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, 2000
                                       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
         (State or other jurisdiction of incorporation or organization)

                                   62-1607709
                      (I.R.S. Employer Identification No.)


                             1907 North Roan Street
                          Johnson City, Tennessee 37601
              (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. [ ]

     The  registrant's  revenues for the twelve  months ended  December 31, 2000
were $14,391,955.

     The  aggregate  market  value  of  the  shares  of  Common  Stock  held  by
nonaffiliates  of the  registrant  as of March 15, 2001 is  approximately  $15.7
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, 2001,
Common Stock, $1.00 par value, 1,465,512 shares.

Documents  Incorporated  by Reference:  Proxy  Statement  related to 2001 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,  2000,  we had  consolidated  total  assets of  approximately  $204
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 two branches 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.

<PAGE>


Net Interest Income

         The following  table sets forth  weighted  average  taxable  equivalent
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>

                                                             2000                                1999
                                                --------------------------------------------------------------------
(Fully taxable equivalent)                                 Interest       Average            Interest     Average
(Dollars in thousands)                          Average     Income/       Yields/    Average  Income/     Yields/
                                                Balance     Expense        Rate      Balance  Expense      Rate
                                                --------------------------------------------------------------------
Assets:

Interest-earning assets:
<S>                                            <C>             <C>           <C>   <C>        <C>             <C>
Loans net of unearned income................   $127,088        $10,951       8.62% $99,726    $ 8,220         8.24%
U.S. Treasury and other U.S.  government         40,255          2,795       6.94%  28,825      1,887         6.55%
agencies....................................
Other earning assets .......................      1,509            110       7.29%   1,630        101         6.18%
Federal funds sold..........................        888             54       6.14%   4,670        224         4.79%
                                                    ---             --       ----    -----        ---         ----
    Total interest-earning assets/interest
income......................................    169,740         13,910       8.20% 134,851     10,432         7.74%
                                                -------         ------       ----  -------     ------         ----
Cash and due from banks.....................      2,512                              1,949
Other assets................................      6,198                              5,033
Allowance for loan losses...................      (895)                              (737)
                                                  ----                               ----
    Total...................................   $177,555                            $141,096
                                                =======                             =======

Liabilities and stockholders' equity:

Interest-bearing liabilities:

Interest-bearing checking deposits..........     $6,460          $ 132       2.04%  $5,334      $ 110         2.07%
Savings.....................................     23,185          1,105       4.84%  40,780      1,972         4.84%
Money Market................................     22,496          1,159       5.15%  13,940        631         4.53%
Time certificates...........................     83,091          5,054       6.08%  52,849      2,950         5.58%
Borrowed funds..............................     18,428          1,160       6.30%   9,352        507         5.42%
                                                 ------          -----       ----    -----        ---         ----
    Total interest-bearing liabilities/
            interest expense................    153,660          8,610       5.60% 122,255      6,170         5.05%
                                                -------          -----       ----  -------      -----         ----
Non-interest bearing demand  deposits.......      7,091                              6,206
Other liabilities...........................      1,043                              1,112
Stockholders' equity........................     15,761                             11,523
                                                 ------                             ------
    Total...................................   $177,555                           $141,096
                                                =======                            =======
Net interest earnings.......................                    $5,300                         $4,262
                                                                ======                         ======
Net interest on interest-earning assets.....                                 3.12%                            3.16%

Return on average assets....................                                 0.78%                            0.77%
Return on average equity....................                                 8.75%                            9.44%
Cash dividends declared.....................                                    --                               --
Dividend payout ratio.......................                                    --                               --
</TABLE>

<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, 2000               December 31, 1999
                                                                   Versus                          Versus
                                                              December 31, 1999               December 31, 1998
                                                             Increase (Decrease)             Increase (Decrease)
                                                             Change Due to: (1)              Change Due to: (1)
                                                             ------------------              ------------------
    (Dollars in thousands)                               Volume      Rate     Total      Volume     Rate      Total
                                                         ------      ----     -----      ------     ----      -----

    Increase (decrease) in: (2)
<S>                                                         <C>        <C>      <C>        <C>       <C>        <C>
    Loans, net of unearned income....................       $2,358     $373     $2,731     $2,602    $(149)     $2,453
    U.S. Treasury and other U.S. government agency             794      114        908        759      (55)        704
    securities.......................................
    Other earning assets ............................          (9)       18          9       (95)        24        (71)
    Federal funds sold...............................        (232)       63      (169)      (191)      (40)       (231)
                                                             ----        --      ----       ----       ---         ---
             Total interest income...................                            3,479                           2,855
                                                                                 -----                           -----


    Increase (decrease) in: (2)
    Interest-bearing checking deposits...............           23      (2)         21         35       (2)         33
    Savings deposits.................................        (833)     (34)      (867)      1,750        14      1,764
    Money Market.....................................          441       87        528        170       (6)        164
    Time certificates................................        1,832      272      2,104      (618)     (152)      (770)
    Borrowed funds...................................          572       82        654        217         1        218
                                                               ---       --        ---        ---         -        ---
             Total interest expense..................                            2,440                           1,409
                                                                                 -----                           -----
    Increase (decrease) in net  interest income......                         $  1,039                        $  1,446
                                                                               =======                         =======
</TABLE>
---------------------------
(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.



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
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 State of
Franklin  Bancshares  as of December 31, 2000 and 1999.  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, 2000
                                                -------------------------------------------------------------------
                                                              After 3 months  After 12
                                                   Within         within       months         After
                                                  3 months      12 months   within 5 years   5 years        Total
                                                  --------      ---------   --------------   -------        -----
       (Dollars in thousands)
       Earning assets:
<S>                                                <C>             <C>          <C>          <C>          <C>
       Loans.........................              $34,017         $6,233       $60,426      $35,744      $136,420
       Investment securities:
            Available for sale.......                3,071                        8,508       27,136        38,715
            Held to maturity.........                                             2,000       11,989        13,989
       Federal funds sold............                2,525                                                   2,525
       Interest-bearing deposits.....                  227                                                     227
       Federal Home Loan Bank stock..                1,525                                                   1,525
                                                     -----                                                   -----
                Total earning assets.              $41,365       $  6,233       $70,934      $74,869      $193,401
                                                    ======        =======        ======       ======       =======
       Interest-bearing liabilities:
       Interest-bearing deposits.....              $80,349        $55,227       $17,002                   $152,578
       Short-term debt...............               12,660                                                  12,660
       Long-term debt................                                                        11,819         11,819
                                                                                             ------         ------
       Total interest-bearing liabilities          $93,009        $55,227       $17,002   $  11,819       $177,057
                                                   =======        =======       =======   =========       ========

       Net repricing gap.............            $(51,644)      $(48,994)       $53,932      $63,050       $16,344

       Rate sensitivity gap:
       Net repricing gap as a percentage
          of total earning assets....              (26.84)%       (25.46)%        28.03%       32.77%         8.49%
       Cumulative gap................            $(51,644)     $(100,638)      $(46,706)     $16,344       $16,344
       Cumulative gap as a percentage of
       total earning assets..........              (26.84)%       (52.30)%       (24.27)%       8.49%         8.49%
</TABLE>



<TABLE>
<CAPTION>


                                                                                 December 31, 1999
                                             ---------------------------------------------------------------------
                                                            After 3 months    After 12
                                                 Within         within         months        After 5
                                                3 months       12 Months     within 5 years    Years          Total
                                                --------       ---------     --------------    -----          -----
      (Dollars in thousands)
      Earning assets:
<S>                                              <C>             <C>           <C>            <C>          <C>
      Loans..............................        $32,527         $ 3,669       $46,754        $31,943      $114,893
      Investment securities:
           Available for sale............          1,609                         1,966         17,866        21,441
           Held to maturity..............                                                      13,988        13,988
      Federal funds sold.................            308                                                        308
      Interest-bearing deposits..........            133                                                        133
      Federal Home Loan Bank stock.......          1,418                                                      1,418
                                                   -----                                                      -----
               Total earning assets......        $35,995          $3,669       $48,720        $63,797      $152,181
                                                  ======           =====        ======         ======       =======

      Interest-bearing liabilities:
      Interest-bearing deposits..........        $71,530         $32,862       $20,083                     $124,475
      Short-term debt....................          4,092                                                      4,092
      Long-term debt.....................                                                       9,627         9,627
                                                                                                -----        ------
      Total interest-bearing liabilities.        $75,622         $32,862       $20,083       $  9,627      $138,194
                                                 =======         =======       =======       ========      ========

      Net repricing gap..................      $(39,627)       $(29,193)       $28,637        $54,170       $13,987

      Rate sensitivity gap:
      Net repricing gap as a percentage
         of total earning assets.........        (26.17)%        (19.28)%        18.91%         35.78%         9.24%
      Cumulative gap.....................      $(39,627)       $(68,820)      $(40,183)       $13,987       $13,987
      Cumulative gap as a percentage of
          total earning assets...........        (26.17)%        (45.45)%       (26.54)%         9.24%         9.24%
</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.


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, 2000 and 1999 (in thousands).





                                                            2000            1999
                                                            ----            ----
Non interest-bearing deposits:
Individuals, partnerships and corporations......         $7,810           $5,846
Certified and official checks...................          1,694            1,916
                                                          -----            -----
  Total non interest-bearing deposits...........          9,504            7,762

Interest-bearing deposits:
Interest-bearing demand accounts................         38,489           19,960
Savings accounts................................         16,657           43,695
Certificates of deposit, less than $100,000.....         73,952           46,199
Certificates of deposit, greater than $100,000..         23,480           14,621
                                                         ------           ------
  Total interest-bearing deposits...............        152,578          124,475
                                                        -------          -------

  Total deposits................................       $162,082         $132,237
                                                        =======          =======


     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,
                                                           ----------------------------------------------------
                                                                   2000                           1999
                                                           --------------------            --------------------
(Dollars in thousands)
<S>                                                        <C>           <C>               <C>           <C>
Non interest-bearing  deposits....................         0.00%         $7,091            0.00%         $6,206
Savings deposits..................................         4.77%         23,185            4.84%         40,780
Money market deposits ............................         5.15%         22,496            4.53%         13,940
Time deposits.....................................         6.08%         83,091            5.58%         52,849
Interest-bearing  demand deposits.................         2.04%          6,460            2.07%          5,334
                                                           ----           -----            ----           -----
    Total deposits................................                     $142,323                        $119,109
                                                                       ========                        ========
</TABLE>




     At  December  31,  2000 and  1999,  time  deposits  greater  than  $100,000
aggregated  approximately  $23.5 million and $14.6  million,  respectively.  The
following table  indicates,  as of December 31, 2000 and 1999, the dollar amount
of  deposits  of  $100,000  or more by the time  remaining  until  maturity  (in
thousands):

<TABLE>
<CAPTION>

                                           2000                                           1999
                                           ----                                           ----
                                               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     $6,851     $12,140      $4,489   $23,480        $1,876       $7,335    $5,410     $14,621
</TABLE>



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, 2000 and 1999.

           (In Thousands)
                                                           2000            1999
                                                           ----            ----
           Investment securities:
            Available for sale...................         $ 38,715      $ 21,441
            Held to maturity.....................           13,989        13,988
           Short-term interest-bearing deposits                227           133
           Federal funds sold....................            2,525           308
           Federal Home Loan Bank stock..........            1,525         1,418
           Loans:
            Real estate..........................           86,675        74,375
            Commercial and other.................           49,866        40,591
                                                            ------        ------
              Total loans........................          136,541       114,966
             Less unearned income................              121            73
                                                               ---            --
            Loans, net of unearned income........          136,420       114,893
                                                           -------       -------
          Total earning assets ..................         $193,401      $152,181
                                                           =======       =======


Investment Portfolio

     For a  description  of  the  composition  of  the  carrying  value  of  our
investment  portfolio  at  December  31,  2000  and  1999,  see  Note  11 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, 2000
and 1999. The weighted  average tax equivalent  yields on these  instruments are
presented based on final maturity.

<TABLE>
<CAPTION>

                                                              2000                                    1999
                                                              ----                                    ----
                                              Amortized    Estimated     Weighted    Amortized    Estimated     Weighted
                                                Cost     Market Value  Average Yield    Cost    Market Value  Average Yield
                                                ----     ------------  -------------    ----    ------------  -------------
(Dollars in thousands)
 Held to maturity:
----------------

Obligations of U.S. Government
agencies:
<S>                                                <C>          <C>             <C>       <C>            <C>           <C>
Due after 1 year but within 5 years........       $1,999       $ 1,988         6.31%     $1,000         $ 973         6.25%
Due after 5 years but within 10 years......       11,990        11,805         6.57%     12,988        12,328         6.55%
                                                  ------        ------                   ------        ------
           Total...........................      $13,989       $13,793         6.53%    $13,988       $13,301         6.53%
                                                  ======        ======                   ======        ======
Available for sale:
------------------

      Obligations of U.S. Government
      agencies:
        Due after 1 year but within 5 years        $ 998         $ 991         6.06%      $ 998         $ 966         6.06%
        Due after 5 year but within 10 years      18,772        18,654         6.84%     16,765        16,053         6.61%
        Due after 10 years but within 15           1,924         1,957         7.38%      2,993         2,813         6.94%
      years................................
        Due after 15 years                         1,764         1,873         6.97%         --            --            --

      Municipal Securities:
        Due after 1 year but within 5 years          510           513         6.46%         --            --            --
        Due after 5 year but within 10 years         770           782         6.84%         --            --            --
        Due after 10 years but within 15           2,023         2,032         7.22%         --            --            --
      years................................
        Due after 15 years                           747           779         8.97%         --            --            --

      Equity Securities (Preferred Stock
         In U S Government Agencies):

        Callable after 1 year but within 5         7,000         7,052         7.95%         --            --            --
      years...............................
        Callable after 5 year but within 10        1,000         1,010         7.88%         --            --            --
      years...............................

      Other - due within 1 year............        3,071         3,071         6.09%      1,609         1,609         5.05%
                                                   -----         -----                    -----         -----

           Total...........................      $38,579       $38,714         7.08%    $22,365       $21,441         6.55%
                                                 =======       =======                  =======       =======
</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.


Loan Portfolio

     The following  table sets forth the  composition  of our loan  portfolio at
December 31, 2000 and 1999.


                                                        2000           1999
                                                   -------------- --------------
     (In Thousands)
     Real estate loans:
       Construction and land development.........          $  762        $ 1,490
       Secured by residential properties.........          77,846         65,220
       Commercial real estate loans..............           7,802          7,665
                                                            -----          -----
          Total real estate loans................          86,410         74,375
     Commercial and industrial loans.............          27,751         23,060
     Installment loans...........................          21,841         16,954
     Other consumer loans........................             390            418
     All other loans.............................              28             86
                                                               --             --

         Total loans.............................        $136,420       $114,893
                                                          =======        =======


         The following tables set forth the maturities of the loan portfolio and
its sensitivity to interest rate changes at December 31, 2000:

<TABLE>
<CAPTION>

                                                      One Year      One Through        Over
     (In Thousands)                                    or Less      Five Years      Five Years        Total
                                                       -------      ----------      ----------        -----
<S>                                                      <C>         <C>              <C>            <C>
     Real estate construction loans                      $ 762            $ --           $  --        $ 762
     Commercial and industrial loans....                 9,012           2,965          27,308       15,331
     All other loans....................                24,158          51,414          32,778      108,350
                                                        ------          ------          ------      -------

       Total loans......................               $40,251         $60,426         $35,743     $136,420
                                                        ======          ======          ======      =======
</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, 2000 (in thousands):


       Fixed rate...........................................         $12,867
       Floating rate........................................          50,015

       Other loans maturing after one year:

       Fixed rate...........................................          28,552
       Floating rate........................................           4,735
                                                                       -----

                Total loans maturing after one year.........        $ 96,169
                                                                     =======


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:

         o        acquisition and development,
         o        construction,
         o        permanent financing, and
         o        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:

                                                             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.


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 1, 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, 2000 the Company had  non-accrual  loans totaling  $984,000
and no restructured  loans.  Loans 90 days or more past due totaled $194,000 for
the same period.  The increase in non-accrual loans resulted  primarily from the
bankruptcy  of  one  borrower  and  we  anticipate  an  additional  increase  of
approximately  $400,000  during  the coming  quarter.  We are  currently  in the
process of foreclosure and believe these loans to be adequately  collateralized.
Consequently,  we do not anticipate significant losses. The Company has no loans
to foreign borrowers and we are not aware of any additional  problems that would
significantly  increase  the  amount or number of  problem  loans in the  coming
months.

Credit Risk Management and Reserve for Loan and Lease 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
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, lease, or
portion  thereof  which is  classified  as a "loss" by  regulatory  examiners is
charged-off.

     The reserve for loan and lease 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 or  leases  previously  charged  off are  recovered.  The
resulting reserve for loan and lease losses is viewed by management as a single,
unallocated  reserve  available  for all loans or  leases.  Rules  and  formulas
relative to the  adequacy  of the  reserve,  although  useful as  guidelines  to
management,  are not rigidly applied.  The reserve for loan and lease losses was
$1,062,511  at year end 2000, or 0.78% of loans and leases  outstanding,  net of
unearned  income,  compared to $810,303 or 0.71% at year end 1999.  During these
periods  charge-offs have remained  relatively low.  Management does not foresee
any events that will  significantly  increase loan losses in the coming  months.
The following table presents data related to the Company's  consolidated reserve
for loan and lease losses for the years ended December 31, 2000 and 1999.


                                                          2000          1999
                                                     ------------- -------------
(Dollars In thousands)

Balance at beginning of period....................           $810          $630
Charge offs:
  Commercial .....................................             --            --
  Real estate mortgage. ..........................             40            --
  Installment loans to individuals................             10             1
                                                             ----          ----
Recoveries:
  Commercial ....................................              --            --
  Real estate mortgage...........................              --            --
  Installment loans to individuals...............              --            --
                                                             ----          ----
Net charge offs...................................             50             1
Additions to reserve charged to operations........            303           181
                                                             ----          ----

Balance at end of period..........................         $1,063          $810
                                                           ======          ====
Ratio of net charge offs during the period to
 average loans and leases outstanding during the
 period...........................................           0.04%         0.00%
Average allowance for loan and lease losses to average
total loans and leases............................           0.70%         0.71%



     At December 31, 2000 and 1999,  the allowance for loan and lease losses was
allocated as follows:

<TABLE>
<CAPTION>

                                                               2000                                 1999
                                                               ----                                 ----
              (Dollars in thousands)
                                                             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..............................         $319            30%                   $ 80          20%
     Real estate mortgage....................          585            55%                    527          65%
     All other ..............................          159            15%                    203          15%
                                                       ---            ---                    ---          ---
        Total................................       $1,063           100%                   $810          100%
                                                     =====           ====                    ===          ====
</TABLE>

     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 non-accrual  status. When a loan is placed on non-accrual
status,  all interest  previously  accrued but not collected is reversed against
current period interest income.  Income on 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,
                                                                                        ------------------
                                                                                        2000          1999
                                                                                        ----          ----
<S>                                                                                    <C>           <C>
Non-accrual loans.............................................................         $ 984         $ 222
Restructured loans............................................................            --            --
Other loans past due 90 days or more to principal or interest payments........           194            --
Nonperforming loans as a percentage of net loans before allowance for loan
 losses.......................................................................          0.72%         0.19%
Allowance for loan losses as a percentage of nonperforming loans..............           108%          365%
</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:

                                                      2000              1999
                                               ----------------- ---------------
     Average loans and leases to average             89.3%            83.7%
     deposits...............................

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.

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           December
                                                                            31, 2000           31, 1999
                                                                                ----               ----
     (Dollars in thousands)
     Capital:
     Tier I capital:
<S>                                                                            <C>               <C>
              Stockholders' common equity.................                     $17,225           $13,498
              Less unrealized (loss) gain in securities ..                          90             (610)
              Less disallowed intangibles.................                          --                --
                                                                              --------          --------
                       Total Tier I capital...............                      17,135            14,108
     Tier II capital:
              Qualifying allowance for loan losses........                       1,063               810
                                                                                 -----               ---
                       Total capital......................                      18,198            14,918
     Risk-adjusted assets.................................                     128,576           101,395
     Quarterly average assets.............................                     194,936           155,226

     Ratios:
     Tier I capital to risk-adjusted assets.....................               13.33%              13.86%
     Tier II capital to risk-adjusted assets....................                 .83%                .80%
     Total capital to risk-adjusted assets......................               14.15%              14.66%
     Leverage-- Tier I capital to quarterly  average assets
     less  disallowed intangibles...............................                8.79%               9.09%
</TABLE>


     On December  31, 2000 and 1999,  we exceeded  the  regulatory  minimums and
qualified as a well-capitalized institution under the regulations.

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.


<PAGE>


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 authority to terminate deposit
insurance pursuant to procedures established for that purpose.

     At December  31, 2000,  our deposit base for purposes of FDIC  premiums was
$164  million.  We paid FDIC  insurance  premiums of $9,000 in 1998,  $12,374 in
1999, and $27,840 in 2000.

     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 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
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 the Savings
Bank's  capitalization  of $15.3  million,  our  loans-to-one  borrower limit is
approximately $3.8 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 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 to gain control of State of Franklin by
electing  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.

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 also 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
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,  2000,  we had a total of 53  employees  with 41 of those
employed on a full-time basis.

Item 2.  Description of Property

     We operate at five  locations  with our  principal  office  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 at our principal
office, 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.  An additional
full service branch at 4409 Fort Henry Drive in Kingsport was opened in November
2000.  The  Savings  Bank  owns  the land and the  buildings  in both  Kingsport
locations. 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
Tennessee Department of Financial  Institutions 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.



                                     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  management's  knowledge  of  transactions  in the
Common Stock of State of Franklin  Bancshares  during 2000,  prices  ranged from
$13.50 to $15.00 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.  As of June 30,
2000, closing date of the offering, 275,085 shares had been sold, generating net
proceeds of $3,631,462.  With the proceeds,  $1.5 million was invested in equity
of the  Savings  Bank,  $200,000  invested  in  equity of the  Leasing  Company,
$600,000 loaned to the Company's ESOP, and the remainder will be used to support
future  expansion of operations or  diversification  into other  banking-related
businesses and for other business or investment purposes.

     There were 1,207  holders of record of the Common  Stock as of December 31,
2000.

     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, 2000  COMPARED TO THE YEAR ENDED  DECEMBER 31,
1999

EARNINGS REVIEW

     Total net income of State of Franklin for the year ended  December 31, 2000
was  $1,379,687,  an increase of $292,590 over the year ended  December 31, 1999
total net  income of  $1,087,097.  Earnings  per  share  was $1.00  compared  to
earnings per share of $0.95 in 1999.  Return on average assets was 0.78% and the
return on average equity was 8.75% for the year ended December 31, 2000.

     Operating  results  in  2000  reflected  higher  net  interest  income  and
noninterest  income.  Net  interest  income of $5.2  million  for the year ended
December  31,  2000 was up 22% over the 1999  period.  Loans  increased  19% and
deposits  increased  23%.  The 2000  provision  for  possible  loan  losses  was
$302,609.  Noninterest  income  increased  $29,591,  or 6%,  with other fees and
service  charges  primarily  responsible  for the  increase  over the year ended
December 31, 1999.  Noninterest expense was $3.4 million for the 2000 period, an
increase  of 14%  over the  1999  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  $948,000 or 22% for the year ended December
31, 1999 to $5.2 million  compared to $4.3  million for the year ended  December
31, 1999.  Total loans  outstanding  increased  $21.7  million or 19% over total
loans at December 31, 1999.

     Average  deposits  increased by 23% or $23.2  million to $142.3  million in
2000   compared   to  $119.1   million  in  1999.   The  rate  paid  on  average
interest-bearing  liabilities  increased 55 basis  points  during the year ended
December 31, 2000 to 5.60%.

Provision for Loan Losses

     During the year ended  December 31, 2000,  the  provision for possible loan
losses was  $302,609.  There were $50,402 in  charge-offs  during the year ended
December 31, 2000 and $1,450 for the year ended December 31, 1999. The allowance
for possible loan losses represented 0.78% of total loans, net of mortgage loans
held-for-sale, at December 31, 2000, compared to 0.71% at December 31, 1999.

Provision for Income Taxes

     For the year ended  December 31, 2000,  the  provision for income taxes was
$658,123,  an increase of $150,804  from 1999,  primarily due to the increase in
income before income taxes.

Noninterest Income

     State of Franklin's  noninterest  income was $571,578 during the year ended
December 31, 2000, an increase of $29,591 or 6% over the comparable 1999 period.
The increase was attributable to increases in other fees and service charges and
insurance  commission  income of  $103,002  and $802,  respectively,  which were
partially  offset by decreases in net gains on loans sold, net gains on sale and
maturity of securities,  and net rental income of $39,165, $12,724, and $22,324,
respectively.

Noninterest Expense

     Noninterest expense totaled $3.4 million for the period ending December 31,
2000, an increase of $413,808, or 14%. Noninterest expense to average assets was
1.94% for the period  ending  December  31, 2000  compared to 2.15% for the same
period a year ago.  Compensation and related benefits of $1.5 million  accounted
for 23% of the total compared to $1.3 million or 42% for the year ended December
31, 1999.


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  $52.7  million at December 31,  2000.  The
investment  portfolio at year end consisted of $37.5 million in debt  securities
issued by the U. S Government or Federal Agencies, $8 million in preferred stock
issued by Federal  Agencies,  and $4.1  million in  securities  issued by state,
county, or municipalities.

At December 31, 2000, securities categorized as available-for-sale totaled $38.7
million while the  held-to-maturity  securities  totaled $14 million compared to
$21.4  million in  available-for-sale  and $14  million in  held-to-maturity  at
December 31, 1999. At December 31, 2000,  the  available-for-sale  portfolio had
gross  unrealized  gains of $135,875 while our  held-to-maturity  securities had
$196,757 in unrealized  losses due to changes in market rates. Due to the credit
quality of these investments, no realized losses are expected.

Loans

     Loans  outstanding  totaled  $136.4  million at  December  31,  2000.  This
represented an increase of 19% from the December 31, 1999  outstanding  loans of
$114.9 million.  First mortgage loans increased to $54.7 million at December 31,
2000,  an increase of 25% from $43.7  million at December 31, 1999.  Real estate
construction  lending  totaled  $24.5  million and $23.5 million at December 31,
2000 and 1999,  respectively.  Commercial  loans  increased to $50.9  million at
December 31, 2000, an increased 22% from $41.9 million at December 31, 1999.

Non-Performing Assets

     Nonaccrual  loans  totaled  $984,000 at December  31, 2000 and  $222,000 at
December 31, 1999. Loans past due 90 days or more were $194 thousand at December
31, 2000 and $0 at December 31, 1999. The allowance for possible loan losses was
$1,062,511 and $810,303 at December 31, 2000 and 1999, respectively.  Management
believes  the  allowance  for  possible  loan  losses is adequate to provide for
potential loan losses.


Deposits

     Total  deposits at  December  31, 2000 of $162.1  million,  represented  an
increase of $29.8 million or a 23% increase from $132.2  million at December 31,
1999.  Non-interest bearing demand deposits totaled $9.5 million at December 31,
2000,  an increase  of $1.7  million or 22% from  December  31,  1999.  Interest
bearing  demand  and money  market  deposits  increased  $18.4  million to $38.5
million at December 31, 2000.  Savings deposits  declined $26.9 million to $16.7
million at December 31, 2000. The decline in savings  deposits was due mainly to
funds shifting out of the millennium  savings  product  offered by the Bank into
other deposit categories.  The millennium saving account was offered through out
1999 and guaranteed a 5% rate through  year-end.  Time deposits  increased $36.6
million to $97.4 million at December 31, 2000.

Capital

     Equity capital at December 31, 2000 was $17.2 million,  an increase of $3.7
million from $13.5 million at December 31, 1999.  The increase in equity capital
was due in part to a new stock offering  beginning in November 1999. 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.  During  2000,  163,993
additional shares were sold with net proceeds of an additional $2.2 million.  At
December 31, 2000, all capital ratios were in excess of the regulatory minimums,
with State of Franklin's Tier 1, total  risk-based and leverage ratio of 13.33%,
14.15% and 8.79%, 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 $47 million at December 31, 2000.

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.



<PAGE>



Item 7. Financial Statements

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




<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)
--------------------
T.S. JOHNSON, CPA                         P.O. BOX 1736                           A.C. NICKELL, CPA (1921-1983)
J.F. RODGERS, CPA                    JOHNSON CITY, TENNESSEE 37605                W.E. MORELOCK, CPA (1927-1985)
G.L. FREEMAN, 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,  2000  and  1999,  and  the  related
    consolidated  statements of income, changes in stockholders' equity and cash
    flows  for  the  years  ended  December  31,  2000,  1999  and  1998.  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, 2000 and 1999,
    and the results of their operations and their cash flows for the years ended
    December 31,  2000,  1999 and 1998 in  conformity  with  generally  accepted
    accounting principles.




    BAYLOR AND BACKUS
    Certified Public Accountants

    Johnson City, Tennessee

    March 15, 2001


<PAGE>


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

<TABLE>
<CAPTION>

State of Franklin Bancshares, Inc.
Consolidated Statements of Financial Condition

December 31, 2000 and 1999
                                                                                         2000                  1999
                                                                                         ----                  ----
Assets
<S>                                                                                 <C>                   <C>
Cash and Due from Banks                                                             4,715,833             2,785,509
Federal Funds Sold                                                                  2,525,000               308,000
Short-Term Interest-Bearing Deposits                                                  227,422               133,148
                                                                                  -----------           -----------
   Total Cash and Cash Equivalents                                                  7,468,255             3,226,657
                                                                                  -----------           -----------
Investments - Held-To-Maturity
  (Estimated Market 2000 - $13,792,610 and 1999 - $13,301,184)                     13,989,368            13,988,346
Investments - Available-for-Sale                                                   38,714,467            21,440,591
Loans Held for Sale                                                                   264,922               453,562
Loans and Leases Receivable                                                       136,155,217           114,439,773
  Less: Allowance for Loan and Lease Loss                                         ( 1,062,511)          (   810,303)
                                                                                  -----------           -----------
Loans and Leases Receivable, Net                                                  135,092,706           113,629,470
                                                                                  -----------           -----------
Accrued Interest Receivable, Net                                                    1,542,443             1,271,439
Land, Buildings and Equipment at Cost Less
  Accumulated Depreciation of $883,607 in 2000
  and $607,618 in 1999                                                              5,395,933             4,058,242
Prepaid Expense and Accounts Receivable                                                77,379                77,907
FHLB Stock                                                                          1,524,500             1,417,700
Investment in Service Bureau at Cost                                                   15,000                15,000
Deferred Tax Assets                                                                   313,815               599,503
                                                                                  -----------           -----------

         Total Assets                                                             204,398,788           160,178,417
                                                                                  ===========           ===========

Liabilities and Stockholders' Equity

Liabilities:

Interest-Free Deposits                                                              9,503,943             7,762,451
Interest-Bearing Deposits                                                         152,578,447           124,475,175
Advances by Borrowers for Taxes and Insurance                                         107,235               117,372
Accrued Interest on Deposits                                                          188,408                95,734
Accounts Payable and Accrued Expenses                                                 296,388               488,630
Notes Payable                                                                         571,637               626,615
FHLB Short-Term Advances                                                           12,660,000             4,045,000
FHLB Long-Term Advances                                                            11,246,679             9,047,707
Deferred Gain on REO                                                                   21,448                21,448
                                                                                  -----------           -----------
Total Liabilities                                                                 187,174,185           146,680,132
                                                                                  -----------           -----------
Stockholders' Equity:

Common Stock, $1.00 Par Value,
  Authorized: 10,000,000 Shares; Issued: 1,465,512 Shares
    at December 31, 2000 and 1,301,519 Shares at December 31, 1999                  1,465,512             1,301,519
Paid-In Capital                                                                    14,251,461            12,243,730
Accumulated Other Comprehensive Income                                                 89,678          (    610,238)
Retained Earnings                                                                   2,569,575             1,189,889
Less: Employee Stock Ownership                                                   (  1,151,623)         (    626,615)
                                                                                  -----------           -----------
Total Stockholders' Equity                                                         17,224,603            13,498,285
                                                                                  -----------           -----------
         Total Liabilities and Stockholders' Equity                               204,398,788           160,178,417
                                                                                  ===========           ===========
</TABLE>


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

<PAGE>
<TABLE>
<CAPTION>

State of Franklin Bancshares, Inc.
Consolidated Statements of Income

For the Years Ended December 31, 2000, 1999, and 1998


                                                                                2000         1999              1998
                                                                                ----         ----              ----
Interest Income
<S>                                                                   <C>               <C>               <C>
Interest on Loans                                                     10,951,017        8,220,542         5,756,736
Other Interest Income                                                  2,869,360        2,211,555         1,820,032
                                                                     -----------      -----------         ---------
         Total Interest Income                                        13,820,377       10,432,097         7,576,768
                                                                     -----------      -----------         ---------
Interest Expense
Interest on Deposits                                                   7,450,364        5,663,933         4,457,203
Other Interest Expense                                                 1,160,101          506,556           303,932
                                                                     -----------      -----------         ---------
         Total Interest Expense                                        8,610,465        6,170,489         4,761,135
                                                                     -----------      -----------         ---------
Net Interest Income Before Provision for Loan Losses                   5,209,912        4,261,608         2,815,633
Provision for Loan Losses                                            (   302,609)    (    181,429)       (  275,127)
                                                                     -----------     ------------        ----------
         Net Interest Income After Provision for Loan Losses           4,907,303        4,080,179         2,540,506
                                                                     -----------      -----------         ---------
Other Income
Other Fees and Service Charges                                           380,476          277,474           176,455
Net Gain on Loans Sold                                                    62,597          101,762            46,180
Net Gain on Sale and Maturity of Securities                                  --            12,724            38,769
Insurance Commission Income                                               40,336           39,534            37,120
Rental Income, Net                                                        88,169          110,493           102,330
Other                                                                         --               --            10,301
                                                                    ------------     ------------        ----------
         Total Other Income                                              571,578          541,987           411,155
                                                                    ------------     ------------        ----------
Other Expenses
Compensation and Related Benefits                                      1,572,923        1,275,949         1,048,393
Occupancy Expenses                                                       304,804          278,804           246,437
Furniture and Equipment Expenses                                         271,897          258,480           183,905
Advertising                                                               98,385          147,032           118,102
Data Processing Expense                                                  369,392          320,692           218,251
Other                                                                    823,670          746,307           587,878
                                                                    ------------      -----------        ----------
         Total Other Expenses                                          3,441,071        3,027,264         2,402,966
                                                                     -----------      -----------         ---------
Income Before Income Taxes                                             2,037,810        1,594,902           548,695
Provision for Income Taxes                                          (    658,123)     (   507,805)      (    52,206)
                                                                    ------------      -----------       -----------
Net Income                                                             1,379,687        1,087,097           496,489
                                                                       =========        =========         =========
Basic Earnings Per Share                                                    1.04             0.97              0.44
                                                                            ====             ====              ====
Diluted Earnings Per Share                                                  1.00             0.95              0.44
                                                                            ====             ====              ====
</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>

State of Franklin Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 2000, 1999, and 1998


                                                                            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, 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
                                                                                                                   ------------
                                                                                                                     (  650,058)
   Net Income                                --         --              --            --    1,087,097         --      1,087,097
         Total Comprehensive Income          --         --              --            --           --         --        437,039
                                      ---------      -----      ----------        ------      -------   --------    -----------

Balance at December 31, 1999          1,301,519         --      12,243,730      (610,238)   1,189,889   (626,615)    13,498,285
                                                                                                                    -----------

Net Proceeds
  from Secondary Stock Offering         163,993         --       2,007,731            --           --         --      2,171,724
                                                                                                                    -----------
ESOP Shares Allocated                        --         --              --            --           --     74,986         74,986
                                                                                                                    -----------
Additional ESOP Shares Issued                --         --              --            --           --   (599,994)      (599,994)
                                                                                                                    -----------
Comprehensive Income
   Other Comprehensive Income,
     Net of Tax:
     Unrealized Gains on Securities
       Available-For-Sale:
       Unrealized Holding Gains
         Arising During the Period
           (Net of $360,563 Income Tax)      --         --              --       699,915           --         --        699,915
                                                                                                                   ------------

Net Income                                   --         --              --            --    1,379,687         --      1,379,687
                                                                                                                   ------------
         Total Comprehensive Income          --         --              --            --           --         --      2,079,603
                                      ---------      -----      ----------        ------      -------   --------   ------------
Balance at December 31, 2000          1,465,512         --      14,251,461        89,677    2,569,576 (1,151,623)    17,224,603
                                      =========      =====      ==========        ======    ========= ==========     ==========
</TABLE>


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

<PAGE>
<TABLE>
<CAPTION>


State of Franklin Bancshares, Inc.
Consolidated Statements of Cash Flows

For the Years Ended December 31, 2000, 1999, and 1998



                                                                            2000                1999               1998
                                                                     -----------        ------------       ------------
Cash Flows from Operating Activities
<S>                                                                    <C>                 <C>                  <C>
Net Income                                                             1,379,686           1,087,097            496,489
Items Not Affecting Cash and Cash Equivalents:
   Depreciation                                                          275,989             260,484            200,848
   (Increase) in Accrued Interest                                   (    271,004)      (     585,476)     (     285,203)
   Deferred Tax Assets                                              (     74,874)      (      71,570)     (     139,229)
   Provisions for Loan Losses                                            302,609             181,429            275,127
   (Increase) Decrease in Prepaid Expenses
     and Accounts Receivable                                                 528              78,597             23,673
   Increase (Decrease) in Interest Payable                                92,674       (       8,035)            60,300
   Increase (Decrease) in Accounts Payable
     and Accrued Expenses                                           (    192,242)            293,103             67,353
   Increase in Deferred Loan Fees, Net                                    48,072               4,993             14,873
   (Gain) on Sale of Investments                                             --        (      12,724)     (      38,769)
   Discount Accretion                                               (     62,403)      (      10,046)     (       9,097)
   Earned ESOP Shares                                                     74,986              38,205             12,075
   FHLB Stock Dividends                                             (    106,800)      (      75,800)     (      20,359)
   (Increase) Decrease in Loans Available-For-Sale                       188,640           1,173,838      (   1,447,100)
                                                                    ------------         -----------        -----------

       Net Cash Provided (Used) by Operating Activities                1,655,861           2,354,095      (     789,019)
                                                                    ------------         -----------       ------------


Cash Flows from Investing Activities
Purchase of Held-to-Maturity Investments                                     --        (  13,987,813)                --
Purchase of Available-for-Sale Investments                          ( 17,658,492)      (  17,041,379)       (20,233,390)
Proceeds from Maturities of Held-to-Maturity Investments                      --                  --         10,000,000
Proceeds from Sale of Available-for-Sale Investments                     504,171             255,734          6,874,235
Proceeds from Maturities of Available-for-Sale Investments             1,002,305           6,595,000          7,500,000
Principal Payments on Mortgage-Backed Securities
  Available-for-Sale                                                         --               35,965            143,676
Increase in Loans Receivable, Net                                   ( 21,813,918)      (  29,217,319)     (  34,673,331)
Purchases of Premises and Equipment                                 (  1,613,680)      (     201,375)     (     749,918)
Purchase of FHLB Stock                                                        --       (     870,700)     (     451,000)
                                                                    ------------        ------------       ------------

       Net Cash Used by Investing Activities                        ( 39,579,614)      (  54,431,887)     (  31,589,728)
                                                                    ------------        ------------       ------------
</TABLE>



                                (continued...)



<PAGE>


<TABLE>
<CAPTION>


State of Franklin Bancshares, Inc.
Consolidated Statements of Cash Flows

For the Years Ended December 31, 2000, 1999, and 1998



                                                                            2000                1999               1998
                                                                  --------------      --------------     --------------
Cash Flows from Financing Activities
<S>                                                                   <C>                 <C>                <C>
Net Increase in Deposits                                              29,844,764          35,873,550         24,120,193
Net Increase (Decrease) in Advances by Borrowers
  for Taxes and Insurance                                          (      10,137)             18,588             38,873
Issuance of Common Stock, Net                                          2,171,724           1,452,742             55,483
ESOP Shares Purchased                                              (     599,994)                 --                 --
Organization Costs                                                            --                  --      (      11,355)
  Proceeds from Debt                                                  10,813,972           4,092,707         10,300,000
Repayments of Debt                                                 (      54,978)      (      61,310)     (     612,075)
                                                                   -------------       -------------       ------------

       Net Cash Provided by Financing Activities                      42,165,351          41,376,277         33,891,119
                                                                      ----------          ----------         ----------

       Net Increase (Decrease) in Cash and Cash Equivalents            4,241,598         (10,701,515)         1,512,372

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

       Cash and Cash Equivalents at End of Period                      7,468,255           3,226,657         13,928,172
                                                                     ===========         ===========         ==========


Supplemental Schedule of Noncash Investing and Financing Activities:

Increase (Decrease) in Unrealized Gain on Securities
   Available-For-Sale, Net of Deferred Tax Liability               (     699,916)      (     650,058)            14,439
                                                                    ============        ============      =============
   Acquisition of Real Estate Property through
   Foreclosure of Related Loan                                                --              80,973            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                                                             1,162,389             275,960            170,415
                                                                     ===========        ============       ============
     Interest                                                          8,817,791           6,178,524          4,700,835
                                                                     ===========         ===========        ===========
</TABLE>

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


<PAGE>

State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998



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 at an offering  price of $13.50.  The offering  expired
         June 30,  2000.  A total of 275,085  shares had been sold  through  the
         expiration  date,  generating  gross proceeds of  $3,713,648.  Expenses
         associated with the offering totaled $124,277.

         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 two
         branches 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.

         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.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998

Note 1   Continued
------
         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).

         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.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 1   Continued

         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.

         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.

         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 years' financial
         statements  included  herein  have been  reclassified  to put them on a
         comparable  basis to the  amounts  reported  in the  December  31, 2000
         consolidated financial statements.

Note 2   Land, Buildings and Equipment

     Fixed assets at December 31, 2000, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>

                                                                   2000                 1999                  1998
                                                          -------------       --------------         -------------

<S>                                                           <C>                    <C>                   <C>
         Land                                                 1,450,000              850,000               850,000
         Buildings and Leasehold Improvements                 2,941,388            2,296,821             2,213,345
         Furniture, Fixtures and Equipment                    1,888,152            1,519,039             1,401,140
                                                              ---------            ---------             ---------
                                                              6,279,540            4,665,860             4,464,485
         Less: Accumulated Depreciation                         883,607              607,618               347,134
                                                             ----------           ----------            ----------

                                                              5,395,933            4,058,242             4,117,351
                                                              =========            =========             =========
</TABLE>



State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 3   Loans and Leases Receivable

         Loans and leases receivable at December 31, 2000, 1999 and 1998 consist
of the following:


<TABLE>
<CAPTION>

                                                                                2000             1999              1998
                                                                    ---------------- ----------------    --------------

<S>                                                                       <C>              <C>               <C>
              First Mortgage Loans                                        54,716,151       43,715,282        35,195,869
              Construction Loans                                          24,454,126       23,525,380        22,024,861
              Consumer Loans                                              10,066,638        9,703,102         7,726,136
              Participation Loans, Net                                       533,676          533,676           863,162
              Commercial Loans                                            50,931,829       41,919,362        26,603,529
              Savings Account Loans                                          138,122          248,964           545,011
              Credit Line Advances                                           392,295          419,062           396,618
              Direct Finance Leases                                        1,461,095          904,705           120,999
                                                                       -------------   --------------      ------------

                Gross Loans and Leases Receivable                        142,693,932      120,969,533        93,476,185
                                                                         -----------      -----------        ----------

              Less:
                Undisbursed Portion of Loans in Process               (    6,418,090) (     6,457,206)    (   8,179,727)
                Net Deferred Loan Origination Fees                    (      120,626) (        72,554)    (      67,561)
                Accumulated General Loan Loss Allowance               (    1,062,511) (       810,303)    (     630,324)
                                                                       -------------   --------------      ------------

                                                                      (    7,601,227) (     7,340,063)    (   8,877,612)
                                                                       -------------    -------------       -----------

              Loans and Leases Receivable - Net                          135,092,706      113,629,470        84,598,573
                                                                         ===========      ===========        ==========
</TABLE>

         An analysis of the allowance for loan and lease losses is as follows:


<TABLE>
<CAPTION>

                                                                                2000             1999              1998
                                                                    ----------------   --------------    --------------
<S>                                                                          <C>              <C>               <C>
                Balance - Beginning of Period                                810,303          630,324           355,474
                Provision for Losses                                         302,609          181,429           275,127
                Actual Loan and Lease Losses                             (    50,401)    (      1,450)    (         277)
                                                                    ----------------  ----------------  ---------------
                Balance - End of Period                                    1,062,511          810,303           630,324
                                                                    ================  ================  ===============
</TABLE>

         The gross amount of  participation  loans serviced by State of Franklin
         Savings Bank has remained at $1,067,240  for years ending  December 31,
         2000 and 1999 and $1,220,000 at year ending December 31, 1998.

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.



State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 4   Continued

         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.


         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  acquiring,  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,  2000,  that the Savings  Bank meets all
         capital adequacy requirements to which it is subject.

         As of December 31,  2000,  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.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998

Note 4   Continued
<TABLE>
<CAPTION>

         The capital ratios for State of Franklin Savings Bank are as
         follows:                                                                         For Capital
                                                                                          Adequacy Purposes
                                                                                          And To Be Well
                                                                                          Capitalized Under
                                                                                          Prompt Corrective
                                                                   Actual                 Action Provisions
                                                                   ------                 -----------------
                                                                                        Amount
                                                                                    (greater than or
               In Thousands (Unaudited)                      Amount        Ratio        equal to)      Ratio
               ------------------------                      ------        -----         ------        -----
         As of December 31, 2000:
                Total Risk-Based Capital
<S>                                                         <C>          <C>            <C>          <C>
                  (to Risk-Weighted Assets)                  16,355       12.78%          12,802       10.0%
                Tier 1 Capital
                  (to Risk-Weighted Assets)                  15,325       11.97%           7,681        6.0%
                Tier 1 Capital
                  (to Adjusted Total Assets)                 15,325        7.93%           9,665        5.0%
         As of December 31, 1999:
                Total Risk-Based Capital
                  (to Risk-Weighted Assets)                  13,303       13.12%          10,140       10.0%
                Tier 1 Capital
                  (to Risk-Weighted Assets)                  12,222       12.05%           6,084        6.0%
                Tier 1 Capital
                  (to Adjusted Total Assets)                 12,222        7.91%           7,730        5.0%
</TABLE>

The capital ratios for State of Franklin Bancshares, Inc. are as follows:
<TABLE>
<CAPTION>

                                                                                          For Capital
                                                                                          Adequacy Purposes
                                                                                          And To Be Well
                                                                                          Capitalized Under
                                                                                          Prompt Corrective
                                                                   Actual                 Action Provisions
                                                                   ------                 -----------------
                                                                                         Amount
                                                                                    (greater than or
               In Thousands (Unaudited)                      Amount        Ratio       or equal to)    Ratio
               ------------------------                      ------        -----         ------        -----
         As of December 31, 2000:
                Total Risk-Based Capital
<S>                                                          <C>          <C>             <C>          <C>
                  (to Risk-Weighted Assets)                  18,197       14.15%          12,858       10.0%
                Tier 1 Capital
                  (to Risk-Weighted Assets)                  17,135       13.33%           7,715        6.0%
                Tier 1 Capital
                  (to Adjusted Total Assets)                 17,135        8.79%           9,747        5.0%

         As of December 31, 1999:
                Total Risk-Based Capital
                  (to Risk-Weighted Assets)                  14,919       14.66%          10,176       10.0%
                Tier 1 Capital
                  (to Risk-Weighted Assets)                  14,109       13.86%           6,106        6.0%
                Tier 1 Capital
                  (to Adjusted Total Assets)                 14,109        9.09%           7,769        5.0%
</TABLE>


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.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


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.  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, 2000, 1999 and
         1998 were $571,637, $626,615 and $692,022, 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 $571,637,
         $626,615 and $687,925, respectively.

         On June 30, 2000,  the ESOP  borrowed an  additional  $599,994 from the
         Company  and used the funds to  purchase  44,444  additional  shares of
         common  stock of the  Company at $13.50 per share.  Note  payments  are
         $7,280 per month for ten years with a fixed interest rate of 8.00%. The
         note  balance  outstanding  at December 31, 2000 was  $579,985.  Shares
         owned by the ESOP at December 31, 2000 totaled 130,942.

         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:



                                                           December 31,
                                                     2000                1999
                                               -------------            --------
         Number of Shares
              Released and Allocated                  26,431              16,054
              Committed to be Released                 5,554               5,188
              Suspense                                98,957              59,804

         Fair Value
              Released and Allocated                 396,465             216,729
              Committed to be Released                83,310              70,038
              Suspense                             1,484,355             807,354


         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,
                                                      2000                1999
                                                   ---------           ---------
         Compensation Expense                        186,000             127,272
         Contributions                               186,000             127,272


         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.



State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 6   Continued

         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.

         The stock option plans for outside  directors and for  management  were
         amended,  effective  April 17,  1998 and  again  June 23,  2000,  for a
         portion  of  the  secondary   offerings   (75,192  and  60,546  shares,
         respectively). Approximately one-third of these shares was allocated to
         outside  directors and the remaining to management.  The exercise price
         of these options was set at $11 per share for options granted April 17,
         1998 and $13.50 for options  granted June 23, 2000.  The other terms of
         these options are the same as the terms of the original options.

         An additional 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  options  vest over five years and expire after
         ten  years.  There  are  significant   restrictions  imposed  based  on
         continued employment.
<TABLE>
<CAPTION>

                                                                               Awarded  And                  Weighted Average
                                                                                Unexercised       Vested      Exercise Price
                                                                                   Options        Options      Per Share
                                                                                   -------        -------      ---------
December 31, 1999
-----------------
<S>                                                        <C>                   <C>              <C>              <C>
Options Granted - Outside Directors                January 1, 1999               55,557           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            195,134           69,445
                                                                                =======           ======

December 31, 2000
-----------------
Options Granted - Outside Directors                January 1, 2000               50,006           35,001           $10.50
                                                   During 2000                   23,508                            $13.50
Options Granted - Management                       January 1, 2000              145,128           73,476           $11.16
                                                   During 2000                   37,038               --           $13.50
                                                                                --------      ----------
Options Outstanding                                December 31, 2000            255,680         108,477
                                                                                =======         =======
</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 Standard 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.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 7   Deposits

         Savings deposit balances are summarized as follows:
<TABLE>
<CAPTION>

                                                        December 31, 2000                        December 31, 1999
                                                 Average                                 Average
                                                  Rate       Amount       Percent          Rate       Amount      Percent
                                                  ----       ------       -------          ----       ------      -------
<S>                                               <C>      <C>             <C>              <C>     <C>             <C>
              Passbook                            4.68     16,657,166      10.28            4.85    43,579,494      32.96
              Interest-Free Checking               --       9,503,943       5.86             --      7,762,451       5.87
              NOW                                 2.00      7,465,557       4.61            1.99     6,285,555       4.75
              Money Market Deposit                5.51     31,022,840      19.14            4.48    13,790,665      10.43
                                                         ------------    -------                  ------------    --------

                                                           64,649,506      39.89                    71,418,165      54.01
                                                         ------------    -------                  ------------    -------

              Fixed Term Certificate Accounts
                Balances $100,000 or Greater      6.38     23,480,179      14.48            5.65    14,620,826      11.05
                Balances Less than $100,000       6.36     73,952,705      45.63            4.67    46,198,635      34.94
                                                         ------------    -------                  ------------    -------

                                                           97,432,884      60.11                    60,819,461      45.99
                                                         ------------    -------                  ------------    -------

                                                          162,082,390     100.00                   132,237,626     100.00
                                                          ===========     ======                   ===========     ======
</TABLE>

The contractual  maturity of certificate accounts at December 31, 2000 and 1999,
is as follows:
<TABLE>
<CAPTION>

                                        Year Ending December 31, 2000               Year Ending December 31, 1999
                                        -----------------------------               -----------------------------
<S>                                       <C>              <C>                      <C>             <C>
                                          2001             81,572,541               2000            42,805,186
                                          2002             13,728,541               2001             5,447,698
                                          2003              1,810,104               2002            11,749,728
                                          2004                321,698               2003               789,631
                                          2005 and After           --               2004 and After      27,218
                                                           ----------                               ----------
                                                           97,432,884                               60,819,461
                                                           ==========                               ==========
</TABLE>

Note   8 Accrued Interest Receivable, Net

<TABLE>
<CAPTION>

                                                                                    2000                  1999
                                                                           -------------         -------------
<S>                                                                              <C>                   <C>
         Loans (net of allowance for uncollected interest of $0)                 826,044               640,909
         Investment Securities                                                   703,354               620,334
         Cash and Due from Banks                                                     517                 1,015
                                                                               ---------             ---------
                                                                               1,529,915             1,262,258
                                                                               =========             =========
</TABLE>

Note   9 Federal Home Loan Bank Advances
<TABLE>
<CAPTION>

     Advances from FHLB are summarized as follows for the periods ended December
     31, 2000 and 1999:

         Contractual Maturity                                                    2000                  1999
         --------------------                                                    ----                  ----
<S>                                                                           <C>                    <C>
         Short-Term (Rate Floats Daily) (Within One Year)                     12,660,000             4,045,000
                                                                              ==========             =========
         Fixed Rate (Within 10 Years)                                         11,246,679             9,000,000
                                                                              ==========             =========
         Weighted Average Rate                                                     6.07%                 5.43%
</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, 2000 and 1999 were approximately  $35,860,019
     and $19,669,661, respectively.


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 10  Other Noninterest Expense

         Other  noninterest  expense  amounts are  summarized as follows for the
periods ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>

                                                                                  2000           1999            1998
                                                                             ---------      ---------       ---------
Other Noninterest Expense:
<S>                                                                             <C>            <C>             <C>
               Seminars and Education Expenses                                  48,826         42,550          36,343
               Insurance Expense                                                56,591         42,237          32,241
               Professional Expenses and Supervisory Examinations              141,214        118,729          99,748
               Office Supplies and Postage                                     136,832        156,513         149,478
               Telephone                                                        89,058        114,625          82,512
               Other                                                           351,149        271,658         187,556
                                                                               -------        -------         -------

                                                                               823,670        746,312         587,878
                                                                               =======        =======         =======
</TABLE>

Note 11  Investment Securities

         The   amortized   cost  and  fair   value  of   investment   securities
         held-to-maturity and  available-for-sale at December 31, 2000 and 1999,
         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, 2000:

                                                                                     Gross            Gross       Estimated
                                                                    Amortized       Unrealized      Unrealized      Market
                                                                      Cost           Gains           Losses         Value
                                                                      ----           -----           ------         -----
Available-for-Sale:

   United States Government Agency Securities Maturing:
<S>                                                              <C>                <C>            <C>         <C>
     After one year but within five years                           998,166             --           7,088        991,078
     After five years but within ten years                       18,771,856         44,900         162,495     18,654,261
     Over ten years but within fifteen years                      1,923,946         48,719          15,858      1,956,807
     Over fifteen years but within twenty years                   1,763,598        109,422              --      1,873,020

   Municipal Securities Maturing:
     After one year but within five years                           510,000          2,658              --        512,658
     After five years but within ten years                          770,000         12,405              --        782,405
     Over ten years but within fifteen years                      2,022,990          9,352              --      2,032,342
     Over fifteen years but within twenty years                     747,345         31,539              --        778,884

   Equity Securities (Preferred Stock in
     U S Government Agencies):
       Callable after 1 year but within five years                7,000,000         52,321              --      7,052,321
       Callable after five years but within ten years             1,000,000         10,000              --      1,010,000
   Other
       Within one year                                            3,070,691             --              --      3,070,691
                                                                -----------  -------------   -------------    -----------

                          Total Available-for-Sale               38,578,592        321,316         185,441     38,714,467
                                                                 ==========        =======         =======     ==========

             Held-to-Maturity:

  United States Government Agency Securities Maturing:
    After one year but within five years                          1,999,598             --          12,384      1,987,214
    After five years but within ten years                        11,989,770          4,171         188,544     11,805,397
                                                                 ----------     ----------      ----------     ----------
                          Total Held-to-Maturity                 13,989,368          4,171         200,928     13,792,611
                                                                 ==========     ==========      ==========     ==========
</TABLE>


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998

Note 11 Continued
<TABLE>
<CAPTION>

        December 31, 1999:
                                                                                      Gross         Gross       Estimated
                                                                Amortized          Unrealized     Unrealized      Market
                                                                   Cost               Gains         Losses         Value
                                                                   ----               -----         ------         -----
Available-for-Sale:
   United States Government Agency Securities Maturing:
<S>                                                                 <C>               <C>           <C>           <C>
     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>


     Gross proceeds from sales of investment securities  available-for-sale  for
     the period ended December 31, 2000, 1999 and 1998 were $0, $6,630,965,  and
     $14,374,235,  respectively,  resulting in gross gains of $0,  $12,724,  and
     $38,769, respectively.

Note 12  Legal Proceedings

     The  Company  and its  subsidiaries  are  periodically  involved  in  legal
     proceedings that are generally incidental to their businesses.  At December
     31,  2000,  there were no legal  proceedings  that were  expected to have a
     material impact on the Company's financial statements.

Note 13  Related Party Transactions

     The Savings Bank has granted loans to its executive 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.  Loan balances
     to executive  officers and  directors at December 31, 2000 and 1999 were as
     follows:


                                                      2000               1999
                                                 -------------      ------------
Loan Balances at the Beginning of the Period         2,702,537        2,826,000
New Loans                                              898,963          202,812
Repayments                                          (1,812,572)      (  326,275)
                                                     ---------       ----------
Loan Balances at the End of the Period               1,788,928        2,702,537
                                                     =========        =========

     Executive  officers and  directors  have lines of credit that have not been
     used in the amount of $781,127  and $323,209 at December 31, 2000 and 1999,
     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 part of 1999,  increasing  to $2,932 as of  September  1, 1999 and
     extending to August 31, 2002.



State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998

Note 14  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, 2000                          December 31, 1999
                                                -----------------                          -----------------
                                         Fixed         Variable                       Fixed        Variable
                                        Rate             Rate         Total           Rate          Rate          Total
                                        ----             ----         -----           ----          ----          -----
<S>                                      <C>           <C>            <C>            <C>          <C>            <C>
         Mortgage Loans to Originate     271,200             --       271,200        100,000      1,896,550      1,996,550
         Construction Loans              469,185      5,924,394     6,393,579        241,701      6,195,828      6,437,529
         Unsecured Lines of Credit            --        978,359       978,359             --        526,107        526,107
         Overdraft Protection Accounts   370,852             --       370,852        318,458             --        318,458
         Home Equity Lines of Credit          --      4,969,611     4,969,611             --      3,879,949      3,879,949
         Commercial                           --      5,370,550     5,370,550             --      3,795,484      3,795,484
                                       ---------    -----------   -----------   ------------    -----------    -----------

                                       1,111,237     17,242,914    18,354,151        660,159     16,293,918     16,954,077
                                       =========     ==========    ==========        =======     ==========     ==========
</TABLE>


     Commitments under standby letters of credit totaled  approximately  $67,500
     and $215,407 December 31, 2000 and 1999, respectively.

     At December 31, 2000, 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 $21,093,321.

     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:

                                                       2000              1999
                                                 ------------      ------------

               Selling Price                        7,359,346         8,832,597
               Less: Carrying Value                 7,244,050         8,690,751
                         Loan Cost                     52,699            40,084
                                                  -----------       -----------
               Net Gain on Loans Sold                  62,597           101,762
                                                   ==========        ==========

     At  December  31,  2000 and  1999,  the  Savings  Bank had  mortgage  loans
     committed  to  be  sold  totaling  $264,922  and  $453,562,   respectively.
     Commitments  to  originate  loans to be sold on the  secondary  market were
     $486,384 and $416,050 at December 31, 2000 and 1999, 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
     April 4, 2003 and July 8, 2003.  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, 2000 are as
     follows:

                                           Noncancelable          Cancelable
     Years Ended                              Leases-               Leases-
     December 31,                          Building & Auto         Building
    ------------                          ---------------           --------
        2001                                    55,099               1,680
        2002                                    55,099               1,680
        2003                                    44,330               1,680
        2004                                    35,190               1,680
        2005                                    35,190               1,680
        ----                                    ------               -----
  Total Minimum Future Rentals                 224,908               8,400
                                               =======               =====


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 15  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, 2000 and 1999:

<TABLE>
<CAPTION>

                                                                                       Carrying             Fair
                                                                                       Amount               Value
                                                                                       ------               -----
         December 31, 2000:

         Financial Assets:
<S>                                                                                   <C>                 <C>
              Cash and Cash Equivalents                                               7,468,255           7,468,255
              Investment Securities                                                  52,703,835          52,642,953
              Loans                                                                 136,420,139         136,420,139
              Accrued Interest Receivable                                             1,542,443           1,542,443

         Financial Liabilities:
              Deposits                                                              162,082,390         162,243,761
              Advance Payments by Borrowers  for Taxes and Insurance (Escrows)          107,235             107,235
              Accrued Interest on Deposits                                              188,408             188,408
              Notes Payable                                                             571,637             488,154
              FHLB Advances                                                          23,906,679          23,937,013

December 31, 1999:
------------------
         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
</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.

     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.




State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 15  Continued


     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.

     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.



State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 16  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,  2000,  1999 and 1998 is as
     follows:

<TABLE>
<CAPTION>


                                                                         2000              1999              1998
                                                                       ---------        ---------          --------
<S>                                                                     <C>              <C>               <C>
         Computed "Expected" Tax (Expense)                              (794,746)        (602,076)         (186,556)
         Bad Debt Deduction                                              118,018           68,490           110,492
         Amortization of Organization Expense                             21,133           23,232            17,845
         Other                                                         (  44,219)       (  23,223)      (       855)
         FHLB Dividends                                                   41,691           25,772             6,868
                                                                        --------         --------         ---------

         Provision for Income Taxes                                     (658,123)        (507,805)        (  52,206)
                                                                         =======          =======          ========

         Current Income Tax (Expense)                                   (721,546)        (579,375)         (183,707)
         Deferred Income Tax Benefit                                      63,423           71,570           131,501
                                                                        --------         --------           -------

         Provision for Income Taxes                                     (658,123)        (507,805)        (  52,206)
                                                                         =======          =======          ========

         Deferred Tax Assets:
              Due to Net Operating Loss Carryforward                          --            3,517                --
              Due to Unrealized (Gains) Losses on Investments          (  51,633)         314,365         (  20,496)
              Due to FHLB Dividends                                    (  77,147)       (  26,294)       (    6,868)
              Due to Reserve for Loan Losses                             403,754          307,915           214,310
              Other                                                       38,841               --                --
                                                                        --------    -------------      ------------
         Deferred Tax Assets - Net                                       313,815          599,503           186,946
                                                                         =======          =======           =======
</TABLE>

     The Savings  Bank had a net  operating  loss NOL  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 17  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.

     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 Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 18  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.

     Earnings per Share Computation:
<TABLE>
<CAPTION>

                                                                     2000                1999               1998
                                                                ------------        ------------       ------------
<S>                                                                <C>                 <C>                  <C>
         Net Income                                                1,379,687           1,087,097            496,489

         Average Basic Shares Outstanding                          1,329,958           1,123,721          1,117,270

         Basic Earnings Per Share                                       1.04                0.97               0.44
                                                                        ====                ====               ====


         Net Income                                                1,379,687           1,087,097            496,489

         Average Basic Shares Outstanding                          1,329,958           1,123,721          1,117,270
         Dilutive Effect Due to Stock Options                         42,873              24,828              6,484
                                                                 -----------         -----------       ------------

         Average Shares Outstanding, as Adjusted                   1,372,831           1,148,549          1,123,754

         Diluted Earnings Per Share                                     1.00                0.95               0.44
                                                                        ====                ====               ====
</TABLE>


Note 19  Condensed Parent Company Only Financial Statements

         Statement of Financial Position
<TABLE>
<CAPTION>

                                                                                     December 31,       December 31,
                                                                                         2000               1999
                                                                                         ----               ----
                  Assets:

<S>                                                                                   <C>                 <C>
         Cash and Cash Equivalents                                                    1,314,064           1,467,135
         Investments - Available-for-Sale                                               494,462             467,471
         Investments in Subsidiaries                                                 15,986,334          12,200,724
         Deferred Tax Assets                                                              3,099               3,099
                                                                                 --------------           ---------
                Total Assets                                                         17,797,959          14,138,429
                                                                                     ==========          ==========
         Liabilities:

         Notes Payable                                                                  571,637             626,615
         Accounts Payable and Accrued Expenses                                            1,719              13,529
                                                                                 --------------       -------------
                Total Liabilities                                                       573,356             640,144
                                                                                   ------------        ------------
         Stockholders' Equity:

         Common Stock, $1.00 Par Value,
            Authorized: 10,000,000 Shares; Issued: 1,465,512 Shares                   1,465,512           1,301,519
         Paid-In Capital                                                             14,251,461          12,243,730
         Accumulated Other Comprehensive Income                                          89,678       (     610,238)
         Retained Earnings                                                            2,569,575           1,189,889
         Less: Employee Stock Ownership                                            (  1,151,623)      (     626,615)
                                                                                    -----------        ------------
                Total Stockholders' Equity                                           17,224,603          13,498,285
                                                                                     ----------          ----------
                    Total Liabilities and Stockholders' Equity                       17,797,959          14,138,429
                                                                                     ==========          ==========
</TABLE>


State of Franklin Bancshares, Inc.
Notes to Consolidated Financial Statements

For the Years Ended December 31, 2000, 1999, and 1998


Note 19  Continued

<TABLE>
<CAPTION>

         Statement of Income

                                                                                   Period Ended         Period Ended
                                                                                   December 31,         December 31,
                                                                                           2000                 1999
                                                                                           ----                 ----
<S>                                                                                      <C>                 <C>
         Interest Income                                                                 50,659              27,041
         Other Operating Expenses                                                     (  60,343)          (  35,205)
                                                                                      ---------           ---------
         Income (Loss) before Income Taxes and Equity
           in Undistributed Earnings of Subsidiaries                                  (   9,684)          (   8,164)
         Provision for Income Taxes                                                   (   3,676)          (   3,099)
                                                                                      ---------           ---------
        Income (Loss) before Equity in Undistributed Earnings of Subsidiaries         (   6,008)          (   5,065)
         Equity in undistributed Earnings of Subsidiaries                             1,385,695           1,092,162
                                                                                      ---------           ---------
         Net Income                                                                   1,379,687           1,087,097
                                                                                      =========           =========
</TABLE>

<TABLE>
<CAPTION>

         Statement of Cash Flows
                                                                                   Period Ended          Period Ended
                                                                                    December 31,          December 31,
                                                                                       2000                   1999
                                                                                       ----                   ----
         Cash Flows from Operating Activities
<S>                                                                                   <C>                 <C>
                Net Income                                                            1,379,687           1,087,097
                Items Not Affecting Cash and Cash Equivalents:
                  Equity in Undistributed Earnings of Subsidiaries                  ( 1,385,695)         (1,092,162)
                  Deferred Tax Asset                                                         --          (    3,099)
                  Increase (Decrease) in Accounts Payable                           (    11,810)             10,786
                  Earned ESOP Shares                                                     74,986              38,205
                  (Increase) Decrease in Accounts Receivable                                 --             108,286
                                                                                    -----------          ----------
                    Net Cash Provided by Operating Activities                            57,168             149,113
                                                                                    -----------          ----------
         Cash Flows from Investing Activities
                Purchase of Available-for-Sale Investments                         (     26,991)         (  130,041)
                Proceeds from Sale of Available-for-Sale Investments                         --             255,734
                Investment in Subsidiary                                           (  1,700,000)         (  200,000)
                                                                                     ----------          ----------
                    Net Cash Used by Investing Activities                          (  1,726,991)         (   74,307)
                                                                                     ----------          ----------
         Cash Flows from Financing Activities
                Issuance of Common Stock, Net                                         2,171,724           1,452,742
                ESOP Shares Purchased                                              (    599,994)                 --
                Repayments of Debt                                                 (     54,978)         (   61,310)
                                                                                    -----------          ----------
                    Net Cash Provided by Financing Activities                         1,516,752           1,391,432
                                                                                      ---------           ---------
                    Net Increase (Decrease) in Cash and Cash Equivalents           (    153,071)          1,466,238
         Cash and Cash Equivalents at Beginning of Period                             1,467,135                 897
                                                                                      ---------       -------------
                    Cash and Cash Equivalents at End of Period                        1,314,064           1,467,135
                                                                                      =========           =========
</TABLE>




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 of Directors                            President
  and Chief Executive Officer







--------------------------------------------------------------------------------
1907 North Roan Street - P.O.  Box 940 - Johnson  City,  Tennessee  37605-0940 -
(423) 926-3300 - Facsimile (423) 232-4448




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 9 of State of
Franklin's Proxy Statement related to its 2001 Annual Meeting of Shareholders.

Item 10. Executive Compensation.

     This item is  incorporated  by reference  to page 7 of State of  Franklin's
Proxy Statement related to its 2001 Annual Meeting of Shareholders.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     This item is  incorporated  by reference  to page 6 of State of  Franklin's
Proxy Statement related to its 2001 Annual Meeting of Shareholders.

Item 12. Certain Relationships and Related Transactions

     This item is  incorporated  by reference  to page 9 of State of  Franklin's
Proxy Statement related to its 2001 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.
23                         Consent of Baylor and Backus
-------------------
*    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,
2000.


<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, 2001

     In accordance  with the  requirements  of the Exchange Act, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.



Signature                     Capacity                                      Date
---------                     --------                                      ----

/ s /  Charles E. Allen,Jr.   Chairman of the Board, Director     March 27, 2001
---------------------------   (principal executive, financial,
     Chares E. Allen, Jr.     and accounting officer)

/ s /  Randal R. Greene       President, Director                 March 27, 2001
---------------------------
     Randal R. Greene

/ s /  Steven Gross               Director                        March 27, 2001
--------------------------
     Steven Gross

/ s /  Donald R. Jeanes           Director                        March 27, 2001
--------------------------
     Donald R. Jeanes

/ s / Henry J. Williams, M.D.     Director                        March 27, 2001
-----------------------------
     Henry J. Williams, M.D.

/s/ Kenneth E. Cutshall, M.D.     Director                        March 27, 2001
-----------------------------
     Kenneth E. Cutshall, M.D.

/ s / Charles E. Allen, Sr.       Director                        March 27, 2001
------------------------------
     Charles E. Allen, Sr.

/ s /  Richard S. Venable         Director                        March 27, 2001
------------------------------
     Richard S. Venable

/ s / Verrill M. Norwood, Jr.     Director                        March 27, 2001
------------------------------
     Verrill M. Norwood, Jr.

/ s / Cameron E. Perry            Director                        March 27, 2001
------------------------------
     Cameron E. Perry

/ s / Vance W. Cheek              Director                        March 27, 2001
------------------------------
     Vance W. Cheek



                                   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.


                                   Exhibit 23
                          Consent of Baylor and Backus

We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 (No. 333-63187) of State of Franklin  Bancshares,  Inc. of
our report dated March 15, 2001 which appears in  Registrant's  Annual Report on
Form 10-KSB for the year ended December 31, 2000.

                                                              BAYLOR AND BACKUS


Johnson City, Tennessee
March 28, 2001