative  to  recent mergers of large
financial  institutions  by  offering local ownership, local decision making and
other  personalized  services characteristic of local, community-based financial
institutions.  The  holding company structure provides flexibility for expansion
of  our banking business through acquisition of other financial institutions and
provision  of  additional  banking-related  services  which  the  traditional
commercial  bank  may  not  provide  under  present  laws.

THE  SAVINGS  BANK

     The  Savings Bank was incorporated under the laws of the State of Tennessee
and  commenced  business  on February 26, 1996, as a Tennessee-chartered savings
bank  whose  deposits are insured by the Federal Deposit Insurance Corporation's
(generally  known  as  the  "FDIC")  Bank  Insurance  Fund.  The Savings Bank is
regulated  by  the  Tennessee Department of Financial Institutions and the FDIC.
The  Savings  Bank  operates  a  main  office  and two branches in Johnson City,
Washington  County,  Tennessee,  and  one  branch in Kingsport, Sullivan County,
Tennessee.  The  Savings  Bank  owns  John  Sevier  Title  Services  Inc.,  a
Tennessee-chartered  and  regulated  title  insurance  company.

SERVICES

     We  provide  a  wide range of personal and corporate banking services.  Our
principal  business  is  to  accept demand and savings deposits from the general
public  and  to invest such funds in residential mortgage loans and, to a lesser
extent,  in  commercial  and consumer loans in our market area.  We seek savings
deposits  and  transaction accounts from households and businesses by offering a
full  range  of savings accounts, retirement and professional accounts, checking
accounts and time certificates.  We also offer 24-hour automated teller machines
and  other  financial  services.

MARKETS

     Our  customers  are  primarily individuals, households, and small-to-medium
sized  businesses, as well as physicians and other professionals. We are subject
to  substantial  competition,  however, from other commercial banks, savings and
loan  associations,  credit unions and finance companies operating in Washington
and  Sullivan  counties  and  elsewhere  in the Tri-Cities, Tennessee / Virginia
region.  Particularly  intense  competition  for  loans  and deposits comes from
other  financial  institutions  in  our  market  area.

     In  certain  aspects  of  our business, we also compete with credit unions,
small  loan  companies,  insurance  companies,  mortgage  companies,  finance
companies,  brokerage houses and other financial institutions, some of which are
not  subject  to  the same degree of regulation and restriction that we are, and
some  of  which  have financial resources greater than ours.  Our future success
will  depend  primarily  upon  the  difference between the cost of our borrowing
(primarily  interest  paid  on  deposits)  and income from operations (primarily
interest  or  fees  earned on loans, sales of loans and investments). We compete
for  funds  with  other  institutions,  which,  in most cases, are significantly
larger than we are and are able to provide a greater variety of services than we
can.  These  competitors  may  thus  obtain deposits at lower rates of interest.


                                        2
<PAGE>
NET  INTEREST  INCOME

     The  following  table sets forth weighted average yields earned by State of
Franklin  on  our  earning  assets  and  the  weighted average rates paid on our
average deposits and other interest-bearing liabilities for the years indicated,
and  certain  other  information:

<TABLE>
<CAPTION>
                                                                        1999                           1998
                                                        ---------------------------------------------------------------
(Fully taxable equivalent)                                             Interest  Average              Interest  Average
(Dollars in thousands)                                     Average     Income/    Yields/   Average   Income/   Yields/
                                                           Balance     Expense     Rate     Balance   Expense     Rate
                                                          ----------  ---------  --------  ---------  --------  -------
<S>                                                       <C>         <C>        <C>       <C>        <C>       <C>
ASSETS:

Interest-earning assets:

Loans net of unearned income                              $  99,726   $  8,220      8.24%  $ 68,157   $  5,767    8.46%
U.S. Treasury and other U.S.  government agencies            28,825      1,887      6.55%    17,237      1,183    6.86%
Other earning assets                                          1,630        101      6.18%     3,172        172    5.44%
Federal funds sold                                            4,670        224      4.79%     8,645        454    5.25%
                                                          ----------  ---------            ---------  --------
    Total interest-earning assets/interest income           134,851     10,432      7.74%    97,211      7,577    7.79%
                                                          ----------  ---------            ---------  --------
Cash and due from banks                                       1,949                           1,564
Other assets                                                  5,033                           4,498
Allowance for loan losses                                      (737)                           (631)
                                                          ----------                       ---------
    Total                                                 $ 141,096                        $102,641
                                                          ==========                       =========

LIABILITIES AND STOCKHOLDERS' EQUITY:

Interest-bearing liabilities:

Interest-bearing checking deposits                        $   5,334   $    110      2.07%  $  3,644   $     78    2.14%
Savings                                                      40,780      1,972      4.84%     4,589        208    4.52%
Individual retirement accounts                               13,940        631      4.53%    10,194        468    4.59%
Time certificates                                            52,849      2,950      5.58%    63,928      3,720    5.82%
Borrowed funds                                                9,352        507      5.42%     5,337        288    5.40%
                                                          ----------  ---------            ---------  --------
    Total interest-bearing liabilities/interest expense     122,255      6,170      5.05%    87,693      4,761    5.43%
                                                          ----------  ---------  --------  ---------  --------  -------
Non-interest bearing demand  deposits                         6,206                           3,886
Other liabilities                                             1,112                             269
Stockholders' equity                                         11,523                          10,794
                                                          ----------                       ---------
    Total                                                 $ 141,096                        $102,641
                                                          ==========                       =========
Net interest earnings                                                 $  4,262                        $  2,816
                                                                      =========                       ========

Net interest on interest-earning assets                                              3.16%                        2.90%
Return on average assets                                                             0.77%                        0.29%
Return on average equity                                                             9.44%                        2.80%
Cash dividends declared                                                                --                           --
Dividend payout ratio                                                                  --                           --
</TABLE>


                                        3
<PAGE>
     The  following  table  summarizes  changes  in  interest  income,  interest
expense, and the interest rate differential aggregated by the changes in volumes
and  rates:

<TABLE>
<CAPTION>
                                                                December 31, 1999           December 31, 1998
                                                                      Versus                     Versus
                                                                December 31, 1998           December 31, 1997
                                                               Increase (Decrease)          Increase (Decrease)
                                                                Change Due to: (1)          Change Due to: (1)
                                                                ------------------          ------------------
(Dollars in Thousands)                                       Volume     Rate     Total    Volume    Rate    Total
                                                            ---------  -------  -------  --------  ------  -------
<S>                                                         <C>        <C>      <C>      <C>       <C>     <C>
Increase (decrease) in: (2)
Loans, net of unearned income                               $  2,602   $ (149)  $2,454   $ 2,892   $ 136   $3,028
U.S. Treasury and other U.S. government agency securities        759      (55)     704       (70)   (521)    (591)
Other earning assets                                             (95)      24       72       166     (22)     144
Federal funds sold                                              (191)     (40)     230        35    (161)     196
                                                            ---------  -------  -------  --------  ------  -------
           Total interest income                                                 2,855                      2,777
                                                                                -------                    -------
Increase (decrease) in: (2)
Interest-bearing checking deposits                                35       (2)      33       298     (25)     273
Savings deposits                                               1,750       14    1,765       103     (28)      75
Individual retirement accounts                                   170       (6)     164       113      (7)     108
Time certificates                                               (618)    (152)    (770)    1,101     (75)   1,026
Borrowed funds                                                   217        1      218       304      --      304
                                                            ---------  -------  -------  --------  ------  -------
          Total interest expense                                                 1,409                      1,786
                                                                                -------                    -------

Increase (decrease) in net  interest income                                    $ 1,446                     $  991
                                                                               ========                    =======
<FN>
------------------------------------
(1)     Increases (decreases) are attributable to volume changes and rate changes on the following basis:  Volume
        Change  equals change in volume times prior year rate.  Rate Change equals change in rate times prior
        year volume. Changes that are not due  solely to  volume  or  rate  changes  are  allocated  to  volume.

(2)     For  purposes  of  this  schedule, non-accruing loans are included in the average balances and tax exempt
        income  is  reflected  on  a  tax  equivalent  basis.  As  tax exempt income is exempt only for Federal
        income tax purposes  and  not  Tennessee  purposes, tax equivalent income is based upon an effective 34%
        tax rate.  Loan fees included  in  interest  income  are  not  material  to  the  presentation.
</TABLE>

LIABILITY  AND  ASSET  MANAGEMENT

     A  committee  composed  of  our  officers  and directors is responsible for
managing  our  assets  and  liabilities.  The  chairman  of the committee is our
Chairman  of  the Board, Charles E. Allen, Jr.  The committee attempts to manage
our  asset  growth, liquidity and capital to maximize income and reduce interest
rate  risk.  The  committee  directs  our  overall acquisition and allocation of
funds  and  reviews  and  discusses  our  assets  and  liability funds budget in
relation  to the actual flow of funds.  The committee also reviews and discusses

     -     peer  group  comparisons,
     -     the  ratio  of  rate-sensitive  assets to rate-sensitive liabilities,
     -     the  ratio  of  allowance  for  loan  losses  to  outstanding  and
           nonperforming  loans,
     -     expected  loan  demand,
     -     investment  opportunities,
     -     core  deposit  growth  within  specific  categories,
     -     regulatory  changes,
     -     monetary  policy  adjustments,  and
     -     the  overall  state  of  the  local  and  national  economies.

     The  matching  of  assets  and liabilities may be analyzed by examining the
extent  to which the assets and liabilities are "interest rate sensitive" and by
monitoring  an  institution's  interest  rate  sensitivity  "gap."  An  asset or


                                        4
<PAGE>
liability is said to be interest rate sensitive within a specific time period if
it  will  mature  or  reprice  within  that  time  period.  The  interest  rate
sensitivity  gap  is  defined  as  the  difference  between  the  amount  of
interest-earning  assets maturing or repricing within a specific time period and
the  amount  of  interest-bearing  liabilities maturing or repricing within that
time  period.  A  gap  is  considered  positive when the amount of interest rate
sensitive  assets  exceeds the amount of interest rate sensitive liabilities.  A
gap  is  considered  negative  when  the  amount  of  interest  rate  sensitive
liabilities  exceeds  the  amount  of  interest rate sensitive assets.  During a
period  of  rising interest rates, a negative gap would tend to adversely affect
net  interest income while a positive gap would tend to result in an increase in
net  interest income.  During a period of falling interest rates, a negative gap
would  tend to result in an increase in net interest income while a positive gap
would  tend  to  adversely  affect  net  interest  income.

     The following table is an interest sensitivity profile for the Savings Bank
as  of  December  31, 1999 and 1998. The table represents a static point in time
and  does not consider other variables, such as changing spread relationships or
interest  rate  levels.  "Net  repricing  gap"  is  the difference between total
earning  assets  and  total  interest-bearing liabilities repricing in any given
period  and  "cumulative gap" is the sum of the net repricing gap from period to
period.  Interest-bearing  demand, savings and money market account deposits are
presented  as  repricing  in  the  earliest  period  presented.

<TABLE>
<CAPTION>
                                                           December  31,  1999
                                     --------------------------------------------------------------------
                                                  After 3 months
                                       Within       Within 12       After 12 months    After 5
                                      3 months        months        Within 5 years      years      Total
                                     ----------  ----------------  -----------------  ---------  ---------
<S>                                  <C>         <C>               <C>                <C>        <C>
(Dollars in thousands)
EARNING ASSETS:
Loans                                $  33,133   $         3,066   $         46,452   $ 31,944   $114,595
Investment securities:
  Available for sale                     1,141                                  966     18,866     20,973
  Held to maturity                                                            1,000     12,988     13,988
Federal funds sold                         308                                                        308
Interest-bearing
deposits                                   133                                                        133
Federal Home Loan Bank stock             1,418                                                      1,418
                                     ----------  ----------------  -----------------  ---------  ---------
     Total earning assets            $  36,134   $         3,066   $         48,418   $ 63,798   $151,416
                                     ==========  ================  =================  =========  =========

INTEREST-BEARING LIABILITIES:
Interest-bearing deposits            $  71,530   $        32,862                                 $124,475
Short-term debt                          4,048                     $         20,083              $  4,048
Long-term debt                                                                           9,000      9,000
                                     ----------  ----------------  -----------------  ---------  ---------
Total interest-bearing liabilities   $  75,578   $        32,862   $         20,083   $  9,000   $137,523
                                     ==========  ================  =================  =========  =========

Net repricing gap                    $ (39,444)  $       (29,796)  $         28,335   $ 54,798   $ 13,893

Rate sensitivity gap:
Net repricing gap as a percentage
  of total earning assets              (26.05)%          (19.68)%             18.71%     36.19%      9.18%
Cumulative gap                       $ (39,444)  $       (69,240)  $        (40,906)   $ 13,893  $ 13,893
Cumulative gap as a percentage
  of total earning assets              (26.05)%          (45.73)%           (27.02)%      9.18%      9.18%
</TABLE>


                                        5
<PAGE>
<TABLE>
<CAPTION>
                                                              December  31,  1998
                                     ------------------------------------------------------------------------
                                                  After 3 months
                                       Within       Within 12       After 12 months     After 5
                                      3 months        months        Within 5 years       years        Total
                                     ----------  ----------------  -----------------  ------------  ---------
<S>                                  <C>         <C>               <C>                <C>           <C>
(Dollars in thousands)

EARNING ASSETS:
Loans                                $  16,424   $         7,443   $         38,406   $    14,286   $ 86,559
Investment securities:
     Available for sale                                                          36        12,045     12,081
     Held to maturity                                                                                     --
Federal funds sold                       6,421                                                         6,421
Interest-bearing deposits                5,113                                                         5,113
                                     ----------  ----------------  -----------------  ------------  ---------
Total earning assets                 $  37,958   $         7,443   $         38,442   $    26,331   $116,174
                                     ==========  ================  =================  ============  =========

INTEREST-BEARING LIABILITIES:
Interest-bearing deposits            $  22,879   $        24,515   $         43,534   $             $ 90,928
Long-term debt                                             3,000              6,000                    9,000
                                     ----------  ----------------  -----------------  ------------  ---------
Total interest-bearing liabilities   $  22,879   $        27,515   $         49,534   $        --   $ 99,928
                                     ==========  ================  =================  ============  =========

Net repricing gap                    $  15,079   $       (20,072)  $        (11,092)  $    26,331   $ 10,246

Rate sensitivity gap:
Net repricing gap as a percentage
   of total earning assets               13.69%          (18.22)%           (10.07)%        23.90%      9.30%
Cumulative gap                       $  15,079   $        (4,993)  $        (16,085)   $   10,246    $ 10,246
Cumulative gap as a percentage
of total earning assets                  13.69%           (4.53)%           (14.60)%         9.30%      9.30%
</TABLE>

Management  has  made  the  following  assumptions  in  the  above  analysis:

(a)     Assets  and  liabilities  are  generally assigned to a period based upon
        their  earliest repricing period when the repricing  is  less  than  the
        contractual maturity.

(b)     Nonaccrual  loans  are  included  in  the  loan  category.

(c)     Investment  securities  available  for sale are currently treated in the
        same  manner  as  comparable  securities  in  the  investment securities
        held to maturity  portfolio in that they are scheduled according  to the
        earlier of their contractual  maturities  or  earliest  repricing dates;
        however, the maturities  of callable  agency  securities  are  scheduled
        according to  their  call dates  when  valued  at  a  premium  to  par.

(d)     Money  market  deposits  and  savings  deposits that have no contractual
        maturities  are  scheduled  in  the  within  3  months  category.


                                        6
<PAGE>
DEPOSITS

     We  offer a full range of depositor accounts and services to both consumers
and  businesses.   None of these deposits were brokered.  Our primary sources of
funds  are  interest-bearing  deposits.  The  following  table  sets  forth  our
deposit  structure  at  December  31,  1999  and  1998  (in  thousands).

<TABLE>
<CAPTION>
                                                  1999     1998
                                                --------  -------
<S>                                             <C>       <C>
Non interest-bearing deposits:

Individuals, partnerships and corporations      $  5,846 $  4,346
Certified and official checks                      1,916    1,292
                                                --------  -------
  Total non interest-bearing deposits              7,762    5,638

Interest-bearing deposits:
Interest-bearing demand accounts                  19,960   18,306
Savings accounts                                  43,695    6,108
Certificates of deposit, less than $100,000       46,199   49,587
Certificates of deposit, greater than $100,000    14,621   16,725
                                                --------  -------

  Total interest-bearing deposits                124,475   90,726
                                                --------  -------

  Total deposits                                $132,237  $96,364
                                                ========  =======
</TABLE>

     The  following  table  shows,  by  category,  the  weighted average rate on
deposits  and  the  average  amount  of  deposits  for  the  periods  indicated:

<TABLE>
<CAPTION>
                                                            December 31,
                                      ---------------------------------------------------------------
                                                1999                                 1998
                                      ---------------------------      ------------------------------
(In Thousands)
<S>                                    <C>            <C>                    <C>            <C>
Non interest-bearing  deposits         0.00%           $    6,206            0.00%          $   3,886
Savings deposits                       4.84%               40,780            4.52%              4,589
Money market deposits                  4.53%               13,940            4.59%             10,194
Time deposits                          5.58%               52,849            5.82%             63,929
Interest-bearing  demand deposits      2.07%                5,334            2.14%              3,644
                                                       ----------                           ---------
Total deposits                                         $  119,109                           $  86,242
                                                       ==========                           =========
</TABLE>

     At  December  31,  1999  and  1998,  time  deposits  greater  than $100,000
aggregated  approximately  $14.6  million  and $16.7 million, respectively.  The
following  table  indicates, as of December 31, 1999 and 1998, the dollar amount
of  deposits  of  $100,000  or  more  by  the  time remaining until maturity (in
thousands):

<TABLE>
<CAPTION>
                                      1999                                    1998
                                      ----                                    ----
                                         1 Year                                  1 Year
                   3 Months   3 to 12   through            3 Months   3 to 12   through
                    or less    Months   5 years    Total    or less    Months   5 years    Total
                   ---------  --------  --------  -------  ---------  --------  --------  -------
<S>                <C>        <C>       <C>       <C>      <C>        <C>       <C>       <C>
Time certificates  $  1,876   $  7,335  $  5,410  $  14,621 $  6,271  $  5,670  $  4,784  $16,725
</TABLE>


                                        7
<PAGE>
ASSETS

     Our  management  considers  many  criteria  in  managing  assets, including
creditworthiness,  diversification  and structural characteristics, maturity and
interest rate sensitivity.  The following table sets forth our earning assets by
category  at  December  31,  1999  and  1998.

<TABLE>
<CAPTION>
                                         1999      1998
                                       --------  --------
<S>                                    <C>       <C>
(In Thousands)
Investment securities:
  Available for sale                   $ 21,441  $ 12,249
  Held to maturity                       13,988
Short-term interest-bearing deposits        133     5,000
Federal funds sold                          308     6,421
Federal Home Loan Bank stock              1,418       471
Loans:
  Real estate                            74,375    51,311
  Commercial and other                   40,591    35,494
                                       --------  --------
    Total loans                         114,966    86,805
   Less unearned income                      73        68
                                       --------  --------
  Loans, net of unearned income         114,893    86,737
                                       --------  --------
Total earning assets                   $152,181  $110,878
                                       ========  ========
</TABLE>

INVESTMENT  PORTFOLIO

     For  a  description  of  the  composition  of  the  carrying  value  of our
investment  portfolio  at  December  31,  1999  and  1998,  see  Note  12 to the
Consolidated  Financial  Statements  attached  hereto.

     The  following  table  presents  the maturity distribution of the amortized
cost and estimated market value of our investment portfolio at December 31, 1999
and  1998.  The weighted average yields on these instruments are presented based
on  final  maturity.

<TABLE>
<CAPTION>
                                                          1999                                   1998
                                                          ----                                   ----
                                           Amortized    Estimated      Weighted     Amortized   Estimated       Weighted
                                              Cost    Market Value  Average Yield      Cost    Market Value   Average Yield
                                           ---------  ------------  -------------  ---------  ------------  -------------
<S>                                        <C>        <C>           <C>            <C>        <C>           <C>
(Dollars in Thousands)
Held to maturity:
-----------------------------------------
Obligations of U.S. Government agencies:
  Due after 1 year but within 5 years      $   1,000  $        973          6.25%
  Due after 5 years but  within 10 years      12,988        12,328          6.55%
                                           ---------  ------------
     Total                                 $  13,988  $     13,301          6.53%
                                           =========  ============
Available for sale:
-----------------------------------------
Obligations of U.S. Government agencies:
  Due within 1 year                        $       0  $          0          0.00%
  Due after 1 year but within 5 years            998           966          6.06%  $  10,555  $     10,613          6.68%
  Due after 10 years                           2,993         2,813          6.94%        999         1,001          7.06%
Other - due within 1 year                      1,609         1,609          5.05%         36            36          7.20%
                                           ---------  ------------                 ---------  ------------
     Total                                 $  22,365  $     21,441          6.55%  $  11,590  $     11,650          6.71%
                                           =========  ============                 =========  ============
</TABLE>

INVESTMENT  POLICY

     Our investment portfolio policy is designed to provide guidelines by which
the  funds  not otherwise needed to meet loan demand of our market area can best
be  invested to meet fluctuations in the loan demand and deposit structure.  Our
investment  officer, Chairman Allen, seeks to balance the market and credit risk
against  the  potential  investment return, make investments compatible with the
pledging  requirements  of our deposits of public funds, and maintain compliance
with  regulatory  investment  requirements.   The  Investment Policy is reviewed
annually  by  the  Directors.  Chairman  Allen reports monthly to the Directors.


                                        8
<PAGE>
LOAN  PORTFOLIO

     The following table sets forth the composition of our loan portfolio at
December  31,  1999  and  1998.

<TABLE>
<CAPTION>
                                        1999     1998
                                      --------  -------
<S>                                   <C>       <C>
(In Thousands)
Real estate loans:
  Construction and land development   $  1,490  $ 2,013
  Secured by residential properties     65,220   51,821
  Commercial real estate loans           7,665    9,104
                                      --------  -------
     Total real estate loans            74,375   62,938
Commercial and industrial loans         23,060   13,784
Installment loans                       16,954    9,424
Other consumer loans                       418      396
All other loans                             86       17
                                      --------  -------

    Total loans                       $114,893  $86,559
                                      ========  =======
</TABLE>


The  following  tables  set  forth  the maturities of the loan portfolio and its
sensitivity  to  interest  rate  changes.

<TABLE>
<CAPTION>
                                            December 31, 1999
                                            -----------------
                                             Maturity Range
                                             --------------
                                  One Year   One Through      Over
(In Thousands)                     or Less    Five Years   Five Years    Total
                                  ---------  ------------  -----------  --------
<S>                               <C>        <C>           <C>          <C>
Real estate construction loans    $   1,490  $         --  $        --  $  1,490
Commercial and industrial loans       7,616        10,777        4,667    23,060
All other loans                      27,089        35,977       27,277    90,343
                                  ---------  ------------  -----------  --------

  Total loans                     $  36,195  $     46,754  $    31,944  $114,893
                                  =========  ============  ===========  ========
</TABLE>

     The  sensitivity  to  interest  rate  changes  of  that portion of our loan
portfolio  that  matures  after  one  year  is  set  forth  below.

     Real  estate and commercial and industrial loans maturing after one year as
of  December  31,  1999  (in  thousands):

    Fixed rate                                 $  13,354
    Floating rate                                 50,156

    Other  loans  maturing  after  one  year:

    Fixed rate                                    13,966
    Floating rate                                  1,222
                                                 -------

          Total loans maturing after one year    $78,698
                                                 =======


                                        9
<PAGE>
LENDING  POLICY

     While  the  ultimate  authority  to  approve  loans rests with our Board of
Directors,  lending authority is delegated by the Directors to our loan officers
and  loan  committees,  each  of  whom  may make a limited amount of secured and
unsecured  loans  to  a  single borrower or related group of borrowers.  Lending
limits  of  individual officers are documented in the respective personnel files
and are reviewed annually by the Directors.  Loan officers discuss with a senior
officer any loan request which exceeds their individual lending limit.  The loan
must  have the joint approval from the originating officer and a senior officer.
Our  President  and  Chief  Executive Officer has the authority to approve first
mortgages  for  one-to-four  family  residential  loans  which  conform  to  the
guidelines  of the Farmers Home Administration, the Veterans Administration, and
the Tennessee Housing Development Authority, and other conventional investors in
any  amount.

     Our  Lending Policy provides written guidelines for lending activities and
is  reviewed  at least annually by the Directors.  The Directors recognize that,
from  time  to  time, it is in State of Franklin's best interest to deviate from
the  established,  written  credit  policy  and  have established guidelines for
granting exceptions to the policy.  Situations in which such exceptions might be
granted  include  the  waiving of requirements for independent audited financial
statements  when a comfort level with respect to the financial statements of the
borrower  can  be otherwise obtained; and when it is desirable to meet the terms
offered  by  a  competitor.  All  exceptions  granted are documented in the loan
committee's  minutes.

     State  of Franklin's  primary business lies in making real estate mortgage
loans  in  the market area.  Real estate loans made outside the market area must
be in compliance with the exception-to-policy guidelines.  Lending activities in
the  real  estate  area  tend  to  fall  into  the  four  general  categories of

     -     acquisition  and  development,
     -     construction,
     -     permanent  financing,  and
     -     home  equity.

     As  a  general rule, we seek to maintain loan-to-collateral value ratios of
at  least  80% of the actual purchase price or the appraised value, whichever is
less.  This  limit  is  reduced  for  certain  types  of  real  estate  loans in
conformity  to  industry  and  regulatory  guidelines.  The following standards,
established by inter-agency guidelines by the federal bank regulators, including
the  FDIC,  went  into  effect  on  March  19,  1993:


     As  a  general rule, we seek to maintain loan-to-collateral value ratios of
at  least  80% of the actual purchase price or the appraised value, whichever is
less.  This  limit  is  reduced  for  certain  types  of  real  estate  loans in
conformity  to  industry  and  regulatory  guidelines.  The following standards,
established by inter-agency guidelines by the federal bank regulators, including
the  FDIC,  went  into  effect  on  March  19,  1993:

                                                             Maximum  Allowable
          Loan  Category                                   Loan-to-Value  Ratio
          --------------                                   --------------------

     Land                                                          65%
     Land  development                                             75%
     Owner-occupied  commercial                                    75%
     Construction
        Commercial,  multifamily  (1)  and  other  nonresidential  80%
        1-4  family  residential                                   85%
     Improved  property                                            85%
     Owner-occupied  1-4  family and home equity (2)               85%

     --------------------------
     (1)     Multifamily  construction  includes condominiums and cooperatives.
     (2)     A  loan-to-value  limit  has  not  been  established for permanent
             mortgage  or  home  equity  loans  or  owner-occupied, 1-4  family
             residential  property.  However,  for  any  such loan with a loan-
             to-value  ratio  that   equals  or  exceeds  90%  at  origination,
             appropriate credit enhancement  in  the  form  of either  mortgage
             insurance or readily marketable collateral  is  required.


                                       10
<PAGE>
LOAN  REVIEW  AND  NONPERFORMING  ASSETS
----------------------------------------

     We  have  an  internal  loan  review  system  to determine deficiencies and
corrective  action  to  be  taken.  Loans  are  graded  as  follows:

     CLASS  1.  Prime loans based upon liquid collateral with adequate margin or
     --------
supported by strong financial statement of recent date.  Character and repayment
ability  of borrower are excellent and unquestioned.  Position of company in its
industry  and in its community is excellent.  High liquidity, minimum risk, good
ratios,  low  handling  cost.

     CLASS  2.  Desirable  loans of somewhat less stature than Class A, but with
     ---------
strong  financial  statements,  and/or  secured  by  strong collateral position.
Probability  of  serious  financial  deterioration  is  unlikely.

     CLASS  3.  Satisfactory  loans of average or mediocre strength; having some
     --------
deficiency  or  vulnerability  to  changing economic or industry conditions, but
currently  collectible.  Secured loans lacking in margin or liquidity.  Loans to
individuals,  perhaps  supported  in  dollars  of net worth but whose supporting
assets  are illiquid.  Sometimes used as a temporary classification for untested
borrowers  or  where  information  is  incomplete.

     CLASS  4.  First  classification  that  has relevancy to bank examiners.  A
     --------
warning  classification  which  portrays one or more deficiencies that cannot be
tolerated  even  in  the  short  run.  Regulatory  classification  "Other Assets
Especially  Mentioned.

     CLASS  5.  Substandard  credits  for  their  steadiness  or other deficient
     --------
nature.  Company  or  individual  loans  with  no  evident  future,  which  are
unfavorable,  affecting loan-to-deposit ratio or cost of funds.  Heavy leveraged
accounts, with no immediate relief or compensating features.  Accounts requiring
attention  of  loan  officer  due  to  lack  of  borrower  cooperation.

     CLASS 6.  Doubtful credits with weaknesses demanding full attention of loan
     -------
officer.  Collection  or  liquidation  in  full is highly questionable.  Serious
problems  exist  to  the  point  where  a  partial  loss of principal is likely.

     CLASS  7.  Loans  where  an  element of probable loss is present.  Critical
     --------
credits requiring immediate and drastic action.  Loan should probably be charged
off.  Bank  examiners  will  probably  classify  such  loans  as  "Loss."

     Loans  graded  "5", "6" or "7" will automatically be referred to management
for  inclusion  on  our "watch list."  We also employ an outside bank consulting
firm  to  perform  an  independent  annual  loan  review.

     Nonperforming  loans  are  placed on non-accrual basis of accounting if (i)
there  is deterioration in the financial condition of the borrower; (ii) payment
in full of principal or interest is not expected; or (iii) principal or interest
has  been  in default for 90 days or more, unless the obligation is well secured
and  in  the process of collection.  The three categories of nonperforming loans
are  non-accrual  status  loans,  renegotiated  debt,  and  loans  in Chapter 13
bankruptcy  unless  a  repayment  schedule  is  adopted  that pays out the loan.

     At  December  31,  1999  the  Savings  Bank had  non accrual loans totaling
$221,781  and  no  restructured  loans  or  loans 90 days or more past due.  The
Savings  Bank  has  no  loans  to  foreign borrowers and we are not aware of any
problems  that  would  significantly  increase  the  amount or number of problem
loans  in  the  coming  months.

CREDIT  RISK  MANAGEMENT  AND  RESERVE  FOR  LOAN  LOSSES

     Credit  risk  and  exposure  to  loss  are  inherent  parts  of the banking
business.  Management  seeks to manage and minimize these risks through its loan
and  investment policies and loan review procedures.  Management establishes and
continually reviews lending and investment criteria and approval procedures that
it  believes reflect the risk sensitive nature of our business.  The loan review
procedures  are  set  to  monitor  adherence  to the established criteria and to
ensure  that  on  a continuing basis such standards are enforced and maintained.
Management's  objective  in  establishing lending and investment standards is to
manage  the  risk  of  loss  and  provide  for income generation through pricing


                                       11
<PAGE>
policies.  To  effect this policy, management meets weekly to review and approve
loans  and  meets  monthly  to  review  investments.

     The  loan  portfolio  is  regularly  reviewed and management determines the
amount  of  loans  to be charged-off.  In addition, such factors as our previous
loan  loss  experience, prevailing and anticipated economic conditions, industry
concentrations  and  the  overall  quality of the loan portfolio are considered.
While  management  uses  available  information to recognize losses on loans and
real  estate  owned, future additions to the allowance may be necessary based on
changes in economic conditions.  In addition, various regulatory agencies, as an
integral  part  of their examination process, periodically review the allowances
for  losses  on  loans  and  real estate owned.  Such agencies may require us to
recognize additions to the allowances based on their judgments about information
available  at  the time of their examinations.  In addition, any loan or portion
thereof  which is classified as a "loss" by regulatory examiners is charged-off.

     The reserve for loan losses is increased by provisions charged to operating
expense.  The  reserve  is reduced by charging off loans or portions of loans at
the  time  they  are deemed by management to be uncollectible and increased when
loans  previously  charged  off  are  recovered.  The resulting reserve for loan
losses  is  viewed  by management as a single, unallocated reserve available for
all loans.  Rules and formulas relative to the adequacy of the reserve, although
useful  as  guidelines  to  management, are not rigidly applied. The reserve for
loan losses was $810,000 at year end 1999, or 0.71% of loans outstanding, net of
unearned  income,  compared to $630,000 or 0.74% at year end 1998.  During these
periods  both charge-offs and loans on non accrual have remained relatively low.
Management  does  not  foresee  any events that will significantly increase loan
losses  in  the  coming  months;  however,  increases  to  the reserve were made
primarily  as  a  result  of growth and the risk associated with the size of the
loan  portfolio.  While the reserve has increased significantly, it has remained
relatively level as a percent of total loans.  The following table presents data
related  to  State  of  Franklin's  reserve  for loan losses for the years ended
December  31,  1999  and  1998.

<TABLE>
<CAPTION>
                                                                                             1999    1998
                                                                                            ------  ------
(Dollars In Thousands)
<S>                                                                                         <C>     <C>
Balance at beginning of period                                                              $ 630   $ 355
Charge offs:
  Commercial                                                                                   --      --
  Real estate mortgage                                                                         --      --
  Installment loans to individuals                                                              1      --
                                                                                            ------  ------

Recoveries:
  Commercial                                                                                   --      --
  Real estate mortgage                                                                         --      --
  Installment loans to individuals                                                             --      --
                                                                                            ------  ------

Net charge offs
Additions to reserve charged to operations                                                    181     275
                                                                                            ------  ------
Balance at end of period                                                                    $ 810   $ 630
                                                                                            ======  ======

Ratio of net charge offs during the period to average loans outstanding during the period    0.00%   0.00%
Average allowance for loan losses to average total loans                                     0.71%   0.74%
</TABLE>

At  December  31,  1999 and 1998, the allowance for loan losses was allocated as
follows:

<TABLE>
<CAPTION>
(Dollars in thousands)
                                       1999                               1998
                                       ----                               ----
                                Percent of loans in each          Percent of loans in each
                        Amount  category to total loans   Amount  category to total loans
                        ------  ------------------------  ------  ------------------------
<S>                     <C>     <C>                       <C>     <C>
Commercial              $   80                       20%  $   15                        2%
Real estate mortgage       527                       65%     460                       73%
All other                  203                       15%     155                       25%
                        ------  ------------------------  ------  ------------------------
   Total                $  810                      100%  $  630                      100%
                        ======  ========================  ======  ========================
</TABLE>


                                       12
<PAGE>
     The  allocation  of the allowance is presented based in part on evaluations
of  past history and composition of the loan portfolio.  Since these factors are
subject  to  change,  the current allocation of the allowance is not necessarily
indicative  of  the  breakdown  of  future  losses.

     The  following  table  sets  forth  information  with  respect  to  our
nonperforming loans on the dates indicated.  Accrual of interest is discontinued
when there is reasonable doubt as to the full, timely collections of interest or
principal.  When  a  loan becomes contractually past due 90 days with respect to
interest  or principal, it is reviewed and a determination is made as to whether
it should be placed  on  nonaccrual status.  When a loan is placed on nonaccrual
status,  all  interest  previously accrued but not collected is reversed against
current period interest income.  Income  n such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Interest accruals are resumed on such loans only when they are brought
fully current  with  respect to principal and interest and when, in the judgment
of  management,  the loans are estimated to be fully collectible as to principal
and  interest.  Restructured loans are those loans on which concessions in terms
have been  granted  because  of  a borrower's financial difficulty.  Interest is
generally  accrued  on  such  loans  in  accordance  with  the  new  terms.

<TABLE>
<CAPTION>
     Nonperforming assets (Dollars in thousands):                                             December 31,
                                                                                           ------------------
                                                                                             1999      1998
                                                                                           --------  --------
<S>                                                                                        <C>       <C>
     Nonaccrual loans                                                                      $   222        --
     Restructured loans                                                                         --        --
     Other loans past due 90 days or more to principal or interest payments                     --   $     2
     Nonperforming loans as a percentage of net loans before allowance for loan losses        0.00%     0.00%
     Allowance for loan losses as a percentage of nonperforming loans                          365%   31,500%
</TABLE>

CAPITAL  RESOURCES/LIQUIDITY

     Of  primary  importance  to  depositors,  creditors  and  regulators is the
ability  to  have  readily  available  funds  sufficient to repay fully maturing
liabilities.  Our  liquidity,  represented by cash and cash due from banks, is a
result of our operating, investing and financing activities.  In order to insure
funds are available at all times, we devote resources to projecting on a monthly
basis the amount of funds which will be required and maintain relationships with
a diversified customer base so funds are accessible.  Liquidity requirements can
also  be  met  through  short-term  borrowings  or the disposition of short-term
assets which are generally matched to correspond to the maturity of liabilities.

     Although  we have no formal liquidity policy, in the opinion of management,
its  liquidity  levels  are  considered  adequate.  We  are  not  subject to any
specific  liquidity  requirements  imposed  by  regulatory  orders.  Management
believes  its liquidity ratios meet or exceed regulatory guidelines.  Management
does  not know of any trends or demands which are reasonably likely to result in
liquidity  increasing  or  decreasing  in  any  material  manner.

     The following table sets forth liquidity ratios for the periods indicated:

                                                  1999     1998
                                                 -------  -------
   Average loans to average deposits              83.7%    79.0%

IMPACT  OF  INFLATION  AND  CHANGING  PRICES

     The  consolidated  financial statements and related consolidated financial
data  presented  herein have been prepared in accordance with generally accepted
accounting  principles  which  require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in  the  relative purchasing power of money over time and due to inflation.  The
impact of inflation on our operations is reflected in increased operating costs.
Unlike  most  industrial  companies, virtually all of our assets and liabilities
are  monetary  in  nature.  As  a result, interest rates have a more significant
impact  on  our  performance  than  the  effects of general levels of inflation.
Interest  rates  do  not  necessarily  move in the same direction or in the same
magnitude  as  the  price  of  goods  and  services.


                                       13
<PAGE>
CAPITAL  ADEQUACY

     Capital  adequacy refers to the level of capital required to sustain asset
growth  over  time  and  to  absorb  losses.  Our  management's  objective is to
maintain  a  level  of  capitalization  that  is sufficient to take advantage of
profitable  growth opportunities while meeting regulatory requirements.  This is
achieved  by improving profitability through effectively allocating resources to
more  profitable  businesses,  improving  asset  quality,  strengthening service
quality,  and  streamlining  costs.  The  primary measures used by management to
monitor the results of these efforts are the ratios of average equity to average
assets,  average  tangible equity to average tangible assets, and average equity
to  net  loans.

     Capital  guidelines  require the maintenance of an amount of capital based
on  risk-adjusted  assets  so  that categories of assets with potentially higher
credit  risk  will require more capital backing than assets with lower risk.  In
addition,  financial  institutions  and  their holding companies are required to
maintain capital to support, on a risk-adjusted basis, certain off-balance sheet
activities  such  as  loan  commitments.

     The  capital  guidelines  classify  capital into two tiers, referred to as
Tier  I  and  Tier  II.  Under  risk-based  capital  requirements, total capital
consists  of  Tier I capital which is generally common stockholders' equity less
goodwill  and  Tier II capital which is primarily a portion of the allowance for
loan  losses and certain qualifying debt instruments.  In determining risk-based
capital  requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily  on the regulatory assigned levels of credit risk associated with such
assets.  Off-balance  sheet  items  are  considered  in  the  calculation  of
risk-adjusted  assets  through conversion factors established by the regulators.
The framework for calculating risk-based capital requires financial institutions
to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital and
prepare a leveraged computation comparing Tier I capital to total average assets
less  goodwill.

     Our  consolidated  capital  ratios  are  set  forth  below.

<TABLE>
<CAPTION>
                                                   December 31, 1999    December 31, 1998
                                                  ------------------  -------------------
<S>                                               <C>                 <C>
(Dollars in Thousands)
CAPITAL:
Tier I capital:
     Stockholders' common equity                  $          13,498   $           11,570
     Less unrealized (loss) gain in securities                 (610)                  40
     Less disallowed intangibles                                 --                   --
                                                  ------------------  -------------------
              Total Tier I capital                           14,109               11,530
Tier II capital:
     Qualifying allowance for loan losses                       810                  630
                                                  ------------------  -------------------
              Total capital                                  14,919               12,161
Risk-adjusted assets                                        101,395               74,160
Quarterly average assets                                    155,226              108,452

RATIOS:
Tier I capital to risk-adjusted assets                        13.86%               15.55%
Tier II capital to risk-adjusted assets                         .80%                 .85%
Total capital to risk-adjusted assets                         14.66%               16.40%
Leverage - Tier I capital to quarterly  average
assets less disallowed intangibles                             9.09%               10.63%
</TABLE>

          On  December  31,  1999,  we  exceeded  the  regulatory  minimums  and
qualified  as  a  well-capitalized  institution  under  the  regulations.


                                       14
<PAGE>
SUPERVISION  AND  REGULATION

GENERAL
--------

     As  a Tennessee-chartered, federally-insured savings bank, the Savings Bank
is  subject  to  extensive regulation.  Lending activities and other investments
must  comply  with  various  statutory  and  regulatory  requirements, including
prescribed minimum capital standards.  The Savings Bank is regularly examined by
the  FDIC  and  the  Tennessee  Department  of  Financial Institutions and files
periodic  reports  concerning  its  activities and financial conditions with its
regulators.  The  Savings  Bank's  relationship with depositors and borrowers is
also  regulated  to a great extent by both federal law and the laws of the State
of  Tennessee,  especially  in such matters as the ownership of accounts and the
form  and  content  of  mortgage  documents.

     Federal  and  state  banking  laws  and regulations govern all areas of the
operation  of  the  Savings Bank, including reserves, loans, mortgages, capital,
issuance  of  securities,  payment  of  dividends and establishment of branches.
Federal  and  state  bank regulatory agencies also have the general authority to
limit  the  dividends paid by insured banks if such payments should be deemed to
constitute  an  unsafe  and  unsound practice.  Both the Tennessee Department of
Financial  Institutions  and  the  FDIC  have the authority to impose penalties,
initiate  civil  and  administrative  actions  and  take other steps intended to
prevent  banks  from  engaging  in  unsafe  or  unsound  practices.

TENNESSEE  SUPERVISION  AND  REGULATION
---------------------------------------

     As  a  Tennessee-chartered  savings  bank,  the  Savings Bank is subject to
various  state laws and regulations which limit the amount that can be loaned to
a  single  borrower,  the  type  of  permissible  investments,  and  geographic
expansion,  among other things.  The Savings Bank must submit an application and
receive  the  approval  of  the  Tennessee  Department of Financial Institutions
before  opening  a  new  branch  office  or  merging  with  another  financial
institution.  The  Commissioner  of  the Department has the authority to enforce
state  laws  and  regulations by ordering a director, officer or employee of the
Savings  Bank  to  cease  and desist from violating a law or regulation and from
engaging  in  unsafe  or  unsound  banking  practices.

     The  Savings  Bank  is  chartered  under the Savings Bank Chartering Act of
1991.  The  Tennessee  Department  of  Financial  Institutions  has  not  yet
promulgated  any regulations governing the operation of savings banks.  However,
the  Savings  Bank  Act  contains  a  "parity  provision"  that  authorizes  the
Department  to  promulgate  regulations  authorizing  savings  banks to make any
investment or engage in any activity that is permissible for federally-chartered
savings banks, subject to the same limitations applicable to federally-chartered
savings  bank,  upon  the  Commissioner's determination that Tennessee-chartered
savings  banks would be at a competitive disadvantage absent such authorization.

FEDERAL  REGULATION
--------------------

     Deposit  Insurance.  Our  deposit  accounts  are  insured by the FDIC up to
     -------------------
applicable  limits  by  the  Bank  Insurance  Fund.  The Bank Insurance Fund was
designated  as  an insurance fund pursuant to the Financial Institutions Reform,
Recovery  and Enforcement Act of 1989.  As insurer, the FDIC issues regulations,
conducts  examinations,  requires the filing of reports and generally supervises
and  regulates  the  operations of state-chartered banks that are not members of
the  Federal  Reserve  System.  FDIC approval is required prior to any merger or
consolidation  involving  state,  nonmember  banks,  or  the  establishment  or
relocation  of  an  office facility thereof.  FDIC supervision and regulation is
intended  primarily  for  the  protection  of  depositors and the FDIC insurance
funds.

     Pursuant  to  the  Federal  Deposit  Insurance  Act,  as amended, all Bank
Insured  Fund-insured  banks  must  pay  semiannual  insurance  assessments  to
recapitalize  the Bank Insurance Fund  to a 1.25% of insured deposits ratio.  In
August  1995,  the  FDIC  substantially  reduced  deposit insurance premiums for
well-capitalized,  well-managed  Bank Insurance Fund-insured institutions to the
lowest  assessment  rate of 4 basis points per $100 of assessable deposits.  The
Bank  Insurance  Fund  premium reduction became effective in September 1995. Any
insured  bank  which  does  not  operate  in  accordance with or conform to FDIC
regulations,  policies and directives may be sanctioned for non-compliance.  For
example, proceedings may be instituted against any insured bank or any director,
officer  or  employee  of such bank who engages in unsafe and unsound practices,
including  the  violation  of applicable laws and regulations.  The FDIC has the


                                       15
<PAGE>
authority  to terminate deposit insurance pursuant to procedures established for
that  purpose.

     At  December  31, 1999, our deposit base for purposes of FDIC premiums was
$134  million.  We paid  FDIC insurance premiums of $0 in 1996, $4,552 in 1997,
$9,000  in  1998  and  $12,374  in  1999.

     Prompt  Corrective  Action.  Under  Section  38  of  the  Federal  Deposit
     ---------------------------
Insurance  Act, as amended, each federal banking agency is required to implement
a  system  of  prompt corrective action for institutions which it regulates. The
federal  banking  agencies have promulgated substantially similar regulations to
implement  this  system  of prompt corrective action.  Under the regulations, an
institution  shall  be  deemed  to  be:


     -    "well capitalized" if it has a total risk-based capital ratio of 10.0%
          or  more,  has  a  Tier  1 risk-based  capital  ratio of 6.0% or more,
          has  a Tier 1 leverage capital  ratio  of 5.0%  or  more  and  is  not
          subject  to specified requirements to meet  and  maintain  a  specific
          capital  level  for  any  capital  measure;

     -    "adequately  capitalized"  if  it has a total risk-based capital ratio
          of  8.0%  or  more,  a Tier 1 risk-based capital ratio that is 4.0% or
          more,  or a Tier 1  leverage capital  ratio  that  is  4.0%  or  more;

     -    "undercapitalized"  if it has a total risk-based capital ratio of less
          than  8.0%, a Tier 1 risk-based capital ratio  that is less than 4.0%
          or a Tier 1 leverage  capital  ratio  that is  less  than  4.0%  (3.0%
          under  certain circumstances);

     -    "significantly  undercapitalized" if it has a total risk-based capital
          ratio  that is less  than 6.0%, a Tier 1 risk-based capital ratio that
          is less than  3.0% or a Tier  1  leverage  capital  ratio that is less
          than 3.0%; and

     -    "critically  undercapitalized" if it has a ratio of tangible equity to
          total  assets  that  is  equal  to  or  less  than  2.0%.

     Section  38  of  the  Federal  Deposit  Insurance  Act and the implementing
regulations  also provide that a federal banking agency may, after notice and an
opportunity  for  a  hearing,  reclassify  a  well-capitalized  institution  as
adequately  capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in  the next lower category if the institution is an unsafe or unsound condition
or  engaging  in  an  unsafe  or  unsound practice.  (The FDIC may not, however,
reclassify  a  significantly  undercapitalized  institution  as  critically
undercapitalized).

     An institution generally must file a written capital restoration plan which
meets  specified  requirements,  as well as performance guaranty by each company
that  controls  the  institution,  with  the  appropriate federal banking agency
within  45 days of the date that the institution receives notice or is deemed to
have  notice  that  it  is  undercapitalized,  significantly undercapitalized or
critically  undercapitalized.  Immediately  upon  becoming  undercapitalized, an
institution  shall become subject to the provisions of Section 38 of the Federal
Deposit  Insurance  Act,  which  set  forth  various mandatory and discretionary
restrictions  on  its  operations.

     Standards  for  Safety  and  Soundness.  The  Federal Deposit Insurance Act
     ---------------------------------------
requires  the  federal  banking regulatory agencies to prescribe, by regulation,
standards  for  all  insured  depository  institutions  relating  to:

     -  internal  controls,  information  systems  and  internal  audit systems;
     -  loan  documentation;
     -  credit  underwriting;
     -  interest  rate  risk  exposure;
     -  asset  growth;  and
     -  compensation,  fees  and  benefits.

The federal banking agencies have adopted regulations and Interagency Guidelines
Prescribing  Standards  for  Safety  and  Soundness  to  implement  safety  and


                                       16
<PAGE>
soundness  standards  required  by  the  Federal  Deposit  Insurance Act.  These
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before  capital  becomes  impaired.  The agencies also adopted asset quality and
earnings  standards  which are part of these Guidelines.  Under the regulations,
if  the  FDIC  determines that we fail to meet any standards prescribed by these
Guidelines, the agency may require us to submit to the agency an acceptable plan
to  achieve  compliance  with  the  standard, as required by the Federal Deposit
Insurance Act.  The final regulations establish deadlines for the submission and
review  of  such  safety  and  soundness  compliance  plans.

     Capital  Requirements.  The  FDIC's minimum capital standards applicable to
     ----------------------
FDIC-regulated banks and savings bank require the most highly-rated institutions
to  meet  a  "Tier  1"  leverage capital ratio of at least 3.0% of total assets.
Tier  1  (or  "core  capital")  consists  of  common  stockholders'  equity,
noncumulative  perpetual  preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage  servicing  rights and certain other accounting adjustments.  All other
banks  must  have a Tier 1 leverage ratio of at least 100-200 basis points above
the 3% minimum.  The FDIC capital regulations establish a minimum leverage ratio
of  not  less than 4% for banks that are not highly rated or are anticipating or
experiencing  significant  growth.

     FDIC  capital  regulations  require  higher  capital levels for banks which
exhibit  more  than  a  moderate degree of risk or exhibit other characteristics
which necessitate that higher than minimum levels of capital be maintained.  Any
insured  bank  with  a  Tier  1 capital to total assets ratio of less than 2% is
deemed  to  be  operating in an unsafe and unsound condition pursuant to Section
8(a)  of the Federal Deposit Insurance Act unless the insured bank enters into a
written  agreement,  to  which  the  FDIC  is  a  party,  to correct its capital
deficiency.  Insured  banks  operating  with Tier 1 capital levels below 2% (and
which  have  not  entered  into a written agreement) are subject to an insurance
removal  action.  Insured banks operating with lower than the prescribed minimum
capital  levels generally will not receive approval of applications submitted to
the  FDIC.  Also, inadequately capitalized state nonmember banks will be subject
to  such  administrative  action  as  the  FDIC  deems  necessary.

     FDIC  regulations also require that savings banks meet a risk-based capital
standard.  The  risk-based  capital  standard  requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to  risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In  determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks  the  FDIC  believes  are  inherent  in  the  type  of asset or item.  The
components  of  Tier 1 capital are equivalent to those discussed above under the
3%  leverage  requirement.  The  components of mandatory convertible securities,
term  subordinated  debt,  intermediate-term  preferred  stock and allowance for
possible  loan  and  lease losses.  Allowance for possible loan and lease losses
includable  in  supplementary  capital  is  limited  to  a  maximum  of 1.25% of
risk-weighted  assets.  Overall,  the  amount  of  capital  counted  toward
supplementary  capital  cannot exceed 100% of Tier 1 capital.  The FDIC includes
in  its  evaluation  of  a  bank's  capital adequacy an assessment of risk-based
capital focusing principally on broad categories of credit risk.  No measurement
framework  for  assessing  the level of a bank's interest rate risk exposure has
been  codified but, effective board and senior management oversight of the banks
tolerance  for  interest  rate  risk  is  required.

     The  FDIC  has  adopted  the  Federal  Financial  Institutions  Examination
Council's  recommendation  regarding  the  adoption  of  Statement  of Financial
Accounting  Standard  No.  115,  "Accounting for Certain Investments in Debt and
Equity  Securities."  Specifically,  the agencies determined that net unrealized
holding  gains or losses on available for sale debt and equity securities should
not  be  included  when  calculating  core  and  risk-based  capital  ratios.

     FDIC  capital  requirements  are  designated  as  the  minimum  acceptable
standards  for  banks  whose overall financial condition is fundamentally sound,
which  are  well-managed and have no material or significant financial weakness.
The  FDIC  capital  regulations  state  that, where the FDIC determines that the
financial  history  or  condition,  including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a  bank  has  a significant volume of assets classified substandard, doubtful or
loss  or  otherwise criticized, the FDIC may determine that the minimum adequate
amount  of  capital  for  that  bank  is  greater  than  the  minimum  standards
established  in  the  regulation.

     We  believe  that,  under  the  current  regulations,  the Savings Bank has
sufficient  capital  to  meet its minimum capital requirements.  However, events


                                       17
<PAGE>
beyond  the  control  of  the Savings Bank, such as a downturn in the economy in
areas  where  the  Savings  Bank  has  most of its loans, could adversely affect
future  earnings  and, consequently, the ability of the Savings Bank to meet its
capital  requirements.

     Activities and Investments of Insured State-Chartered Banks.  Section 24 of
     ------------------------------------------------------------
the  Federal  Deposit Insurance Act, as amended, generally limits the activities
and  equity investments of FDIC-insured, state-chartered banks to those that are
permissible  for  national  banks.  Under  regulations  dealing  with  equity
investments,  an  insured  state  bank  generally may not directly or indirectly
acquire  or retain any equity investment of a type, or in an amount, that is not
permissible  for a national bank.  An insured state bank is not prohibited from,
among  other  things,

     (1)  acquiring  or  retaining  majority  interest  in  a  subsidiary,

     (2)  investing  as  a  limited partner in a partnership the sole purpose of
     which is direct or indirect investment   in the acquisition, rehabilitation
     or  new   construction  of  a qualified housing project, provided that such
     limited partnership investment may  not  exceed  2%  of  the  bank's  total
     assets,

     (3)  acquiring  up  to  10%  of  the  voting stock of a company that solely
     provides or reinsures  directors',     trustees'  and  officers'  liability
     insurance  coverage or  bankers' blanket bond group insurance  coverage for
     insured  depository  institutions,  and

     (4) acquiring or retaining the voting shares of a depository institution if
     certain requirements are met.  State     law also provides that the Savings
     Bank may  invest  in  any  investment  permissible  by  federally chartered
     Savings banks,  subject  to  the  restrictions  for  such  entities.

     FDIC  regulations  implementing Section 24 of the Federal Deposit Insurance
Act  provide  that  an  insured  state-chartered  bank  may  not,  directly,  or
indirectly  through  a subsidiary, engage as "principal" in any activity that is
not  permissible  for  a  national bank unless the FDIC has determined that such
activities  would pose no risk to the insurance fund of which it is a member and
the  bank is in compliance with applicable regulatory capital requirements.  Any
insured  state-chartered  bank or savings bank directly or indirectly engaged in
any  activity  that  is  not  permitted  for  a  national  bank  must  cease the
impermissible  activity.

     Loans-to-One-Borrower.  The aggregate amount of loans that we are permitted
     ----------------------
to  make  under  applicable  regulations  to any one borrower, including related
entities,  is  the  greater  of  25%  of unimpaired capital with Board approval.
Based  on our current capitalization of $12.2 million, our loans-to-one borrower
limit  is  approximately  $3.1  million.

     Federal  Reserve  System.  In  1980,  Congress  enacted  legislation  which
     -------------------------
imposed  Federal  Reserve  requirements  on  all  depository  institutions  that
maintain transaction accounts or non-personal time deposits.  These reserves may
be  in  the  form  of  cash  or  non-interest-bearing deposits with the regional
Federal  Reserve  Bank.  NOW  accounts  and  other types of accounts that permit
payments or transfers to third parties fall within the definition of transaction
accounts  and are subject to these reserve requirements, as are any non-personal
time  deposits  at  a  bank.

     Community  Reinvestment  Act.  We are also subject to the provisions of the
     -----------------------------
Community  Reinvestment Act of 1977, which requires the appropriate federal bank
regulatory  agency,  in  connection  with  its regular examination of a bank, to
assess  the  bank's record in meeting the credit needs of the community serviced
by  the  bank,  including low and moderate income neighborhoods.  The regulatory
agency's  assessment  of  the  bank's  record  is  made available to the public.
Further,  such assessment is required of any bank which has applied, among other
things,  to establish a new branch office that will accept deposits, relocate an
existing  office  or  merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.  As a component
of  its  Community  Reinvestment  Act outreach, we have instituted an affordable
home  loan  program  for  first-time  home  buyers  and  low  to moderate income
borrowers.  We  also  offer  Tennessee  Housing  Development Authority, Veterans
Administration  and  Federal  Home  Administration  loans.

     Interstate  Banking.  On September 29, 1994, the Federal government enacted
     --------------------
the  Riegle-Neal  Interstate  Banking and Branching Efficiency Act of 1994.  The
provisions  of  this  Act  became effective on September 29, 1995, at which time


                                       18
<PAGE>
eligible  bank  holding  companies  in  any  state  were permitted, with Federal
Reserve  approval,  to  acquire  organizations in any other state.  As such, all
existing  regional  compacts and substantially all existing regional limitations
on  interstate acquisitions of banking organizations have been eliminated.  This
Act  also  removed  substantially all of the existing prohibitions on interstate
branching  by  banks.  On  and after June 1, 1997, a bank operating in any state
may  establish  one  or  more  branches  within  any  other  state  without  the
establishment  of  a  separate  banking  structure  within  the  other  state.

     Under  the  Tennessee  Bank  Reform  Act of 1996 that amended the Tennessee
Banking  Act,  the acquisition of Tennessee banks and bank holding companies by,
and  mergers  with,  out-of-state  banks and bank holding companies is permitted
with  the  prior  approval  of the Department subject to the requirements of the
Act.  An  amendment to the Bank Reform Act of 1996, effective June 1, 1997, also
permits  Tennessee  state  banks  and  savings banks, with prior approval of the
Department  of  Financial Institutions, to operate branches outside the state of
Tennessee.  Although  this  legislation has the potential to increase the number
of  competitors in our market place, we cannot predict the actual impact of such
legislation  on  our  competitive  position.  Out-of-state  banks may not, under
current  Tennessee law, branch de novo into Tennessee nor may out-of-state banks
                               -- ----
or  bank  holding  companies  enter Tennessee through "branch-only" acquisition.

CHANGE  IN  CONTROL  RESTRICTIONS
---------------------------------

     Statutory  Provisions.  The Change in Bank Control Act requires the written
     ---------------------
consent  of  the  FDIC  be  obtained  prior  to  any person or company acquiring
"control"  of  a  state-chartered savings bank.  Tennessee law also requires the
prior  written  consent  of  the Department of Financial Institutions to acquire
control  of  a  Tennessee-chartered  savings  bank.  Upon  acquiring  control, a
company  will  be deemed to be a bank holding company and must register with the
Federal  Reserve.  Conclusive  control  is  presumed  to  exist  if, among other
things,  an  individual  or  company  acquires more than 25% of any class of our
voting stock.  Rebuttable control is presumed to exist if, among other things, a
person  acquires  more  than  10%  of any class of voting stock and the issuer's
securities  are  registered  under  Section 12 of the Securities Exchange Act of
1934  or  the  person  would  be  the  single largest stockholder.  Restrictions
applicable  to  the operations of a bank holding company and conditions that may
be  imposed  by the Federal Reserve in connection with its approval of a company
to  become  a  bank  holding  company may deter companies from seeking to obtain
control  of  State  of  Franklin.

     Other.  While  not directly restricting efforts to acquire control of State
     -----
of  Franklin,  certain  other characteristics of our organization may discourage
attempts  to  acquire  control  of  us.  Our  By-Laws provide that approximately
one-third  of  our  Board of Directors are elected each year,  thereby making it
more  difficult  for  a  potential  acquirer  of control of State of Franklin to
replace the members of the Board of Directors than it would be if directors were
elected  at more frequent intervals or if a greater percentage of directors were
elected  at  any  one  time.

     The  restrictions  contained  in  the  Change  of  Bank Control Act and the
regulations  promulgated  thereunder  will  apply  to acquisitions of the common
stock  in  the  offering.  In  addition,  as  a  result  of all of the foregoing
restrictions  on acquisitions, State of Franklin is a less attractive target for
a  "takeover"  attempt  than  other  less-highly  regulated companies generally.
Accordingly, these restrictions might deter offers to purchase State of Franklin
which  stockholders  may consider to be in their best interests, and may make it
more  difficult  to  remove  incumbent  management.

REGULATION  OF  BANK  HOLDING  COMPANIES
----------------------------------------

     We  are  subject  to  regulation by the Federal Reserve and are required to
file with the Federal Reserve annual reports and other information regarding our
business  operations  and  the  business operations of our subsidiaries.  We are
also  subject  to  examination by the Federal Reserve and are required to obtain
Federal  Reserve  approval prior to acquiring, directly or indirectly, ownership
or  control of voting shares of any bank if, after such acquisition, we will own
or  control,  directly  or  indirectly, more than 5% of the voting stock of such
bank.  In  addition,  pursuant to the provisions of the Bank Holding Company Act
of  1956,  as  amended,  and  regulations  promulgated  by  the  Federal Reserve
thereunder,  the  bank  holding  company  is  only  able to engage in, or own or
control companies that engage in, activities deemed by the Federal Reserve to be
so  closely  related  to  banking  as  to  be  a  proper  incident  thereto.


                                       19
<PAGE>
DIVIDENDS
---------

     During  the  first  three  years  of  the  Savings  Bank's operation it was
precluded  from  declaring  and  paying  dividends  in  accordance  with  the
requirements  of the Tennessee Department of Financial Institutions.  Except for
a  $5,000  dividend  paid  by  the  Savings  Bank  to State of Franklin to cover
organizational  expenses,  which  was  approved  by  the Department of Financial
Institutions,  earnings  generated  from  the operation of the Savings Bank have
been used to finance the growth of the Savings Bank.   The effect of the special
one-time  dividend  was  eliminated  through  consolidating  entries.

     Following  the  mandatory  initial  three-year moratorium on the payment of
dividends  imposed  by  regulatory  authorities,  the Board of Directors may now
determine  whether  dividends  on  the  common  stock will be declared and paid,
taking  into  consideration  our  operating  results,  financial  condition, tax
considerations,  future  capital  requirements  and other relevant factors.  The
Directors  may  declare  a  non-cash  dividend  if,  after considering the above
factors, it appears prudent to do so.  The Directors are not, however, obligated
to  pay  any  such  dividend and will only do so if it appears to be in the best
interest  of State of Franklin.  The Directors do not anticipate that a dividend
will  be  paid  in  the  foreseeable  future.

     Tennessee  law  requires that dividends be paid only from retained earnings
(or  undivided  profits), except that dividends may be paid from capital surplus
with  the  prior,  written  consent of the Department of Financial Institutions.
Tennessee  laws  regulating  savings  banks  require certain charges against and
transfers  from  an  institution's  undivided  profits  account before undivided
profits  can  be  made  available  for the payment of dividends.  The Department
generally  prohibits  a newly chartered institution from paying dividends during
its  first  three  years  of  operation without the Department's prior approval.

MONETARY  POLICY
----------------

     We,  like  other  depository  institutions,  are  affected  by the monetary
policies  implemented by the Federal Reserve.  The Federal Reserve has the power
to restrict or expand the money supply through open market operations, including
the  purchase  and  sale  of government securities and the adjustment of reserve
requirements.  These  actions  may  result in significant fluctuations in market
interest rates, which could adversely affect our operations, such as our ability
to  make  loans  and  attract  deposits,  as  well  as  market demand for loans.

CAPITAL  ADEQUACY
-----------------

     See  "Capital Adequacy" above for a discussion of bank regulatory agencies'
capital  adequacy  requirements.

RECENT  LEGISLATION
-------------------

     Bills  are  presently  pending  before  the  United  States  Congress,  and
additional  bills  may  be  introduced  in  the  future  in the Congress and the
Tennessee  General  Assembly, to alter the structure, regulation and competitive
relationships  of  the  nation's  financial  institutions.

     On December 19, 1991, President Bush  signed  the Federal Deposit Insurance
Corporation's  Improvement  Act of 1991 ("FDICIA"), the principal initial effect
of  which  was to permit the Bank Insurance Fund (the "BIF") to borrow up to $30
billion  from the U.S. Treasury (to be repaid through deposit insurance premiums
over  15 years) and to permit the BIF to borrow working capital from the Federal
Financing Bank in an amount up to 90 percent of the value of the assets the FDIC
has  acquired from failed banks, which it is estimated would yield approximately
$40  billion in working capital.  The bill followed a year-long effort initiated
by  the  Bush Administration to enact major banking legislation.  Virtually none
of  the  Administration's  major  systemic  proposals,  including  nationwide
interstate  banking  and  branching  or  ownership  of financial institutions by
commercial  entities,  were  included  in  the final bill.  However, a number of
additional  pervasive  supervisory  measures, some of which are described below,
were  included  in  the FDICIA.  The effect of these measures will be to a great
extent  dependent  on  the manner in which bank regulatory authorities choose to
enforce  regulations  which  have  been  recently issued pursuant to the FDICIA.

     The  Gramm-Leach-Bailey  Financial  Modernization  Act of 1999 permits bank


                                       20
<PAGE>
holding  companies  meeting  certain  management,  capital,  and  community
reinvestment  act  standards  to  engage  in  a  substantially  broader range of
non-banking  activities  than  permitted  previously,  including  insurance
underwriting  and  merchant banking activities.  The Act repeals sections 20 and
32  of  the Glass Steagall Act, permitting affiliations of banks with securities
firms and registered investment companies.  The Act authorizes financial holding
companies,  permitting  banks to be owned by security firms, insurance companies
and  merchant  banking companies and visa-versa.  Some of these affiliations are
also permissible for bank subsidiaries.  The Act gives the Federal Reserve Board
authority  to  regulate financial holding companies, but provides for functional
regulation  of  subsidiary  activities.

     The  Gramm-Leach-Bailey Financial Modernization Act also modifies financial
privacy  and  community reinvestment laws.  The new financial privacy provisions
generally  prohibit  financial  institutions  such  as  State  of  Franklin from
disclosing  non-public  personal  financial  information to third parties unless
customers  have  the  opportunity  to  opt  out of the disclosure.  The Act also
magnifies  the  consequences  of  a  bank  receiving  a less than a satisfactory
community  reinvestment  act  rating,  by  freezing  new  activities  until  the
institution  achieves  a  better  community  reinvestment  act  rating.

EMPLOYEES

     At  December  31,  1999,  we  had  a total of 48 employees with 36 of those
employed  on  a  full-time  basis.

ITEM  2.     DESCRIPTION  OF  PROPERTY

     Our  principal  office  is located at 1907 North Roan Street, Johnson City,
Washington  County,  Tennessee.  The  Savings  Bank  owns  the  land  and  the
approximately  36,000  square  foot  building,  18,000 feet of which is leasable
space.  This  property  serves  as  the  main  office of the  Savings Bank.  The
Savings  Bank also operates branch offices at 3300 Browns Mill Road and 612 West
Walnut  Street,  Johnson City, Tennessee; and 240 West Center Street, Kingsport,
Sullivan County, Tennessee.  The Savings Bank owns the land and the buildings in
Kingsport.  The  West  Walnut  branch  is  also  owned by the Savings Bank.  The
Savings  Bank  leases the Browns Mill Road office from Allen and Allen.  Charles
E.  Allen,  Jr.,  chairman  and chief financial officer of the Savings Bank, and
Charles  E.  Allen, Sr., M.D., a director of the Savings Bank, are principals of
Allen  and  Allen.  The lease was negotiated at arm's length and was approved by
the Department and the FDIC.  Rent for the 2,625 square foot building for  three
years  will  be  $35,190  annually.  This  amount  includes taxes, insurance and
maintenance  costs.

      All  facilities have improvements including drive-through tellers, vaults,
night  depository  and  certain  facilities  have  safe  deposit  boxes.

ITEM  3.     LEGAL  PROCEEDINGS

     There  are  no  pending  legal  proceedings to which State of Franklin is a
party  or  of  which  any  of our properties are subject that are expected to be
material;  nor  are there material proceedings known to us to be contemplated by
any  governmental  authority;  nor  are  there material proceedings known to us,
pending  or  contemplated,  in  which  any director, officer or affiliate or any
principal  security  holder of State of Franklin, or any associate of any of the
foregoing,  is  a  party  or  has  an  interest  adverse  to  State of Franklin.

ITEM  4.     SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS

     None.


                                       21
<PAGE>
                                   PART  II

ITEM  5.     MARKET  FOR  COMMON  EQUITY  AND  RELATED  STOCKHOLDER  MATTERS

      There  is no established public trading market for our Common Stock.   Our
management  is  aware  that isolated transactions in the Common Stock occur from
time to time.  To the best of the knowledge of State of Franklin transactions in
the  Common  Stock during 1999 were for prices ranging from $11.00 to $13.50 per
share.  In  October  1999 we filed with the SEC a Registration Statement on Form
SB-1  (File  No.  333-88393)  regarding  an offering of 370,370 shares of common
stock  at  a  purchase  price  of  $13.50 per share.  The Board of Directors may
expand  the  offering  to  a  maximum  of 555,555 shares.  As of March 15, 2000,
155,038  shares  of  the current offering have been sold, generating proceeds of
$2,093,013.

     There  were  923  holders  of record of the Common Stock as of December 31,
1999.

     State of Franklin currently intends to retain its earnings, if any, for use
in  the  business  and  does  not  anticipate  paying  any cash dividends in the
foreseeable  future.  The board of directors cannot predict when such dividends,
if any, will ever be made.  The payment of dividends, if any, shall at all times
be  subject  to  the  payment of expenses, the maintenance of reasonable working
capital  and  risk  reserves, and minimum capitalization requirements for banks.

ITEM  6.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR  PLAN  OF  OPERATION

GENERAL

     The  following  discussion  and  analysis  is  intended  to  assist  in
understanding  the financial condition and the results of operations of State of
Franklin.  References  to  "State  of  Franklin"  include  State  of  Franklin
Bancshares,  Inc.  and/or  State  of  Franklin  Savings  Bank.

FOR  THE  YEAR  ENDED  DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31,
1998

EARNINGS  REVIEW

     Total  net income of State of Franklin for the year ended December 31, 1999
was  $1,087,097,  an  increase of $590,608 over the year ended December 31, 1998
total  net  income of $496,454.   Net income per share was $0.95 compared to per
share  income  of  $0.44  in  1998.  Return  on average assets was 0.77% and the
return  on average equity was 9.43% for the year period ended December 31, 1999.

     Operating  results  in  1999  reflected  higher  net  interest  income  and
noninterest  income.  Net  interest  income  of  $4.3 million for the year ended
December  31,  1999  was  up  51% over the 1998 period.  Loans increased 34% and
deposits  increased  37%.  The  1999  provision  for  possible  loan  losses was
$181,429.  Noninterest  income  increased  $130,831, or 32%, with other fees and
service  charges and net gain on loans sold responsible for most of the increase
over the year ended December 31, 1998.  Noninterest expense was $3.0 million for
the  1999  period,  an increase of 26% over the 1998 period, primarily resulting
from  increased  salaries  and benefits, data processing and other expenses as a
result  of  the  overall  growth  of  State  of  Franklin.

NET  INTEREST  INCOME  AND  MARGIN

     Net  interest  income  increased  $1.4  million  or  51% for the year ended
December  31,  1999  to $4.3 million compared to $2.8 million for the year ended
December  31, 1998.  Total loans outstanding increased $29.2 million or 34% over
total  loans  at  December  31,  1998.


                                       22
<PAGE>
     Average  deposits  increased  by  38% or $32.9 million to $119.1 million in
1999  compared  to  $86.2  million  in  1998.  The  rate  paid  on  average
interest-bearing  liabilities  decreased  38  basis points during the year ended
December  31,  1999  to  5.05%.

PROVISION  FOR  LOAN  LOSSES

     During  the  year  ended December 31, 1999, the provision for possible loan
losses  was  $181,429.  There  were  $1,450 in charge-offs during the year ended
December  31, 1999 and $277 for the year ended December 31, 1998.  The allowance
for possible loan losses represented 0.71% of total loans, net of mortgage loans
held-for-sale,  at  December  31,  1999, compared to 0.74% at December 31, 1998.

PROVISION  FOR  INCOME  TAXES

     For  the  year  ended December 31, 1999, the provision for income taxes was
$507,805,  an  increase  of $455,599 from 1998, primarily due to the increase in
income  before  income  taxes.

NONINTEREST  INCOME

     State  of  Franklin's noninterest income was $541,986 during the year ended
December  31,  1999,  an  increase  of  $130,831 or 32% over the comparable 1998
period.  The  increase  was  attributable to increases in other fees and service
charges, net gain on loans sold, insurance commission and income, and net rental
income of $101,019, $55,582, $2,414, and $8,163, respectively, which were offset
by  decreases in other income and net gain on sale and maturity of securities of
$10,301  and  $26,045,  respectively.

NONINTEREST  EXPENSE

     Noninterest expense totaled $3.0 million for the period ending December 31,
1999,  an  increase  of  $624,298.  Compensation  and  related  benefits of $1.3
million  accounted  for 42% of the total compared to $1.0 million or 44% for the
year  ended  December  31,  1998.


BALANCE  SHEET  REVIEW

     State  of  Franklin  places  an  emphasis  on an integrated approach to our
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.

INVESTMENT  SECURITIES

     Investment  securities  totaled  $35.4  million  at December 31, 1999.  The
majority  of  the  holdings  are  backed  by  U. S. Government or Federal Agency
guarantees  limiting  the  credit  risk  associated  with  these securities.  At
December  31,  1999,  available-for-sale  securities  totaled  $21.4 million and
held-to-maturity  totaled  $14  million  compared  to  $12.0  million
available-for-sale  and no held-to-maturity investment at December 31, 1998.  At
December 31, 1999, we had experienced gross unrealized losses of $924,603 in our
available-for-sale  investment  securities  and $687,162 in our held-to-maturity
securities  due to changes in market rates.  All securities were purchased at or
below par value and are redeemable at par value upon maturity of the investment.
Due  to  the  credit  quality  of  these  investments,  no  realized  losses are
expected.

LOANS

     Loans  outstanding  totaled  $114.9  million  at  December  31, 1999.  This
represented  an  increase of 32% from the December 31, 1998 outstanding loans of
$86.9  million.

     Consumer  loans increased to $9.7 million at December 31, 1999, an increase
of 26% from $7.7 million at December 31, 1998.  Real estate construction lending
totaled  $23.5  million  and  $22.0  million  at  December  31,  1999  and 1998,
respectively.  Commercial  loans  of  $41.9  million  at  December  31, 1999, an
increased  58%  from  $26.6  million  at  December  31,  1998.


                                       23
<PAGE>
NON-PERFORMING  ASSETS

     Nonaccrual  loans totaled $221,781  at December 31, 1999 and $0 at December
31,  1998.  Loans  past  due  90  days  or more were $0 at December 31, 1999 and
$2,000 at December 31, 1998. The allowance for possible loan losses was $810,303
and  $630,324  at December 31, 1999 and 1998, respectively.  Management believes
the allowance for possible loan losses is adequate to provide for potential loan
losses.

DEPOSITS

     Total  deposits  at  December  31,  1999  of $132.2 million, represented an
increase  of  $35.9 million or a 37% increase from $96.4 million at December 31,
1998.  Non-interest bearing demand deposits totaled $7.8 million at December 31,
1999,  a  increase  of  $2.2  million  or  40% from December 31, 1998.  Interest
bearing demand and money market deposits increased $1.7 million to $20.1 million
at December 31, 1999.  Savings deposits increased $37.5 million to $43.6 million
at  December  31,  1999.  Time  deposits  of  $60.8 million decreased from $66.3
million  at December 31, 1998.  The decline in time deposits was due mainly to a
shift  into  a  new  savings product offered by the Bank.  The millennium saving
account  was offered through out 1999 and guaranteed a 5% rate through year-end.

CAPITAL

     Equity  capital at December 31, 1999 was $13.5 million, an increase of $1.9
million from $11.6 million at December 31, 1998.  The increase in equity capital
was  due in part to a new stock offering beginning in November.  By December 31,
1999,  State of Franklin had issued 111,092 additional shares of stock resulting
in  an  addition to capital of  $1.5 million.  At December 31, 1999, all capital
ratios  were in excess of the regulatory minimums, with State of Franklin's Tier
1,  total  risk-based  and  leverage  ratio  of  13.86%,  14.66%  and  9.09%,
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  which  State  of  Franklin  has  not
significantly  used.  State  of  Franklin had unused sources of liquidity in the
form  of  unused  federal  funds  lines  of  credit and a line of credit for the
Federal  Home Loan Bank of Cincinnati totaling $14 million at December 31, 1999.

EFFECTS  OF  INFLATION  AND  CHANGING  PRICES

     The  consolidated financial statements and related financial data presented
herein  have  been  prepared  in  accordance  with generally accepted accounting
principles,  which  require  the measurement of financial position and operating
results  in terms of historical dollars, without considering changes in relative
purchasing  power  over  time  due  to  inflation.

     Unlike  most  industrial  companies,  virtually  all  of  the  assets  and
liabilities  of  a  financial  institution are monetary in nature.  As a result,
interest  rates  generally  have  a  more  significant  impact  on  a  financial
institution's  performance  than  does  the effect of inflation.  In the current
interest  rate  environment,  the  liquidity and maturity structures of State of
Franklin's  assets  and  liabilities  are  critical to maintenance of acceptable
performance  levels.

YEAR  2000

     State of Franklin experienced a successful transition into the 21st century
primarily resulting from extensive testing and correcting problems in advance of
the  change  date.  We  will continue to test operating systems during the first
half  of 2000 to insure all programs are operating properly.  There have been no
occurrences  of  Y2K  failure  during  the  first  ten  weeks  of the year 2000.


                                       24
<PAGE>
ITEM  7.  FINANCIAL  STATEMENTS

The  consolidated financial statements of State of Franklin are set forth below.

                       STATE OF FRANKLIN BANCSHARES, INC.

                             JOHNSON CITY, TENNESSEE

                              INDEX TO AUDIT REPORT

                           DECEMBER 31, 1999 AND 1998



AUDITED  CONSOLIDATED  FINANCIAL  STATEMENTS:
                                                                         PAGES
                                                                         -----

     Independent  Auditor's  Report                                        26

     Consolidated  Statements  of  Financial  Condition                    27

     Consolidated  Statements  of  Income                                  28

     Consolidated  Statements  of  Changes  in  Stockholders'  Equity      29

     Consolidated  Statements  of  Cash  Flows                        30 - 31

     Notes  to  Consolidated  Financial Statements                    32 - 55

     Statement  of  Management  Responsibility                             56


                                       25
<PAGE>
<TABLE>
<CAPTION>
<S>                  <C>                                     <C>
                          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)
-----------------
                               P.O. BOX 1736                 A.C. NICKELL, CPA (1921-1983)
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)
</TABLE>



                          INDEPENDENT AUDITOR'S REPORT


To  the  Stockholders  and
  the  Board  of  Directors
State  of  Franklin  Bancshares,  Inc.
Johnson  City,  Tennessee


We  have audited the accompanying consolidated statements of financial condition
of State of Franklin Bancshares, Inc. (a Tennessee corporation) and subsidiaries
as  of  December  31,  1999 and 1998, and the related consolidated statements of
income,  changes  in  stockholders'  equity  and  cash flows for the years ended
December  31,  1999, 1998 and 1997.  These consolidated financial statements are
the  responsibility  of  State  of  Franklin Bancshares, Inc.'s management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based  on  our  audits.

We  conducted  our  audits  in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance  about  whether  the consolidated financial statements are
free  of  material  misstatement.  An audit includes examining, on a test basis,
evidence  supporting  the  amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made  by  management,  as well as evaluating the overall
financial  statement  presentation.  We  believe  that  our  audits  provide  a
reasonable  basis  for  our  opinion.

In  our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material respects, the financial position of State of Franklin
Bancshares,  Inc.  and  subsidiaries  as  of December 31, 1999 and 1998, and the
results  of  their  operations and their cash flows for the years ended December
31,  1999,  1998  and  1997  in  conformity  with  generally accepted accounting
principles.



BAYLOR  AND  BACKUS
Certified  Public  Accountants

Johnson  City,  Tennessee

March  15,  2000



    MEMBERS OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS & TENNESSEE
                     SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS


                                       26
<PAGE>
<TABLE>
<CAPTION>
                                       STATE OF FRANKLIN BANCSHARES, INC.
                                           JOHNSON CITY, TENNESSEE
                               CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                           DECEMBER 31, 1999 AND 1998

                                                  A S S E T S


                                                                                1999              1998
                                                                         ------------------  ----------------
<S>                                                                      <C>                 <C>
Cash and Due from Banks                                                          2,785,509         2,507,172

Federal Funds Sold                                                                 308,000         6,421,000
Short-Term Interest-Bearing Deposits                                               133,148         5,000,000
                                                                         ------------------  ----------------
    Total Cash and Cash Equivalents                                              3,226,657        13,928,172
                                                                         ------------------  ----------------
Investments - Held-To-Maturity
  (Estimated Market 1999 - $13,301,184)
  (Estimated Market 1998 - $-0-)                                                13,988,346                --
Investments - Available-for-Sale                                                21,440,591        12,248,572
Loans Held for Sale 453,562                                                       ,627,400
Loans and Leases Receivable                                                    114,439,773        85,228,897
  Less: Allowance for Loan and Lease Loss                                         (810,303)         (630,324)
                                                                         ------------------  ----------------
Loans and Leases Receivable, Net                                               113,629,470        84,598,573
                                                                         ------------------  ----------------
Accrued Interest Receivable, Net                                                 1,271,439           685,963
Land, Buildings and Equipment at Cost Less  Accumulated
 Depreciation of $607,618 in 1999  and $347,134 in 1998                          4,058,242         4,117,351
Prepaid Expense and Accounts Receivable                                             77,907            48,218
Receivable from ESOP                                                                    --           108,286
FHLB Stock                                                                       1,417,700           471,200
Investment in Service Bureau at Cost                                                15,000            15,000
Deferred Tax Assets                                                                599,503           186,946
                                                                         ------------------  ----------------
    Total Assets                                                                160,178,417       118,035,681
                                                                         ==================  ================

                 L I A B I L I T I E S   A N D   S T O C K H O L D E R S'   E Q U I T Y

Liabilities:
Interest-Free Deposits                                                           7,762,451         5,638,066
Interest-Bearing Deposits                                                      124,475,175        90,726,011
Advances by Borrowers for Taxes and Insurance                                      117,372            98,784
Accrued Interest on Deposits                                                        95,734           103,769
Accounts Payable and Accrued Expenses                                              488,630           189,379
Notes Payable                                                                      626,615           687,925
FHLB Advances                                                                   13,092,707         9,000,000
Deferred Gain on REO                                                                21,448            21,448
                                                                         ------------------  ----------------

    Total Liabilities                                                           146,680,132       106,465,382
                                                                         ------------------  ----------------

Stockholders' Equity:

Common Stock, $1.00 Par Value,
  Authorized: 10,000,000 Shares; Issued: 1,301,519 Shares
    at December 31, 1999 and 1,180,152 Shares at December 31, 1998               1,301,519         1,180,152
Common Stock Subscribed                                                                 --             6,996
Paid-In Capital                                                                  2,243,730        10,905,359
Accumulated Other Comprehensive Income                                            (610,238)           39,820
Retained Earnings                                                                1,189,889           102,792
Less: Employee Stock Ownership                                                    (626,615)        (664,820)
                                                                         ------------------  ----------------

  Total Stockholders' Equity                                                    13,498,285        11,570,299
                                                                         ------------------  ----------------

    Total Liabilities and Stockholders' Equity                                 160,178,417       118,035,681
                                                                         ==================  ================
</TABLE>


                                       27
<PAGE>
<TABLE>
<CAPTION>
                               STATE OF FRANKLIN BANCSHARES, INC.
                                    JOHNSON CITY, TENNESSEE
                               CONSOLIDATED STATEMENTS OF INCOME
                      FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

                                                         1999           1998           1997
                                                    --------------  -------------  ------------
<S>                                                 <C>             <C>            <C>
Interest Income
   Interest on Loans                                    8,220,542      5,756,736     2,729,255
   Other Interest Income                                2,211,555      1,820,032     1,946,194
                                                    --------------  -------------  ------------

      Total Interest Income                            10,432,097      7,576,768     4,675,449
                                                    --------------  -------------  ------------

Interest Expense
   Interest on Deposits                                 5,663,933      4,457,203     2,975,541
   Other Interest Expense                                 506,556        303,932           786
                                                    --------------  -------------  ------------

      Total Interest Expense                            6,170,489      4,761,135     2,976,327
                                                    --------------  -------------  ------------

Net Interest Income Before Provision for
Loan Losses                                             4,261,608      2,815,633     1,699,122
Provision for Loan Losses                                (181,429)      (275,127)     (226,095)
                                                    --------------  -------------  ------------

      Net Interest Income After Provision for Loan
      Losses                                            4,080,179      2,540,506     1,473,027
                                                    --------------  -------------  ------------

Other Income
   Other Fees and Service Charges                         277,474        176,455        87,238
   Net Gain on Loans Sold                                 101,762         46,180        15,138
   Net Gain on Sale and Maturity of Securities             12,724         38,769       148,045
   Insurance Commission Income                             39,534         37,120        34,776
   Rental Income, Net                                     110,493        102,330        36,839
   Other                                                       --         10,301        17,563
                                                    --------------  -------------  ------------

      Total Other Income                                  541,987        411,155       339,599
                                                    --------------  -------------  ------------

Other Expenses
      Compensation and Related Benefits                 1,275,949      1,048,393       782,029
      Occupancy Expenses                                  278,804        246,437       190,762
      Furniture and Equipment Expenses                    258,480        183,905        98,439
      Advertising                                         147,032        118,102       132,316
      Data Processing Expense                             320,692        218,251       121,240
      Other                                               746,307        587,878       435,882
                                                    --------------  -------------  ------------

          Total Other Expenses                          3,027,264      2,402,966     1,760,668
                                                    --------------  -------------  ------------

Income Before Income Taxes                              1,594,902        548,695        51,958
Provision for Income Taxes                               (507,805)       (52,206)        5,077
                                                    --------------  -------------  ------------

Net Income                                              1,087,097        496,489        57,035
                                                    ==============  =============  ============

Basic Earnings Per Share                                     0.97           0.44          0.05
                                                    ==============  =============  ============

Diluted Earnings Per Share                                   0.95           0.44          0.05
                                                    ==============  =============  ============
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>
                                                                     Accumulated
                                                 Common                 Other                Employee
                                      Common     Stock      Paid-In  Comprehensive Retained  Stock
                                      Stock    Subscribed   Capital     Income     Earnings  Ownership     Total
                                     --------  ----------  ----------  --------   ---------  ---------  -----------
<S>                                 <C>        <C>         <C>         <C>        <C>        <C>        <C>
Balance at December 31, 1996          610,000          --   5,230,415    58,997   (450,732)        --    5,448,680
                                                                                                       ------------
Net Proceeds
  from Secondary Stock Offering       501,280          --   4,929,721        --         --         --    5,431,001
                                                                                                       ------------
Comprehensive Income
 Other Comprehensive Income,
  Net of Tax:
   Unrealized Gains on Securities
    Available-For-Sale:
      Unrealized Holding Gains
       Arising During the Period
       (Net of $61,152  Income Tax)        --          --          --    59,709         --         --       59,709
Less: Reclassification Adjustment
       (Net of $48,076 Income Tax)         --          --          --   (93,325)        --         --      (93,325)
                                                                                                           (33,616)
Net Income                                 --          --          --        --     57,035         --       57,035
                                                                                                       ------------
Total Comprehensive Income                 --          --          --        --         --         --       23,419
                                    ---------  ----------  ----------  --------  ---------  ---------  ------------
Balance at December 31, 1997        1,111,280          --  10,160,136    25,381   (393,697)        --   10,903,100
                                                                                                       ------------
Net Proceeds
  from Sale of Stock                   68,872       6,996     745,223        --         --   (700,000)      121,091
                                                                                                       ------------
ESOP Shares Allocated                      --          --          --        --         --     35,180       35,180
                                                                                                       ------------
Comprehensive Income
 Other Comprehensive Income,
  Net of Tax:
   Unrealized Gains on Securities
    Available-For-Sale:
     Unrealized Holding Gains
      Arising During the Period
       (Net of $20,496 Income Tax)         --          --          --    39,820         --         --       39,820
Less: Reclassification Adjustment
       (Net of $14,520 Income Tax)         --          --          --   (25,381)        --         --      (25,381)
                                                                                                            14,439
Net Income                                 --          --          --        --    496,489         --      496,489
                                                                                                       ------------
Total Comprehensive Income                 --          --          --        --         --         --      510,928
                                    ---------  ----------  ----------  --------  ---------  ---------  ------------
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
                                                                                                       ------------
Net Income                                 --          --          --        --  1,087,097         --    (650,058)
                                                                                                        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
                                    =========  ==========  ==========  ========  =========  =========  ============
</TABLE>

     The accompanying notes are an integral part of the consolidated financial
                                   statements.


                                       29
<PAGE>
<TABLE>
<CAPTION>
                                            STATE OF FRANKLIN BANCSHARES, INC.
                                                 JOHNSON CITY, TENNESSEE
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


                                                                  1999            1998            1997
                                                              --------------  -------------  --------------
<S>                                                           <C>             <C>            <C>
Cash Flows from Operating Activities
 Net Income                                                      1,087,097         496,489          57,035
 Items Not Affecting Cash and Cash Equivalents:
  Depreciation                                                     260,484         200,848         107,624
  (Increase) in Accrued Interest                                  (585,476)       (285,203)       (238,330)
  Deferred Tax Assets                                              (71,570)       (139,229)         (5,077)
  Provisions for Loan Losses                                       181,429         275,127         226,094
  (Increase) Decrease in Prepaid Expenses
    and Accounts Receivable                                         78,597          23,673         (44,510)
  Increase (Decrease) in Interest Payable                           (8,035)         60,300          21,845
  Increase (Decrease) in Accounts Payable
  Increase in Deferred Loan Fees, Net                                4,993          14,873          35,042
  (Gain) on Sale of Investments                                    (12,724)        (38,769)       (148,045)
  Discount Accretion                                               (10,046)         (9,097)        (23,559)
  Earned ESOP Shares                                                38,205          12,075              --
  FHLB Stock Dividends                                             (75,800)        (20,359)             --
  (Increase) Decrease in Loans Available-For-Sale                1,173,838      (1,447,100)       (180,300)
                                                              -------------  --------------  --------------

    Net Cash Provided (Used) by Operating Activities             2,354,095        (789,019)       (372,188)
                                                              -------------  --------------  --------------

Cash Flows from Investing Activities
 Purchase of Held-to-Maturity Investments                      (13,987,813)             --              --
 Purchase of Available-for-Sale Investments                    (17,041,379)    (20,233,390)    (16,284,843)
 Proceeds from Maturities of Held-to-Maturity Investments               --      10,000,000              --
 Proceeds from Sale of Available-for-Sale Investments              255,734       6,874,235      12,683,359
  Proceeds from Maturities of Available-for-Sale Investments     6,595,000       7,500,000       1,500,000
  Principal Payments on Mortgage-Backed Securities                  35,965         143,676          72,359
  Increase in Loans Receivable, Net                            (29,217,319)    (34,673,331)    (33,501,786)
  Purchases of Premises and Equipment                             (201,375)       (749,918)     (2,068,063)
  Purchase of FHLB Stock                                          (870,700)       (451,000)             --
                                                              -------------  --------------  --------------
    Net Cash Used by Investing Activities                      (54,431,887)    (31,589,728)    (37,598,974)
                                                              -------------  --------------  --------------
</TABLE>


                                       30
<PAGE>
<TABLE>
<CAPTION>
                                            STATE OF FRANKLIN BANCSHARES, INC.
                                                 JOHNSON CITY, TENNESSEE
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                                                          1999            1998            1997
                                                                      -------------  --------------  --------------
<S>                                                                   <C>            <C>             <C>
Cash Flows from Financing Activities
  Net Increase in Deposits                                              35,873,550      24,120,193      38,026,675
  Net Increase in Advances by Borrowers
  for Taxes and Insurance                                                   18,588          38,873          40,303
  Issuance of Common Stock, Net                                          1,452,742          55,483       5,431,001
  Organization Costs                                                            --         (11,355)             --
  Proceeds from Debt                                                     4,092,707      10,300,000              --
  Repayments of Debt                                                       (61,310)       (612,075)             --
                                                                      -------------  --------------  --------------

      Net Cash Provided by Financing Activities                          1,376,277      33,891,119      43,497,979
                                                                      -------------  --------------  --------------

        Net Increase (Decrease) in Cash and Cash Equivalents           (10,701,515)      1,512,372       5,526,817

Cash and Cash Equivalents at Beginning of Period                        13,928,172      12,415,800       6,888,983
                                                                      -------------  --------------  --------------

        Cash and Cash Equivalents at End of Period                       3,226,657      13,928,172      12,415,800
                                                                      =============  ==============  ==============

Supplemental Schedule of Noncash Investing and Financing Activities:

Increase (Decrease) in Unrealized Gain on Securities
   Available-For-Sale, Net of Deferred Tax Liability                      (650,058)         14,439         (33,616)
Acquisition of Operating Equipment for Contributed Capital                       -              --          16,500
Acquisition of Real Estate Property through
  Foreclosure of Related Loan                                                0,973         241,600              --
Origination of Mortgage Loan to Finance
   the Sale of Foreclosed Real Estate                                       81,000         270,000              --
                                                                      =============  ==============  ==============

Supplemental Disclosures of Cash Flow Information:

  Cash Paid During the Period for:

    Taxes                                                                  275,960         170,415              --
                                                                      =============  ==============  ==============

    Interest                                                             6,178,524       4,700,835       2,954,482
                                                                      =============  ==============  ==============
</TABLE>

The  accompanying  notes  are  an  integral  part  of the consolidated financial
statements.


                                       31
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  1   SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES
------    ----------------------------------------------

          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.  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.

          The State of Franklin  Savings Bank (Savings Bank),  headquartered  in
          Johnson City,  Tennessee,  was  incorporated on February 15, 1996, and
          was the first Tennessee Chartered Stock Savings Bank under the Savings
          Bank  Chartering  Act of 1991 (Savings Bank Act).  The Savings  Bank's
          application to the Federal  Deposit  Insurance  Corporation  (FDIC) to
          obtain  federal  deposit  insurance  for the  Savings  Bank's  deposit
          accounts  under the Bank Insurance Fund (BIF) was approved on February
          9,  1996.   The  Tennessee   Department   of  Financial   Institutions
          (Department)  approved the Savings Bank's registration on February 15,
          1996.

          The  Savings  Bank's  initial  stock  offering  of 610,000  shares was
          completely subscribed. All shares were purchased as of March 31, 1996,
          the end of the initial offering period.

          A private placement offering was conducted in 1997 with 501,280 shares
          of  subscribed  common  stock sold for $11 per share.  The date of the
          offering  was April 7, 1997,  expiring on September  30,  1997.  Total
          proceeds  received  related  to the  offering  were  $5,495,380  and a
          receivable  of  $18,700  was due from  Individual  Retirement  Account
          transfers at December 31, 1997. Expenses relating to the offering were
          $83,079.  The net proceeds of $5,431,001  were used to provide capital
          to support future operations.

          A second  private  placement  offering began on November 17, 1999. The
          number of shares  originally  offered  was  370,370  with a maximum of
          555,555  shares.  The  offering  price is  $13.50.  A total of 111,092
          shares had been sold  through  December  31,  1999,  generating  gross
          proceeds of $1,499,742.

          The State of Franklin Savings Bank's primary market area is Washington
          and Sullivan Counties and their immediate  vicinity in Tennessee.  The
          Savings Bank has three  branches in Johnson City,  Tennessee,  and one
          branch in Kingsport, Tennessee.

          The  principal  business  of the  Savings  Bank is to  accept  savings
          deposits  from  the  general  public  and  to  invest  such  funds  in
          residential  mortgage  loans and,  to a lesser  extent,  consumer  and
          commercial  loans.  The  Savings  Bank  provides  a  wide  variety  of
          financial services to its customers.

          A summary of significant accounting policies of the Company follows:

          BASIS OF FINANCIAL STATEMENT PRESENTATION

          The  consolidated  financial  statements  include the  accounts of the
          Company and its subsidiaries.  All significant  intercompany  accounts
          and  transactions  have been eliminated.  The  consolidated  financial
          statements  of the  Company  have been  prepared  in  conformity  with
          generally  accepted  accounting  principles  and  reflect  the accrual
          method  of  accounting.   In  preparing  the  consolidated   financial
          statements,  management is required to make estimates and  assumptions
          that affect the reported  amounts of assets and  liabilities as of the
          date of the consolidated financial statements and the reported amounts
          of revenues and expenses during the reporting  period.  Actual results
          could differ significantly from those estimates.


                                       32
<PAGE>

                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  1   Continued
-------

          Material  estimates that are  particularly  susceptible to significant
          change  relate to the  determination  of the  allowance  for losses on
          loans.

          A substantial  portion of the Savings  Bank's loans is secured by real
          estate in local markets. Accordingly, the ultimate collectibility of a
          substantial   portion  of  the  Savings   Bank's  loan   portfolio  is
          susceptible to changes in local market conditions.

          Management believes the allowance for loan losses is adequate.

          While  management  uses available  information to recognize  losses on
          loans,  future  additions to the allowances may be necessary  based on
          changes  in  local  economic  conditions.   In  addition,   regulatory
          agencies,   as  an  integral  part  of  their   examination   process,
          periodically review the Savings Bank's allowances for losses on loans.
          Such  agencies may require the Savings Bank to recognize  additions to
          the allowance based on their judgments about information  available to
          them at the time of their examination.

          CASH AND CASH EQUIVALENTS

          Cash and highly liquid  investments with maturities of three months or
          less when purchased are considered  cash and cash  equivalents for the
          purposes of the consolidated  statements of cash flows.  Cash and cash
          equivalents  consist  primarily of cash and due from banks and federal
          funds sold.

          LAND, BUILDINGS AND EQUIPMENT

          Land is carried at cost. Buildings and equipment,  including leasehold
          improvements, are carried at cost and are being depreciated over their
          estimated  useful  lives  on the  straight-line  method.  Repairs  and
          maintenance items are expensed and improvements are capitalized.  Upon
          retirement or sale, any gain or loss will be charged to operations.

          LOANS RECEIVABLE

          Loans  receivable are stated at unpaid  principal  balances,  less the
          allowance for loan losses and net deferred loan  origination  fees and
          unearned discounts.

          Unearned  discounts on installment loans are recognized as income over
          the term of the loans using a method that  approximates  the  interest
          method.

          Loan  origination  and  commitment  fees,  as well as  certain  direct
          origination  costs,  are deferred and amortized as a yield  adjustment
          over  the  lives of the  related  loans  using  the  interest  method.
          Amortization  of  deferred  loan fees is  discontinued  when a loan is
          placed on nonaccrual status.

          Loans  are  placed  on  nonaccrual   when  principal  or  interest  is
          delinquent for 90 days or more. Any unpaid interest previously accrued
          on those loans is reversed  from income,  and  thereafter  interest is
          recognized only to the extent of payments received.

          The  allowance  for loan losses is  maintained  at a level  which,  in
          management's judgment, is adequate to absorb credit losses inherent in
          the loan portfolio.  Management's  periodic evaluation of the adequacy
          of the  allowance  is based  on the  Savings  Bank's  past  loan  loss
          experience,  known  and  inherent  risks  in  the  portfolio,  adverse
          situations that may affect the borrower's ability to repay,  estimated
          value of any underlying  collateral,  and current economic conditions.
          The  allowance  for loan losses is increased  by a provision  for loan
          losses, which is charged to expense, and decreased by charge-offs (net
          of recoveries).


                                       33
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  1    Continued
-------

          INVESTMENT AND MORTGAGE-BACKED SECURITIES

          The Company is subject to Statement of Financial  Accounting Standards
          (SFAS) No. 115,  Accounting for Certain Investments in Debt and Equity
          Securities. Accordingly, investment and mortgage-backed securities are
          categorized   as   either   held-to-maturity,   trading   account   or
          available-for-sale securities.

          Held-to-maturity  securities are bonds, notes and debentures for which
          the  Savings  Bank has the  positive  intent  and  ability  to hold to
          maturity and are reported at cost, adjusted for premiums and discounts
          that are recognized in interest  income using the interest method over
          the period to maturity.

          Trading account securities are investments held principally for resale
          in the  near  term  and  mortgage-backed  securities  held for sale in
          conjunction   with  mortgage  banking   activities.   Trading  account
          securities  would be recorded at their fair values.  Unrealized  gains
          and losses on trading account securities would be included immediately
          in  other  income.   The  Savings  Bank  has  no  securities  in  this
          classification at year end.

          Available-for-sale securities consist of bonds, notes, debentures, and
          certain equity  securities not classified as trading  securities or as
          held-to-maturity  securities.  The change in unrealized  holding gains
          and losses, net of tax, on available-for-sale  securities are reported
          as a separate component of other comprehensive  income until realized.
          Realized gains (losses) on available-for-sale  securities are included
          in other income  (expense)  and,  when  applicable,  are reported as a
          reclassification  adjustment,  net  of  tax,  in  other  comprehensive
          income.

          Gains and  losses  on the sale of  available-for-sale  securities  are
          determined using the specific-identification  method. The amortization
          of premiums and the accretion of discounts are  recognized in interest
          income using methods approximating the interest method over the period
          of maturity.

          Declines  in  the  fair  value  of  individual   held-to-maturity  and
          available-for-sale  securities  below  their  cost that are other than
          temporary  would  have  resulted  in  write-downs  of  the  individual
          securities to their fair value.  No write-downs  have been included in
          earnings as realized losses.

          FEDERAL HOME LOAN BANK STOCK

          Federal  Home Loan Bank  (FHLB)  stock is a  required  investment  for
          institutions  that are members of the Federal  Home Loan Bank  system.
          The   required   investment   in  the  common  stock  is  based  on  a
          predetermined  formula  and is  carried  at cost  on the  consolidated
          statements of financial condition.

          FORECLOSED REAL ESTATE

          Foreclosed real estate includes both formally  foreclosed property and
          in-substance  foreclosed property.  In-substance foreclosed properties
          are those  properties  for which the  institution  has taken  physical
          possession,  regardless of whether formal foreclosure proceedings have
          taken place.

          At the time of foreclosure,  foreclosed real estate is recorded at the
          lower of the  carrying  amount or fair value less cost to sell,  which
          becomes the property's new basis. Any write-downs based on the asset's
          fair value at date of  acquisition  are charged to the  allowance  for
          loan losses. After foreclosure,  these assets are carried at the lower
          of  their  new cost  basis  or fair  value  less  cost to sell.  Costs
          incurred  in  maintaining   foreclosed   real  estate  and  subsequent
          adjustments  to the  carrying  amount of the  property are included in
          income (loss) on foreclosed real estate.


                                       34
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  1     Continued
-------

          INCOME TAXES

          Income  taxes are  provided  for the tax  effects of the  transactions
          reported in the consolidated financial statements and consist of taxes
          currently due plus deferred  taxes  related  primarily to  differences
          between the basis of  available-for-sale  securities and allowance for
          loan losses for financial and income tax  reporting.  The deferred tax
          assets and liabilities represent the future tax return consequences of
          those differences, which will either be taxable or deductible when the
          assets and liabilities  are recovered or settled.  Deferred tax assets
          and  liabilities  are reflected at income tax rates  applicable to the
          period in which the deferred tax assets or liabilities are expected to
          be realized or settled.  As changes in tax laws or rates are  enacted,
          deferred tax assets and liabilities are adjusted through the provision
          for income taxes.

          DIVIDENDS

          As was anticipated,  for at least the first three years of operations,
          all earnings,  which were generated from the operations of the Savings
          Bank, were used to finance the growth of the Savings Bank and were not
          available to be paid to outside stockholders as dividends.  Hereafter,
          in determining whether dividends will be declared on the Common Stock,
          the Board of Directors will take into account the Company's  operating
          results,  financial condition, tax considerations,  future capital and
          cash flow requirements, and other relevant factors.

          Tennessee  law  requires  that  dividends  be paid only from  retained
          earnings (or  undivided  profits),  except that  dividends may be paid
          from capital  surplus with the prior written  consent of the Tennessee
          Department  of  Financial  Institutions.   Tennessee  laws  regulating
          savings banks require  certain  charges  against and transfers from an
          institution's  undivided  profits account before undivided profits can
          be made  available  for the payment of  dividends.  In  addition,  the
          Department  generally  prohibits a newly  chartered  institution  from
          paying  dividends  during its first three years of operations  without
          the Department's prior approval.

          On August 21,1998,  the Savings Bank paid a special one-time  dividend
          of $5,000  to the  Company.  This  dividend  was used to pay  expenses
          related to the formation of the Holding Company.  The Savings Bank had
          received approval from the State of Tennessee  Department of Financial
          Institutions.

          RECLASSIFICATIONS

          In  instances  where  required,   amounts  reported  in  prior  year's
          financial  statements  included  herein have been  reclassified to put
          them on a comparable basis to the amounts reported in the December 31,
          1999 consolidated financial statements.

NOTE  2   LAND,  BUILDINGS  AND  EQUIPMENT
-------   --------------------------------

          Fixed  assets at December 31, 1999,  1998 and 1997 are  summarized  as
          follows:

<TABLE>
<CAPTION>
                                        1999       1998       1997
                                      ---------  ---------  ---------
<S>                                   <C>        <C>        <C>
Land                                    850,000    850,000    850,000
Buildings and Leasehold Improvements  2,296,821  2,213,345  1,964,431
Furniture, Fixtures and Equipment     1,519,039  1,401,140    900,136
                                      ---------  ---------  ---------
                                      4,665,860  4,464,485  3,714,567
Less: Accumulated Depreciation          607,618    347,134    146,286
                                      ---------  ---------  ---------

                                      4,058,242  4,117,351  3,568,281
                                      =========  =========  =========
</TABLE>


                                       35
<PAGE>
<TABLE>
<CAPTION>
                                        STATE OF FRANKLIN BANCSHARES, INC.
                                            JOHNSON CITY, TENNESSEE
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          DECEMBER 31, 1999, 1998 AND 1997


NOTE  3   LOANS  AND  LEASES  RECEIVABLE
-------   ------------------------------

          Loans and  leases  receivable  at  December  31,  1999,  1998 and 1997
          consist of the following:


                                                      1999            1998           1997
                                                 --------------  --------------  -------------
<S>                                              <C>             <C>             <C>
First Mortgage Loans                                43,715,282      35,195,869     24,984,570
Construction Loans                                  23,525,380      22,024,861     11,859,068
Consumer Loans                                       9,703,102       7,726,136      4,764,911
Participation Loans, Net                               533,676         863,162        873,263
Commercial Loans                                    41,919,362      26,603,529     12,256,079
Savings Account Loans                                  248,964         545,011        193,130
Credit Line Advances                                   419,062         396,618        239,115
Direct Finance Leases                                  904,705         120,999             --
                                                 --------------  --------------  -------------

Gross Loans and Leases Receivable                  120,969,533      93,476,185     55,170,136
                                                 --------------  --------------  -------------

Less:
Undisbursed Portion of Loans in Process             (6,457,206)     (8,179,727)    (4,387,881)
Net Deferred Loan Origination Fees                     (72,554)        (67,561)       (52,688)
Accumulated General Loan Loss Allowance               (810,303)       (630,324)      (355,474)
                                                 --------------  --------------  -------------

                                                    (7,340,063)     (8,877,612)    (4,796,043)
                                                 -------------  --------------  -------------

Loans and Leases Receivable - Net                  113,629,470      84,598,573     50,374,093
                                                 ==============  ==============  =============

An analysis of the allowance for loan and lease
losses is as follows:
                                                     1999             1998           1997
                                                 --------------  --------------  -------------

Balance - Beginning of Period                          630,324         355,474        130,715

Provision for Losses                                   181,429         275,127        226,094
Actual Loan and Lease Losses                            (1,450)           (277)        (1,335)
                                                 --------------  --------------  -------------

Balance - End of Period                                810,303         630,324        355,474
                                                 ==============  ==============  =============
</TABLE>

          The gross amount of participation  loans serviced by State of Franklin
          Savings Bank was  $1,067,240  and $1,220,000 for December 31, 1999 and
          1998, respectively.


                                       36
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  4   SUPERVISION  AND  REGULATION
-------   ----------------------------

          GENERAL

          As a  Tennessee-chartered  federally insured savings bank, the Savings
          Bank is subject to extensive regulation.  Lending activities and other
          investments   must  comply  with  various   statutory  and  regulatory
          requirements,  including  prescribed  minimum capital  standards.  The
          Savings  Bank is  regularly  examined  by the FDIC  and the  Tennessee
          Department  of  Financial  Institutions  and  files  periodic  reports
          concerning its activities and financial condition with its regulators.
          The Savings Bank's  relationship with depositors and borrowers also is
          regulated  to a great  extent by both  federal law and the laws of the
          State of  Tennessee,  especially  in such matters as the  ownership of
          savings accounts and the form and content of mortgage documents.

          Federal and state banking laws and regulations govern all areas of the
          operation of the Savings Bank, including reserves,  loans,  mortgages,
          capital,   issuance   of   securities,   payment  of   dividends   and
          establishment of branches.  Federal and state bank regulatory agencies
          also have the general authority to limit the dividends paid by insured
          banks if such  payments  should be deemed to  constitute an unsafe and
          unsound  practice.  The primary federal regulator of the Savings Bank,
          the FDIC,  has  authority  to  impose  penalties,  initiate  civil and
          administrative  actions and take other steps intended to prevent banks
          from engaging in unsafe or unsound practices.

          Tennessee  law  permits  the  Savings  Bank to  become a member of the
          Federal  Reserve  System or the  Federal  Home Loan Bank  System.  The
          Savings Bank is a member of the Federal Home Loan Bank of  Cincinnati.
          The FHLB of  Cincinnati  functions  as a  central  reserve  bank  that
          provides credit for member institutions. The Savings Bank, as a member
          of the FHLB of  Cincinnati,  is required  to own capital  stock in the
          FHLB  of   Cincinnati.   Provided   certain   standards   related   to
          creditworthiness  continue  to  be  met,  the  Savings  Bank  will  be
          authorized  to apply for  additional  advances on the security of such
          stock  and on  certain  of its  residential  mortgage  loans and other
          assets   (principally,   securities   which  are  obligations  of,  or
          guaranteed by, the United States). The Savings Bank's current advances
          from FHLB are disclosed in Note 9.

          TENNESSEE SUPERVISION AND REGULATION

          As a Tennessee-chartered  savings bank, the Savings Bank is subject to
          various state laws and  regulations  that limit the amount that can be
          loaned to a single borrower, the type of permissible investments,  and
          geographic expansion, among other things. The Savings Bank must submit
          an  application  and receive the  approval  of the  Department  before
          opening  a  new  branch  office  or  merging  with  another  financial
          institution. The Commissioner of the Department (Commissioner) has the
          authority  to  enforce  state  laws  and  regulations  by  ordering  a
          director,  officer or employee of the Savings Bank to cease and desist
          from  violating a law or  regulation  and unsafe and  unsound  banking
          practices.


                                       37
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  4   Continued
-------

          FEDERAL REGULATION

          The Company is subject to regulation by the Federal Reserve Bank (FRB)
          and is required to file annual  reports  with the FRB.  The Company is
          subject  to  examination  by the FRB and is  required  to  obtain  FRB
          approval  prior to  aquiring,  directly or  indirectly,  ownership  or
          control of more than 5% of the voting stock of a bank.  The Company is
          only able to engage in,  own,  or  control  companies  that  engage in
          activities closely related to banking.

          The Savings Bank was approved by the FDIC to have its deposit accounts
          insured up to applicable  limits by the Bank  Insurance  Fund. The BIF
          was  designated  as  an  insurance  fund  pursuant  to  the  Financial
          Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). As
          insurer, the FDIC issues regulations, conducts examinations,  requires
          the filing of reports  and  generally  supervises  and  regulates  the
          operations  of  state-chartered  banks  that  are not  members  of the
          Federal Reserve System.  FDIC approval is required prior to any merger
          or   consolidation   involving   state,   nonmember   banks,   or  the
          establishment  or  relocation  of an  office  facility  thereof.  FDIC
          supervision and regulation is intended primarily for the protection of
          depositors and the FDIC insurance funds.

          Any insured bank that does not operate in  accordance  with or conform
          to FDIC  regulations,  policies and  directives  may be sanctioned for
          noncompliance.  For example, proceedings may be instituted against any
          insured bank or any  director,  officer,  or employee of such bank who
          engages in unsafe and unsound  practices,  including  the violation of
          applicable  laws  and  regulations.  The  FDIC  has the  authority  to
          terminate  deposit  insurance  pursuant to procedures  established for
          that  purpose.  Failure  to  meet  minimum  capital  requirements  can
          initiate     certain      mandatory---and      possibly     additional
          discretionary---actions by regulators that, if undertaken,  could have
          a direct material effect on the Savings Bank's  financial  statements.
          Under capital  adequacy  guidelines and the  regulatory  framework for
          prompt corrective  action, the Savings Bank must meet specific capital
          guidelines  that involve  quantitative  measures of the Savings Bank's
          assets, liabilities, and certain off-balance-sheet items as calculated
          under  regulatory  accounting  practices.  The Savings  Bank's capital
          amounts and classification  are also subject to qualitative  judgments
          by  the  regulators  about  components,  risk  weightings,  and  other
          factors.

          Quantitative  measures  established  by regulation  to ensure  capital
          adequacy  require the Savings  Bank to  maintain  minimum  amounts and
          ratios (set forth in the table  below) of total and Tier 1 capital (as
          defined in the regulations) to risk-weighted assets (as defined),  and
          Tier 1 capital (as defined) to average assets (as defined). Management
          believes,  as of December  31,  1999,  that the Savings Bank meets all
          capital adequacy requirements to which it is subject.

          As of December 31, 1999,  the most recent  notification  from the FDIC
          categorized the Savings Bank as well-capitalized  under the regulatory
          framework for prompt corrective action. The "prompt corrective action"
          regulations  established  five categories of depository  institutions:
          (1)    well-capitalized,     (2)    adequately    capitalized,     (3)
          under-capitalized,   (4)  significantly  under-capitalized,   and  (5)
          critically  under-capitalized.  Each category  relates to the level of
          capital  for  the   depository   institution.   A   "well-capitalized"
          institution  meets the minimum  level  required by  regulation  (i.e.,
          total risk-based  capital ratio of 10% or greater, a Tier 1 risk-based
          capital ratio of 6% or greater and a leverage ratio of 5% or greater).
          To be categorized as well-capitalized,  the Savings Bank must maintain
          minimum  total  risk-based,  Tier 1  risk-based,  and Tier 1  leverage
          ratios as set forth in the table.  There are no  conditions  or events
          since that  notification  that  management  believes  have changed the
          institution's category.


                                       38
<PAGE>
                        STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     DECEMBER  31,  1999,  1998  AND  1997

NOTE  4   Continued
-------

          The  capital  ratios  for  State  of  Franklin  Savings  Bank  are  as
          follows:

<TABLE>
<CAPTION>
                                                      For Capital
                                                   Adequacy  Purposes
                                                     And To Be Well
                                                   Capitalized  Under
                                                   Prompt  Corrective
                                   Actual          Action  Provisions
                                -----------        ------------------
In Thousands (Unaudited)        Amount  Ratio       Amount    Ratio
--------------------------      -------------       ----------------
<S>                             <C>     <C>         <C>       <C>
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%

As of December 31, 1998:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)   11,908  16.24%       >=7,334   10.0%
  Tier 1 Capital
    (to Risk-Weighted Assets)   10,989  14.98%       >=4,400    6.0%
  Tier 1 Capital
    (to Adjusted Total Assets)  10,989   9.44%       >=5,823    5.0%
</TABLE>

<TABLE>
<CAPTION>
                                                      For Capital
                                                   Adequacy  Purposes
                                                     And To Be Well
                                                   Capitalized  Under
                                                   Prompt  Corrective
                                   Actual          Action  Provisions
                                -------------      ------------------
In Thousands (Unaudited)        Amount  Ratio       Amount    Ratio
--------------------------      -------------       ----------------
<S>                             <C>     <C>         <C>       <C>
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%

As of December 31, 1998:
  Total Risk-Based Capital
    (to Risk-Weighted Assets)   12,161  16.40%       >=7,416  10.0%
  Tier 1 Capital
    (to Risk-Weighted Assets)   11,530  15.55%       >=4,450   6.0%
  Tier 1 Capital
    (to Adjusted Total Assets)  11,530  10.63%       >=5,423   5.0%
</TABLE>


                                       39
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  5   MORTGAGE-BACKED  SECURITIES
-------   ---------------------------

          Mortgage-backed  securities represent participating interests in pools
          of long-term  first mortgage loans  originated and serviced by issuers
          of  the  securities.  Mortgage-backed  securities  are  classified  as
          available-for-sale  securities and carried at fair value. Premiums and
          discounts  are  amortized  using  methods  approximating  the interest
          method over the remaining period to contractual maturity, adjusted for
          anticipated   prepayments.   Expected   maturities  will  differ  from
          contractual maturities because borrowers may have the right to call or
          prepay obligations without call or prepayment penalties.


NOTE  6   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. The ESOP
          was  established  and funded for 1997.  On February  28,  1998,  5,236
          shares of the  Savings  Bank with a fair value of $57,600  were issued
          for the 1997  contribution.  The Savings Bank stock was  exchanged for
          Company  stock as  discussed  in Note 1.  During the third  quarter of
          1998,  the ESOP borrowed  $700,000 from the Company and used the funds
          to purchase  63,636  shares of common  stock of the Company at $11 per
          share.  This  increased the ESOP's  shares from 5,236 to 68,872.  Note
          payments are $8,218 per month for ten years with a fixed interest rate
          of 7.25%. The note balances outstanding at December 31, 1999, 1998 and
          1997 were $626,615, $692,022 and $0, respectively.

          A related loan was granted for the purpose of  leveraging  the ESOP in
          the amount of $700,000 with similar terms and collaterized with stock.
          The note balances outstanding at December 31, 1999, 1998 and 1997 were
          $626,615, $687,925 and $0, respectively.

          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:

<TABLE>
<CAPTION>
                                  December 31,
                                1999       1998
                               -------    -------
<S>                         <C>           <C>
Number of Shares
  Released and allocated          16,054    6,333
  Committed to be Released         5,188    2,101
  Suspense                        59,804   60,438

Fair Value
  Released and allocated         216,729   69,663
  Committed to be Released        70,038   23,111
  Suspense                       807,354  664,820
</TABLE>


                                       40
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  6   Continued
-------

          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  ESOP
          compensation costs exclude interest which is classified as such on the
          consolidated  statements of income.  Contributions  to the ESOP are as
          follows:

                                                          December  31,
                                                        1999        1998
                                                     ---------     -------
           Compensation  Expense                       127,272     76,222
           Contributions                               127,272     76,222

          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 will be 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 6%
          of their  salary  and is  matched  by the  Company  up to the  maximum
          allowed amount.

          In connection with the 401(k) provision and the Company  contribution,
          there were 6,996  shares of common  stock  subscribed  at December 31,
          1998.

          STOCK OPTION PLANS

          On December 21, 1996, the Savings  Bank's Board of Directors  approved
          the Stock  Option  Plan for  Directors  and the Stock  Option Plan for
          Management.  A total of 15% of the  original  stock  offering  (91,500
          shares) was reserved for these plans.  These plans were  retroactively
          amended after year end.

          Under  the  amended  stock  option  plan  for the  outside  directors,
          one-third of the total shares were granted to the outside directors as
          compensation  for directors' fees over the next five years.  Beginning
          when the Savings Bank had annual profitability,  the options will vest
          at 20% per year to each  director.  This will total  2,346  shares per
          director.  The  exercise  price of the  options is $10 per share.  The
          vested  portion of the options may be exercised at any time.  There is
          no  termination  date on the options,  but in the event of death,  the
          estate must exercise the options within twelve months.  If the Savings
          Bank is sold or merged, the options become 100% vested.

          Under the stock  option  plan for  management,  the  remaining  61,000
          shares  were  granted to  management  as an  incentive  in the Savings
          Bank's  performance.  The  options  retroactively  began to vest after
          three consecutive quarters of profitability.  The options will vest at
          20% per year for five years.  The exercise price of the options is $10
          per share.  The vested  portion of the options may be exercised at any
          time. There is no termination date on the options, but in the event of
          death,  the estate must exercise the options within twelve months.  If
          the  individual  leaves the service of the Savings  Bank,  the options
          must be exercised  within three months,  although this requirement may
          be waived by the board.  If the  Savings  Bank is sold or merged,  the
          options become 100% vested.


                                       41
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  6   Continued
-------

          The stock option plans for outside  directors and for management  were
          amended  again,  effective  April 17, 1998,  for 15% of the  secondary
          offering (75,192  shares).  One-third of these shares was allocated to
          outside  directors and the remaining to management.  Exercise price of
          these  options  was set at $11 per  share.  The  other  terms of these
          options are the same as the terms of the original options.

          A new stock incentive plan was started October 15, 1999.  34,000 stock
          options were granted for  management  employees with an exercise price
          of $13.50.  These vested options vest over five years and expire after
          ten  years.  These  are  significant  restrictions  imposed  based  on
          continued employment.

<TABLE>
<CAPTION>
                                                                               Weighted
                                                                               Average
                                                            Awarded            Exercise
                                                              And                Price
                                                           Unexercised Vested     Per
                                                             Options   Options   Share.
                                                         ------------  --------  -------
<S>                                        <C>               <C>       <C>       <C>
  Options Granted - Outside Directors      January 1, 1999   55,564    24,993    $ 10.45

  Options Granted - Management             January 1, 1999   111,128   44,452    $ 10.45

                                           During 1999        34,000        --   $ 13.50

  Options Exercised                                             (554)       --   $ 10.00

  Options Expired - Outside Directors                         (4,997)       --   $ 10.00
                                                              --------  -------

  Options Outstanding - December 31, 1999                     195,141     69,445
                                                              =======     ======
</TABLE>

          The State of Franklin  Savings Bank accounts for these plans under APB
          Opinion No. 25, Accounting for Stock Issued to Employees,  under which
          no  compensation  cost has been  recognized.  Statement  of  Financial
          Accounting Standards No. 123, Accounting for Stock-based Compensation,
          (SFAS No. 123) requires compensation cost to be calculated by the fair
          value based method.  However,  it is not possible to estimate the fair
          value of the options at the grant date.  Therefore,  the  estimates of
          compensation  cost have been  determined by the intrinsic  value based
          method.


                                       42
<PAGE>
<TABLE>
<CAPTION>
                                STATE OF FRANKLIN BANCSHARES, INC.
                                     JOHNSON CITY, TENNESSEE
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999, 1998 AND 1997

NOTE  7   DEPOSITS
-------   --------

          Savings  deposit  balances  are  summarized  as  follows:
                                          December 31, 1999          December 31, 1998
                                     --------------------------  --------------------------
                                    Average                       Average
                                     Rate     Amount     Percent    Rate     Amount    Percent
                                   -------  ----------   -------  -------  ----------  -------
<S>                                <C>      <C>          <C>      <C>       <C>         <C>
  Passbook                            4.85   43,568,092    32.95     4.25   6,083,930     6.31

  Interest-Free Checking                --    7,762,451     5.87       --   4,365,719     4.53

  Christmas Club                      4.25       11,402     0.01     4.25      24,198     0.03

  NOW                                 1.99    6,285,555     4.75     1.64   5,848,650     6.07

  Money Market Deposit                4.48   13,790,665    10.43     4.48  13,730,025    14.25
                                            -----------  -------           ----------  -------

                                             71,418,165    54.01           30,052,522    31.19
                                            -----------  -------           ----------  -------
  Fixed Term Certificate Accounts
    365 Day IRA                       4.91      726,758     0.55     5.27     832,859     0.86
    18 Month IRA                      4.67       34,926     0.03     5.34       8,058     0.01
    30 Month IRA                      4.81      332,300     0.25     5.12     384,998     0.40
    30 Month IRA (and Keogh)          5.93    4,648,935     3.51     6.09   3,446,063     3.58
    30 Month                          5.98   15,788,902    11.94     6.04  10,566,996    10.97
    12 Month Roth IRA                 5.88      110,186     0.08     4.30      99,665     0.10
    18 Month Roth IRA                 4.89       36,473     0.03     4.90      32,773     0.03
    30 Month Roth IRA                 5.62       11,399     0.01     5.69       6,866     0.01
    7 Month                           4.05      627,372     0.47     5.50  10,396,334    10.79
    30 Month Educational IRA          5.50           83       --     5.50          79       --
    9 Month                           4.64      625,716     0.47     5.49   3,195,279     3.31
    11 Month                          5.67    8,316,791     6.29       --          --       --
    1 Year                            5.01    5,614,080     4.24     5.39  11,280,906    11.71
    13 Month                          5.18    8,037,759     6.08       --          --       --
    3 Year                            6.14    3,353,635     2.54     6.15   3,256,713     3.38
    Jumbo                             5.67    4,505,908     3.41     5.83   9,481,823     9.84
    2 Year                            5.37    3,400,250     2.57     5.80   6,059,613     6.29
    4 Year                            6.03      541,219     0.41     6.14     459,645     0.48
    5 Year                            5.89      399,481     0.30     5.92     372,264     0.38
    18 Month                          5.07    1,575,902     1.19     5.44   2,331,932     2.42
    182 Day Money Market              4.61    2,110,308     1.60     4.67   4,078,315     4.23
    90 Day Money Market               3.40       21,078     0.02     3.40      20,374     0.02
                                            -----------  -------           ----------  -------

                                             60,819,461    45.99           66,311,555    68.81
                                            -----------  -------           ----------  -------

                                            132,237,626    100.00          96,364,077   100.00
                                            ===========  ========          ==========  =======
</TABLE>

The  contractual  maturity  of certificate accounts at December 31, 1999 and
1998, is as ollows:

<TABLE>
<CAPTION>
Year Ending December 31, 1999           Year Ending December 31, 1998
----------------------------------     -----------------------------
<S>                       <C>         <C>                            <C>
2000                      42,805,186      1999                       47,393,530
2001                       5,447,698      2000                       13,584,484
2002                      11,749,728      2001                        4,341,244
2003                         789,631      2002                          355,992
2004 and After                27,218      2003 and After                636,305
                          ----------                                 ----------

                          60,819,461                                 66,311,555
                          ==========                                ===========
</TABLE>


                                       43
<PAGE>
<TABLE>
<CAPTION>
                                    STATE OF FRANKLIN BANCSHARES, INC.
                                          JOHNSON CITY, TENNESSEE
                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      DECEMBER 31, 1999, 1998 AND 1997

NOTE   8   ACCRUED  INTEREST  RECEIVABLE,  NET
--------   -----------------------------------

                                                                1999      1998
                                                             ---------   -------
<S>                                                          <C>         <C>
  Loans (Net of Allowance for Uncollected Interest of $0)      640,909   471,133
  Mortgage Backed Securities                                        --       210
  Investment Securities                                        620,334   206,606
  Cash and Due from Banks                                        1,015     8,014
                                                             ---------   -------
                                                             1,262,258   685,963
                                                             =========   =======
</TABLE>

NOTE   9   FEDERAL  HOME  LOAN  BANK  ADVANCES
--------   -----------------------------------

          Advances  from FHLB are  summarized  as follows for the periods  ended
          December 31, 1999 and 1998:

<TABLE>
<CAPTION>
  Contractual Maturity                                    1999       1998
                                                       ----------  ----------
<S>                                                    <C>         <C>
  Cash Management (Rate Floats Daily) (Within 1 Year)  4,045,000          --
                                                       ==========  ==========

  Fixed Rate (Within 10 Years)                         9,000,000   9,000,000
                                                       ==========  ==========

  Weighted Average Rate                                     5.43%       5.42%
</TABLE>

          The Savings Bank pledges as collateral for these  borrowings  selected
          qualifying  mortgage  loans (as defined)  under an agreement  with the
          FHLB.  Loans pledged at December 31, 1999 and 1998 were  approximately
          $19,669,661 and $13,500,000, respectively.


NOTE  10   OTHER  NONINTEREST  EXPENSE
--------   ---------------------------

          Other  noninterest  expense  amounts are summarized as follows for the
          periods ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         1999     1998     1997
                                                        -------  -------  -------
<S>                                                     <C>      <C>      <C>

  Other Noninterest Expense:
    Seminars and Education Expenses                      42,550   36,343   24,308
    Insurance Expense                                    42,237   32,241   32,322
    Professional Expenses and Supervisory Examinations  118,729   99,748   61,133
    Office Supplies and Postage                         156,513  149,478  144,851
    Telephone                                           114,625   82,512   43,638
    Other                                               271,658  187,556  129,630
                                                        -------  -------  -------

                                                        746,312  587,878  435,882
                                                        =======  =======  =======
</TABLE>


                                       44
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  11   ORGANIZATION  EXPENSE
--------   ---------------------

          The  following  organization  expenses  were  netted  against  paid-in
          capital:

<TABLE>
<CAPTION>
                                     1999   1998   1997
                                     ----  ------  ----
<S>                                  <C>   <C>     <C>
  Compensation and Related Benefits    --      --    --
  Supplies                             --      --    --
  Telephone                            --      --    --
  Advertising                          --      --    --
  Other                                --  11,355    --
                                     ----  ------  ----

                                       --  11,355    --
                                     ====  ======  ====
</TABLE>

NOTE  12   INVESTMENT  SECURITIES
--------   ----------------------

          The   amortized   cost  and  fair  value  of   investment   securities
          held-to-maturity and available-for-sale at December 31, 1999 and 1998,
          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.

<TABLE>
<CAPTION>
  December 31, 1999:
  ---------------------------
                                            Gross        Gross     Estimated
                                          Amortized    Unrealized  Unrealized    Market
                                             Cost        Gains       Losses      Value
                                          -----------  ----------  ----------  ----------
<S>                                       <C>          <C>         <C>         <C>
Available-for-Sale:
   United States Government
    Agency Securities Maturing:
     After one year
      but within five years                   997,706          --      31,336     966,370
    After five years
      but within ten years                 15,765,456          --     713,089  15,052,367
    Over ten years
      but within fifteen years              2,993,262          --     180,178   2,813,084
    Equity Securities
    Callable after five years
      but within ten years                  1,000,000          --          --   1,000,000
  Other
    Within one year                         1,608,770          --          --   1,608,770
                                          -----------  ----------  ----------  ----------

      Total Available-for-Sale             22,365,194          --     924,603  21,440,591
                                          ===========  ==========  ==========  ==========
  Held-to-Maturity:
  United States Government
    Agency Securities Maturing:
    After one year
      but within five years                 1,000,000          --      27,138     972,862
    After five years
    but within ten years                   12,988,346          --     660,024  12,328,322
                                          -----------  ----------  ----------  ----------

                Total Held-to-Maturity     13,988,346          --     687,162  13,301,184
                                          ===========  ==========  ==========  ==========
</TABLE>


                                       45
<PAGE>
<TABLE>
<CAPTION>
                                   STATE OF FRANKLIN BANCSHARES, INC.
                                        JOHNSON CITY, TENNESSEE
                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   DECEMBER 31, 1999, 1998 AND 1997

  December 31, 1998:
  ---------------------------
                                                         Gross           Gross     Estimated
                                                        Amortized      Unrealized  Unrealized    Market
                                                           Cost          Gains       Losses      Value.
                                                     ----------------  ----------  ----------  ----------
<S>                                       <C>                          <C>         <C>         <C>
Available-for-Sale:
   United States Government
    Agency Securities Maturing:
     After one year
        but within five years                               5,989,785      20,515          --   6,010,300

      After five years
        but within ten years                                5,564,386      39,557          --   5,603,943
    Mortgage Backed Securities:
      Corporate issue                                          35,947         211          --      36,158
    Other
      Within one year                                         598,171          --          --     598,171
                                                         ------------  ----------  ----------  ----------

        Total                                              12,188,289      60,283          --  12,248,572
                                                         ============  ==========  ==========  ==========
</TABLE>

          Gross proceeds from sales of investment securities  available-for-sale
          for the period ended December 31, 1999, 1998 and 1997 were $6,630,965,
          $14,374,235 and $14,183,359, respectively, resulting in gross gains of
          $12,724, $38,769 and $148,045, respectively.


NOTE  13   LEGAL  PROCEEDINGS
--------   ------------------

          The Company and its subsidiaries  are  periodically  involved in legal
          proceedings  that are  generally  incidental to their  businesses.  At
          December 31, 1999, there were no legal  proceedings that were expected
          to have a material impact on the Company's financial statements.


                                       46
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  14   RELATED  PARTY  TRANSACTIONS
--------   ----------------------------

          Activity  with The Savings Bank has granted  loans to its officers and
          directors.  Management  believes  that  such  loans  were  made in the
          ordinary  course of  business  with  normal  credit  terms,  including
          interest  rates and collateral and do not represent more than a normal
          risk of collection.  related parties during 1999, 1998 and 1997 was as
          follows:

<TABLE>
<CAPTION>
                                                   1999          1998          1997
                                                -----------  ------------  ------------
<S>                                             <C>          <C>           <C>
  Loan Balances at the Beginning of the Period   4,118,565     2,046,056       555,432
  New Loans                                      1,950,877     2,514,787     1,656,131
  Repayments                                    (1,024,694)     (442,278)     (165,507)
                                                -----------  ------------  ------------

  Loan Balances at the End of the Period         5,044,748     4,118,565     2,046,056
                                                ===========  ============  ============
</TABLE>

          Officers and directors  have  unsecured  lines of credit that have not
          been used in the amount of  $151,964,  $49,501 and $56,500 at December
          31, 1999, 1998 and 1997, respectively.

          Officers  and  directors  also  have  unsecured  overdraft  protection
          accounts with available balances in the amount of $55,468, $83,892 and
          $26,518 at December 31,  1999,  1998 and 1997,  respectively.  Secured
          home-equity  lines  of  credit  for  officers  and  directors  have an
          available  amount of  $172,164,  $39,579 and  $15,170 at December  31,
          1999, 1998 and 1997, respectively.

          Two individuals, one a director and the other an officer and director,
          are also partners in a partnership in which the following  significant
          transaction occurred:

          The Savings  Bank  leases the Browns Mill Office in Johnson  City from
          The partnership.  The monthly lease payments were $2,550 per month for
          all of 1998 and 1997 and part of 1999,  increasing  to  $2,932  during
          1999.

NOTE  15   COMMITMENTS
--------   -----------

          In the normal course of business,  State of Franklin  Savings Bank has
          various  outstanding  commitments and contingent  liabilities that are
          not reflected in the accompanying  consolidated  financial statements.
          The principal commitments of the Savings Bank are as follows:

<TABLE>
<CAPTION>
                                December 31, 1999                     December 31, 1998
                       -------------------------------------------------------------------------
                        Fixed       Variable       Fixed      Variable
                        Rate          Rate         Total        Rate        Rate        Total
                      ----------  ------------  ------------  ---------  -----------  ----------
<S>                   <C>         <C>           <C>           <C>        <C>          <C>

Mortgage Loans
 to Originate            100,000      1,896,550    1,996,550         --      294,400     294,400
Unsecured Lines
 of Credit                    --        526,107      526,107         --      511,287     511,287
Overdraft Protection
 Accounts                318,458             --      318,458    260,595           --     260,595
Home Equity
 Lines of Credit              --      3,879,949    3,879,949         --    2,498,854   2,498,854
Commercial                    --      3,795,484    3,795,484         --    2,451,831   2,451,831
                      ----------  -------------  -----------  ---------  -----------  ----------

                         418,458     10,098,090   10,516,548    260,595    5,756,372   6,016,967
                      ==========  =============  ===========  =========  ===========  ==========
</TABLE>


                                       47
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  15   Continued
--------

          Commitments  under  standby  letters of credit  totaled  approximately
          $215,407 and $242,133 at December 31, 1999 and 1998, respectively.

          At December 31, 1999,  the Savings Bank had unused lines of credit for
          funds  purchases  and daylight  overdrafts  with two banks.  The lines
          total $4,000,000 and have variable interest rates based on the lending
          bank's daily federal  funds rate.  The Savings Bank also has available
          lines of credit with FHLB in the amount of $21,944,600.

          The  Savings  Bank is  engaged  in the sale of  mortgage  loans on the
          secondary  market.  These loans are sold outright and are not serviced
          by the Savings Bank.  The gain on the sale of these  mortgage loans is
          as follows:

<TABLE>
<CAPTION>
                            1999       1998
                          ---------  ---------
<S>                       <C>        <C>
  Selling Price           8,832,597  5,083,213
  Less: Carrying Value    8,690,751  5,016,375
            Loan Cost        40,084     20,658
                          ---------  ---------

  Net Gain on Loans Sold    101,762     46,180
                          =========  =========
</TABLE>

          At December 31, 1999 and 1998,  the Savings  Bank had  mortgage  loans
          committed to be sold totaling  $453,562 and $1,627,400,  respectively.
          Commitments to originate loans to be sold on the secondary market were
          $416,050 and $1,758,740 at December 31, 1999 and 1998, respectively.

          The Savings Bank leases office space at the Browns Mill Road,  Johnson
          City,  branch location under an operating lease which was scheduled to
          expire on August  31,  1999  with an  option to renew and  extend  for
          another  three years.  The Savings Bank  exercised  the option and the
          lease has been  extended  until August 31, 2002.  The Savings Bank has
          two  automobile  leases that expire on June 15, 2000. The Savings Bank
          also  leases  storage  space at the Browns  Mill Road,  Johnson  City,
          branch location under a month-to-month operating lease.

          Management  expects as operating leases expire in the normal course of
          business,  they  will be  renewed  or  replaced  by  leases  on  other
          properties at current market rental rates at the time of renewal.

          Approximate minimum future rentals to be paid under the cancelable and
          noncancelable  leases for five years  subsequent  to December 31, 1999
          are as follows:

<TABLE>
<CAPTION>
                                 Noncancelable  Cancelable
  Years Ended                       Leases        Leases -
  December 31,                  Building & Auto  Building
------------------------------  ---------------  ---------
<S>                             <C>              <C>
2000                                     43,034      1,680
2001                                     35,190      1,680
2002                                     35,190      1,680
2003                                     35,190      1,680
2004                                     35,190      1,680
                                ---------------  ---------

  Total Minimum Future Rentals          183,794      8,400
                                ===============  =========
</TABLE>


                                       48
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  16   FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS
--------   ---------------------------------------

          The fair value of  financial  instruments  is disclosed to comply with
          SFAS No. 107,  Disclosure  about Fair Value of Financial  Instruments.
          The following  tables present  estimates of fair value for the Savings
          Bank's financial instruments at

December  31,  1999  and  1998:
------------------------------

<TABLE>
<CAPTION>
                                          Carrying       Fair
                                           Amount        Value
                                         -----------  -----------
<S>                                      <C>          <C>
Financial Assets:
  Cash and Cash Equivalents                3,226,657    3,226,657
  Investment Securities                   35,428,937   34,741,775
  Loans                                  114,083,032  113,565,759
  Accrued Interest Receivable              1,271,439    1,271,439

Financial Liabilities:
  Deposits                               132,237,626  132,286,777
  Advance Payments by Borrowers
    for Taxes and Insurance (Escrows)        117,371      117,371
  Accrued Interest on Deposits                95,734       95,734
  Notes Payable                              626,615      596,843
  FHLB Advances                           13,092,708   13,092,708

December  31,  1998:
-------------------

                                          Carrying       Fair
                                           Amount        Value
                                         -----------  -----------
Financial Assets:
  Cash and Cash Equivalents               13,928,172   13,928,172
  Investment Securities                   12,248,572   12,248,572
  Loans                                   86,225,973   86,997,373
  Accrued Interest Receivable                685,963      685,963

Financial Liabilities:
  Deposits                                96,364,077   96,684,783
  Advance Payments by Borrowers
    for Taxes and Insurance (Escrows)         98,784       98,784
  Accrued Interest on Deposits               103,769      103,769
  Notes Payable                              687,925      673,283
  FHLB Advances                            9,000,000    9,000,000
</TABLE>

          The  carrying  amounts  in the  preceding  table are  included  in the
          consolidated  statements of financial  condition  under the applicable
          captions.  The contract or notional amounts of the Company's financial
          instruments with  off-balance-sheet  risk are disclosed in Note 15. No
          derivatives  were  held  by  the  Company.  It is not  practicable  to
          estimate the fair value of Federal Home Loan Bank stock  because it is
          not marketable.  The carrying amount of that investment is reported at
          cost in the consolidated statements of financial condition.


                                       49
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  16   Continued
--------

          The following  describes the  assumptions  and  methodologies  used to
          calculate the fair value for financial instruments.

          FAIR  VALUES  OF   FINANCIAL   INSTRUMENTS:   Statement  of  Financial
          ----------------------------------------
          Accounting   Standards  No.  107,  Disclosures  about  Fair  Value  of
          Financial  Instruments,  requires disclosure of fair value information
          about financial instruments,  whether or not recognized in the balance
          sheet,  for which it is practicable  to estimate that value.  In cases
          where quoted market prices are not available, fair values are based on
          estimates  using present value or other  valuation  techniques.  Those
          techniques  are  significantly   affected  by  the  assumptions  used,
          including  the discount  rate and  estimates of future cash flows.  In
          that regard,  the derived fair value estimates cannot be substantiated
          by comparison to independent  markets and, in many cases, could not be
          realized in immediate settlement of the instruments. Statement No. 107
          excludes   certain   financial   instruments   and  all   nonfinancial
          instruments  from  its  disclosure  requirements.   Accordingly,   the
          aggregate fair value amounts presented do not represent the underlying
          value of the Company.

          FLOATING  RATE LOANS:  Floating rate 1-4 family  residential  mortgage
          -------------------
          loans reprice periodically and will lag movements in market rates. The
          fair  value  for  floating  rate  mortgage   loans  is  calculated  by
          discounting  future  cash flows to their  present  value.  Future cash
          flows,  consisting  of  principal  payments,  interest  payments,  and
          repricings,  are  discounted  with  current  Savings  Bank  prices for
          similar instruments  applicable to the remaining maturity.  Prepayment
          assumptions based on historical prepayment speeds have been applied to
          the 1-4 family residential floating rate mortgage portfolio.

          FIXED RATE LOANS AND  LEASES:  The fair value for fixed rate loans and
          -----------------------------
          leases is calculated by discounting future cash flows to their present
          value.  Future cash flows,  consisting of both  principal and interest
          payments,  are discounted with current Savings Bank prices for similar
          instruments   applicable   to  the  remaining   maturity.   Prepayment
          assumptions based on historical prepayment speeds have been applied to
          the fixed rate mortgage and installment loan portfolios.

          ALLOWANCE  FOR LOAN LOSSES:  The fair value of the  allowance for loan
          ----------------------------
          losses is  approximated  by the book value.  Additionally,  the credit
          exposure  known  to exist in the loan  portfolio  is  embodied  in the
          allowance for loan losses.

          CASH AND CASH EQUIVALENTS: The fair value of cash and cash equivalents
          ----------------------------
          are approximated by the book value.


                                       50
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  16   Continued
--------

          INVESTMENT SECURITIES: Market quotes, when available, are used for the
          ----------------------
          fair value of investment securities.

          DEFINED  MATURITY  DEPOSITS:  The  fair  value  for  defined  maturity
          ---------------------------
          deposits  is  calculated  by  discounting  future  cash flows to their
          present  value.  Future cash flows,  consisting of both  principal and
          interest payments, are discounted with Savings Bank prices for similar
          instruments  applicable to the remaining maturity.  For the purpose of
          this disclosure, defined maturity deposits include all certificates of
          deposit and other time deposits.

          UNDEFINED  MATURITY  DEPOSITS:  The fair value of  undefined  maturity
          -----------------------------
          deposits is required by the statement to equal the book value. For the
          purpose of this disclosure, undefined maturity deposits include demand
          deposits,  checking interest  accounts,  savings  accounts,  and money
          market accounts.

          LONG-TERM  DEBT:  The fair value of  long-term  debt  instruments  and
          ---------------
          Federal Home Loan Bank advances is estimated  using a discounted  cash
          flow calculation, based on current rates for similar debt.

          LIMITATIONS: The foregoing fair value estimates are made at a specific
          -----------
          point in time, based on pertinent market data and relevant information
          on the  financial  instrument.  These  estimates  do not  include  any
          premium or discount  that could  result from an offer to sell,  at one
          time,  the Savings  Bank's entire  holdings of a particular  financial
          instrument  or  category  thereof.   Since  no  market  exists  for  a
          substantial portion of the Savings Bank's financial instruments,  fair
          value  estimates were  necessarily  based on judgments with respect to
          future expected loss  experience,  current economic  conditions,  risk
          assessments  of various  financial  instruments  involving a myriad of
          individual borrowers, and other factors. Given the innately subjective
          nature of these estimates, the uncertainties  surrounding them and the
          matters of significant judgment that must be applied, these fair value
          estimations cannot be calculated with precision. Modifications in such
          assumptions could meaningfully alter these estimates.

          Since  these fair value  approximations  were made  solely for on- and
          off-balance  sheet  financial  instruments,  no  attempt  was  made to
          estimate  the value of  anticipated  future  business and the value of
          nonfinancial   statement  assets  and  liabilities.   Other  important
          elements  which are not deemed to be financial  assets or  liabilities
          include the value of the Savings  Bank's  existing  core deposit base,
          premises  and   equipment,   and   goodwill.   Further,   certain  tax
          implications  related to the  realization of the unrealized  gains and
          losses could have a substantial  impact on these fair value  estimates
          and have not been incorporated into any of the estimates.


                                       51
<PAGE>
<TABLE>
<CAPTION>

                          STATE OF FRANKLIN BANCSHARES, INC.
                                JOHNSON CITY, TENNESSEE
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999, 1998 AND 1997

NOTE  17   FEDERAL  INCOME  TAX
--------   -------------------

          A  reconciliation  between the effective income tax expense or benefit
          and the amount computed by multiplying the projected statutory federal
          income tax rate for the period ended December 31, 1999,  1998 and 1997
          is as follows:

                                                      1999        1998       1997
                                                   ----------  ----------  ---------
<S>                                                <C>         <C>         <C>

Computed "Expected" Tax (Expense) Benefit           (602,076)   (186,556)    (7,794)
Bad Debt Deduction                                    68,490     110,492    (73,785)
Amortization of Organization Expense                  23,232      17,845     16,943
Other                                                (23,223)       (855)     1,101
Reversal of Allowance for Deferred Tax Assets             --          --     68,612
FHLB Dividends                                        25,772       6,868         --
                                                   ----------  ----------  ---------

Provision for Income Taxes                          (507,805)    (52,206)     5,077
                                                   ==========  ==========  =========

Current Income Tax (Expense) Benefit                (579,375)   (183,707)    13,075
Deferred Income Tax (Expense) Benefit                 71,570     131,501     (7,998)
                                                   ----------  ----------  ---------

Provision for Income Taxes                          (507,805)    (52,206)     5,077
                                                   ==========  ==========  =========

Deferred Tax Assets:
  Due to Net Operating Loss Carryforward               3,517          --     68,521
  Due to Unrealized (Gains) Losses on Investments    314,365     (20,496)   (13,076)
  Due to FHLB Dividends                              (26,294)     (6,868)        --
  Due to Reserve for Loan Losses                     307,915     214,310         --
                                                   ----------  ----------  ---------

                                                     599,503     186,946     55,445
                                                   ----------  ----------  ---------
Reserve for Deferred Tax Assets:
  Beginning Balance                                       --          --    (68,612)
  Amount Reserved                                         --          --         --
  Reversal of Reserved Amount                             --          --     68,612
                                                   ----------  ----------  ---------

    Ending Balance                                        --          --         --
                                                   ----------  ----------  ---------

Deferred Tax Assets - Net                            599,503     186,946     55,445
                                                   ==========  ==========  =========
</TABLE>

          The Savings Bank had a net  operating  loss  carryforward  of $195,157
          which was used to offset  federal  taxable income in 1998. The holding
          company has a net operating loss carryforward of $10,435 for 1999.

          In  assessing  the  realizability  of the related  deferred tax asset,
          management  considers  whether  it is more  likely  than not that some
          portion or all of the  deferred  tax asset will not be  realized.  The
          ultimate  realization  of deferred  tax assets is  dependent  upon the
          existence of, or generation  of,  taxable  income in the periods which
          those temporary  differences are deductible.  Management considers the
          projected future taxable income and tax planning  strategies in making
          this  assessment.  Based upon the projection for future taxable income
          over the  periods  which  the  deferred  tax asset is  deductible,  at
          December 31, 1999, management believes it is more likely than not that
          the  Savings  Bank  will  realize  the  benefits  of these  deductible
          differences.

NOTE  18   COMPREHENSIVE  INCOME
--------   ---------------------

          In June of 1997,  the  Financial  Accounting  Standards  Board  issued
          Statement of Financial  Accounting  Standards No. 130, (SFAS No. 130),
          Reporting   Comprehensive   Income.  This  new  statement  establishes
          standards for reporting and  displaying  comprehensive  income and its
          components  in a basic set of  financial  statements.  The  purpose of
          reporting  comprehensive  income is to report a measure of all changes
          in equity of an enterprise that results from  recognized  transactions
          and other economic events of the period other than  transactions  with
          owners in their capacity as owners.


                                       52
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                             JOHNSON CITY, TENNESSEE
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997

NOTE  18   CONTINUED
--------

          Comprehensive  income is defined as the change in equity of a business
          enterprise  during a period  from  transactions  and other  events and
          circumstances from nonowner sources. It includes all changes in equity
          during a period except those resulting from  investments by owners and
          distributions to owners.

          Reclassification   adjustments   are   made  to  avoid   counting   in
          comprehensive  income  items that are  displayed as part of net income
          for  a  period  that  also  had  been   displayed  as  part  of  other
          comprehensive  income in that period or earlier periods.  For example,
          gains on investment  securities that were realized and included in net
          income of the  current  period  that also had been  included  in other
          comprehensive  income as  unrealized  holding  gains in the  period in
          which they arose must be deducted through other  comprehensive  income
          of the  period  in which  they are  included  in net  income  to avoid
          including them in comprehensive income twice.

          State of Franklin Savings Bank adopted SFAS No. 130 effective December
          31, 1997 and restated  the previous  year's  financial  statements  to
          comply with the new reporting requirements.

NOTE  19   EARNINGS  (LOSS)  PER  SHARE
--------   ----------------------------

          Statement of Financial  Accounting  Standards  No. 128 (SFAS No. 128),
          Earnings  Per Share,  is  effective  for  fiscal  years  ending  after
          December 15, 1997. This statement presents standards for computing and
          presenting  earnings  per share  (EPS) and  applies to  entities  with
          publicly  held common stock or potential  common  stock.  SFAS No. 128
          simplifies  previous  standards  for  computing  EPS  and  makes  them
          comparable   to   international   EPS   standards.   It  replaces  the
          presentation of primary EPS with the  presentation of basic EPS. Basic
          EPS excludes  dilution and is computed by dividing income available to
          common  stockholders by the  weighted-average  number of common shares
          outstanding  for  the  period.  Diluted  EPS  reflects  the  potential
          dilution that could occur if  securities  or other  contracts to issue
          common stock were exercised or converted into common stock or resulted
          in the  issuance of common  stock that then shared in the  earnings of
          the entity. Diluted EPS is computed similarly to fully diluted EPS.

          The Savings Bank adopted  SFAS No. 128  effective  January 1, 1997 and
          restated the previous year's  financial  statements to comply with the
          new reporting requirements.

<TABLE>
<CAPTION>
                                               1999       1998       1997
                                             ---------  ---------  ---------
<S>                                          <C>        <C>        <C>
Net Income Available to Common Shareholders  1,087,097    496,489     57,035
                                             =========  =========  =========

Average Shares
  Average Shares - Basic                     1,123,721  1,117,270  1,111,280
  Effect of Dilutive Common Stock Options       24,828      6,484      8,316
                                             ---------  ---------  ---------

  Average Shares - Diluted                   1,148,549  1,123,754  1,119,596
                                             =========  =========  =========

Basic Earnings Per Share                          0.97       0.44       0.05
                                             =========  =========  =========

Diluted Earnings Per Share                        0.95       0.44       0.05
                                             =========  =========  =========
</TABLE>


                                       53
<PAGE>
<TABLE>
<CAPTION>
                                      STATE OF FRANKLIN BANCSHARES, INC.
                                           JOHNSON CITY, TENNESSEE
                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                       DECEMBER 31, 1999, 1998 AND 1997

NOTE  20     CONDENSED  PARENT  COMPANY  ONLY  FINANCIAL  STATEMENTS
--------     -------------------------------------------------------

STATEMENT  OF  FINANCIAL  POSITION


                                                                              December 31,     December 31,
                                                                                  1999             1998
                                                                             --------------  ----------------
<S>                                                                          <C>             <C>
Assets:

Cash and Cash Equivalents                                                        1,467,135               897
Investments - Available-for-Sale                                                   467,471           593,164
Receivable from ESOP                                                                    --           108,286
Investments in Subsidiaries                                                     12,200,724        11,565,733
Deferred Tax Assets                                                                  3,099                --
                                                                             --------------  ----------------

  Total Assets                                                                  14,138,429        12,268,080
                                                                             ==============  ================

Liabilities:
Notes Payable                                                                      626,615           687,925
Accounts Payable and Accrued Expenses                                               13,529             2,743
                                                                             --------------  ----------------

  Total Liabilities                                                                640,144           690,668
                                                                             --------------  ----------------

Stockholders' Equity:
Common Stock, $1.00 Par Value,
  Authorized: 10,000,000 Shares; Issued: 1,301,519 Shares                        1,301,519         1,180,152
Common Stock Subscribed                                                                 --             6,996
Paid-In Capital                                                                 12,243,730        10,907,472
Accumulated Other Comprehensive Income                                            (610,238)           39,820

Retained Earnings                                                                1,189,889           107,792
Less: Employee Stock Ownership                                                    (626,615)         (664,820)
                                                                             --------------  ----------------

  Total Stockholders' Equity                                                    13,498,285        11,577,412
                                                                             --------------  ----------------

    Total Liabilities and Stockholders' Equity                                  14,138,429        12,268,080
                                                                             ==============  ================

STATEMENT OF INCOME
                                                                              Period Ended     Period Ended
                                                                              December 31,     December 31,
                                                                                  1999             1998
                                                                             --------------  ----------------

Interest Income                                                                     27,041             8,634
Other Operating Expenses                                                           (35,205)            5,000
                                                                             --------------  ----------------

Income (Loss) before Income Taxes and Equity
  in Undistributed Earnings of Subsidiaries                                         (8,164)           13,634
Provision for Income Taxes                                                          (3,099)           (2,743)
                                                                             --------------  ----------------

      Income (Loss) before Equity in Undistributed Earnings of Subsidiaries         (5,065)           10,891

Equity in Undistributed Earnings of Subsidiaries                                 1,092,162           485,598
                                                                             --------------  ----------------

Net Income                                                                       1,087,097           496,489
                                                                             ==============  ================
</TABLE>


                                       54
<PAGE>
<TABLE>
<CAPTION>
                               STATE OF FRANKLIN BANCSHARES, INC.
                                    JOHNSON CITY, TENNESSEE
                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1999, 1998 AND 1997

NOTE  20     Continued
--------

                                                                   Period Ended   Period Ended
                                                                   December 31,   December 31,
                                                                       1999           1998
                                                                  --------------  -------------
<S>                                                               <C>             <C>
Cash Flows from Operating Activities
  Net Income                                                          1,087,097        496,489
  Items Not Affecting Cash and Cash Equivalents:
    Equity in Undistributed Earnings of Subsidiaries                 (1,092,162)      (485,598)
    Deferred Tax Asset                                                   (3,099)            --
    Increase in Accounts Payable                                         10,786          2,743
    Earned ESOP Shares                                                   38,205         12,075
    (Increase) Decrease in Accounts Receivable                          108,286         (8,218)
                                                                  --------------  -------------

      Net Cash Provided by Operating Activities                         149,113         17,491
                                                                  --------------  -------------

Cash Flows from Investing Activities
  Purchase of Available-for-Sale Investments                           (130,041)      (707,634)
  Proceeds from Sale of Available-for-Sale Investments                  255,734        114,470
  Investment in Subsidiary                                             (200,000)      (100,000)
                                                                  --------------  -------------

      Net Cash Used by Investing Activities                             (74,307)      (693,164)
                                                                  --------------  -------------

Cash Flows from Financing Activities
  Issuance of Common Stock, Net                                       1,452,742             --
  Organization Costs                                                         --        (11,355)
  Proceeds from Debt                                                         --        700,000
  Repayments of Debt                                                    (61,310)       (12,075)
                                                                  --------------  -------------

      Net Cash Provided by Financing Activities                       1,391,432        676,570
                                                                  --------------  -------------

      Net Increase in Cash and Cash Equivalents                       1,466,238            897

Cash and Cash Equivalents at Beginning of Period                            897             --
                                                                  --------------  -------------

      Cash and Cash Equivalents at End of Period                      1,467,135            897
                                                                  ==============  =============
</TABLE>


                                       55
<PAGE>
                       STATE OF FRANKLIN BANCSHARES, INC.
                     STATEMENT OF MANAGEMENT RESPONSIBILITY


          The  management  of  State  of  Franklin  Bancshares,   Inc.  and  its
          subsidiaries is responsible for the preparation, content and integrity
          of the  consolidated  financial  statements and all other  information
          included in this annual report. The consolidated financial statements,
          which include  management's best estimates where judgment is required,
          are  prepared  in  accordance  with  generally   accepted   accounting
          principles  applied on a consistent basis and meet the requirements of
          the appropriate regulatory agencies.

          The  Company  has  established  and  maintains  a system  of  internal
          controls designed to provide reasonable  assurance as to the integrity
          and reliability of the consolidated  financial  statements and related
          information,  the  protection  of assets and  customer  deposits  from
          material loss or misuse,  and the  detection of  fraudulent  financial
          reporting.  The Company's system of internal controls includes written
          policies  and   procedures,   proper   delegation   of  authority  and
          organizational division of responsibilities, and the careful selection
          and training of qualified personnel.

          Management  recognizes that the cost of a system of internal  controls
          should not exceed the  benefits  derived  and that there are  inherent
          limitations  to be considered in the  potential  effectiveness  of any
          system.  However,  management  believes  that the  system of  internal
          controls provides  reasonable  assurances that financial  transactions
          are  recorded   properly  to  permit  the   preparation   of  reliable
          consolidated financial statements.

          Management  also  recognizes  its  responsibility  for  conducting the
          Company's affairs in an ethical and socially  responsible manner. This
          responsibility is characterized and reflected in key policy statements
          covering, among other subjects,  proper conduct of business practices.
          The Company maintains a systematic program to communicate,  review and
          assess compliance with these policies.

          The Audit  Committee of the Board of Directors has the  responsibility
          for the recommendation of the independent certified public accountants
          for the Company. The Board of Directors,  through its Audit Committee,
          is responsible  for ensuring that both  management and the independent
          certified public accountants fulfill their respective responsibilities
          with regard to the financial  statements.  The  independent  certified
          public accountants have free access to the Audit Committee.

          The Company's  consolidated  financial statements have been audited by
          Baylor and Backus.  Their  responsibility  is to express an opinion on
          the Company's  consolidated  financial  statements  and, in performing
          their audit, to evaluate the Company's  internal control system to the
          extent  they  deem  necessary  in order to  issue  an  opinion  on the
          Company's consolidated  financial statements.  As described further in
          their  report,  their  opinion  is based on their  audits,  which were
          conducted in accordance with generally accepted auditing standards and
          is believed by them to provide a reasonable basis for their opinion.





Charles  E.  Allen,  Jr.                Randal  R.  Greene

Chairman  of  the  Board                President


                                       56
<PAGE>
ITEM  8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING AND
          FINANCIAL  DISCLOSURE

     None

                                  PART  III

ITEM  9.  DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS

     This  item  is  incorporated by reference to pages 4, 5, and 10 of State of
Franklin's  Proxy  Statement related to its 2000 Annual Meeting of Shareholders.

ITEM  10.  EXECUTIVE  COMPENSATION.

     This  item  is  incorporated  by  reference  to  pages 9 and 10 of State of
Franklin's  Proxy  Statement related to its 2000 Annual Meeting of Shareholders.

ITEM  11.  SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND  MANAGEMENT

     This  item  is  incorporated  by reference to page 8 of State of Franklin's
Proxy  Statement  related  to  its  2000  Annual  Meeting  of  Shareholders.

ITEM  12.  CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

     This  item  is  incorporated by reference to page 10 of State of Franklin's
Proxy  Statement  related  to  its  2000  Annual  Meeting  of  Shareholders.

ITEM  13.  EXHIBITS  AND  REPORTS  ON  FORM  8-K

(1)  Exhibits
     --------

     Exhibit No.   Description
     -----------   -----------

     3.1*          Charter  of  State  of  Franklin  Bancshares,  Inc.
     3.2*          Bylaws  of  State  of  Franklin  Bancshares,  Inc.
     21            Subsidiaries  of  State  of  Franklin  Bancshares,  Inc.
     27            Financial  Data  Schedule  (For  SEC  use  only)
  -----------------
  *   Incorporated  herein  by  reference to the Registrant's Form 10-KSB, filed
      with  the  Securities  and  Exchange  Commission  on March 28, 1999
      (File number 000-24675).

(2)  Reports  on  Form  8-K
     ----------------------

     No  reports  on  Form  8-K were filed during the quarter ended December 31,
1999.


                                       57
<PAGE>
     In  accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has  caused this report to be signed on its behalf by the undersigned, thereunto
duly  authorized.

                                        STATE  OF  FRANKLIN  BANCSHARES,  INC.

                                             By:  /s/  Charles  E.  Allen,  Jr.
                                                  -----------------------------
                                                       Chairman  of  the  Board

                                            Date:  March  27,  2000

<TABLE>
<CAPTION>
Signature                                               Capacity                               Date
---------                                             -----------                             ----------
<S>                             <C>                                                       <C>
 /s/ Charles E. Allen, Jr.      Chairman of the Board, Director                           March 27, 2000
------------------------------
Chares E. Allen, Jr.            (principal executive, financial, and accounting officer)
------------------------------  --------------------------------------------------------

 /s/ Randal R. Greene           President, Director                                       March 27, 2000
------------------------------
Randal R. Greene                (principal executive officer)
------------------------------  --------------------------------------------------------

/s/ Stephen Gross               Director                                                  March 27, 2000
------------------------------
Steven Gross
------------------------------

 /s/Donald R. Jeanes            Director                                                  March 27, 2000
------------------------------
Donald R. Jeanes
------------------------------

 /s/ Henry J. Williams, M.D.    Director                                                  March 27, 2000
------------------------------
Henry J. Williams, M.D.
------------------------------

 /s/ Kenneth E. Cutshall, M.D.  Director                                                  March 27, 2000
------------------------------
Kenneth E. Cutshall, M.D.
------------------------------

 /s/ Charles E. Allen, Sr.      Director                                                  March 27, 2000
------------------------------
Charles E. Allen, Sr.
------------------------------

/s/  Richard S. Venable         Director                                                  March 27, 2000
------------------------------
Richard S. Venable
------------------------------

 /s/ Verrill M. Norwood, Jr.    Director                                                  March 27, 2000
------------------------------
Verrill M. Norwood, Jr.
------------------------------

 /s/ Cameron E. Perry           Director                                                  March 27, 2000
------------------------------
Cameron E. Perry
------------------------------

 /s/ Vance W. Cheek             Director                                                  March 27, 2000
------------------------------
Vance W. Cheek
------------------------------
</TABLE>


                                       58
<PAGE>
                                                                      Exhibit 21
                              Subsidiaries of State of Franklin Bancshares, Inc.


     State  of  Franklin  Savings Bank, a Tennessee-chartered savings bank, is a
wholly-owned  subsidiary  of  State of Franklin Bancshares, Inc., as is State of
Franklin  Leasing  Corporation,  a  Tennessee  corporation.  John  Sevier  Title
Services,  Inc.,  a Tennessee corporation, is a wholly owned subsidiary of State
of  Franklin  Savings  Bank.


                                       59
<PAGE>