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                                                                     EXHIBIT 3.2


                                    BYLAWS OF
                       STATE OF FRANKLIN BANCSHARES, INC.
                             A BANK HOLDING COMPANY


                     ARTICLE I - HOME OFFICE; OTHER OFFICES

         The home office of State of Franklin Bancshares, Inc. ("the Company"),
shall be located at 1907 North Roan Street, Johnson City, Washington County,
Tennessee 37601. The Company may maintain other offices at such other places as
may be determined by the Board of Directors, subject to the approval of the
appropriate regulatory authorities.

                            ARTICLE II - SHAREHOLDERS

         SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the home office of the Company or at such other
place as the Board of Directors may determine.

         SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the Company
for the election of Directors and for the transaction of any other business of
the Company shall be held annually within 120 days after the end of the
Company's fiscal year at such date and time within such 120-day period as the
Board of Directors may determine.

         SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Tennessee Commissioner of Financial Institutions ("Commissioner") or the Federal
Reserve Board ("FRB") may be called at any time by the Chairman of the Board,
the President, a majority of the Board of Directors, the Commissioner or the
FRB, and shall be called by the Chairman of the Board, the President, or the
Secretary upon the written request of the holders of not less than ten percent
(10%) of all of the outstanding capital stock of the Company entitled to vote at
the meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Company addressed to
the Chairman of the Board, the President, or the Secretary.

         SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with procedures adopted by the Board of Directors. The
Board of Directors shall designate, when present, either the Chairman or the
President to preside at such meetings.

         SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 10 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, the President, or the Secretary, or the Directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail
addressed to the stockholder at the address as it appears on the stock transfer
books or records of the Bank as of the record date prescribed in Section 6 of
this Article II with postage 



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prepaid. When any shareholders' meeting, either annual or special, is adjourned
for 30 days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting. It shall not be necessary to give any notice of the
time and place of any meeting adjourned for less than 30 days or of the business
to be transacted at the meeting, other than an announcement at the meeting at
which such adjournment is taken.

         SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in the case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this section
such determination shall apply to any adjournment.

         SECTION 7. VOTING LISTS. After fixing a record date for a meeting, the
officer or agent having charge of the stock transfer books for shares of the
Company shall make a complete list of the shareholders entitled to vote at such
meeting, or any adjournment, arranged in alphabetical order, with the address
and the number of shares held by each. This list of shareholders shall be kept
on file at the home office of the Company and shall' be available for inspection
by any shareholder at any time during usual business hours, beginning two (2)
business days after notice of the meeting is given for which the list was
prepared and continuing through the meeting, at the Company's principal office
or at a place identified in the meeting notice in the city where the meeting
will be held. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to inspection by any shareholder
during the entire time of the meeting. The original stock transfer book shall
constitute prima facie evidence of the shareholders entitled to examine such
list or transfer books or to vote at any meeting of shareholders.

         SECTION 8. QUORUM. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present are represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.

         SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid more
than eleven months from the date of its execution. except for a proxy coupled
with an interest.

         SECTION 10. VOTING POWERS. At all meetings of the shareholders, each 
shareholder shall be entitled to cast one vote for each share of stock recorded
in the shareholder's name on the books of the



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Company as of the record date on any issue brought before the meeting; provided,
however, that in electing the Board of Directors, each shareholder shall be
entitled to cast one vote per share for each office of Director to be filled.
There shall be no cumulative voting.

         SECTION 11. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, m the absence of written
directions to the Company to the contrary, at any meeting of the shareholders of
the Company any one or more of such shareholders may cast, in person or by
proxy, all votes to which such ownership is entitled. In the event an attempt is
made to cast conflicting votes, in person or by proxy, by the several persons
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such shares
and present in person or by proxy at such meeting, but no votes shall be cast
for such stock if a majority cannot agree.

         SECTION 12. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation, may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without the transfer into his or her name if authority to do so is contained in
an appropriate order of the court or other public authority by which such
receiver was appointed.

         A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.

         Neither treasury shares of its own stock held by the Company, if
authorized by law, nor shares held by another corporation, if a majority of the
shares entitled to vote for the election of Directors of such other corporation
are held by the Company, shall be voted at any meeting or counted in determining
the total number of outstanding shares at any given time for purposes of any
meeting.

         SECTION 13. NOMINATIONS FOR DIRECTOR. The Board of Directors shall act
as a nominating committee for selecting the management nominees for election as
Directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the Secretary at least twenty (20) days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Company. No nominations for
Directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Company at least five (5) days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Company. Ballots bearing the names
of all persons nominated by the nominating committee and by shareholders shall
be provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least twenty (20) days prior to the



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annual meeting, nominations for Directors may be made at the annual meeting by
any shareholder entitled to vote and shall be voted upon.

         SECTION 14. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Company
at least five (5) days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
five (5) days before the meeting, such proposal shall be laid over for action at
an adjourned, special, or annual meeting of the shareholders taking place thirty
(30) days or more thereafter. This provision shall not prevent the consideration
and approval or disapproval at the annual meeting of reports of officers,
Directors, and committees, but in connection with such reports, no new business
shall be acted upon at such annual meeting unless stated and filed as herein
provided.

         SECTION 15. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.

                        ARTICLE III - BOARD OF DIRECTORS

         SECTION 1. GENERAL POWERS. The business and affairs of the Company
shall be under the direction of its Board of Directors. The Board of Directors
shall elect a Chairman of the Board, a President, and a Secretary annually and
shall designate, when present, either the Chairman of the Board or the President
to preside at its meetings.

         SECTION 2. NUMBER AND TERM.

         (a) The Board of Directors shall consist of no fewer than five (5) nor
more than twenty-five (25) members, the precise number of which members may be
fixed or changed by the Board of Directors, including an increase or decrease in
the number of Directors. The number so fixed by the Board of Directors shall be
divided into three (3) classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three (3) years and until
their successors are elected and qualified. The terms of Directors in the first
group shall expire at the first annual shareholders' meeting after their
election; the terms of the second group shall expire at the second annual
shareholders' meeting after their election; and the terms of the third group
shall expire at the third annual shareholders meeting after their election. At
each annual shareholders' meeting held thereafter, the Directors shall be chosen
for a term of three (3) years to succeed those whose terms expire.

         (b) The initial number of Directors shall be twelve (12).

         SECTION 3. MEETINGS.

         (a) Organizational Meeting. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of shareholders.



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         (b)      Regular Meetings.

                           (i) The Board of Directors may provide, by
                  resolution, the time and place for the holding of regular
                  meetings without other notice than such resolution.
                           (ii) Meetings may be held as determined by the
                  Directors or may be called by the Chairman, the President,
                  one-third of the Directors, the Commissioner or the FRB.
                  Notice of such meetings, other than the organizational meeting
                  or other regular meetings set by resolution pursuant to this
                  Section 3, may be by telegram, telephone, facsimile
                  transmission, letter or in person.
                           (iii) The Board of Directors may, with the approval
                  of two-thirds (2/3) of the Directors, change the location,
                  date and time of any meeting of the Board.

         SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or one-third of the Directors. The persons authorized to call special meetings
of the Board of Directors may fix any place as the place for holding any special
meeting of the Board of Directors called by such persons.

         Members of the Board of Directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 11 of this Article.

         SECTION 5. NOTICE. Written notice of any special meeting shall be given
to each Director at least two (2) days prior thereto when delivered personally
or by telegram or at least five (5) days prior thereto when delivered by mail at
the address at which the Director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the mail so addressed, with
postage prepaid if mailed or when delivered by the telegraph company if sent by
telegram. Any Director may waive notice of any meeting by a writing filed with
the Secretary. The attendance of a Director at a meeting shall constitute a
waiver of notice of such meeting, except where a Director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice of waiver of notice of such meeting.

         SECTION 6. QUORUM. A majority of the number of Directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 5 of this Article III.

         SECTION 7. MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by regulation of the FRB or
by these Bylaws.

         SECTION 8. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all the Directors.


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         SECTION 9. RESIGNATION. Any Director may resign at any time by sending
a written notice of such resignation to the home office of the Company addressed
to the Chairman of the Board or the President. Unless otherwise specified, such
resignation shall take effect upon receipt by the Chairman of the Board or the
President. More than three consecutive absences from regular meetings of the
Board of Directors, unless excused by resolution of the Board of Directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the Board of Directors.

         SECTION 10. VACANCIES. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining Directors
although less than a quorum of the Board of Directors. A Director elected to
fill a vacancy shall be elected to serve until the next election of Directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of Directors may be filled by election by the Board of Directors for a
term of office continuing only until the next election of Directors by the
shareholders.

         SECTION 11. COMPENSATION. Directors, as such, may receive a stated
salary for their services. By resolution of the Board of Directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the Board of Directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the Board of
Directors may determine.

         SECTION 12. PRESUMPTION OF ASSENT. A Director of the Company who is
present at a meeting of the Board of Directors at which action on any Company
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file a written dissent to such action with the person
acting as the Secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary of the Company within
five (5) days after the date a copy of the minutes of the meeting is received.
Such right to dissent shall not apply to a Director who voted in favor of such
action.

         SECTION 13. REMOVAL OF DIRECTORS. At a meeting of Shareholders called
expressly for that purpose, any Director may be removed with or without cause by
a vote of the holders of a majority of the shares then entitled to vote at an
election of Directors. If less than the entire board is to be removed, no one of
the Directors may be removed if the votes cast against the removal would be
sufficient to elect a Director if then cumulatively voted at an election of the
class of Directors of which such Director is a part. Whenever the holders of the
shares of any class are entitled to elect one or more Directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a Director or Directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.

         SECTION 14. DIVIDENDS. The Board of Directors may, in its discretion,
declare and pay dividends in cash or in capital stock from time to time, but no
more frequently than once in each calendar quarter and subject to the other
requirements of Tennessee Business Corporation Act and such other laws or
regulatory approval as may be applicable.

         SECTION 15. ADDITIONAL POWERS. In addition to the powers and authority
conferred upon them by these Bylaws, the Board of Directors may exercise all
such powers and do such acts and things as it



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may be authorized or required to do by statute or by rule or regulation of
applicable regulatory authorities, or by the Charter of the Company, or by the
Shareholders of the Company.

                       ARTICLE IV - OFFICERS AND EMPLOYEES

         SECTION 1. ELECTION OF OFFICERS, OFFICIALS AND COMMITTEES. At their
meetings immediately following the annual shareholders' meetings each year, or
at any other regular or special meeting, the Board of Directors shall elect a
Chairman of the Board, a President and a Secretary. They shall elect such other
officers as they shall deem necessary from time to time, and shall prescribe the
duties to which such officers shall be assigned. The Chairman of the Board or
President may recommend and the Board of Directors may appoint any Committees,
as they may deem necessary or proper.

         SECTION 2. REMOVAL OF OFFICERS. Any or all officers and members of
Committees may be removed at any regular or special meeting of the Board of
Directors without the necessity of any specification thereof in the call of the
meeting. Any officer or Committee member may be suspended by the Chairman of the
Board or the President until the next meeting of the Board of Directors.

         SECTION 3. ONE PERSON MAY HOLD ONE OR MORE OFFICES. Any number of
offices not inconsistent with each other may be held by the same person;
provided, however, that the same person may not hold the offices of President
and Secretary.

         SECTION 4. APPOINTMENT OF AGENTS AND EMPLOYEES. All agents and
employees shall be appointed by the Chairman of the Board or the President or by
some other person employed by the Company and designated by the Chairman of the
Board or the President for that purpose; provided, however, that the Board of
Directors may require that all such appointments be made subject to approval by
the Board.

         SECTION 5. FIDELITY BONDS AND OTHER INSURANCE.

         (a) The Board of Directors shall direct and require good and sufficient
fidelity bonds on all active officers and employees, whether or not they draw
salary or compensation, which bonds shall provide for indemnity to such Company
on account of any losses sustained by it as the result of any dishonest,
fraudulent or criminal act or omission committed or omitted by them acting
independently or in collusion or combination with any person or persons. At the
discretion of the Board, such bond may be in individual schedule or blanket
form, and the premiums therefor shall be paid by the Company.

         (b) The Board of Directors shall direct and require suitable insurance
protection to the Company against burglary, robbery, theft, liability and other
similar insurable hazards to which the Company may be exposed in the operations
of its business on the premises or elsewhere.

         (c) At least once in each year, the Board of Directors shall prescribe
the amount or penal sum of such bonds or policies and the sureties or
underwriters thereon, after giving due and careful consideration to all known
elements and factors constituting such risk or hazard. Such action shall be
recorded in the minutes of the Board and be subject to approval of the FRB.


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                    ARTICLE V - POWERS AND DUTIES OF OFFICERS

         SECTION 1. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be an
ex-officio member of all Standing Committees, except the Auditing Committee. The
Chairman, together with the President and the Executive Committee, if any, shall
decide upon the general policy to be followed by the Company, and to be carried
out by its officers. The Chairman of the Board and the President may be the same
person.

         SECTION 2. PRESIDENT. The President may be the Chief Executive Officer
of the Company and shall be an ex-officio member of all Standing Committees,
except the Auditing Committee. The President shall have general management and
supervision of all of the affairs and business of the Company, including but not
limited to the operation of the home office and any other offices, including
supervision of all officers and employees engaged in such operations, and shall
have such other duties and authority as may be conferred by these Bylaws or by
the Board of Directors. The President, together with the Chairman of the Board
and the Executive Committee, if any, shall determine the general policy to be
followed by the Company, and to be carried out by its officers. The offices of
the Chairman of the Board and the President may be held by the same person.

         SECTION 3. SECRETARY. The Secretary shall attend and keep minutes of
all meetings of the shareholders and the Board of Directors. The Secretary shall
issue notices of all meetings of shareholders, Directors, Committees or other
meetings where notice is required. The Secretary shall preserve the
organizational papers, the corporate Charter, the Bylaws, minutes of the
proceedings of meetings of shareholders, Directors, and reports of the Board and
the Committees. The minutes of each meeting shall be signed by the Chairman of
the Board or the President and attested by the Secretary.

         SECTION 4. OTHER OFFICERS. The other officers of the Company shall have
such authority and perform such duties as may from time to time be delegated to
them by the Board of Directors, the Executive Committee, the Chairman of the
Board or the President.

                      ARTICLE VI - EXECUTION OF INSTRUMENTS

         SECTION 1. SALE AND TRANSFER OF SECURITIES. The Chairman, the
President, and the Secretary are authorized to sell and assign or endorse for
transfer or exchange any stock, bond, United States security, or other security,
or to request payment or reissue of any and all such securities now or hereafter
registered in the name of the Company and owned by it or held by it in any
fiduciary capacity; to sell and assign any such securities which the Company is,
or shall be, authorized or empowered to sell and assign as attorney for, or
other representative of, the owner thereof, and to use one or more attorneys for
such purpose.

         SECTION 2. DEEDS AND CONTRACTS. The Chairman, the President, the
Executive Vice President, and the Secretary are authorized to purchase and sell
real estate and to execute all contracts of the Company.

         SECTION 3. NOTES, SECURITY AGREEMENTS AND PLEADINGS. The Chairman, the
President, and the Secretary, may be authorized by resolution of the Board of
Directors, which may also require the signature of any other officer of the
Company, to endorse all notes or bills of exchange to borrow money on behalf of
the Company and to pledge collateral belonging to the Company as security 


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for such loans and to execute such notes and security agreements as may be
necessary or proper therefor; to execute pleadings, releases of claims and other
papers for and on behalf of the Company; and to place securities belonging to
the Company as security for public funds deposited in the Company.

         SECTION 4. RELEASE OF LIENS. The Chairman, the President, or the
Secretary are severally authorized to execute release of liens on real property
and on tangible and intangible personal property securing indebtedness owing the
Company.

                      ARTICLE VII - COMMITTEES OF THE BOARD

                           A. THE EXECUTIVE COMMITTEE

         SECTION 1. MEETINGS AND DUTIES. The Executive Committee, if any, shall
be composed of the Chairman, the President and at least three (3) other
Directors. The Chairman of the Board or the President shall serve as its
Chairman. The Executive Committee shall meet when called by the Chairman of the
Board, President or any three (3) Executive Committee members. In the absence of
a member of the Executive Committee, the Chairman may appoint another Director
to serve in the absent member's place. The Executive Committee shall have
supervision of the current business of the Company and of the management and
investment of its funds and assets. It shall direct and supervise the duties and
functions of the officers. It shall consider and pass on any loans to be made by
the Company, shall recommend to the Board of Directors the salaries of all
officers of the Company and shall have general supervision of all expenses. The
Committee may recommend reasonable compensation for Directors, advisors to the
Board, and Committee members for attendance at meetings, subject to the approval
of the Board. A majority of the Executive Committee shall constitute a quorum,
and resolutions may be adopted by a majority vote of a quorum. An employee of
the Company as designated by the Chairman of the Board or the President shall
act as Secretary of the Executive Committee and record all minutes of the
Executive Committee.

         SECTION 2. ELECTION OF OFFICERS. The Executive Committee may elect 
officers subject to approval by the Board of Directors.

         SECTION 3. ADDITIONAL AUTHORITY. At any time occurring between regular
meetings of the Board of Directors, the Executive Committee shall have the power
to adopt resolutions which shall be of like force and effect as though regularly
adopted by the Board of Directors, except that the Executive Committee may not
declare dividends, amend the Bylaws, elect Directors or approve extensions of
credit by the Company to a Director or Directors or to any firm in which any
Director owns an interest. Any such actions thus taken by the Executive
Committee shall be subject to review by the Board of Directors; provided,
however, that such review shall not affect the rights of other persons who may
have relied on the same.

                            B. THE AUDITING COMMITTEE

         SECTION 1. MEETINGS AND DUTIES. The Auditing Committee, none of whom
shall be active officers of the Company, shall consist of at least three (3)
members of the Board of Directors, recommended by the President or the Chairman
of the Board, and appointed by the Board. The Auditing Committee shall meet at
least annually and at the call of the Chairman of the Board or the


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Chairman of the Auditing Committee. In the absence of a member of the Committee,
the Chairman may appoint another Director to serve in the absent member's place;
provided, however, that neither the President nor the Chief Executive Officer
may serve on the Auditing Committee. The Committee shall examine such books,
assets and securities of the Company as it deems necessary or proper, or as it
may be directed to examine, comparing and verifying the same. A record shall be
kept of all such examinations, which shall be certified to by the members of the
Auditing Committee serving, and presented to the Board of Directors at its next
meeting. The Auditing Committee shall report to the Board of Directors the
results of the examination relating to whether the Company is in a sound and
solvent condition, whether adequate internal audit controls and procedures are
being maintained, and recommending to the Board such changes as shall be deemed
advisable.

         SECTION 2. EMPLOYMENT OF CERTIFIED PUBLIC ACCOUNTANTS. The Auditing
Committee, upon its own recommendation and with the approval of the Board of
Directors and the shareholders, may employ a qualified firm of Certified Public
Accountants to make the examination and audit of the Company. If such a
procedure is followed, the one annual examination and audit of such firm of
accountants and the presentation of its reports to the Board of Directors, will
be deemed sufficient to comply with the requirements of this Article of these
Bylaws.

                               C. OTHER COMMITTEES

         The Board of Directors may appoint other committees, from time to time,
as recommended by the President or the Chairman of the Board, for such purposes
and with such powers as the Board may determine. Unless otherwise specified by
the Board or these Bylaws, a majority of the Committee members will constitute a
quorum of any Board-appointed Committee.

                       ARTICLE VIII - CERTIFICATES OF STOCK

         SECTION 1. ISSUANCE. Certificates of the capital stock of the Company
shall be issued for one or more full shares only and shall be numbered
consecutively. Each certificate shall be personally signed by those officers who
may, from time to time, be named by the Board of Directors or the Executive
Committee. Two signatures, of any combination of the President, Chairman of the
Board or Secretary, shall be required, and the seal of the Company or a
facsimile thereof, shall be impressed or printed on each certificate.

         Certificates shall meet the requirements of the laws of the State of
Tennessee and shall state upon the face thereof that the stock is transferable
only upon the books of the Company.

         SECTION 2. TRANSFER. Capital stock shall be transferable only on the
books of the Company, subject to these Bylaws, by the owner in person or by an
attorney or legal representative, written evidence of whose authority shall be
filed with the Company, and no transfer of stock shall be required except upon
surrender or cancellation of the certificate representing same. Certificates of
shares of stock shall state upon the face thereof that the stock is transferable
only upon the books of the Company. The Company shall not be required to
transfer any certificate of shares of stock to another when the transferror
thereof is indebted to the Company. A stock certificate book or other suitable
record shall be maintained of all assignments and transfers of stock.



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         When stock is transferred, the returned certificates shall be canceled
and preserved for record purposes for such a period of time as the Board of
Directors deems advisable or as otherwise required by applicable law.

         SECTION 3. LOST CERTIFICATE. Duplicate certificates may be issued in 
lieu of lost certificates upon proof of loss and indemnification satisfactory 
to the Company.

                          ARTICLE IX - INDEMNIFICATION

         (a) Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director, officer or employee
of the Company or is or was serving at the request of the Company as a Director,
officer or employee of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans (hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a Director, officer or employee or in
any other capacity while serving as a Director, officer or employee, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the Tennessee Business Corporation Act, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
such law permitted the Company to provide prior to such amendment), against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA fines, excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a Director, officer or employee and shall inure to the benefit of
the indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in paragraph) hereof with respect to proceedings to enforce
rights to indemnification, the Company shall indemnify only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Company. The
right to indemnification conferred in this Article X shall be a contract right
and shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition hereinafter an
"advancement of expenses"); provided, however, that if the Tennessee Business
Corporation Act requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director, officer or employee (and not in any other
capacity in which service was or is rendered by such indemnitee, including
without limitation, service to any employee benefit plan) shall be made only
upon delivery to the Company of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this Article X or otherwise (hereinafter an "undertaking").

         (b) if a claim under paragraph (a) of this Article X is not paid in
full by the Company within thirty (30) days after a written claim has been
received by the Company, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be ten (10) days the
indemnitee may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim. If successful in whole or in part in any such
suit or in a suit brought by the Company to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to 


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enforce a right of indemnification hereunder but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses), it shall be a
defense that, and (ii) any suit brought by the Company to recover an advancement
of expenses pursuant to the terms of an undertaking the Company shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met the applicable standard of conduct set forth in the Tennessee
Business Corporation Act. Neither the failure of the Company (including its
Board of Directors, independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Tennessee Business Corporation
Act, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its shareholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met such applicable standard of conduct or, in the case
of such suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the Company to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this Article X or otherwise shall be on the
Company.

         (c) The rights to indemnification and to the advancement of expenses
conferred in this Article X shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, these Bylaws, agreement,
vote of shareholders or disinterested Directors or otherwise.

         (d) The Company may, to the extent authorized form time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses, to any agent of the Company to the fullest extent of the provisions of
this Article X with respect to the indemnification and advancement of expenses
of Directors, officers, and employees of the Company.

                      ARTICLE X - FISCAL YEAR; ANNUAL AUDIT

         The fiscal year of the Company shall end on the 31st day of December of
each year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the Board of Directors. The appointment of such accountants shall be subject to
annual ratification by the Shareholders.

                             ARTICLE XI - DIVIDENDS

         Subject to the terms of the Company's Charter, the laws of the State of
Tennessee, and the regulations and orders of the FRB, the Board of Directors
may, from time to time, declare, and the Company may pay, dividends on its
outstanding classes of capital stock.

                            ARTICLE XII - AMENDMENTS

         (a) These Bylaws may be changed or amended by the vote of a majority of
the Directors at any regular or special meeting of the Board; provided, however,
that the Directors shall have been given ten (10) days notice of intention to
change or offer an amendment thereto.



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<PAGE>   13


         (b) Only by a vote of the holders of a majority of the outstanding
voting shares voted at a meeting of the Shareholders may these Bylaws be amended
to affect the duties, term of office or indemnification of a Director.

                             ARTICLE XIII - RECORDS

         The Charter, the Bylaws and the proceedings of all meetings of the
shareholders, the Board of Directors, and any Standing Committees of the Board,
shall be recorded in appropriate minute books provided for the purpose. The
minutes of each meeting shall be signed by the Chairman of the Board, the
President or the Secretary, or other officer appointed to act as Secretary of
the meeting.

                               ARTICLE XIV - SEAL

         The Company shall have a corporate seal which shall have inscribed
 thereon,

                      "STATE OF FRANKLIN BANCSHARES, INC."

         The Chairman of the Board or the President and Secretary shall have
authority to affix the corporate seal of the Company and to attest the same.

         No document other than the certificates of capital stock of the Company
shall be required to have the corporate seal. A facsimile of the corporate seal
printed on the certificates of capital stock shall be fully effective as the
corporate seal of the Company.

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