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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 2000.
REGISTRATION NO. 333-37726
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BANCTENN CORP.
--------------
(Name of Small Business Issuer in its charter)
TENNESSEE 6022 62-1225291
------------------------------ ----------------------------- ------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
301 EAST CENTER STREET
KINGSPORT, TENNESSEE 37660
(423) 378-9500
--------------
(Address, and telephone number
of principal executive offices)
WILLIAM C. ARGABRITE, ESQ. COPIES TO:
HUNTER, SMITH & DAVIS, LLP KATHRYN L. KNUDSON, ESQ.
1212 N. EASTMAN ROAD POWELL GOLDSTEIN FRAZER & MURPHY LLP
KINGSPORT, TENNESSEE 37664 191 PEACHTREE STREET, N.E., 16TH FLOOR
(423) 378-8829 ATLANTA, GEORGIA 30303
-------------- (404) 572-6952
(Name, address, and
telephone number, of
agent for service)
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS DATED SEPTEMBER 25, 2000; SUBJECT TO COMPLETION
428,571 SHARES
BANCTENN CORP.
COMMON STOCK
$28.00 PER SHARE
This is an offering of 428,571 shares of BancTenn Corp.'s common stock.
All of these shares are being sold by BancTenn Corp. We are offering this stock
first to our current shareholders who have preemptive rights to purchase new
shares issued by BancTenn Corp. If there are shares remaining after the
expiration of our shareholders' preemptive rights, we will sell the remaining
shares to persons whose subscriptions are accepted according to the terms of
this offering. Subject to the preemptive rights of our current shareholders, we
reserve the right to begin accepting subscriptions conditionally from the
general public.
Except for subscriptions tendered pursuant to the exercise of
preemptive rights, the minimum purchase for any one investor is 200 shares.
Unless we agree, you may not revoke or change your subscription after you have
submitted your signed subscription agreement. We may choose to reject your
subscription entirely or accept it for only a portion of the shares for which
you subscribe. See "The Offering" beginning on page 11 of this prospectus.
Our officers and directors will offer and sell the common stock on a
best-efforts basis without compensation. Prior to this offering, there has been
no public trading market for the common stock.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public price $28.00 $11,999,988
Maximum possible net proceeds $27.77 $11,900,000
Minimum possible net proceeds $ 0.00 $ 0
</TABLE>
We will deposit immediately into BancTenn Corp.'s general operating
account all proceeds received from the sale of stock purchased through the
exercise of preemptive rights. We will deposit into a non-interest bearing
deposit account at Bank of Tennessee the proceeds received from subscriptions
for non-preemptive rights purchases. After the preemptive rights period has
expired, we will process the non-preemptive rights subscriptions, remove the
proceeds of such subscriptions from escrow, and transfer such monies to BancTenn
Corp.'s general operating account. Except for the minimum subscription of 200
shares per purchaser, there is no minimum aggregate amount of stock that must be
purchased or subscribed in order for the non-preemptive rights escrow to be
terminated. We plan to close the offering on December 31, 2000, but reserve the
right to extend the offering through March 31, 2001. Additionally, we may choose
to end the offering sooner.
INVESTING IN THE COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
THE SHARES OF COMMON STOCK OFFERED ARE NOT DEPOSITS, SAVINGS ACCOUNTS,
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ____________, 2000.
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[INSIDE FRONT COVER]
[A map depicting BancTenn Corp.'s market area and banking locations
appears here.]
<PAGE> 4
SUMMARY
This summary does not contain all the information you should consider
before investing in the common stock. You should read carefully the entire
prospectus.
Share information included in this prospectus has been restated to
reflect a six-for-five stock split which became effective on May 9, 1997 and a
five-for-four stock split which became effective on May 13, 1999.
BANCTENN CORP.
BancTenn Corp. is a one-bank holding company headquartered in
Kingsport, Tennessee. As of June 30, 2000, we had total consolidated assets of
approximately $354.49 million, total deposits of $305.52 million, and
shareholders' equity of approximately $23.18 million. We are conducting this
offering to raise additional capital to support our subsidiary, Bank of
Tennessee, to retire debt, to pursue additional strategic opportunities, and for
other general corporate purposes.
Through our wholly owned subsidiary, Bank of Tennessee, we offer a
broad line of banking and financial products and services using a strategy of
combining large-bank products and services with small-bank service and
responsiveness. Based on June 30, 2000 call report data, we rank 16th in asset
size out of 229 FDIC-insured banks operating in Tennessee. Our growth over the
past several years has been generated through expansion of our market area and
our affiliate relationships with other financial institutions in the
Southeastern United States.
OFFICE LOCATIONS
We operate nine full-service banking locations and eight automated
teller machines that are located in six contiguous counties in northeast
Tennessee. As of December 31, 1999, our deposit market share was 8.79% in
Sullivan County, 5.01% in Washington County, and 24.04% in Unicoi County. See
"Business of BancTenn Corp.--Facilities" on page 23.
The address and phone number of our principal executive offices are:
301 East Center Street
Kingsport, Tennessee 37660
(423) 378-9500
BUSINESS STRATEGY
Our commitment to excellence is defined by our mission:
- To enhance the quality of life of our customers and our
communities by providing superior financial services.
- To achieve excellence in the financial services field through
proper human resource development, utilization and reward.
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- To maximize return on invested capital through appropriate
pricing, marketing and expense control.
- To expect and require our employees to maintain the highest
ethical conduct both in their business and personal endeavors.
LINES OF BUSINESS
We provide traditional banking products and services through
high-quality and personalized delivery systems. We offer a wide variety of
checking, savings, and certificates of deposit. We offer a broad range of
commercial, retail and personal loan products and credit arrangements.
Additionally, we offer credit and debit cards and limited forms of electronic
banking. We recognize the need to adapt as our customers and the financial
industry become more technologically driven. As a result, we expect to begin
offering Internet banking to our customers. To complement our traditional
banking products and services, we also offer investment and brokerage services.
In addition, we offer data processing and back-room support services to other
financial institutions and businesses.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by BancTenn Corp............... 428,571 shares
Common stock to be outstanding after the offering... 1,897,172 shares
Use of proceeds..................................... We intend to use the net proceeds as capital
to support the asset growth of Bank of
Tennessee, to retire debt, to pursue
strategic opportunities, and for other
general corporate purposes. See "The
Offering" on page 11 and "Use of Proceeds"
on page 14.
Minimum Purchase.................................... 200 shares
(except for shares purchased under preemptive
rights for which there is no minimum)
Maximum Purchase.................................... 20,000 shares
(except for shares purchased under preemptive
rights for which there is no maximum)
See "The Offering--Preemptive Rights" on
page 11 and "Important Provisions of Our
Charter and Bylaws--Preemptive Rights" on
page 60.
</TABLE>
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<TABLE>
<S> <C>
Dividends........................................... Historically, we have paid nominal cash dividends.
See "Market Price of and Dividends on Common Stock" on
page 15.
Dilution............................................ New investors will incur immediate dilution between the
purchase price per share and our book value per share after
the offering of approximately $9.51. See "Dilution" on
page 16.
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated unaudited financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this prospectus. This information has been derived
from audited financial statements for 1997 through 1999 and from unaudited
financial statements for the six months ended June 30, 2000 and 1999. You should
not rely on the six-month information as being indicative of results expected
for the entire year.
<TABLE>
<CAPTION>
AT AND FOR THE SIX AT AND FOR THE
MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------ ----------------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets $354,466 $275,966 $299,627 $254,691 $212,044
Loans, net 274,857 216,481 238,149 203,995 153,997
Total deposits 305,517 235,530 263,573 220,895 185,823
Investment securities available for sale 42,124 32,192 32,582 26,398 25,904
Investment securities held to maturity 2,049 3,161 3,019 3,361 5,229
Shareholders' equity 23,164 20,771 22,193 19,976 17,786
AVERAGE BALANCES:
Assets $321,590 $259,686 $269,552 $231,367 $198,824
Earning assets 299,718 239,765 248,660 212,544 181,403
Loans, net of unearned income 259,968 210,364 220,987 178,935 142,679
Shareholders' equity 22,068 18,617 19,115 17,825 15,572
SELECTED INCOME STATEMENT DATA:
Interest income $ 12,295 $ 9,319 $ 19,717 $ 17,268 $ 14,643
Interest expense 6,914 4,529 9,743 8,470 7,131
Net interest income 5,381 4,790 9,974 8,798 7,512
Provision for loan losses 766 310 665 611 345
Noninterest income 1,837 1,343 2,724 2,572 2,239
Noninterest expense 4,860 4,038 8,580 7,704 6,387
Income tax expense 526 634 1,218 1,112 1,103
Net income 1,066 1,151 2,235 1,943 1,916
PER SHARE DATA: (1)
Net income per share basic $ 0.73 $ 0.81 $ 1.56 $ 1.37 $ 1.37
Net income per share diluted 0.69 0.76 1.49 1.31 1.30
Dividends paid per share -- -- 0.04 0.04 0.03
Book value 15.77 14.56 15.11 14.00 12.59
Average common shares outstanding 1,469 1,427 1,435 1,417 1,400
Ending common shares outstanding 1,469 1,427 1,469 1,427 1,413
ASSET QUALITY RATIOS:
Net charge-offs to average loans outstanding 0.03% 0.04% 0.07% 0.15% 0.03%
Allowance to period end loans 1.12% 0.97% 1.00% 0.92% 1.00%
Allowance to non-performing assets 651.47% 3538.33% 505.26% 1406.67% 2124.66%
SELECTED FINANCIAL RATIOS:
Interest rate spread 3.21% 3.52% 3.53% 3.51% 3.39%
Net yield on interest earning assets 3.78% 4.10% 4.08% 4.20% 4.14%
Net income to average total assets 0.66% 0.89% 0.83% 0.84% 0.96%
Net income to average shareholders' equity 9.66% 12.37% 11.69% 10.90% 12.30%
Efficiency ratio (2) 67.32% 65.84% 67.57% 67.76% 65.50%
Average shareholders' equity to average total assets 6.86% 7.17% 7.09% 7.70% 7.83%
</TABLE>
(1) All per share amounts have been adjusted for common stock splits,
effected in the form of dividends, to shareholders of record on May 13,
1999 and May 9, 1997.
(2) Calculated by dividing total noninterest expense, excluding securities
gains and losses, by net interest income plus noninterest income.
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RISK FACTORS
An investment in the common stock involves a significant degree of
risk. You should carefully consider the following risk factors and other
information in this prospectus before deciding to invest in the common stock.
The following paragraphs describe the risks that we believe are
material to your decision to invest in our common stock. You should also read
carefully the cautionary statement following these Risk Factors regarding the
use of forward-looking statements.
THERE HAS NOT BEEN A PUBLIC MARKET FOR OUR COMMON STOCK AND ONE IS NOT LIKELY TO
DEVELOP AFTER THE OFFERING, WHICH MAY LIMIT YOUR ABILITY TO SELL YOUR SHARES OF
COMMON STOCK.
Prior to the offering, there has not been a public market for our
common stock, and one is not likely to develop after the offering. If an active
trading market does not develop or continue after the offering, you may not be
able to sell your shares at or above the public offering price. We presently do
not intend to cause our common stock to be listed on any stock exchange or
quoted through any recognized quotation system. Additionally, following this
offering, we will have a relatively small shareholder base and small number of
shares outstanding. You should consider carefully the limited liquidity of your
investment before purchasing any shares of common stock.
THE ARBITRARILY DETERMINED PUBLIC OFFERING PRICE MAY BE HIGHER OR LOWER THAN THE
MARKET PRICE OF OUR COMMON STOCK AFTER THE OFFERING.
The public offering price may not indicate the market price for the
common stock after the offering. Because an active trading market does not exist
for the common stock, we were unable to set an offering price that would reflect
the effect of an efficient market for the stock. Instead, we determined the
public offering price based on a variety of factors, including the prices at
which the common stock has most recently been sold, the history of, and
prospects for, the banking industry in our market areas, the price to earnings
and price to book value multiples represented by the offering price and by the
prices of publicity traded common stock of comparable companies, our historical
and prospective cash flow and earnings and that of comparable companies in
recent periods. See "The Offering--Determination of Offering Price" on page 13.
THE MARKET PRICE OF OUR COMMON STOCK WILL FLUCTUATE AND COULD FLUCTUATE
SIGNIFICANTLY.
If a market develops for our common stock after the offering, we may
experience significant fluctuations in the market price of our common stock.
Factors that may affect the price of our common stock include the depth and
liquidity of the market for the common stock, investor perception of our
financial strength, conditions in the banking industry such as credit quality
and monetary policies, and general economic and market conditions. Our quarterly
operating results, changes in analysts' earnings estimates, changes in general
conditions in the economy or financial markets or other developments affecting
us could cause the market price of the common stock to fluctuate substantially.
In addition, from time to time the stock market experiences extreme price and
volume fluctuations. This volatility may significantly affect the market price
of our common stock for reasons unrelated to our operating performance.
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THE MARKET PRICE OF OUR COMMON STOCK COULD DROP SIGNIFICANTLY IF LARGE BLOCKS OF
OUR COMMON STOCK ARE SOLD IN THE PUBLIC MARKET.
The market price of our common stock could drop significantly if the
holders of our common stock sell or are perceived by the market as intending to
sell large blocks of shares. After this offering, we will have up to 1,897,197
outstanding shares of common stock. We estimate that our directors, executive
officers and principal shareholders will purchase approximately 46,315 shares in
this offering. Of the 1,897,197 shares, approximately 875,511 will be
immediately available for resale in the public market without restriction. The
remaining 1,021,686 outstanding shares will represent shares held by our
affiliates that are restricted under the federal securities laws. These shares
will become available for resale in the public market beginning 90 days after
the close of this offering, subject to the volume and other limitations under
federal securities laws. See "Shares Eligible for Future Sale" on page 64, for a
discussion of the resale limitations under federal securities laws.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A MAJORITY OF OUR OUTSTANDING COMMON
STOCK AND WILL BE ABLE TO CONTROL THE OUTCOME OF CORPORATE ACTIONS THAT REQUIRE
SHAREHOLDER APPROVAL.
After the completion of the offering, our executive officers and
directors, collectively, will have the power to block business combinations and
to control the outcome of all matters required to be submitted to our
shareholders for approval. These matters include decisions relating to the
election of directors, the determination of day-to-day corporate and management
policies and other significant corporate transactions. The executive officers
and directors of BancTenn Corp. collectively will beneficially own approximately
1,069,894 or 52.8%, of the outstanding shares of common stock after completion
of the offering. Several of our charter provisions can be amended only with
two-thirds approval of our directors or two-thirds approval of our shareholders.
See "Principal Shareholders and Stock Ownership of Management" on page 46 and
"Description of Our Capital Stock" on page 59.
WE HAVE ANTI-TAKEOVER MEASURES IN OUR CHARTER WHICH MAY DETER OR DEPRIVE
SHAREHOLDERS OF AN OPPORTUNITY TO SELL THEIR SHARES AT A PREMIUM OVER MARKET.
Our charter contains provisions relating to the removal of directors
from our board that may make it more difficult and time consuming for a
potential acquiror to obtain control of BancTenn Corp. by replacing the board of
directors or management. Our charter also contains requirements and standards
that our board of directors must follow in evaluating any transaction proposing
a merger, sale or change of control of our organization. Our charter also
contains requirements and standards that our board of directors must follow when
evaluating any merger, sale or change of control involving BancTenn Corp. If
these provisions deter an attempt to change or gain control of BancTenn Corp.,
you may be deprived of opportunities to sell some or all of your shares at
prices that represent a premium over market prices. See "Important Provisions of
Our Charter and Bylaws" on page 60.
UNPREDICTABLE ECONOMIC CONDITIONS MAY HAVE AN ADVERSE EFFECT ON THE QUALITY OF
OUR LOAN PORTFOLIO AND OUR FINANCIAL PERFORMANCE.
Economic recession over a prolonged period or other economic problems
in our market areas could have a material adverse impact on the quality of our
loan portfolio and the demand for our products and services. For example, a
downturn in the local economy could make it more difficult
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<PAGE> 10
for borrowers to repay their loans, which could lead to loan losses for Bank of
Tennessee. This could in turn adversely affect our financial condition, results
of operations and cash flows. Our success depends to a significant extent upon
economic conditions in Tennessee and particularly in the counties in which we
have branches. The banking industry in Tennessee is affected by general economic
conditions such as inflation, recession, unemployment and other factors beyond
our control. See "Business of BancTenn Corp." on page 18.
WE COULD SUFFER LOAN LOSSES FROM A DECLINE IN CREDIT QUALITY.
At June 30, 2000, our real estate lending accounted for approximately
60% of our loan portfolio while commercial loans accounted for approximately 26%
and consumer loans accounted for approximately 14%. Significant portions of our
real estate loans and commercial loans carry variable interest rates. Real
estate and commercial loans are particularly susceptible to changes in economic
conditions such as inflation and increases in interest rates. We could sustain
losses if borrowers, guarantors and related parties fail to perform in
accordance with the terms of their loans. Because we derive a significant
portion of our net income from our loan portfolio, our financial condition,
results of operations and cash flows could be materially adversely affected if
our borrowers are unable to repay their loans as scheduled. See "Business of
BancTenn Corp.--Lines of Business" on page 18.
CHANGES IN INTEREST RATES MAY DECREASE OUR NET INTEREST INCOME.
If we are unsuccessful in managing interest rate fluctuations, our net
interest income could decrease materially. Our operations depend substantially
on our net interest income, which is the difference between the interest income
earned on our interest-earning assets and the interest expense paid on our
interest-bearing liabilities. Like most depository institutions, our earnings
and net interest income are affected by changes in market interest rates and
other economic factors beyond our control. While we take measures to guard
against interest rate risk, these measures may not be effective in minimizing
our exposure to interest rate risk. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Interest Rate Sensitivity and
Liquidity" on page 42.
DEPARTURES OF OUR KEY PERSONNEL MAY IMPAIR OUR OPERATIONS.
Each member of our management team is important to our success and the
unexpected loss of any of these persons could impair our day-to-day operations
as well as our strategic direction. Our management team includes William B.
Greene, Jr., chairman of BancTenn Corp.; Colon A. Terrell, Jr., president and
chief executive officer of BancTenn Corp.; Roy L. Harmon, Jr., executive vice
president of BancTenn Corp. and chief executive officer of Bank of Tennessee;
Tony L. Howell, executive vice president; Kenneth H. Maloy, president of Bank of
Tennessee; and Mary Mac Wilson, executive vice president of Bank of Tennessee.
Although we have change of control agreements with Mr. Terrell and Mr. Harmon
and key man life insurance on Mr. Terrell, Mr. Harmon, Mr. Howell, Mr. Maloy,
and Mrs. Wilson, we have not entered into employment agreements with any
employees. See "Directors and Executive Officers" on page 48.
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INDUSTRY COMPETITION MAY ADVERSELY AFFECT OUR PROFITABILITY.
The banking business is highly competitive, and our profitability
depends upon our ability to compete in our market areas. We compete with other
commercial banks, savings banks, savings and loan associations, credit unions,
mortgage companies, finance companies, mutual funds, insurance companies,
brokerage and investment banking firms, asset-based non-bank lenders, retail
stores and other non-financial entities that maintain their own credit programs,
and governmental organizations. These competitors may attract customers by
offering more favorable interest rate or financing terms than we do. Many of
these competitors have greater financial and other resources than we have and
compete aggressively with us for market share. Moreover, some of these
competitors are not subject to the same degree of regulation as we are and may
have greater resources than are likely to be available to us. Competition from
non-traditional financial institutions may also affect our success due to the
Gramm-Leach-Bliley Act of 1999. In the future, the United States Congress or the
Tennessee legislature may enact other legislation that may further increase
competitive pressures on us. See "Business of BancTenn Corp.--Competition" on
page 22 and "Supervision and Regulation--Permitted Activities" on page 66.
IF PARAGON COMMERCIAL BANK EXPERIENCES FINANCIAL DIFFICULTIES, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED.
We own 19.11 % of the outstanding stock of Paragon Commercial Bank, a
North Carolina state-chartered bank with its principal place of business in
Raleigh, North Carolina. Together with our affiliates, we own 29.62% of
Paragon's outstanding stock. In addition, two of our directors are members of
Paragon's twelve person board of directors. Under applicable federal banking
law, these facts and circumstances cause the Federal Reserve to consider us a
"source of strength" for Paragon. This means that if Paragon experiences
financial difficulties and is required to raise additional capital, the Federal
Reserve may require us to provide the additional capital necessary to support
Paragon. If this were to occur, it might adversely affect our profitability by
interfering with our ability to support Bank of Tennessee and to otherwise
pursue our strategic plan.
GOVERNMENT REGULATION MAY HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY AND
GROWTH.
Bank holding companies and banks are subject to extensive state and
federal government supervision and regulation. Changes in state and federal
banking laws and regulations or in federal monetary policies could adversely
affect our ability to maintain profitability and continue to grow. For example,
new legislation or regulation could limit the manner in which we may conduct our
business, including our ability to obtain financing, attract deposits, make
loans and achieve satisfactory interest spreads. Many of these regulations are
intended to protect depositors, the public and the FDIC, not shareholders. In
addition, the burden imposed by federal and state regulations may place us at a
competitive disadvantage compared to competitors who are less regulated. The
laws, regulations, interpretations and enforcement policies that apply to us
have been subject to significant, and sometimes retroactively applied, changes
in recent years, and may change significantly in the future. Future legislation
or government policy may also adversely affect the banking industry or our
operations. See "Supervision and Regulation" on page 65.
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<PAGE> 12
OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED BY FEDERAL AND STATE POLICIES AND
REGULATIONS.
Federal Reserve policy and Tennessee Department of Financial
Institutions regulations restrict our ability to pay dividends, and we cannot
assure that we will pay dividends on our common stock in the future. Federal
Reserve policy states that bank holding companies should pay cash dividends on
common stock only out of net income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that a bank holding
company should not maintain a level of cash dividends that undermines its
ability to serve as a source of strength to its banking subsidiaries. Our
ability to declare and pay dividends on the common stock depends upon our
earnings and financial condition, our liquidity and capital requirements, the
general economic and regulatory climate and other factors our board of directors
deems relevant.
Our principal source of funds to pay dividends is cash dividends that
we receive from our subsidiary, Bank of Tennessee. Tennessee law prohibits the
payment of dividends except from a bank's surplus profits. Additionally, FDIC
policies and regulations restrict Bank of Tennessee's ability to pay dividends.
Based upon these regulatory restrictions, the Bank of Tennessee could have paid
BancTenn Corp. a dividend of approximately $3.8 million as of December 31, 1999,
and approximately $6.7 million as of June 30, 2000, without prior regulatory
approval. See "Supervision and Regulation--Payment of Dividends" on page 68.
WE MAY NOT ALLOCATE ALL OF THE NET PROCEEDS OF THIS OFFERING IN THE MOST
PROFITABLE MANNER.
Our management will have complete discretion in determining the use and
allocation of the net proceeds of the offering, which are estimated to be
$11,900,000. We intend to use the net proceeds as capital to support asset
growth at Bank of Tennessee, to retire debt, to pursue strategic opportunities,
and for other general corporate purposes. Our management will have discretion as
to the timing and specific application of the net proceeds, and investors will
not have the opportunity to evaluate the economic, financial and other relevant
information that we will use in applying the proceeds. Although we intend to use
the net proceeds to serve BancTenn Corp.'s best interest, our allocation may not
ultimately reflect the most profitable application of these proceeds. See "Use
of Proceeds" on page 14.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" which include
information about possible or assumed future results of our operations or our
financial performance. Forward-looking statements may also include information
regarding our future plans and objectives. Forward-looking statements are based
on the belief of our management, as well as assumptions they have made and
information currently available to them. Words such as "expect," "estimate,"
"anticipate," "believe" and other similar expressions are intended to identify
forward-looking statements.
The cautionary statements in the "Risk Factors" section and elsewhere
in this prospectus identify important factors and possible events, which involve
risks and uncertainties, that could cause actual results to differ materially
from those contained in the forward-looking statements. If you are interested in
purchasing shares of the common stock, you should carefully consider these risk
factors, as well as factors discussed elsewhere in this prospectus, before
making a decision to invest in the common stock.
10
<PAGE> 14
THE OFFERING
PURPOSE
We are conducting this offering to raise additional capital necessary
to support the capital needs of Bank of Tennessee, to retire debt, to pursue
strategic opportunities, and for other general corporate purposes.
PLAN OF DISTRIBUTION
BancTenn Corp. is offering 428,571 shares of common stock at a price of
$28.00 per share. Except for subscriptions tendered pursuant to the exercise of
preemptive rights, the minimum purchase for any one investor is 200 shares, and
the maximum purchase for any one investor is 20,000 shares unless BancTenn
Corp., in its sole discretion, accepts a subscription for a lesser or greater
number of shares. The shares are being offered through the best efforts of our
officers and directors until December 31, 2000 unless we decide to end the
offering sooner or extend the offering as described under "--Expiration Date" on
page 12. Our officers and directors will not receive any commissions or other
compensation for soliciting sales of the common stock, but they will be
reimbursed for reasonable expenses they incur in the offering. THE OFFERING IS
NOT UNDERWRITTEN.
PREEMPTIVE RIGHTS
Under our charter our shareholders have preemptive rights. This means
that each of our shareholders is entitled to purchase a number of shares in this
offering that will enable him or her to maintain his or her current ownership
percentage. For example, if a shareholder currently owns 1% of our outstanding
stock, that shareholder would be entitled to purchase 4,285 shares of the
428,571 shares in this offering. It would be possible for this shareholder to
purchase more than 4,285 shares but any shares purchased in excess of 4,285
would be based upon the general subscription process rather than upon his or her
preemptive rights. There is no minimum number of shares that a current
shareholder must purchase when exercising his or her preemptive rights. We will
not issue any fractional shares, and when calculating preemptive right
entitlements, we will round down to the nearest whole share.
The preemptive rights offering will begin on September 27, 2000 and
will remain in effect until November 3, 2000 at which time all preemptive rights
to purchase shares in this offering will expire. Any shares not subscribed for
by our current shareholders by November 3, 2000 will be available for purchase
by the general public, including our current shareholders who desire to purchase
more than their preemptive rights entitlement. Subject to the expiration of the
preemptive rights offering, we reserve the right to begin receiving
subscriptions from the general public on September 27, 2000. As indicated in
"--Discretion to Accept Subscriptions" on page 12, we reserve the right to
accept or reject any non-preemptive right subscription.
HOW TO PURCHASE SHARES
You may purchase shares of our common stock by delivering to BancTenn
Corp., 301 East Center Street, Kingsport, Tennessee 37660, Attn: Peggy Cole, the
following items:
11
<PAGE> 15
- Your completed and signed subscription agreement for at least
200 shares of common stock; however, there is no minimum
number of shares required for the exercise of preemptive
rights; and
- A check or a money order payable to BancTenn Corp. in the
amount of the total purchase price for the shares you wish to
purchase, calculated based on a price of $28.00 per share.
A blank subscription agreement accompanies this prospectus. Additional
forms are available upon request from Peggy Cole at the address listed above.
You may not revoke or change your subscription after you have submitted your
signed subscription agreement unless you receive our express permission to do
so. You must subscribe for at least 200 shares of common stock. Additionally, we
may reject any subscription or limit the number of shares sold to any
subscriber.
EXPIRATION DATE
This offering will expire at 5:00 p.m., Eastern Time, on December 31,
2000, unless we choose to end the offering sooner or extend the offering period.
Our decision to end or extend the offering will be based on demand for the
shares and the availability of attractive strategic investment opportunities as
described below. We will not extend the offering beyond March 31, 2001. We will
promptly publish a notice in various local newspapers including The Kingsport
Times-News or otherwise notify you if we change the expiration date of the
offering.
This offering contemplates that we will raise approximately $3,000,000
in new capital for investment in strategic opportunities or as additional
capital for Bank of Tennessee. Our analysis of these opportunities is ongoing.
In the event that we determine that some portion of this additional capital is
not currently needed for strategic investments or as additional capital for Bank
of Tennessee, we reserve the right to conclude this offering before completing
the sale of all 428,571 shares.
ALLOCATION OF SUBSCRIPTIONS IF THE OFFERING IS UNDERSUBSCRIBED
Even if we receive subscriptions for less than 428,571 shares of common
stock, we intend to complete the sale of all shares for which subscriptions are
received, subject to our right to accept or reject any particular subscription,
other than preemptive right subscriptions. We will not accept subscriptions for
more than 428,571 shares of common stock. See "Discretion to Accept
Subscriptions" below.
DISCRETION TO ACCEPT SUBSCRIPTIONS
Except for shares purchased upon the exercise of preemptive rights, we
have the right, in our sole discretion, to accept or reject any subscription in
whole or in part. As a result, you may not receive any or all of the shares for
which you subscribe.
We will notify subscribers promptly after the expiration date as to
whether and to what extent their subscriptions have been accepted. If we do not
accept all or a portion of a subscription, we will return the unaccepted portion
of the subscription funds, without interest, to the subscriber.
12
<PAGE> 16
ISSUANCE OF STOCK CERTIFICATES
Promptly after the expiration date described above, BancTenn Corp.,
acting as its own transfer agent, will issue stock certificates representing the
shares purchased by investors in this offering. We will follow the instructions
contained in the accepted subscription agreements when we issue stock
certificates.
SUBSCRIPTION PROCEEDS
We will deposit immediately into BancTenn Corp.'s general operating
account all proceeds received from the sale of stock purchased through the
exercise of preemptive rights. We will deposit into a non-interest bearing
deposit account at Bank of Tennessee the proceeds received from subscriptions
for non-preemptive rights purchases. After the preemptive rights period has
expired, we will process the non-preemptive rights subscriptions, remove the
proceeds of such subscriptions from escrow, and transfer such monies to BancTenn
Corp.'s general operating account. We will refund any amounts due to subscribers
whose subscriptions we did not accept as described under "--Discretion to Accept
Subscriptions" on page 12.
DETERMINATION OF OFFERING PRICE
Our board of directors established the offering price of $28.00 per
share. This price is equal to 1.85 times our consolidated book value per share
of $15.11 at December 31, 1999, and 17.95 times our net income per share of
$1.56 for the year ended December 31, 1999. The price of $28.00 per share is
also equal to 1.78 times our book value of $15.77 per share at June 30, 2000 and
19.31 times our annualized net income of $1.45 per share based upon our actual
net income of $1,066,330 for the six-months ended June 30, 2000. The Board
considered a number of factors in setting the price, including:
- the prices at which our common stock has most recently been
sold;
- the history of, and prospects for, the banking industry;
- the price-to-earnings and price-to-book value multiples
represented by the offering price and by the prices of
publicly traded common stock of comparable companies; and
- our historical and prospective cash flow and earnings and that
of comparable companies in recent periods.
See "Summary--Summary Consolidated Financial Information" on page 4 and "Market
Price of and Dividends on Common Stock" on page 15.
13
<PAGE> 17
USE OF PROCEEDS
We have lines of credit available from two commercial banks, AmSouth
and SunTrust. The AmSouth line of credit is in the amount of $5,000,000.
Interest is payable quarterly at the 90 day-LIBOR rate plus 1%. Principal is due
and payable in full at maturity on September 1, 2001. The SunTrust line of
credit is in the amount of $5,000,000. Interest is payable quarterly at the
30-day LIBOR rate plus 0.9%. Principal is due and payable in full at maturity on
July 31, 2001.
In 1999, we borrowed $3,000,000 under the AmSouth line to fund our
investment in Paragon Commercial Bank. In 2000, we have borrowed a total of
$1,800,000 under the AmSouth line to provide additional capital to Bank of
Tennessee. These debts are still outstanding. In 2000, we also borrowed
$2,500,000 under the SunTrust line to provide additional capital to Bank of
Tennessee.
Assuming we sell 428,571 shares of common stock in this offering, we
intend to use the net proceeds of this offering to retire these borrowings, to
pursue additional strategic investments, and for general working capital. We
estimate the expenses of this offering to be approximately $100,000 and the net
proceeds from this offering to be approximately $11,900,000. We intend to use
the net proceeds as follows:
<TABLE>
<S> <C>
$ 3,000,000 - retire debt under the AmSouth line for Paragon investment
1,800,000 - retire debt under the AmSouth line for Bank of Tennessee capital
2,500,000 - retire debt under SunTrust line for Bank of Tennessee capital
1,600,000 - future capital needs of Bank of Tennessee
3,000,000 - future strategic investments
-----------
$11,900,000
===========
</TABLE>
If we do not sell all 428,571 shares of this offering, our first
priority will be to use the net proceeds to retire our existing debt. We intend
to use any net proceeds remaining after retirement of our existing debt for the
additional capital needs of Bank of Tennessee and to pursue new strategic
investments as our directors may approve from time to time.
14
<PAGE> 18
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
We had 354 shareholders of record on June 30, 2000. Prior to this
offering, our common stock has not been traded on an established public trading
market, and quotations for the common stock have not been reported on any
market. As a result, there has been no regular market for the common stock, and
the sales prices known to us do not necessarily reflect the prices that would be
paid for the common stock in an active market. Adjusted for stock splits, our
common stock traded at prices between $20.83 and $25.00 per share during 1997,
between $25.00 and $26.40 per share during 1998 and between $20.80 and $29.00
per share during 1999. As of June 30, 2000, the most recent trade we are aware
of was at $30.00 per share.
The following table sets forth the amount of annual dividends we have
paid on our common stock during the years indicated. We have adjusted all per
share dividend amounts to reflect the six-for-five stock split effective on May
9, 1997 and the five-for-four stock split effective on May 13, 1999.
<TABLE>
<CAPTION>
CASH DIVIDEND
FISCAL YEAR DATE PAID PER SHARE
----------- --------- -------------
<S> <C> <C>
1997 February 28, 1997 .033
1998 March 12, 1998 .040
1999 June 1, 1999 .040
</TABLE>
We currently pay cash dividends on an annual basis and have paid
dividends every year since 1991. BancTenn Corp. is a legal entity separate and
distinct from Bank of Tennessee, and BancTenn Corp.'s revenues depend primarily
on the dividends it receives from Bank of Tennessee. Because we intend to
maximize the capital available to support the continued growth of Bank of
Tennessee and to pursue other strategic opportunities from time to time, we do
not anticipate paying substantial dividends to the holders of our common stock
in the foreseeable future. In addition, banking regulations limit the amount of
dividends that Bank of Tennessee can pay and require that Bank of Tennessee
maintain specified minimum levels of capital which, in turn, further limits the
amount of dividends that Bank of Tennessee can pay. See "Supervision and
Regulation--Payment of Dividends" on page 68 and "Supervision and
Regulation--Capital Adequacy" on page 69.
15
<PAGE> 19
DILUTION
As of June 30, 2000, our net tangible book value was $15.77 per share.
"Net tangible book value per share" is tangible net worth, or total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding. After giving effect to the sale of the shares of common stock
offered by this prospectus and after deducting estimated offering expenses, the
pro forma net tangible book value at June 30, 2000 would have been $18.49 per
share. This represents an immediate increase in the net tangible book value of
$2.72 per share to existing shareholders and an immediate dilution of $9.51 per
share to new investors purchasing shares in this offering. The following table
illustrates this per share dilution to new investors:
<TABLE>
<S> <C>
Assumed initial public offering price per share.................................... $ 28.00
Net tangible book value per share at June 30, 2000............................... $ 15.77
Increase in net tangible book value per share attributable to new investors...... 2.72
-------
Pro forma net tangible book value per share after offering......................... 18.49
-------
Dilution in net tangible book value per share to new investors..................... $ 9.51
=======
</TABLE>
16
<PAGE> 20
CAPITALIZATION
The following table shows our capitalization as of June 30, 2000, and
as adjusted to give effect to the receipt of the net proceeds from the sale of
428,571 shares of common stock in the offering. The as adjusted capitalization
assumes that we will sell 428,571 shares of common stock at $28.00 per share
and that the net proceeds from the offering, after deducting the estimated
offering expenses payable by us, will be approximately $11,900,000.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred stock; $1.00 par value; 250,000 shares
authorized; no shares issued $ -- $ --
Common stock; $8.00 par value; 6,000,000 shares
authorized; 1,468,626 actual shares issued and
outstanding, as adjusted 11,749,008 15,177,576
Additional paid-in capital 2,422,715 10,894,147
Retained earnings 9,374,848 9,374,848
Accumulated other comprehensive income (loss) (363,148) (363,148)
------------ ------------
Total Shareholders' Equity $ 23,183,423 $ 35,083,423
============ ============
</TABLE>
17
<PAGE> 21
BUSINESS OF BANCTENN CORP.
BACKGROUND
The principal business activity of BancTenn Corp. is its ownership of
100% of the outstanding stock of Bank of Tennessee, which is a Tennessee
state-chartered bank. Bank of Tennessee was founded in 1974 and has operated
continuously under that name since opening for business. In 1984, Bank of
Tennessee purchased two branches of the former First Security Bank in Erwin,
Tennessee from the Federal Deposit Insurance Corporation. In 1985, Bank of
Tennessee effected a reorganization to establish BancTenn Corp. as a one-bank
holding company owning 100% of the outstanding stock of Bank of Tennessee. Bank
of Tennessee continues to operate as a traditional community bank in the
communities it serves. As of June 30, 2000, we operate nine banking offices in
three counties with $349.91 million in total assets.
In addition to our ownership of Bank of Tennessee, we also invest in
de novo banks in Tennessee and North Carolina. In 1999, we were instrumental in
founding Paragon Commercial Bank, a North Carolina state-chartered bank with
its principal office in Raleigh, North Carolina. We own 19.11% of Paragon's
outstanding stock, and our affiliates own an additional 11.46%. We are
considered a "source of strength" for Paragon under federal banking law. See
"Risk Factors" on page 7. We also have minor investment positions in three
other banks in North Carolina and two other banks in Tennessee. We own
approximately 7.76% of the outstanding stock of Independence Bank,
Kernersville, North Carolina, and 5.00% of Mountain National Bank, Gatlinburg,
Tennessee. We own less than 1% of Cornerstone Bancshares, Inc., Chattanooga,
Tennessee, less than 2% of Cornerstone Bank, Wilson, North Carolina, and
approximately 1% of New Century Bank, Dunn, North Carolina.
We are also affiliated with Carter County Bancorp, Inc., a one-bank
holding company, which owns 100% of the outstanding stock of Carter County
Bank, a Tennessee state-chartered bank. Carter County Bank's principal offices
are in Elizabethton, Tennessee, about 35 miles from our principal offices in
Kingsport, Tennessee. Our chairman, William B. Greene, Jr., is also the
chairman and chief executive officer of Carter County Bancorp, Inc. as well as
its largest shareholder. Mr. Greene beneficially owns approximately 50% of our
outstanding stock and he beneficially owns approximately 87% of the outstanding
stock of Carter County Bancorp, Inc. By virtue of this commonality of
ownership, we and Carter County Bancorp, Inc. are considered affiliates for
regulatory purposes. Within applicable regulatory constraints, Bank of
Tennessee and Carter County Bank sell each other loan participations from time
to time. Additionally, Carter County Bancorp., Inc. and Carter County Bank
purchase data processing and other back-room support services from our
corporate services area known as Tennessee General. Another of our directors,
John E. Seward, Jr., is also a director of Carter County Bancorp, Inc. and
Carter County Bank. Mr. Seward is also a director of the Federal Reserve Bank
of Atlanta, in Atlanta, Georgia. Mr. Steward's directorship with the Federal
Reserve Bank of Atlanta will expire in December of 2000.
LINES OF BUSINESS
Through Bank of Tennessee, we provide a full range of banking services
to our customers including accepting deposits and making loans. Brick and
mortar facilities with people-to-people
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<PAGE> 22
banking has been our mainstay since 1974. As the financial industry becomes
more technology-driven, we have developed new products and business lines to
meet the changing needs and desires of our customers. Bank of Tennessee offers
a wide variety of checking, savings, certificates of deposit and loan accounts.
We also offer credit and debit cards, mortgage loans, lines of credit, and
limited degrees of electronic banking. Bank of Tennessee expects to begin
offering Internet banking in late 2000. Through our business unit known as BT
Financial Services we offer brokerage services in conjunction with UVEST
Investment Services, Inc., a third-party provider of transaction services. We
also offer accounts receivable financing through our business line known as
Business Manager. We offer data processing and back-room support services
through our corporate services area known as Tennessee General. The following
paragraphs describe our services in more detail:
- REAL ESTATE LENDING. Our real estate loans consist of commercial and
residential construction loans, residential first and second mortgage
loans, home equity lines of credit, and term loans secured by first and
second mortgages on the residences of borrowers for home improvements,
education and other personal expenditures. We make residential mortgage
loans with a variety of terms, including fixed and floating rates.
Generally, we retain floating rate loans and sell fixed rate mortgage
loans into the secondary market. Almost all of our loans for
acquisition, development and construction purposes are secured by
commercial real estate, single-family residences or residential
development property.
Risks associated with real estate lending include fluctuations in the
value of real estate, new job creation trends, and the borrower's
financial stability. Real estate loans are made consistent with our
real estate lending policies which prescribe underwriting guidelines.
At June 30, 2000, our real estate lending represented 60.14% of our
total loans. Approximately 45.90% of our real estate loans are fixed
rate loans and 54.10% are variable rate loans. We have purchased
approximately 10.27% of our real estate loans from our affiliate,
Paragon Commercial Bank, Raleigh, North Carolina. See "--Background"
on page 18.
- CONSUMER LENDING. We offer consumer installment loans primarily to
individuals for personal, family, and household purposes. We also
offer credit cards and home equity lines of credit to consumers.
Consumer lending presents unique risks. Consumer loan repayments
depend upon a borrower's financial stability and are more likely to be
adversely affected by job loss, divorce, illness and other personal
hardships. In addition, collateral such as automobiles and other
personal property securing consumer loans depreciates rapidly and
sometimes is an inadequate repayment source if a borrower defaults. In
evaluating these loans, we require our lending officers to review the
borrower's level and stability of income, past credit history, and the
impact of these factors on the borrower's ability to repay the loan in
a timely manner. The Bank of Tennessee board of directors has approved
lending policies that prescribe the standards and procedures to be
followed in making consumer loans. At June 30, 2000, our consumer
loans represented 13.82% of our total loans. Approximately 83.76% of
our consumer loans are fixed rate loans and 16.24% are variable rate
loans.
- COMMERCIAL LENDING. Our commerciaL loan portfolio is dispersed among
various business lines. These loans include a wide variety of small
businesses, commercial real estate (both owner-occupied and investment
property), and acquisition and development and construction lending.
These loans are primarily for the financing of property and plants used
in the course of business by these business operators and, to a lesser
degree, for the financing of
19
<PAGE> 23
equipment, inventory and accounts receivable. The remainder is made up
of loans on properties that may be deemed investment property.
Commercial lending entails greater risks than traditional,
single-family residential lending. Commercial loans typically involve
larger loan balances concentrated among fewer borrowers. The analysis
of commercial loans, which requires expertise in evaluating a
commercial enterprise and its collateral, is generally more complex
than the analysis required for single family residential lending. Like
real estate and consumer loans, commercial loans are subject to
adverse conditions in the economy, as well as the market for the
specific goods and services sold by the commercial borrower. Loans
secured by commercial real estate can also be affected by trends in
the local real estate market. In making all these loans, we manage our
credit risk by actively monitoring measures such as cash flow,
collateral value and other appropriate credit factors. At June 30,
2000, our commercial loans represented 26.04% of our total loans.
Approximately 53.40% of our commercial loans are fixed rate loans and
46.60% are variable loans.
- DEPOSITS AND OTHER BORROWINGS. Deposits are the key component of our
banking business, serving as the primary source of funding for lending
as well as for increasing customer account relationships. We offer
competitively priced deposit products, including checking, savings and
time deposit accounts, as we seek to increase core deposits and market
share in the counties where we operate. Borrowings, principally from
Federal Funds lines of credit with other banks, provide sources of
additional liquidity and funding.
- BROKERAGE SERVICES/INVESTMENTS. We provide brokerage services through
BT Financial Services which offers our customers a wide variety of
investment options, including stocks and bonds, mutual funds,
annuities, 401(k) plans, life insurance, Individual Retirement
Accounts and Simplified Employee Pension Accounts, estate planning and
financial needs analysis. We contract with UVEST Investment Services,
Inc. for the customer support necessary to provides these services.
Under this arrangement, UVEST executes and settles our customers
securities transactions, prepares and distributes monthly account
statements directly to our customers, provides securities safekeeping
services, handles margin accounts, receives and processes dividends
and interest payments, and receives and distributes all forms of
shareholder communications including proxy statements and annual
reports.
- ACCOUNTS RECEIVABLE. Through our Business Manager Program, we enable
our business customers to borrow money using their accounts receivable
as collateral. Typically, we agree to loan funds in increments tied to
the amount and aging of the customer's accounts receivable. We loan
varying percentages of these accounts receivable based upon their
aging and we take over responsibility for billing our customer's
accounts and receiving the payments on those accounts. We hold cash
reserves from our customers in proportion to the amount of receivables
and the amount we have loaned against those receivables. After a
particular account receivable has become delinquent or has aged past a
certain date, we charge that account receivable against these reserves
so that our customer ultimately is responsible for the collection of
the receivables. This credit arrangement enables our customers to
create additional liquidity using their accounts receivable as
collateral.
20
<PAGE> 24
- CORPORATE SERVICES. Through our corporate services area known as
Tennessee General, we provide data processing and support services to
other businesses. Support services include accounting, human resources,
loan administration and loan review. As of June 30, 2000, we provided
these services to eleven other financial institutions including our
affiliates, Paragon Commercial Bank and Carter County Bank, as well as
four nonbanking businesses. See "Business of BancTenn Corp.--Lines of
Business" on page 18.
We have developed brokerage and accounts receivable services as a
strategy to retain existing customers, to attract additional customers from our
market areas, and to enhance our franchise by offering a broader scope of
financial services. We developed the data processing and related back-room
support services to take advantage of excess capacity in our data processing
capabilities and to offer fee-based services to other businesses.
Our operating revenues are derived primarily from interest earned from
our loan and investment securities portfolios and fee income from loan and
deposit products and corporate services. We do not depend upon a single
customer, or a few customers, the loss of any one or more of which would have a
material adverse effect on our financial condition or our results of
operations.
Additionally, under the provisions of the Gramm-Leach-Bliley Act,
which became effective on March 11, 2000, a bank holding company may engage in
activities which are financial in nature or incidental or complementary to a
financial activity. While, at the present time, we have determined not to
pursue any expanded financial services, we will continue to evaluate how these
opportunities might fit our strategic plan. See "Supervision and
Regulation--Permitted Activities" on page 66.
MARKET AREAS
Based on call report data as of June 30, 1999, Bank of Tennessee
ranked 27th in asset size out of 202 state and national FDIC-insured banks
operating in Tennessee. We operate principally in northeast Tennessee, and our
branches are located in Sullivan, Washington and Unicoi counties. We have a
total of 9 branch banking offices. Our primary market area is the three-county
region in which we have branches, and our secondary market includes counties
contiguous to that region. Bank of Tennessee also purchases loan participations
from Paragon Commercial Bank and other banks in North Carolina and Tennessee
with which Bank of Tennessee has an affiliate or service relationship. Our
board of directors has approved a policy whereby up to 20% of Bank of
Tennessee's total loans can in the form of loan participations from these
banks.
The following chart describes the communities in which we operate.
Market share data is based on deposit information available from the FDIC as of
June 30, 1999. Population household and income figures are available from the
First Tennessee Development District as of 1998 [Demographics USA-County
Edition, Market Statistics, 1999 edition], and unemployment rates are January
31, 2000 estimates by the Tennessee Department of Labor.
21
<PAGE> 25
<TABLE>
<CAPTION>
MEDIAN HOUSEHOLD
EFFECTIVE BUYING UNEMPLOYMENT DEPOSIT MARKET
COUNTY POPULATION HOUSEHOLDS INCOME RATE SHARE
------ ---------- ---------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Sullivan 150,617 60,667 $32,591 3.3% 8.79%
Washington 102,211 40,547 30,673 4.0% 5.01%
Unicoi 17,216 7,007 24,314 8.0% 24.04%
</TABLE>
COMPETITION
We compete with several local, regional and national commercial banks,
thrifts, credit unions and mortgage companies for deposits, loans, and other
banking-related financial services. There is intense competition in our market
areas from other financial institutions as well as other "non-bank" companies
that engage in similar activities. Some of our competitors are not subject to
the degree of regulatory review and restrictions that apply to us. In addition,
we must compete with much larger financial institutions that have greater
financial resources than we do and that compete aggressively for market share.
These competitors attempt to gain market share through their financial product
mix, pricing strategies and banking center locations. Legislative developments
related to financial holding companies which have expanded powers, interstate
branching and banking in general are creating more competitive pressure on
smaller financial institutions by providing large banking institutions easier
access to a broader marketplace. We also compete with insurance companies,
savings banks, consumer finance companies, investment banking firms, brokerage
houses, mutual fund managers, investment advisors, and credit unions. Retail
establishments compete for loans by offering credit cards and retail installment
contracts for the purchase of goods and merchandise.
We anticipate that competition from both bank and non-bank entities
will continue to grow. We have been able to compete effectively with other
financial institutions by:
- emphasizing customer service and local office decision-making;
- establishing long-term customer relationships and building
customer loyalty; and
- providing products and services designed to address the
specific needs of our customers.
EMPLOYEE RELATIONS
As of June 30, 2000, we had 149 employees, of whom 126 were full-time
and 23 were part-time. In addition to a bonus program, we currently maintain an
employee benefit program providing, among other benefits, a medical insurance
plan, a 401(k) retirement plan, and life and disability insurance. From time to
time we also grant options to some of our senior management officers to purchase
shares of stock in BancTenn Corp. under our Employee Stock Incentive Plan. We
have also adopted an Employee Stock Purchase Plan generally available to all of
our employees under which options are made available on an annual basis. We
consider these employee benefits, as a whole, to be generally competitive with
employee benefits provided by other employers in our market area. We believe our
future success depends, in part, on our ability to continue to attract and
retain skilled retail, technical, and managerial personnel in order to maintain
our quality delivery of
22
<PAGE> 26
financial and banking services. None of our employees is subject to a collective
bargaining agreement, and we have never experienced a work stoppage.
FACILITIES
Our executive and main banking offices are located at 301 East Center
Street, Kingsport, Tennessee 37660. Our principal support and operational
functions are located at 320 Hanover Drive, Johnson City, Tennessee. All of our
offices are located in Tennessee.
The following chart shows the location of each office and indicates
whether each office is owned or leased.
<TABLE>
<CAPTION>
OWNED (O)
BANKING OFFICES LEASED (L)
--------------- ----------
<S> <C>
KINGSPORT
Main Office O
301 East Center Street
Kingsport, TN 37660-4801
Eastman Road Office O
1708 North Eastman Road
Kingsport, TN 37664
Colonial Heights Office O
4214 Fort Henry Drive
Kingsport, TN 37663-2224
JOHNSON CITY
112 Mountcastle Drive O
Johnson City, TN 37601-2522
1328 W. State of Franklin Road O
Johnson City, TN 37601
JONESBOROUGH
501 E. Jackson Blvd. O
Jonesborough, TN 37659
BRISTOL
308-B Eighth Street L
Bristol, TN 37620
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
OWNED (O)
BANKING OFFICES LEASED (L)
--------------- ----------
<S> <C>
ERWIN
1230 N. Main Street O
Erwin, TN 37650-1236
BLOUNTVILLE
3261 West Main Street O
Blountville, TN 37617
NONBANKING OFFICES
Corporate Offices O
301 East Center Street
Kingsport, TN 37660-4801
BT Financial Services O
112 Mountcastle Drive
Johnson City, TN 37601
Tennessee General O
3200 Hanover Road
Johnson City, TN 37604
</TABLE>
LEGAL PROCEEDINGS
In the ordinary course of operations, we are a party to various legal
proceedings. In the opinion of our management, there is no proceeding pending
or, to our knowledge, threatened in which an adverse decision would have a
material adverse effect on our financial condition or results of operations.
24
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations analyzes the major elements of our Consolidated Statements of
Financial Condition and Consolidated Statements of Income. This section should
be read in conjunction with our financial statements and accompanying notes and
other detailed information appearing elsewhere in this prospectus.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
OVERVIEW
The six-month period ended June 30, 2000 was marked by continued strong
loan demand. Total loans increased $58.37 million or 27.0%, compared to June
30, 1999, as a result of the internal growth of our real estate construction and
mortgage loan portfolios.
Net income for the six months ended June 30, 2000 was $1,066,330, which
was $84,404 or 7.33% less than net income for the six months ended June 30,
1999. Basic and diluted earnings per common share were $.73 and $.69,
respectively, for the six months ended June 30, 2000 and $.81 and $.76,
respectively, for the six months ended June 30, 1999. Annualized return on
average assets and return on average common equity were .66% and 9.66%,
respectively, for the six months ended June 30, 2000 compared to .89% and
12.37%, respectively, for the same period in 1999. Our annualized efficiency
ratio, calculated by dividing total noninterest expense (excluding securities
gains and losses) by net interest income plus noninterest income, was 67.32% for
the six months ended June 30, 2000 and 65.84% for the six months ended June 30,
1999. The adverse change in the efficiency ratio was primarily due to increased
compensation expense and the recognition of our share of Paragon Commercial
Bank's loss from operations. Paragon Commercial Bank began operations in May,
1999 and, thus, had no impact on the first quarter 1999 results.
Total assets at June 30, 2000 increased to $354.47 million from $275.97
million at June 30, 1999 and $299.63 million at December 31, 1999, an increase
of 28.45% and 18.31%, respectively. Deposits rose to $305.52 million at June 30,
2000 from $235.53 million at June 30, 1999 and $263.57 million at December 31,
1999, an increase of 29.71% and 15.92%, respectively. Total shareholders' equity
was $23.16 million at June 30, 2000, representing an increase of 11.62% over
total shareholders' equity at June 30, 1999 and 4.46% over total shareholders'
equity at December 31, 1999.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income represents the amount by which
interest income on interest-earning assets, including securities and loans,
exceeds interest expense incurred on interest-bearing liabilities, including
deposits and other borrowed funds. Net interest income is the principal source
of our earnings. Interest rate fluctuations, as well as changes in the amount
and type of earning assets and liabilities, combine to affect net interest
income.
25
<PAGE> 29
Net interest income for the six months ended June 30, 2000 was $5.38 million
compared to $4.79 million for the six months ended June 30, 1999, an increase of
$.59 million or 12.33%. Net interest income increased as a result of significant
loan growth. Loans, net of unearned income, increased to $274.86 million at June
30, 2000 from $216.48 million at June 30, 1999, an increase of $58.38 million or
26.97%. The yield on average interest-earning assets increased to 8.29% for the
six months ended June 30, 2000 from 7.84% for the six months ended June 30,
1999. The cost of interest-bearing liabilities increased to 5.07% for the six
months ended June 30, 2000 from 4.33% for the six months ended June 30, 1999.
Our net interest margin on a tax-equivalent basis was 3.78% and 4.10% and our
interest rate spread was 3.21% and 3.52% for the periods ended June 30, 2000 and
June 30, 1999, respectively. We were unable to offset completely the increase in
the cost of interest bearing liabilities through rate increases on earning
assets.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
income to bring our allowance for loan losses to a level deemed appropriate by
management based on the factors discussed under "--Financial
Condition--Allowance for Loan Losses" on page 28. The provision for loan losses
was $766,000 for the six months ended June 30, 2000 and $310,000 for the same
time period in 1999, an increase of $456,000 or 147.00%. This increase is
attributable to our loan growth and certain loans that were identified during
the six months ended June 30, 2000 as having more than a normal degree of risk.
Management believes the Allowance for Loan Losses has been increased to a level
that is sufficient to cover all losses that have occurred as of the balance
sheet date.
NONINTEREST INCOME. Noninterest income is an important source of
revenue for financial institutions. Service charges on deposit accounts are the
largest component of noninterest income and a significant source of revenue for
us. Noninterest income for the six months ended June 30, 2000 was $1,837,378, an
increase of $494,673 or 36.84% from $1,342,705 for the same period in 1999. This
increase is primarily attributable to two factors. The Company has experienced
an increase in services charges on fee-based deposit accounts as a result of
marketing and product development efforts that have been focused on package
services with club appeal. In addition, the Company provides data processing and
accounting services to other financial institutions. Fee income derived from
such services has increased as a result of increases in the account base and
number of items processed for such institutions.
NONINTEREST EXPENSE. In the six month period ended June 30, 2000,
noninterest expense increased $821,439 or 20.34% to $4.86 million from $4.04
million for the period ended June 30, 1999. The increase reflected a 19.57%
increase in salaries and employee benefits due to loan officers added to support
a continued strategy of loan growth.
INCOME TAXES. Income tax expense includes both federal income tax and
Tennessee state income tax. The amount of federal income tax expense is
influenced by the amount of taxable income, the amount of tax-exempt income, the
amount of non-deductible interest expense and the amount of other non-deductible
expenses. During the six months ended June 30, 2000, income tax expense was
$526,383 compared to $633,869 for the six months ended June 30, 1999. The
effective tax rate for the six months ended June 30, 2000 was 33.05% compared to
35.52% for the same period of 1999.
IMPACT OF INFLATION. The effects of inflation on the local economy and
on our operating results have been relatively modest for the past several years.
Since substantially all of our assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are
26
<PAGE> 30
less sensitive to the effects of inflation than to changing interest rates,
which do not necessarily change in accordance with inflation rates. We try to
control the impact of interest rate fluctuations by managing the relationship
between our interest rate sensitive assets and liabilities. See "For the Years
Ended December 31, 1999 and 1998--Financial Condition--Interest Rate Sensitivity
and Liquidity" on page 42.
FINANCIAL CONDITION
LOAN PORTFOLIO. Loans, net of unearned income, were $277.96 million at
June 30, 2000, an increase of $59.37 million or 27.16% from $218.59 million at
June 30, 1999. Real estate construction loans increased to $8.19 million at June
30, 2000 from $6.06 million at June 30, 1999, a $2.13 million or 35.33%
increase. Real estate mortgage loans increased to $158.96 million at June 30,
2000 from $131.63 million from June 30, 1999, a $27.33 million or 20.76%
increase. These loan portfolio increases have resulted from management's
implementation of a strategy to increase the loan portfolio by hiring additional
personnel.
NONPERFORMING ASSETS. We have several procedures in place to assist in
maintaining the overall quality of our loan portfolio. We have established
written guidelines contained in our lending policy for the collection of past
due loan accounts. These written guidelines explain in detail our policy on the
collection of loans over 30, 60, and 90 days delinquent. Generally, loans over
90 days delinquent are placed in a nonaccrual status. However, if the loan is
deemed to be in process of collection, it may be maintained on an accrual basis.
Management makes loan officers aware of our lending policy and the collection
policy contained in the lending policy on a continuous basis. Management has
also staffed our collection department with properly trained staff to assist
lenders with collection efforts and to maintain records and develop reports on
delinquent borrowers.
We have historically had strong asset quality. There were $.446 million
or 0.16% of total loans and other real estate in nonperforming assets at June
30, 2000 compared to $.060 million or 0.03% of total loans and other real estate
at June 30, 1999. Despite the increase during the period, nonperforming assets
remain less than 1% of total loans and other real estate. For the periods ended
June 30, 2000 and 1999, approximately $16,228 and $1,500 of interest income
would have been recorded on nonperforming loans, if all such loans had been
accruing interest at the original contract rate. We record real estate acquired
through foreclosure at the lesser of the outstanding loan balance or the fair
value at the time of foreclosure, less estimated cost to sell. We usually
dispose of real estate acquired through foreclosure within one year; however, if
we are unable to dispose of the foreclosed property, the property's value is
assessed annually and written down to its fair value less cost to sell.
27
<PAGE> 31
The following table presents information regarding nonperforming assets
at June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming assets -
Nonaccrual loans $ -- $ 35
Restructured loans -- --
Other real estate and repossessions 446 25
------ ------
Total nonperforming assets $ 446 $ 60
====== ======
Loans past due 90 days or more and still
accruing $ 231 $ 211
====== ======
Ratio of past due loans to loans, net of unearned income(1) 0.55% 0.44%
Ratio of nonperforming assets to loans, net of unearned income and other 0.16% 0.03%
</TABLE>
(1) Excludes mortgage loans held for sale
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a reserve
established through charges to earnings in the form of a provision for loan
losses. Management has established an allowance for loan losses that it believes
is adequate to cover all losses that have occurred in our loan portfolio as of
the balance sheet date. Management presents a monthly review of the allowance
for loan losses to the board of directors. This review primarily focuses on
historical charge-offs, non-performing loans, changes in the size of the loan
portfolio and risk identified through a continuous credit evaluation of loans in
certain risk categories. These categories have also been established by
management and take the form of loan grades. These loan grades closely mirror
regulatory classification guidelines and include pass categories 1 through 4 and
special mention, substandard, doubtful, and loss categories of 5 through 8,
respectively. By grading the loan portfolio in this manner, management is able
to effectively segregate the portfolio by risk, which management believes is the
most effective way to analyze the loan portfolio and the adequacy of the reserve
for loan losses. Also, management reviews activity in the allowance for loan
losses, such as charge-offs and recoveries, during a quarter to identify trends.
We follow a loan review program to evaluate the credit risk in the loan
portfolio. Through the loan review process, we maintain an internally classified
loan list that, along with the delinquency list of loans, helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance for loan losses. Loans classified as "substandard" are those loans
with clear and defined weaknesses such as a highly-leveraged position,
unfavorable financial ratios, uncertain financial ratios, uncertain repayment
sources, or poor financial condition which may jeopardize recoverability of the
debt. Loans classified as "doubtful" are those loans that have characteristics
similar to substandard loans but have an increased risk of loss, or at least a
portion of the loan may require to be charged-off if liquidated. Loans
classified as "loss" are those loans that are in the process of being
charged-off.
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<PAGE> 32
For the six months ended June 30, 2000, net charge-offs totaled $65,000
or 0.05% (annualized) of average loans outstanding for the period compared to
$86,000 in net charge-offs or 0.08% (annualized) of average loans outstanding at
June 30, 1999. For the six months ended June 30, 2000, we recorded a provision
for loan losses of $766,000 compared to $310,000 for the period ended June 30,
1999. At June 30, 2000 the allowance totaled $3.101 million and represented
1.12% of gross loans.
The following table presents an analysis of the allowance for loan
losses and other related data:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding $ 259,968 $ 210,365
========== ==========
Total loans, net of unearned income, at end of period $ 277,958 $ 218,604
========== ==========
Allowance for loan losses at beginning of period $ 2,400 $ 1,899
Provision for loans losses 766 310
Charge-offs:
Commercial and industrial (5) (34)
Real estate (42) --
Consumer (39) (93)
Recoveries:
Commercial and industrial -- 15
Real estate -- 8
Consumer 21 18
---------- ----------
Net charge-offs $ (65) $ (86)
---------- ----------
Allowance for loan losses at end of period $ 3,101 $ 2,123
========== ==========
Ratio of allowance to end of period loans 1.12% 0.97%
Ratio of net charge-offs to average loans 0.03% 0.04%
Ratio of allowance to end of period nonperforming loans 1342.42% 863.01%
</TABLE>
29
<PAGE> 33
The following table describes the allocation of the allowance for loan
losses among various categories of loans and other information for the dates
indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which losses may occur. The total allowance is
available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses applicable to:
Commercial and industrial $1,585 26.04% $ 913 14.54%
Real estate 580 60.14% 198 62.99%
Consumer and other 736 13.82% 473 22.47%
Unallocated 200 -- 539 --
------ ------ ------ ------
Total allowance for loan losses $3,101 100.00% $2,123 100.00%
====== ====== ====== ======
</TABLE>
We believe that the allocation of our allowance for loan losses is
reasonable. When management is able to identify specific loans or categories of
loans where specific amounts of reserve are required, allocations are assigned
to those categories. Federal and state bank regulators also require that a bank
maintain a reserve that is sufficient to absorb an estimated amount of
unidentified potential losses based on management's perception of economic
conditions, loan portfolio growth, historical charge-off experience and exposure
concentrations.
We believe that the allowance for loan losses at June 30, 2000 is
adequate to cover losses that have occurred in the portfolio as of such date.
There can be no assurance that we will not sustain losses in future periods,
which could be substantial in relation to the size of the allowance at June 30,
2000.
INVESTMENT SECURITIES. We use our securities portfolio both as a source
of income and as a source of liquidity. At June 30, 2000, available-for-sale
investment securities totaled $42.12 million, an increase of $9.93 million from
$32.19 million at June 30, 1999. At June 30, 2000, held-to-maturity investment
securities totaled $2.05 million, a decrease of $1.11 million from $3.16 million
at June 30, 1999. At June 30, 2000, investment securities represented 12.46% of
total assets, compared to 12.81% of total assets at June 30, 1999. The average
yield on a fully taxable equivalent basis on the investment portfolio for the
six months ended June 30, 2000 was 6.13% compared to a yield of 5.62% for the
six months ended June 30, 1999.
Mortgage-backed securities are securities that have been developed by
pooling real estate mortgages and are principally issued by federal agencies
such as Fannie Mae and the Federal Home Loan Mortgage Corporation. These
securities are deemed to have high credit ratings, and minimum regular monthly
cash flows of principal and interest are guaranteed by the issuing agencies.
At June 30, 2000, 32.84% of the mortgage-backed securities we held had
contractual final maturities of more than ten years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages.
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<PAGE> 34
Thus, the premium paid must be amortized over a shorter period. Therefore, these
securities purchased at a discount will obtain higher net yields in a decreasing
interest rate environment. As interest rates rise, the opposite will generally
be true. During a period of increasing interest rates, fixed rate
mortgage-backed securities do not tend to experience heavy prepayments of
principal and consequently, the average life of this security will not be unduly
shortened. If interest rates begin to fall, prepayments will increase.
We have adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("Statement
115"). At the date of purchase, we are required to classify debt and equity
securities into one of three categories: held-to-maturity, trading or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. We do not have any securities classified as trading securities.
Investments not classified as either held-to-maturity or trading are classified
as available-for-sale and measured at fair value in the financial statements
with unrealized gains and losses reported, net of tax, in accumulated other
comprehensive income, a separate component of shareholders' equity, until
realized.
DEPOSITS. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of demand, savings, money market
and time accounts. We rely primarily on competitive pricing policies and
customer service to attract and retain these deposits. During all of 1999 and
the first and second quarter of 2000, we offered rates on time deposits that
were designed to generate the significant time deposit growth necessary to fund
our lending and investment activities. This decision to offer such rates on time
deposits did not adversely impact net interest income during 1999 and 2000 and
management does not expect any adverse impact in the future.
Our lending and investing activities are funded principally by
deposits. Approximately 89.86% of our deposits are interest bearing and 10.14%
are non-interest bearing at June 30, 2000. Our total deposits at June 30, 2000
were $305.52 million, an increase of $69.99 million or 29.71% over total
deposits at June 30, 1999. Interest bearing deposits were $274.55 million at
June 30, 2000, an increase of $71.40 million or 35.15% from $203.15 million at
June 30, 1999. Non-interest bearing deposits were $30.97 million at June 30,
2000, a decrease of $1.41 million or 4.35% from $32.38 million at June 30, 1999.
Our average total deposits at June 30, 2000 were $283.68 million, an
increase of 25.05% over average total deposits of $226.86 million at June 30,
1999. Average interest-bearing deposits through June 30, 2000 were $252.42
million, an increase of $58.03 million or 29.85% compared to $194.39 million for
the first six months of 1999. The average non-interest bearing deposits through
June 30, 2000 were $31.26 million, a decrease of $1.21 million or -3.71%
compared to $32.47 million for the first six months of 1999. Approximately
11.02% of total average deposits at June 30, 2000 were non-interest bearing. As
a result, our average cost of deposits was 4.50% for the period ending June 30,
2000.
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<PAGE> 35
We expect that the majority of our certificates of deposit maturing
within one year will renew or be replaced. Should this not occur, management
believes that there will be sufficient cash to fund payments.
OTHER BORROWINGS. Deposits are the primary source of funds for our
lending and investment activities. We also have borrowing ability from the
Federal Reserve discount window, backed by a portion of our commercial loan
portfolio. Our weighted average interest rate for the period ended June 30, 2000
was 5.33%. For a more detailed discussion of our borrowings, see note 16 to the
Consolidated Financial Statements included in this prospectus.
CAPITAL RESOURCES. Capital management consists of providing equity to
support both current and future operations. We are subject to capital adequacy
requirements imposed by the Federal Reserve, and Bank of Tennessee is subject to
capital adequacy requirements imposed by the FDIC and the Tennessee State
Department of Financial Institutions. Both the Federal Reserve and the FDIC have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure,
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve require
all bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital of at least 8.0% of total risk-adjusted assets. "Tier 1
capital" generally includes common shareholders' equity and qualifying perpetual
preferred stock together with related surpluses and retained earnings, less
deductions for goodwill and various other intangibles. "Tier 2 capital" may
consist of a limited amount of intermediate-term preferred stock, a limited
amount of term subordinated debt, specified hybrid capital instruments and other
debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and
a limited amount of the general valuation allowance for loan losses. The sum of
Tier 1 capital and Tier 2 capital is "total risk-based capital."
The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum leverage ratio of Tier 1 capital to
average total consolidated assets of 3.0% for institutions that are generally
considered to be the strongest banking organizations, rated composite 1 under
applicable federal guidelines, and that are not experiencing or anticipating
significant growth. Other banking organizations are required to maintain a
leverage ratio of at least 4.0% to 5.0%. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. Under Federal Reserve guidelines BancTenn Corp.
is classified as well capitalized.
Bank of Tennessee is subject to capital adequacy guidelines of the FDIC
that are substantially similar to the Federal Reserve's guidelines. Also, the
FDIC has promulgated regulations setting the levels at which an insured
institution such as Bank of Tennessee would be
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<PAGE> 36
considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized" for purposes
of prompt corrective action. Under the FDIC's regulations, Bank of Tennessee is
classified as "well capitalized." See "Supervision and Regulation -- Prompt
Corrective Action" on page 70.
Shareholders' equity increased to $23.16 million at June 30, 2000 from
$20.77 million at June 30, 1999, an increase of $2.39 million or 11.62%. This
increase was primarily the result of net income of $2.11 million.
YEAR 2000 COMPLIANCE
We have not experienced any material interruptions or operational
problems associated with Y2K concerns. To date, we are not aware of any
significant problems encountered by our customers or suppliers. Although January
1, 2000 was identified in the banking industry as potentially the most
troublesome date, industry experts have also identified other dates as
presenting possible threats. Based upon our experience to date and feedback we
have received from our borrowers, customers and suppliers, we do not anticipate
any material problems in the performance of our loan portfolio nor any material
interruptions in the services we provide to our customers or receive from our
suppliers.
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<PAGE> 37
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
OVERVIEW
Net income was $2.23 million and $1.94 million for the years ended
December 31, 1999 and 1998, respectively. Basic earnings per share were $1.56
and $1.37 for these same periods whereas diluted earnings per share were $1.49
and $1.31. Earnings growth from 1997 to 1998 and from 1998 to 1999 resulted
principally from an increase in net interest income that primarily was driven by
strong loan demand and an increase in noninterest income as a result of the
addition and the continued growth of several fee-based lines of business. We
posted returns on average assets of .83% and .84% and returns on average equity
of 11.69% and 10.90% for the years ended December 31, 1999 and 1998,
respectively. Our efficiency ratio was 67.57% in 1999 and 67.76% in 1998.
Total assets at December 31, 1999 and 1998 were $299.63 million and
$254.69 million, respectively. Total deposits at December 31, 1999 and 1998 were
$263.57 million and $220.89 million, respectively. Loans, net of unearned income
and allowance for loan losses, were $238.15 million at December 31, 1999, an
increase of $34.16 million or 16.74% from $203.99 million at the end of 1998.
Loan growth not considering the increase in the allowance for loan losses was
16.74%. Shareholders' equity was $22.19 million and $19.98 million at December
31, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income for 1999 was $ 9.97 million,
compared to $8.80 million for 1998, an increase of $1.17 million or 13.30%. The
improvement in net interest income for 1999 was primarily due to the increase in
total interest earning assets, primarily in the loan portfolio. During 1999, the
interest rate spread was 3.53% compared to 3.51% in 1998 and the net interest
margin was 4.08% in 1999 compared to 4.20% during 1998. During 1999, the yield
on interest earning assets decreased 19 basis points to 8.00% in 1999 from 8.19%
in 1998. The cost of funds decreased 21 basis points to 4.47% in 1999 from 4.68%
in 1998. The net interest margin benefited from the declining interest rate
environment in 1998 and early 1999. In the middle part of 1999 the Federal
Reserve began raising interest rates that had the effect of decreasing our net
interest margin.
Our net interest income in 1998 was $8.80 million, an increase of
17.12% over the 1997 level of $7.51 million, due to loan growth and a stable net
interest margin. The improvement in net interest income for 1998 was primarily
due to the increase in total interest earning assets, primarily in the loan
portfolio. During 1998, the yield on interest earning assets increased 12 basis
points to 8.19% in 1998 from 8.07% in 1997 due to the decrease in volume of
higher yielding loans. The cost of funds remained constant at 4.68% in 1998 and
1997.
The following table presents the total dollar amount of average
balances, interest income from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. We had no nonaccrual loans at December 31,
1999 and 1998, respectively.
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<PAGE> 38
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
YIELD/ YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
INTEREST-EARNING ASSETS:
Loans, net of unearned income(1) $218,875 $ 18,029 8.24% $177,215 $ 15,208 8.58%
Investment securities:
Taxable 21,939 1,343 6.12% 25,936 1,621 6.25%
Non-taxable(2) 7,184 472 6.57% 5,988 380 6.35%
Fed funds sold 662 34 5.13% 3,405 188 5.52%
-------- -------- -------- --------
Total interest-earning assets 248,660 19,878 8.00% 212,544 17,397 8.19%
-------- --------
Noninterest-earning assets 21,850 18,823
-------- --------
Total assets $270,510 $231,367
======== ========
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST - BEARING LIABILITIES:
Demand and money market deposits $ 59,434 1,824 3.07% $ 51,763 1,745 3.37%
Savings deposits 14,330 284 1.98% 14,018 330 2.35%
Time deposits 129,555 6,877 5.31% 106,323 5,995 5.64%
Federal funds and other borrowings 14,909 759 5.09% 8,949 400 4.47%
-------- -------- -------- --------
Total interest-bearing liabilities 218,228 9,744 4.47% 181,053 8,470 4.68%
-------- --------
Non-interest-bearing liabilities 33,167 32,489
-------- --------
Total liabilities 251,395 213,542
Shareholders' equity 19,115 17,825
-------- --------
Total liabilities and
shareholders' equity $270,510 $231,367
======== ========
Net interest income $ 10,134 $ 8,927
======== ========
Interest rate spread 3.53% 3.51%
Net yield on interest earning assets 4.08% 4.20%
</TABLE>
(1) Fee income related to loans of $1,351,000 and $ 950,000 for the years
December 31, 1999 and 1998, respectively, is included in interest
income.
(2) In order to make pre-tax income and resulting yields on tax-exempt
investments comparable to those on taxable investments, a
tax-equivalent adjustment has been computed using a federal income tax
rate of 34%.
(3) The net yield on interest earning assets is equal to net interest
income divided by average interest-earning assets.
35
<PAGE> 39
The table below sets forth certain information regarding changes in
interest income and interest expense for periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in average
volume multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume); (iii) changes in rate-volume (changes in rate
multiplied by changes in average volume).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
1999 vs. 1998 1998 vs. 1997
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- ------ ------ -------- -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 3,574 $ (603) $ (150) $ 2,821 $ 3,123 $ (170) $ (34) $ 2,919
Investment securities:
Taxable (250) (34) 6 (278) (285) 12 (3) (276)
Non-taxable 76 13 3 92 54 108 31 193
Federal funds sold (151) (13) 10 (154) (83) 1 -- (82)
-------- ------ ------ -------- -------- ------ ------ --------
Total interest-earning assets $ 3,249 $ (637) $ (131) $ 2,481 $ 2,809 $ (49) $ (6) $ 2,754
-------- ------ ------ -------- -------- ------ ------ --------
INTEREST-BEARING LIABILITIES:
Demand and money market
deposits $ 259 $ (155) $ (25) $ 79 $ 294 $ (30) $ (7) $ 257
Savings deposits 7 (52) (1) (46) (6) (38) 1 (43)
Time deposits 1,310 (351) (77) 882 1,174 9 (3) 1,180
Other liabilities 266 55 38 359 (25) (34) 2 (57)
-------- ------ ------ -------- -------- ------ ------ --------
Total interest-bearing liabilities $ 1,842 $ (503) $ (65) $ 1,274 $ 1,437 $ (93) $ (7) $ 1,337
-------- ------ ------ -------- -------- ------ ------ --------
Net change in net interest Income $ 1,407 $ (134) $ (66) $ 1,207 $ 1,372 $ 44 $ 1 $ 1,417
======== ====== ====== ======== ======== ====== ====== ========
</TABLE>
PROVISION FOR LOAN LOSSES. The allowance for loan losses at December
31, 1999 was $2.4 million, representing 1.00% of outstanding loans. One year
earlier, this ratio was 0.92% of outstanding loans. The provision for loan
losses charged against earnings was $665,000 in 1999 compared to $611,000 in
1998. Net loans charged off in 1999 were $163,152 compared to $262,889 in 1998.
Management believes the Allowance for Loan Losses is adequate to cover all
losses that have occurred as of the balance sheet date.
NONINTEREST INCOME. For 1999, noninterest income totaled $ 2.72
million, an increase of $152,955 or 5.95% versus $2.57 million in 1998. The
increase was primarily due to an increase of $213,071 in fees generated from
data processing and other operating services provided to other financial
institutions.
36
<PAGE> 40
The following table presents the major categories of noninterest
income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts $ 1,435 $ 1,346
Service revenue from data processing and
other operating services for third parties 1,159 946
Brokerage fees 210 154
Other (79) 125
-------- --------
Total noninterest income $ 2,724 $ 2,571
======== ========
</TABLE>
NONINTEREST EXPENSE. The following table presents the major categories
of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits $4,916 $4,262
Bank premises expense 532 522
Equipment rentals, depreciation
and maintenance 502 472
Furniture and fixtures depreciation 167 203
Professional fees 270 203
Regulatory assessments 107 62
Other 2,086 1,980
------ ------
Total noninterest expense $8,580 $7,704
====== ======
</TABLE>
For 1999, noninterest expense totaled $ 8.58 million, an increase of
$876,326 or 11.38% over $7.70 million in 1998. Salaries and employee benefits
for 1999 totaled $ 4.92 million, an increase of $653,872 or 15.34% over $4.26
million for 1998. This was due to several new lending and operations positions
being added. In July 1999, we opened one new branch office in Bristol,
Tennessee. The additional occupancy, equipment and other expenses related to
this branch, together with the opening of Paragon Commercial Bank in Raleigh,
North Carolina, primarily account for the increase in 1999.
INCOME TAXES. In 1999 income tax expense was $1.22 million compared to
$1.11 million in 1998. The effective tax rates in 1999 and 1998, respectively,
were 35.28% and 36.40%.
37
<PAGE> 41
FINANCIAL CONDITION
LOAN PORTFOLIO. At December 31, 1999, loans, net of unearned income,
were $238.15 million, an increase of $34.15 million or 16.74% over net loans at
December 31, 1998 of $204.00 million. The growth in the loan portfolio is
attributable to our strategic focus on growth and to a strong lending market. At
December 31, 1999, real estate-construction loans increased $128,000 or 1.59%
and real estate-mortgage loans increased $40.24 million or 36.20% from December
31, 1998. At December 31, 1999, loans, net of unearned income, were 90.35% of
deposits and 79.48% of total assets.
The following table summarizes our loan portfolio by type of loan:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial and industrial $ 39,241 $ 30,764
Real estate-construction 8,169 8,041
Real estate-mortgage 151,425 111,182
Consumer and other 39,314 54,008
------------ ------------
$ 238,149 $ 203,995
============ ============
Percent of loans by category to total loans:
Commercial and industrial 16.48% 15.08%
Real estate-construction 3.43% 3.94%
Real estate-mortgage 63.58% 54.50%
Consumer and other 16.51% 26.48%
------------ ------------
100.00% 100.00%
============ ============
</TABLE>
The contractual maturity ranges of the commercial and industrial and
real estate-construction portfolios and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
AFTER ONE
YEAR
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial $ 16,273 $ 21,330 $ 272 $ 37,875
Real estate-construction 4,513 2,894 761 8,168
Real estate-mortgage 16,481 80,677 9,036 106,194
Consumer and other 49,390 34,316 2,206 85,912
-------- -------- -------- --------
Total $ 86,657 $139,217 $ 12,275 $238,149
======== ======== ======== ========
Loans with a predetermined
interest rate $ 37,967 $ 81,229 $ 8,065 $127,261
Loans with a floating interest rate 48,690 57,988 4,210 110,888
-------- -------- -------- --------
Total $ 86,657 $139,217 $ 12,275 $238,149
======== ======== ======== ========
</TABLE>
38
<PAGE> 42
NONPERFORMING ASSETS. Loan quality continued to be strong in 1999. We
had nonperforming assets of $475,000 and $135,000 as of December 31, 1999 and
1998, respectively. For 1999, the gross amount of interest income that would
have been recorded on nonperforming loans, if all such loans had been accruing
interest at the original contract rate, was approximately $14,129.
The following table presents information regarding nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming assets
Nonaccrual loans $ 87 $ --
Other real estate and repossessions 388 135
---- ----
Total nonperforming assets $475 $135
==== ====
Loans past due 90 days or more and still
accruing $ 48 $ 93
==== ====
Ratio of past due loans to loans, net of
unearned income 0.37% 0.51%
Ratio of nonperforming assets to loans,
net of unearned income, and other real estate 0.20% 0.07%
</TABLE>
ALLOWANCE FOR LOAN LOSSES. For the year ended 1999, net charge-offs
totaled $163,152 or 0.07% of average loans outstanding for the period, compared
to $262,889 or 0.14% in net charge-offs during 1998. During 1999, we recorded a
provision for loan losses of $665,000 compared with $611,000 for 1998. At
December 31, 1999, the allowance for loan losses totaled $2.40 million, or 1.00%
of total loans, net of unearned income, compared to $1.90 million, or 0.92% of
total loans, net of unearned income, at December 31, 1998.
39
<PAGE> 43
The following table presents an analysis of the allowance for loan
losses and other related data:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding $ 220,987 $ 178,935
========== ==========
Total loans, net of unearned income, at end of period $ 240,549 $ 205,894
========== ==========
Allowance for loan losses at beginning of period $ 1,899 $ 1,551
Provision for loans losses 665 611
Charge-offs:
Commercial and industrial (34) (133)
Real estate (50) (33)
Consumer (171) (156)
Recoveries:
Commercial and industrial 35 32
Real estate 8 --
Consumer 48 27
---------- ----------
Net charge-offs $ (164) $ (263)
---------- ----------
Allowance for loan losses at end of period $ 2,400 $ 1,899
========== ==========
Ratio of allowance to end of period loans 1.00% 0.92%
Ratio of net charge-offs to average loans 0.07% 0.15%
Ratio of allowance to end of period nonperforming loans 2758.62% --
</TABLE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------------ ------------------
PERCENT PERCENT
OF LOANS OF LOANS
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial $1,149 16.48% $ 791 15.08%
Real estate 397 67.01% 218 58.44%
Consumer and other 464 16.51% 523 26.48%
Unallocated 390 367
------ ------ ------ ------
Total allowance for loan losses $2,400 100.00% $1,899 100.00%
====== ====== ====== ======
</TABLE>
40
<PAGE> 44
INVESTMENT SECURITIES. The following table summarizes the contractual
maturity of investment securities and their weighted average yields.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN ONE BUT WITHIN FIVE BUT WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS
----------------- ------------------- ----------------- ----------------- --------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------ ------ -------- ------ ------ ------ ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00% $ --
U.S. government agencies --
and corporations 1,998 6.14% 13,157 6.50% 1,974 7.45% -- 0.00% 17,129
Mortgage-backed 299 5.31% 1,205 6.03% 2,375 6.20% 346 6.32% 4,225
States and political
Subdivisions 2,000 6.41% 865 7.01% 2,102 7.22% 4,365 4.54% 9,332
Restricted securities 801 7.08% -- 0.00% -- 0.00% -- 0.00% 801
Equity securities 4,115 0.00% -- 0.00% -- 0.00% -- 0.00% 4,115
------ ------ -------- ------ ------ ------ ------ ------ --------
Total $9,213 3.47% $ 15,227 6.50% $6,451 6.91% $4,711 4.67% $ 35,602
====== ====== ======== ====== ====== ====== ====== ====== ========
</TABLE>
The following table presents the amortized costs and fair value of
securities classified as available for sale and held-to-maturity at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
AMORTIZE FAIR AMORTIZE FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY SECURITIES
States and political subdivisions $ 1,922 $ 1,921 $ 1,925 $ 1,943
Mortgage-backed securities 1,097 1,076 1,436 1,436
-------- -------- -------- --------
$ 3,019 $ 2,997 $ 3,361 $ 3,379
======== ======== ======== ========
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities $ -- $ -- $ 3,994 $ 4,031
U.S. government agencies and
corporations 17,441 17,129 10,996 11,061
States and political subdivisions 7,581 7,410 4,719 4,787
Mortgage-backed securities 3,168 3,127 4,753 4,797
Equity securities 4,115 4,115 1,017 1,017
Restricted securities 801 801 705 705
-------- -------- -------- --------
$ 33,106 $ 32,582 $ 26,184 $ 26,398
======== ======== ======== ========
</TABLE>
At December 31, 1999, investment securities were $35.60 million, an
increase of $5.84 million from $29.76 million at December 31, 1998. At December
31, 1999, investment securities represented 13.51% of total deposits and 11.88%
of total assets. Approximately $9.21 million or 25.88% of our investment
securities reprice within one year. The average yield on a fully taxable
equivalent basis on the investment portfolio was 5.55% for 1999, compared to
6.28% for 1998.
41
<PAGE> 45
DEPOSITS. Deposits at December 31, 1999 were $263.57 million, an
increase of $42.68 million, or 19.32% from $220.89 million at December 31, 1998.
Noninterest-bearing deposits were $30.05 million at December 31, 1999, a
decrease of $ 4.05 million, or 11.88% from $34.10 million at December 31, 1998.
The daily average balances and weighted average rates paid on deposits
for each of the years ended December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
AMOUNT RATE AMOUNT RATE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Demand and money market deposits $ 59,434 3.07% $ 51,763 3.37%
Savings deposits 14,330 1.98% 14,018 2.35%
Time deposits 129,555 5.31% 106,323 5.64%
-------- --------
Total interest-bearing deposits $203,319 4.42% $172,104 4.69%
======== ========
</TABLE>
The following table sets forth the amount of our certificates of
deposit that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less $11,998
Over three through twelve months 27,722
Over twelve months 2,814
-------
Total $42,534
=======
</TABLE>
OTHER BORROWINGS. Deposits are the primary source of funds for our
lending and investment activities. Occasionally, we obtain additional funds from
the Federal Reserve and correspondent banks. At December 31, 1999, we had no
Federal Funds purchased, compared to Federal Funds purchased of $3.78 million at
December 31, 1998. At December 31, 1999, and 1998, we did not have any
borrowings under advances from the Federal reserve.
At December 31, 1999, we also had a $5,000,000 line of credit with
AmSouth with outstanding borrowings under this line of credit of $3,000,000.
Our weighted average interest rate for the period ended December 31,
1999 was 7.00%. For a more detailed discussion of our borrowings, see notes 6
and 16 to the Consolidated Financial Statements included in this prospectus.
INTEREST RATE SENSITIVITY AND LIQUIDITY. Our asset/liability policy
provides management with the necessary guidelines for effective funds
management, and we have established a measurement system for monitoring our net
interest rate sensitivity position. We manage our sensitivity position within
established guidelines.
42
<PAGE> 46
Interest rate risk is managed by our asset/liability committee which is
composed of members of our senior management and members of our board of
directors. The asset/liability committee formulates strategies based on
appropriate levels of interest rate risk. In determining the appropriate level
of interest rate risk, the asset/liability committee considers the impact on
earnings and capital of the current outlook on interest rates, potential changes
in interest rates, regional economies, liquidity, business strategies and other
factors. The asset/liability committee meets quarterly to review, among other
things, the sensitivity of assets and liabilities to interest rate changes, the
book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activities, commitments to originate loans and the maturities
of investments and borrowings. Additionally, the asset/liability committee
reviews liquidity, cash flow flexibility, maturities of deposits and consumer
and commercial deposit activity.
Management uses an analysis of relationships between interest-earning
assets and interest-bearing liabilities and an interest rate shock simulation
model to manage interest rate risk.
We have traditionally managed our business to reduce our overall
exposure to changes in interest rates. We do this by structuring our balance
sheet in the ordinary course of business. We do not utilize interest rate swaps,
financial options, or financial future contracts in order to reduce interest
rate risk.
An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("gap") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest
rate sensitivity reflects the potential effect on net interest income of a
movement in interest rates. A company is considered to be asset sensitive, or
having a positive gap, when the amount of its interest-earning assets maturing
or repricing within a given period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
company is considered to be liability sensitive, or having a negative gap, when
the amount of its interest-bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. During a period of rising interest rates, a
negative gap would tend to affect net interest income adversely, 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 affect net
interest income adversely. Based on our most recent gap analysis, we are
liability sensitive over the short term and asset sensitive over the longer
term.
43
<PAGE> 47
The following table sets forth an analysis of our interest rate
sensitivity at December 31, 1999:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING
--------------------------------------------------------------------
After After
90 Days One Year After
Within Within Within Five
90 Days One Year Five Years Years Total
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities $ 2,868 $ 1,639 $ 15,356 $15,739 $ 35,602
Gross loans 26,408 61,732 140,678 11,747 240,565
Federal funds sold and short term
investments 2,094 -- -- -- 2,094
--------------------------------------------------------------------
Total interest-earning assets $ 31,370 $ 63,371 $156,034 $27,486 $278,261
--------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Demand, money market and savings --
deposits $ 78,142 $ -- $ -- $ -- $ 78,142
Time deposits 38,069 101,641 15,675 -- 155,385
Borrowings 12,574 -- -- -- 12,574
--------------------------------------------------------------------
Total interest-bearing liabilities $ 128,785 $ 101,641 $ 15,675 $ -- $246,101
--------------------------------------------------------------------
Net repricing period gap $ (97,415) $ (38,270) $140,359 $27,486 $ 32,160
====================================================================
Net repricing cumulative gap $ (97,415) $(135,685) $ 4,674 $32,160
=====================================================
Period gap as a percentage of total earning assets -35.01% -13.75% 50.44% 9.88%
Cumulative gap as a percentage of total earning assets -35.01% -48.76% 1.68% 11.56%
</TABLE>
Shortcomings are inherent in any gap analysis since some assets and
liabilities may not move proportionally as interest rates change. In addition to
gap analysis, we use an interest rate risk simulation model and shock analysis
to test the interest rate sensitivity of net interest income and the balance
sheet, respectively. Contractual maturities and repricing opportunities of loans
are incorporated in the model as are prepayment assumptions and maturity data
within the investment portfolio. Assumptions based on past experience are
incorporated into the model for nonmaturity deposit accounts. Based on our most
recent simulation analysis as of December 31, 1999, we estimate that a 200 basis
point rise or decline in rates over the next 12 month period would have an
impact of no more than 6% on our net interest income for the period. The change
is relatively small, despite our asset sensitive gap position.
As a financial institution, our primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
both the level of income and expense recorded on most of our assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which have a short term to
maturity. Based upon the nature of our operations, we are not subject to foreign
exchange or commodity price risk. Most of our investment securities are
classified as available for sale.
Management reviews our exposure to market risk on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The
44
<PAGE> 48
objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing
income.
Liquidity involves our ability to raise funds to support asset growth
or reduce assets to meet deposit withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate on an ongoing basis.
During the past three years, our liquidity needs have primarily been met by
growth in core deposits, as previously discussed. The cash and federal funds
sold position, supplemented by amortizing investment and loan portfolios, have
generally created an adequate liquidity position.
CAPITAL RESOURCES. The following table provides a comparison of
BancTenn Corp.'s and Bank of Tennessee's leverage and risk-weighted capital
ratios as of December 31, 1999 to the minimum and well capitalized regulatory
standards:
<TABLE>
<CAPTION>
MINIMUM REQUIRED FOR TO BE WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL RATIO AT
PURPOSES ACTION PROVISIONS DECEMBER 31, 1999
------------------------------------------------------------------------------
<S> <C> <C> <C>
BancTenn Corp.:
Leverage ratio 3.00%(1) 5.00% 7.80%
Tier 1 risk-based capital ratio 8.00% 6.00% 9.60%
Risk-based capital ratio 4.00% 10.00% 10.70%
Bank of Tennessee:
Leverage ratio 3.00%(2) 5.00% 7.14%
Tier 1 risk-based capital ratio 4.00% 6.00% 8.63%
Risk-based capital ratio 8.00% 10.00% 9.64%
</TABLE>
(1) The Federal Reserve may require us to maintain a leverage ratio of up
to 200 basis points above the required minimum.
(2) The FDIC may require Bank of Tennessee to maintain a leverage ratio of
up to 200 basis points above the required minimum.
Shareholders' equity increased to $22.19 million at December 31, 1999
from $19.98 million at December 31, 1998, an increase of $2.21 million or
11.06%. This increase was primarily the result of net income of $2.23 million,
less dividends declared on our common stock of $57,098.
45
<PAGE> 49
PRINCIPAL SHAREHOLDERS AND
STOCK OWNERSHIP OF MANAGEMENT
The following table lists, as of June 30, 2000, the number of shares of
common stock beneficially owned by:
- our current directors;
- our executive officers;
- each person or entity known to us to be the beneficial owner
of more than five percent of our outstanding common stock; and
- all of our directors and executive officers as a group.
Information relating to beneficial ownership of common stock by our
principal shareholders and management is based upon information furnished by
each person using "beneficial ownership" concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to dispose or direct the disposition
of the security. The person is also deemed to be a beneficial owner of any
security which that person has a right to acquire within 60 days. Under
Securities and Exchange Commission rules, more than one person may be deemed to
be a beneficial owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he or she may disclaim beneficial
ownership.
The percentages prior to the offering are calculated based on 1,468,626
shares issued and outstanding at June 30, 2000. Percentages after the offering
are based on 1,897,197 shares to be issued and outstanding after the close of
the offering. Unless otherwise indicated, each person is the record owner of and
has sole voting investment power with respect to his or her shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY OWNED
THE OFFERING SHARES BEING AFTER THE OFFERING
-------------------------- PURCHASED --------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
------------------------ ------- ------- --------------- ------- -------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
William B. Greene, Jr. 789,572(1) 52.9% 35,715 825,287(1) 42.9%
Colon A. Terrell, Jr. 54,579(2) 3.6% 1,000 55,579(2) 2.9%
Roy L. Harmon, Jr. 50,445(3) 3.4% 3,000 53,445(3) 2.8%
C. B. Duke, IV 16,069 1.1% 1,000 17,069 *
William R. Garwood 863 * 1,000 1,863 *
John H. Poteat 95,956(4) 6.5% 1,000 96,956(4) 5.1%
John E. Seward, Jr. 19,695(5) 1.3% -- 19,695(5) 1.0%
</TABLE>
46
<PAGE> 50
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY OWNED
THE OFFERING SHARES BEING AFTER THE OFFERING
-------------------------- PURCHASED ----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
------------------------ --------- ------- --------------- --------- -------
<S> <C> <C> <C> <C> <C>
All Directors and Executive
Officers as a Group (7 persons) 1,027,179(6) 64.3% 42,715 1,069,894 52.8%
Additional Principal
Shareholder
Valerie G. Ketron 117,794(7) 8.0% 3,600 121,394(7) 6.4%
2340 Pendragon Road
Kingsport, TN 37660
</TABLE>
-----------
* Less than 1%.
(1) Includes the following:
<TABLE>
<CAPTION>
Number Manner
of Shares Held
--------- ------
<S> <C>
577,190 Owned directly
24,150 Vested options under BancTenn Corp.'s Employee Stock Incentive Plan
174,970 Held by family trusts of which Mr. Greene is trustee or co-trustee
13,262 Voted by Mr. Greene as custodian and trustee for his daughter
</TABLE>
Mr. Greene shares voting power with his sister, Valerie G. Ketron, as
co-trustees with respect to 75,505 shares held in the family trusts
referenced above.
(2) Includes vested options to purchase 40,750 shares under our Employee
Stock Incentive Plan and 1,233 shares under our Employee Stock Purchase
Plan.
(3) Includes vested options to purchase 26,750 shares under our Employee
Stock Incentive Plan and 1,014 shares under our Employee Stock Purchase
Plan. Also includes 12,431 shares held by Mr. Harmon jointly with his
wife and 1,491 shares held by Mr. Harmon as custodian for their son and
1,945 shares owned by Mr. Harmon's wife, as to which beneficial
ownership is shared.
(4) Includes 91,793 shares owned by Mr. Poteat and 4,163 shares owned by
his wife, as to which they share beneficial ownership.
(5) Includes 3,474 shares owned by Mr. Seward's wife as to which he
exercises voting and investment powers.
(6) Percentages of ownership are calculated assuming exercise of all vested
options outstanding under our Employee Stock Incentive Plan and our
Employee Stock Purchase Plan.
(7) Includes 38,023 shares owned by Mrs. Ketron and 75,705 shares as to
which she shares voting powers as co-trustee with her brother, William
B. Greene, Jr. This also includes a total of 4,066 shares held by Mrs.
Ketron as custodian for her daughter and grandchildren.
47
<PAGE> 51
DIRECTORS AND EXECUTIVE OFFICERS
BANCTENN CORP. The following table sets forth information as of June
30, 2000 concerning each of our directors and executive officers. Except for
William R. Garwood, all of the directors of BancTenn Corp. are also directors of
Bank of Tennessee.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
William B. Greene, Jr. 62 Chairman of the Board
Colon A. Terrell, Jr. 52 Director, President and Chief Executive Officer
Roy L. Harmon, Jr. 45 Director and Executive Vice President
C. B. Duke, IV 65 Director
William R. Garwood 62 Director
John H. Poteat 87 Director
John E. Seward, Jr. 51 Director
</TABLE>
BANK OF TENNESSEE. The following table sets forth information as of
June 30, 2000, concerning the executive and senior officers of Bank of
Tennessee.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD WITH BANK
---- --- ------------------------------------
<S> <C> <C>
Roy L. Harmon, Jr. 45 Vice-Chairman and Chief Executive Officer
Kenneth H. Maloy 40 President
Mary Mac Wilson 31 Executive Vice-President
Tony L. Howell 42 Executive President and Chief Credit Officer
Paul W. Holt 61 Executive Vice President
Darla M. Scott 34 Senior Vice President and Chief Financial Officer
Mark Anderson 46 Senior Vice President
Craig S. Denison 41 Senior Vice President
Joe Carr 42 Senior Vice President
</TABLE>
WILLIAM B. GREENE, JR. has been chairman of the board of BancTenn Corp.
since 1985. He served as president and chief executive officer from 1990 to
1992. He is also chairman of the board, president, and chief executive officer
of Carter County Bancorp., Inc., and chairman of Carter County Bank, each of
which is an affiliate of BancTenn Corp. Additionally, he is a director of JDN
Realty Corporation, a real estate investment trust, and a director of Lone Star
Steakhouse and Saloon, Inc., a restaurant company.
COLON A. TERRELL, JR. has served as president of BancTenn Corp. since
1992 and has served as chief executive officer since 1992. Mr. Terrell is a
director of BancTenn Corp. and chairman of the board of Bank of Tennessee. He
served as chief executive officer of Bank of Tennessee from 1992 through 1997.
48
<PAGE> 52
ROY L. HARMON, JR. is an executive vice president of BancTenn Corp. and
vice chairman and chief executive officer of Bank of Tennessee. From 1998
through 1999 he served as president and chief executive officer of Bank of
Tennessee. He was president and chief operating officer of Bank of Tennessee
from 1995 through 1997. He has been employed by BancTenn Corp. and Bank of
Tennessee since 1991.
C. B. DUKE, IV is a director of BancTenn Corp. and Bank of Tennessee.
He was first elected as a director of Bank of Tennessee in 1989 and first
elected as a director of BancTenn Corp. in 1989. Mr. Duke is the chairman and
chief executive officer of Holston Glass Company, a glass fabricator, supplier
and installer headquartered in Kingsport, Tennessee.
WILLIAM R. GARWOOD is a director of BancTenn Corp. and was first
elected in 1997. Mr. Garwood is retired from Eastman Chemical Company where he
was president of Tennessee Eastman Company from 1989 to 1996. Mr. Garwood is a
director of Paragon Commercial Bank, an affiliate of BancTenn Corp. Mr. Garwood
resides in Hilton Head Island, South Carolina and is engaged in private
consulting to the chemical industry. Mr. Garwood served as a director of Bank of
Tennessee from 1991 to 1994.
JOHN H. POTEAT is a director of BancTenn Corp. and Bank of Tennessee.
He was first elected as director of Bank of Tennessee in 1974 and first elected
as director of BancTenn Corp. in 1985. He is engaged in land development and
farming. He previously served as president of Poteat Oil Company, an oil
distributorship.
JOHN E. SEWARD, JR. is a director of BancTenn Corp and Bank of
Tennessee. He was first elected a director of Bank of Tennessee in 1981 and
first elected as a director of BancTenn Corp. in 1985. Mr. Seward is a director
of Carter County Bancorp, Inc. and its subsidiary, Carter County Bank. Mr.
Seward is chairman of the board and chief executive officer of PLC, Inc., a
liquidator of retail and wholesale building supplies headquartered in Piney
Flats, Tennessee. Mr. Seward is also president of Lynn Air, Inc.. an aircraft
leasing and brokerage company.
KENNETH H. MALOY is president and a director of Bank of Tennessee. He
joined Bank of Tennessee in 1998 as executive vice president. Prior to joining
Bank of Tennessee, he was executive vice president at First American National
Bank in Kingsport, Tennessee. He was with First American National Bank for a
total of 15 years with his most recent tenure being from 1993 to 1998.
MARY MAC WILSON is executive vice president of Bank of Tennessee. She
joined Bank of Tennessee in 1992 and has held a number of management positions
including senior vice president-commercial lending and senior vice
president-branch administration. She was elected executive vice president in
January, 2000.
PAUL W. HOLT is executive vice president of Bank of Tennessee and has
been with Bank of Tennessee since 1994. He was previously employed by Dominion
Bank and First Union National Bank in Bristol, Virginia from 1974 to 1994.
DARLA M. SCOTT is senior vice president and chief financial officer of
Bank of Tennessee and also is vice president and chief financial officer of
BancTenn Corp. She has been employed by Bank of Tennessee since 1988.
49
<PAGE> 53
MARK ANDERSON is senior vice president in charge of Bank of Tennessee's
Tennessee General business division and related technology services. Mr.
Anderson has been employed by Bank of Tennessee since 1995. Prior to that time,
he was an owner of Tennessee General Corporation which was the predecessor to
our current Tennessee General business division.
CRAIG S. DENISON is senior vice president of Bank of Tennessee and
concentrates on our commercial banking relationships with professional practice
groups including physicians, attorneys, accountants and other professions. He
joined Bank of Tennessee in 1998. Prior to that time he was a senior vice
president with First American National Bank from 1994 to 1998.
JOE CARR is senior vice president of Bank of Tennessee and concentrates
on commercial lending in Johnson City and Washington County, Tennessee. He
joined Bank of Tennessee in 1990 and has held the position of Senior Vice
President since 1998.
Except for Mr. Greene, none of our directors holds any directorships in
companies with a class of securities registered under Section 12 of the
Securities Exchange Act or subject to the requirements of Section 15(d) of that
Act or any company registered as an investment company under the Investment
Company Act of 1940. Mr. Greene is a director of JDN Realty Corporation and Lone
Star Steakhouse & Saloon, Inc., each of which has securities registered under
Section 12 of the Securities Exchange Act.
BOARD COMMITTEES
BANCTENN CORP. Our board of directors acts a committee of the whole in
most matters. The board of directors has, however, established the following
committees:
AUDIT COMMITTEE. The audit committee of BancTenn Corp. is responsible
for establishing and monitoring the annual external audit engagement with our
independent auditors. The external audit function is required to include all
material activities of Bank of Tennessee and any other financial institution
with which BancTenn Corp. or Bank of Tennessee is considered to have an
affiliate or material business relationship for regulatory purposes including
Paragon Commercial Bank. The audit committee monitors the particular risk areas
incident to BancTenn Corp.'s operations and investments. The audit committee
also monitors the internal audit function of Bank of Tennessee and reviews
financial reports from Bank of Tennessee. The current voting members of the
audit committee are John E. Seward, Jr., chairman, C. B. Duke, IV, William R.
Garwood, and John H. Poteat, each of whom is an outside director. William B.
Greene, Jr., Colon A. Terrell, Jr. and Roy L. Harmon, the inside directors,
serve as non-voting members of the committee.
STOCK OPTIONS COMMITTEE. The stock options committee meets as needed to
review and approve proposed stock option grants under our Employee Stock
Incentive Plan and our Employee Stock Purchase Plan. Officers and employees of
both BancTenn Corp. and Bank of Tennessee are participants in these plans. The
current members of this committee are C. B. Duke, IV., chairman, John E. Seward,
Jr., William R. Garwood, and John H. Poteat, each of whom is an outside
director.
BANK OF TENNESSEE. In addition to the audit committee and stock options
committee of BancTenn Corp., the board of directors of Bank of Tennessee has
also established the following standing committees: the loan and investment
committee, the audit committee and the asset/liability committee.
50
<PAGE> 54
LOAN AND INVESTMENT COMMITTEE. Under applicable limits of authority
delegated by the board of directors of Bank of Tennessee and subject to
applicable banking regulations, the loan and investment committee has the power
to examine and approve loans and extensions of credit and to monitor the Bank's
investment portfolio. The loan and investment committee is comprised of the
members of the Bank of Tennessee board of directors, and its current members are
Jo Anne Paty, chairman, Thomas Burleson, C. B. Duke, IV, Samuel T. Easley, Paul
Farnor, William B. Greene, Jr., Roy L. Harmon, Kenneth Maness, Richard W.
Pectol, Anne B. Pope, John H. Poteat, John E. Seward, Jr., Paul E. Stanton and
Colon A. Terrell, Jr.
AUDIT COMMITTEE. The responsibilities of the audit committee are to
monitor the internal operations of Bank of Tennessee as they pertain to the
Bank's internal financial controls and accounting, to make an annual examination
into the affairs of the Bank, and to report the results of this examination in
writing to the Bank's board of directors together with any recommendations the
committee deems advisable. The current members of the audit committee are John
E. Seward, Jr. chairman, Thomas Burleson, Richard W. Pectol, Anne B. Pope, John
H. Poteat, Colon A. Terrell, Jr., Roy L. Harmon, Jr., and Kenneth H. Maloy.
ASSET/LIABILITY COMMITTEE. The asset/liability committee meets
periodically to monitor the matching of Bank of Tennessee's interest rate
sensitive assets and interest rate sensitive liabilities and to make adjustments
where prudent to maintain appropriate compatibility between these two
components. The current members of the asset/liability committee are C. B. Duke
IV, chairman, Kenneth Maness, Samuel T. Easley, Paul Farnor, William B. Greene,
Jr., Roy L. Harmon, Jr., Kenneth H. Maloy, Jo Anne Paty, and Colon A. Terrell,
Jr.
51
<PAGE> 55
COMPENSATION
DIRECTOR COMPENSATION
FEES. Directors of BancTenn Corp., including directors who are also
officers of BancTenn Corp., receive an annual fee of $6,000, payable in
quarterly installments of $1,500 each. They do not receive any additional fees
for meetings attended. Directors of Bank of Tennessee who are not also employees
of BancTenn Corp. or Bank of Tennessee, receive an annual retainer of $6,000,
payable in quarterly installments of $1,500 each. The chairman of the audit
committee receives a fee of $300 for each meeting attended, and other members of
the audit committee receive a fee of $200 for each committee meeting attended.
The chairman of the loan and investment committee and the chairman of the
asset/liability committee each receive a fee of $150 for each committee meeting
which they chair, and the other members of these committees receive a fee of
$100 for each meeting attended.
STOCK OPTIONS. Under our Directors Stock Option Plan, approved by our
shareholders at the 2000 annual shareholders meeting held on April 24, 2000,
directors of BancTenn Corp. and Bank of Tennessee are eligible to receive
options to purchase our common stock. The maximum annual award per director is
1,000 shares. A person who is a director of both BancTenn Corp. and Bank of
Tennessee is eligible to receive only one option grant per year. Option awards
are available to both employee and non-employee directors. The board has
reserved 50,000 shares of BancTenn Corp. common stock for issuance under options
that may be granted under the plan. The number of shares reserved for issuance
under the plan will be automatically adjusted for any stock split, stock
dividend or other reorganization or reclassification of our common stock.
52
<PAGE> 56
EXECUTIVE COMPENSATION
The table below shows information concerning the compensation paid to
our chief executive officer and our other most highly compensated executive
officers for services to us in all capacities for the years ended 1999, 1998 and
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation(2)
-------------------------- ---------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options(3) Compensation(4)
--------------------------- ---- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
William B. Greene, Jr. 1999 180,000 -- -- --
Chairman of the Board 1998 180,000 -- 12,500 --
1997 180,000 -- -- --
Colon A. Terrell, Jr. 1999 205,411 41,000 -- 14,007
President and Chief Executive 1998 190,082 37,000 8,750 9,704
Officer 1997 164,798 30,000 -- 9,496
Roy L. Harmon, Jr. 1999 159,377 33,000 -- 13,342
Executive Vice President 1998 136,125 28,000 6,250 12,169
1997 105,037 20,000 -- 11,615
Kenneth H. Maloy 1999 111,661 15,000 -- 7,817
President and Chief Operating 1998 85,598 12,000 5,000 --
Officer of Bank of Tennessee 1997 -- -- -- --
Tony L. Howell 1999 97,000 15,000 -- --
Senior Vice President and Chief 1998 88,425 13,500 3,125 --
Credit Officer 1997 66,739 12,000 -- --
</TABLE>
(1) We have omitted information on "perks" and other personal benefits
because the total value of these items does not meet the minimum amount
required for disclosure under Securities and Exchange Commission rules.
(2) BancTenn Corp. has not awarded restricted stock or long-term incentives
other than stock options. Accordingly, we have omitted columns relating
to these types of awards.
(3) Prior to this offering, there has been no public trading market for the
shares of BancTenn Corp. common stock. As a result, we determined the
value of the stock option awards listed above based on the per share
sales price of BancTenn Corp. common stock in the transactions known to
management to have occurred nearest to the grant date. All awards
granted in 1998 were granted on August 31, 1998 and have been adjusted
for a 5-for-4 stock split on May 13, 1999. The nearest known
transaction to August 31, 1998 occurred on September 9, 1998 and the
per share sales price was $25.60 (adjusted for the 5-for-4 stock split
on May 13, 1999). The stock option awards vest at varying schedules
measured from the grant date.
53
<PAGE> 57
(4) Includes the following contributions to the indicated person's 401(k)
plan account for the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Mr. Terrell 4,422 4,016 3,808
Mr. Harmon 4,387 3,214 2,660
Mr. Maloy 3,347 1,938 --
Mr. Howell 2,474 1,681 1,156
</TABLE>
Includes the following premiums paid under split dollar life insurance
plan for each of the years indicated.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Mr. Terrell 9,585 5,688 5,688
Mr. Harmon 8,955 8,955 8,955
Mr. Maloy 4,470 -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
The following table sets forth information regarding grants of stock
options made under our Employee Stock Purchase Plan during the year ended
December 31, 1999. No options were granted under our Employee Stock Incentive
Plan during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options Granted To Exercise or
Options Employees in Base Price
Name Granted (#) Fiscal Year ($/SH) Expiration Date
---- ----------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C>
William B. Greene -- -- -- --
Colon A. Terrell, Jr. 1,766 7.13 17.84 12/31/99
Roy L. Harmon, Jr. 1,316 5.31 17.84 12/31/99
Kenneth H. Maloy -- -- -- --
Tony L. Howell 855 3.45 17.84 12/31/99
</TABLE>
54
<PAGE> 58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table shows, for each named executive officer, the value
of options exercised in 1999, the number of shares of our stock covered by both
exercisable and unexercisable options as of December 31, 1999 and the year-end
value of exercisable and unexercisable options to purchase shares of our stock
as of December 31, 1999.
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARS Options/SARS
Acquired At FY-End (#) At FY-End ($)
On Value ---------------------------- ----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William B. Greene, Jr. 27,000 537,975 24,150 8,750 332,070 22,750
Colon A. Terrell, Jr. 1,766 19,709 40,750 7,000 779,412 35,000
Roy L. Harmon, Jr. 1,316 14,687 26,750 5,000 512,523 25,000
Kenneth H. Maloy -- -- 2,500 2,500 15,703 12,500
Tony L. Howell 855 9,542 6,025 2,500 118,025 12,500
</TABLE>
CHANGE OF CONTROL AGREEMENTS
We have entered into Change of Control Agreements with Colon A.
Terrell, Jr. and Roy L. Harmon, Jr. which provide they are entitled to receive
specified compensation in the event we undergo a "change of control" and either
of them experiences a substantial change in his work duties or responsibilities
within three years thereafter. Specifically, the arrangements provide that upon
the occurrence of a change of control, and if the executive terminates his
employment within three years thereafter, subject to specified exceptions, that
the executive will be entitled to receive from BancTenn Corp. an amount equal to
five times his average annual earnings. In addition, each executive would be
entitled to continued coverage, until his normal retirement age, under the
medical insurance and accident and disability insurance plans in effect as of
the date of termination. Each would also receive ownership of any split-dollar
life insurance policies that might then be in effect insuring his life as well
as ownership of any automobile and country club membership then assigned for his
use. If any automobile or club membership is not transferable or was already
owned by the executive prior to his employment with us, then we will pay a cash
amount reasonably equivalent to the fair market value of the automobile and
country club membership. Each executive would also continue to enjoy any
supplemental retirement benefits or incentive compensation benefits which might
have accrued and been earned prior to his termination.
Under the terms of these agreements, each executive agrees that, in the
event any third person initiates a tender offer or an exchange offer, circulates
a proxy to our shareholders, or takes other steps to effect a change of control,
he will not voluntarily leave his employment upon less than three months prior
written notice and will continue to perform all of his customary duties until
the third party has abandoned its efforts to effect a change of control or until
a change of control has occurred.
55
<PAGE> 59
The benefits of the agreements are not triggered by the executive's
death, permanent disability, or attainment of normal retirement age. In
addition, the benefits would not be available in the event their employment is
terminated for cause which is defined as a felony conviction.
As used in the agreements the term "change of control" means, with
respect to BancTenn Corp. or Bank of Tennessee, the occurrence of any of the
following:
- The death of William B. Greene, Jr.;
- The permanent mental disability of William B. Greene, Jr.
which means that we have obtained a competent independent
medical opinion that he is incapable of managing his business
affairs and exercising the judgment and discretion reasonably
required to do so;
- If any person or entity, including a group as defined in
Section 11(d)(3) of the Securities Exchange Act of 1934, other
than (1) BancTenn Corp. or any of its wholly-owned
subsidiaries, or (2) any employee benefit plan of BancTenn
Corp. or any of its subsidiaries or (3) William B. Greene, Jr.
and his related interests, becomes the beneficial owner of
securities of BancTenn Corp. or Bank of Tennessee having more
than 50% of the combined voting power of the then outstanding
securities of BancTenn Corp. or Bank of Tennessee that may be
cast for the election of directors of BancTenn Corp. or Bank
of Tennessee other than as a result of issuing securities in
the ordinary course of business;
- If, as the result of or in connection with any cash tender or
exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the
foregoing transactions, less than a majority of the combined
voting power of the then outstanding securities of BancTenn
Corp. or Bank of Tennessee, are held in the aggregate by the
holders of the securities entitled to vote generally in the
election of directors of BancTenn Corp. or Bank of Tennessee
immediately prior to such transaction; or
- If, during any period of two consecutive years, individuals
who at the beginning of the two-year period constituted the
board of directors of BancTenn Corp. or Bank of Tennessee
cease for any reason to constitute at least a majority of that
board, unless the election of each director when first elected
during the two-year period was approved by a vote of at least
two-thirds of the directors of BancTenn Corp. or Bank of
Tennessee, as the case may be, then in office.
As used in these agreements, the term "William B. Greene, Jr. and his
related interests" means William B. Greene, Jr., Greene Investment Corporation,
any trust of which Mr. Greene is a trustee, co-trustee, or beneficiary, and any
partnership, corporation or limited liability company of which Mr. Greene is an
officer, director, shareholder, member or equity owner.
EMPLOYEE STOCK INCENTIVE PLAN
The BancTenn Corp. Employee Stock Incentive Plan, adopted in May 1992,
provides for the grant of stock options and other stock-based awards as an
incentive to key employees. We have
56
<PAGE> 60
reserved a total of 279,600 shares to be issued under the Employee Stock
Incentive Plan. Under this plan, the board of directors may grant options,
restricted stock, or other stock-based compensation to employees equal to the
fair market value of the stock on the date of the grant. As of April 30, 2000
and taking into account stock splits, there were outstanding options to purchase
152,601 shares under the plan, and options for 30,662 shares had been exercised.
EMPLOYEE STOCK PURCHASE PLAN
We have reserved 125,000 shares of common stock for issuance under our
Employee Stock Purchase Plan. We adopted the plan in April 1996 under Section
423(b) of the Internal Revenue Code. Under the plan, employees are granted
options each year to purchase a pro-rata portion of a pool of shares which are
set aside under the plan on an annual basis. The options are awarded to eligible
employees in proportion to their relative levels of annual base compensation.
The option price is equal to 85% of the fair market value of our stock at the
date of each annual grant. The plan provides that for purposes of this formula
fair market value cannot be less than 150% of the book value of our stock as of
the end of the preceding calendar year. Any employee who owns more than 5% of
our stock is not eligible to participate in the plan. As of June 30, 2000 and
taking into account stock splits, employees had purchased a total of 64,564
shares under the plan. Additionally, we have awarded options for the year 2000
totaling 19,941 shares.
401(K) PLAN
We have a qualified 401(k) employee retirement plan under which our
employees are eligible, subject to statutory limitations, to have up to 15% of
their gross wages withheld on a tax-deferred basis and contributed to the plan.
The plan covers all of our employees and includes a vesting schedule for
matching contributions made by BancTenn Corp. The employer match is equal to
$.50 for each $1.00 contributed by an employee, up to the first 6% of the
employee's wages. The employer contributions are subject to a vesting schedule
under which 25% becomes vested after an employee completes 3 years of service,
50% after 4 years of service, and 100% after 5 years of service.
CASH BONUSES
Although we have not established a formal cash bonus plan, in the past
we have paid cash bonuses to our employees. The payment of these bonuses, and
the amount and frequency of these bonuses, is subject to the discretion of the
board of directors and there is no assurance that bonuses will be paid in any
given year.
COMPENSATION COMMITTEE
Matters related to executive compensation, including the award of stock
options, cash bonuses and other executive compensation benefits, are handled by
the disinterested members of BancTenn Corp.'s board of directors.
57
<PAGE> 61
RELATED PARTY TRANSACTIONS
Our directors and the business organizations and individuals associated
with them are customers of and have banking transactions with Bank of Tennessee
and our banking affiliates in the ordinary course of business. These
transactions include loans, commitments, lines of credit and letters of credit.
All of these transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and do not involve more than a normal risk of
collectibility or present any other unfavorable features. We also expect to have
additional transactions with these persons and businesses in the future.
Through our Tennessee General division, we provide data processing and
support services to our affiliates, Carter County Bank and Paragon Commercial
Bank. We also provide financial and consulting services to Paragon Commercial
Bank. These services are provided at rates which are comparable to the rates
customarily charged in the general marketplace for these types of services.
From time to time, we contract for the use an airplane owned by Carter
County Bank. We use this airplane in the ordinary course of our business,
particularly as it relates to monitoring our investment in Paragon Commercial
Bank located in Raleigh, North Carolina. We pay for the use of this airplane and
its pilots at a predetermined hourly charge which is consistent with the fair
market value of similar charter services.
Our chairman and largest shareholder, William B. Greene, Jr., is also
the chairman of the board and the largest shareholder of Carter County Bancorp.,
Inc. He controls approximately 87% of the outstanding stock of Carter County
Bancorp., Inc.
58
<PAGE> 62
DESCRIPTION OF OUR CAPITAL STOCK
Our charter authorizes us to issue up to 6,000,000 shares of common
stock, par value $8.00 per share, of which up to 428,571 shares will be issued
in to this offering. As of June 30, 2000, there were 1,468,626 shares of our
common stock issued and outstanding.
COMMON STOCK. All shares of our common stock are entitled to share
equally in dividends from legally available funds, when, as and if declared by
our board of directors. Upon liquidation or dissolution of BancTenn Corp,
whether voluntary or involuntary, all shares of our common stock are entitled to
share equally in all assets available for distribution to the shareholders.
Except for cumulative voting in the election of directors, each holder of our
common stock is entitled to one vote for each share on all matters submitted to
the shareholders. See "Important Provisions of Our Charter and
Bylaws--Cumulative Voting" on page 60. There is no redemption right, sinking
fund provision or right of conversion in existence with respect to our common
stock. All shares of the common stock issued in this offering will be fully paid
and non-assessable. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of our outstanding common
stock are entitled to receive dividends out of legally available assets at times
and in amounts as our board of directors may determine from time to time. Upon
liquidation, dissolution or winding up of BancTenn Corp., the assets legally
available for distribution to shareholders are distributable ratably among the
holders of our common stock after payment of liquidation preferences, if any, on
any outstanding preferred stock and payment of other claims of creditors.
Holders of our common stock have preemptive rights to purchase additional shares
of common stock according to our charter and Tennessee law. See "Important
Provisions of Our Charter and Bylaws--Preemptive Rights" on page 60.
PREFERRED STOCK. Our charter authorizes us to issue up 250,000 shares
of preferred stock upon terms and conditions as our board of directors may
determine from time to time. No consent or approval of the holders of our common
stock is required in order for our board of directors to authorize the issuance
of a series of preferred stock. Our board of directors is authorized to issue
one or more series of preferred stock and to establish the dividend rate,
redemption terms, conversion rights and other similar rights, if any, of any
series of preferred stock. In the event of the liquidation of BancTenn Corp.,
the holders of preferred stock would have legal priority over the holders of our
common stock to the extent of the liquidation preferences of our preferred stock
as established by our board of directors. The issuance of preferred stock, while
providing flexibility in connection with the raising of additional capital or
possible acquisitions, could also have the effect of delaying, deferring or
preventing a change of control of BancTenn Corp. We do not have any shares of
preferred stock outstanding, and we have no current plans to issue any shares of
preferred stock.
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IMPORTANT PROVISIONS OF OUR CHARTER AND BYLAWS
GENERAL
The Tennessee Business Corporation Act and our charter and bylaws
govern shareholders' rights and related matters. Our charter provides for
cumulative voting in the election of directors. Our charter also contains
certain provisions relating to the removal of our directors which could have the
effect of impeding an attempt to change or remove management or gain control of
BancTenn Corp. in a transaction not supported by our board of directors. In
addition, our charter also contains a provision which eliminates the potential
personal liability of directors for monetary damages, and our bylaws contain
provisions which provide indemnification for our directors. The provisions
relating to cumulative voting, removal of directors, elimination of liability,
and indemnification of directors are discussed more fully below.
PREEMPTIVE RIGHTS. Our charter reserves to each holder of our common
stock preemptive rights to acquire additional shares of our common stock when we
offer new shares for purchase. The purpose of preemptive rights is to allow each
shareholder to avoid having his or her ownership position diluted when we issue
new shares of common stock. Preemptive rights provide each shareholder the right
to purchase from us a number of shares that will enable the shareholder to
maintain his or her ownership percentage as of the time new shares are offered
for sale. A shareholder is not required to exercise all or any portion of his or
her preemptive rights and is not prohibited from acquiring additional shares in
excess of his or her preemptive rights entitlement. Under Tennessee law and our
charter, preemptive rights are not applicable with respect to:
- shares issued as compensation to our directors, officers, agents or
employees, or to those of our subsidiaries and affiliates;
- shares issued to satisfy conversion or option rights created to provide
compensation to our directors, officers, agents or employees and to
those of our subsidiaries and affiliates; and
- shares sold other than for money.
Shares which are subject to preemptive rights but which are not acquired by our
shareholders within the time specified may be issued by us for a period of one
year after being to offered to our shareholders at a price not less than the
preemptive rights offering price.
CUMULATIVE VOTING. Under the terms of our charter, shareholders have
the right to exercise cumulative voting in the election of directors. This means
that each shareholder has the right to cast a total number of votes equal to the
product of the total number of shares which he or she is entitled to vote,
multiplied by the total number of directors to be elected. A shareholder may
cast all of his or her cumulative votes for any one director nominee or may
distribute his or her votes among various nominees as he or she deems
appropriate. A shareholder who wishes to exercise his or her right of cumulative
voting must comply with statutory notice requirements.
REMOVAL OF DIRECTORS. Under Tennessee law, one or more directors of a
corporation may be removed with or without cause by the affirmative vote of a
majority of the shares present at a meeting at which a quorum is represented and
entitled to vote, unless the charter or a bylaw adopted
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by the shareholders provides otherwise. Our charter provides, however, that our
directors may be removed during their terms only for cause, which is defined as
final conviction of a felony, declaration of unsound mind by court order,
adjudication of bankruptcy, nonacceptance of office, or conduct prejudicial to
our interests, or without cause only by the affirmative vote of the holders of
two-thirds of the issued and outstanding shares of common stock entitled to vote
in an election of directors.
This provision may make it more difficult and time consuming for a
potential acquiror to obtain control of BancTenn Corp. by replacing the board of
directors and management. Furthermore, this provision may also make it more
difficult for our shareholders to replace the board of directors or management,
even if a majority of the shareholders believes that replacing them would be in
our best interests. As a result, this provision may tend to perpetuate the
incumbent board of directors and management.
Although our management believes this provision is beneficial to our
shareholders, it also may tend to discourage some takeover bids that are not
supported by our board. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over prevailing market prices. On the other hand, defeating undesirable
acquisition offers can be a very expensive and time-consuming process. To the
extent that this provision discourages undesirable proposals, we may be able to
avoid those expenditures of time and money.
INDEMNIFICATION
Our bylaws contain indemnification provisions which provide that
directors, officers, employees or agents of BancTenn Corp., the insiders, will
be indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits, for
example, if it is settled, the indemnification provisions provide that we will
indemnify insiders when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the insider acted in a manner he or she
in good faith believed to be in or not opposed to the best interests of BancTenn
Corp., and with respect to any criminal action or proceeding, if the insider had
no reasonable cause to believe his or her conduct was unlawful. Whether the
applicable standard of conduct has been met is determined by the board of
directors, the shareholders or independent legal counsel in each specific case.
Our bylaws also provide that the indemnification rights set forth in
the bylaws are not exclusive of other indemnification rights to which an insider
may be entitled under any bylaw, resolution or agreement, either specifically or
in general terms approved by the affirmative vote of the holders of a majority
of the shares entitled to vote. We can also provide for greater indemnification
than that set forth in the bylaws if we choose to do so, subject to approval by
our shareholders. We may not, however, indemnify an insider for liability
arising out of circumstances that constitute exceptions to limitation of an
insider's liability for monetary damages. See "--Limitation of Liability" on
page 62.
The indemnification provisions of our bylaws specifically provide that
we may purchase and maintain insurance on behalf of any insider against any
liability asserted against the insider and incurred by him or her in any such
capacity, whether or not we would have had the power to indemnify against the
liability.
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We are not aware of any pending or threatened action, suit or
proceeding involving any insiders for which indemnification from us may be
sought. We have acquired directors and officers liability insurance intended to
cover any indemnification liability we may have to our directors and officers.
To the extent indemnification for liabilities arising under the
Securities Act of 1933 is permitted to our insiders under the above provisions,
or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities, other than the payment by us of
expenses incurred or paid by an insider in the successful defense of any action,
suit or proceeding, is asserted by an insider in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by us is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of the issue.
LIMITATION OF LIABILITY
Our charter, subject to the exceptions listed below, also eliminates
the potential personal liability of a director for monetary damages to us and to
our shareholders for breach of a fiduciary duty as a director.
However, there is no elimination of liability for:
- a breach of the duty of loyalty to us or to our shareholders;
- an act or omission not in good faith or involving intentional
misconduct or a knowing violation of law; or
- liability for unlawful distributions of corporate property.
Our charter does not eliminate or limit our right or that of our shareholders to
seek injunctive or other equitable relief not involving monetary damages.
The Tennessee Business Corporation Act allows Tennessee corporations,
with the approval of their shareholders, to include in their charter a provision
eliminating or limiting the liability of directors, except in the circumstances
described above. We included the limitation of liability provision in our
charter to encourage qualified individuals to serve and remain as our directors.
While we have not experienced any problems in locating directors to date, we
could experience difficulty in the future as our business activities expand and
diversify. We also included the limitation of liability provision to enhance our
ability to secure liability insurance for our directors at a reasonable cost. We
believe that this provision has enabled us to secure this insurance on terms
more favorable than if this provision were not included in our charter.
MERGER TRANSACTIONS
Under our charter, any merger or sale, lease, exchange or other
disposition of all or substantially all of our assets in a transaction with a
person or entity who owns 5% or more of our outstanding shares requires the
affirmative vote of two-thirds of our outstanding shares entitled to vote. This
two-thirds shareholder approval requirement does not apply if:
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- prior to or at the time the person or entity acquired 5% or
more of our stock, our board of directors approved a
memorandum of understanding substantially consistent with the
transaction by which the person or entity acquired the
ownership position; or
- the transaction is approved by at least two-thirds of our
entire board of directors at any time prior to the transaction
being completed.
This charter provision may be amended only by two-thirds approval of our entire
board of directors or by two-thirds approval of all outstanding shares entitled
to vote on the amendment.
With respect to any merger or consolidation offer made by a third
party, and with respect to any tender offer or exchange offer to acquire any
equity security of BancTenn Corp. or any offer to acquire all or substantially
all of our assets, our charter requires that our board of directors, in
determining the best interests of BancTenn Corp. and our shareholders, give due
consideration to all relevant factors including, but not limited to:
- the short-term and long-term social and economic effects on
our employees, customers and other constituents and the
communities that we serve; and
- the consideration being offered by the other party in relation
to the then current value of our assets and our business in a
freely negotiated transaction and in relation to our board's
estimate of our future value as an independent entity.
This charter provision may be amended only by a two-thirds vote of our entire
board of directors by a two-thirds vote of our outstanding shares entitled to
vote on the amendment.
BYLAW AMENDMENTS
Our charter provides that our board of directors has the right to amend
our bylaws by the affirmative vote of a majority of our directors present at a
meeting at which a quorum is present, except that an amendment to change the
number of directors requires the affirmative vote of at least two-thirds of the
entire board of directors. This charter provision may be amended only by
two-thirds approval of our entire board of directors or by two-thirds approval
of our outstanding shares entitled to vote on the amendment.
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SHARES ELIGIBLE FOR FUTURE SALE
After the close of this offering, we will have up to 1,897,197 shares
of common stock outstanding. This includes approximately 875,511 shares that may
be immediately resold after the offering in the public market without
restriction. The remaining 1,021,686 shares of our outstanding common stock will
become available for resale in the public market at future dates after the close
of this offering subject to the resale limitations under the federal securities
laws and subject to other limitations in the case of shares issued under our
Employee Stock Incentive Plan and our Employee Stock Purchase Plan.
Rule 144 under the Securities Act of 1933 places volume and other
limitations on the resale of restricted shares and the resale of shares held by
our affiliates. Restricted shares, for Rule 144 purposes, are shares that have
been acquired within the last two years under an exemption from registration
under federal securities law. An affiliate is a person who directly or
indirectly controls, is controlled by, or is under common control with, the
BancTenn Corp. Affiliates of a company generally include its directors,
executive officers and principal shareholders.
Rule 144 provides that (1) holders of restricted shares who have held
their shares for at least one year, and (2) affiliates, will be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one of the following amounts:
- 1% of the outstanding shares of common stock; or
- the average weekly trading volume during the four calendar
weeks preceding his or her sale.
Sales under Rule 144 are also subject to provisions regarding manner of
sale, notice requirements and the availability of current public information
about BancTenn Corp. Nonaffiliates who have held restricted shares for two years
are not subject to the volume and other limitations under Rule 144. Affiliates
will not be subject to the volume restrictions and other limitations under Rule
144 beginning 90 days after their status as an affiliate terminates, unless they
hold restricted shares. In that event, they must also have held their restricted
shares for two years.
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SUPERVISION AND REGULATION
The following discussion describes the material elements of the
regulatory framework that applies to banks and bank holding companies and
provides specific information related to us.
GENERAL
BancTenn Corp. is a bank holding company registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956. As a result, we and any future non-bank subsidiaries we establish are and
will be subject to the supervision, examination, and reporting requirements of
the Bank Holding Company Act and the regulations of the Federal Reserve.
ACQUISITIONS
The Bank Holding Company Act requires every bank holding company to
obtain the Federal Reserve's prior approval before:
- it may acquire direct or indirect ownership or control of any
voting shares of any bank if, after the acquisition, the bank
holding company will directly or indirectly own or control
more than 5% of the bank's voting shares;
- it or any of its non-bank subsidiaries may acquire all or
substantially all of the assets of any bank; or
- it may merge or consolidate with any other bank holding
company.
The Bank Holding Company Act also provides that the Federal Reserve may
not approve any transaction that would result in or tend to create a monopoly,
substantially lessen competition or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the communities
to be served. The Federal Reserve's consideration of financial resources
generally focuses on capital adequacy, which is discussed below.
Under the Riegle-Neal Interstate and Branching Efficiency Act, we, and
any other bank holding company located in Tennessee, may acquire a bank located
in any other state, and any bank holding company located outside of Tennessee
may acquire any Tennessee-based bank, regardless of state law to the contrary.
In either case, deposit-percentage, aging requirements, and other restrictions
apply. The legislation provides that unless an individual state has elected to
prohibit out-of-state banks from operating interstate branches within its
territory, adequately capitalized and managed bank holding companies will be
able to consolidate their multi-state banking operations into a single bank
subsidiary and to branch interstate through acquisitions. De novo branching by
an out-of-state bank is permitted only if it is expressly permitted by the laws
of the host state.
Under Tennessee law, any Tennessee bank or national bank domiciled in
Tennessee may establish branch offices at any location in any county in
Tennessee. An out-of-state bank that does
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not already maintain a branch in Tennessee may acquire an existing Tennessee
bank branch if the laws of the home state of the out-of-state bank permit
Tennessee banks to establish and maintain branches in that state through the
acquisition of branches under substantially the same terms and conditions as
Tennessee requires for similar transactions into Tennessee.
The Bank Holding Company Act generally prohibits us from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries. The Bank Holding Company Act also prohibits us from
acquiring or keeping direct or indirect control of any company engaged in any
activities other than those activities that the Federal Reserve determines to be
closely related to banking or managing or controlling banks. The
Gramm-Leach-Bliley Act has added additional financial-related activities that
may be conducted by a bank holding company that qualifies as a financial holding
company.
PERMITTED ACTIVITIES
On November 12, 1999 President Clinton signed the Gramm-Leach-Bliley
Act, which amends the Bank Holding Company Act and greatly expands the
activities in which bank holding companies and affiliates of banks are permitted
to engage. The Act eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies, and other
financial service providers. The provisions of the Act relating to permitted
activities of bank holding companies and affiliates of banks became effective on
March 11, 2000. The following discussion describes the activities in which
BancTenn Corp. will be permitted to engage under the Bank Holding Company Act,
as amended by the Gramm-Leach-Bliley Act.
Generally, if BancTenn Corp. qualifies and elects to become a financial
holding company, which is described below, it may engage in activities that are:
- financial in nature;
- incidental to a financial activity; or
- complementary to a financial activity and do not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally.
In determining whether a particular activity is financial in nature or
incidental or complementary to a financial activity, the Federal Reserve must
consider (1) the purpose of the Bank Holding Company and Gramm-Leach-Bliley
Acts, (2) changes or reasonably expected changes in the marketplace in which
financial holding companies compete and in the technology for delivering
financial services, and (3) whether the activity is necessary or appropriate to
allow financial holding companies to effectively compete with other financial
service providers and to efficiently deliver information and services. The Act
expressly lists the following activities as financial in nature:
- lending, trust and other banking activities;
- insuring, guaranteeing, or indemnifying against loss or harm,
or providing and issuing annuities, and acting as principal,
agent, or broker for these purposes, in any state;
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- providing financial, investment, or advisory services;
- issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly;
- underwriting, dealing in or making a market in securities;
- other activities that the Federal Reserve may determine to be
so closely related to banking or managing or controlling banks
as to be a proper incident to managing or controlling banks;
- foreign activities permitted outside of the United States if
the Federal Reserve has determined them to be usual in
connection with banking operations abroad;
- merchant banking through securities or insurance affiliates;
and
- insurance company portfolio investments.
To qualify to become a financial holding company, our depository
institution subsidiaries must be well capitalized and well managed and must have
a Community Reinvestment Act rating of at least "satisfactory." Additionally, we
must file an election with the Federal Reserve to become a financial holding
company and provide the Federal Reserve with 30 days written notice prior to
engaging in a permitted financial activity. Although we do not have any
immediate plans to file an election with the Federal Reserve to become a
financial holding company, one of the primary reasons we selected the holding
company structure was to have increased flexibility. Accordingly, if deemed
appropriate in the future, we may elect to become a financial holding company.
Under the Bank Holding Company Act, a bank holding company, which has
not qualified or elected to become a financial holding company, is generally
prohibited from engaging in or acquiring direct or indirect control of more than
5% of the voting shares of any company engaged in nonbanking activities unless,
prior to the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found
those activities to be so closely related to banking as to be a proper incident
to the business of banking. Activities that the Federal Reserve has found to be
so closely related to banking as to be a proper incident to the business of
banking include:
- factoring accounts receivable;
- acquiring or servicing loans;
- leasing personal property;
- conducting discount securities brokerage activities;
- performing selected data processing services;
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- acting as agent or broker in selling credit life insurance and
other types of insurance in connection with credit
transactions; and
- performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding
company or its subsidiaries to terminate any of these activities or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that the bank holding company's continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of
any of its bank subsidiaries.
BANK OF TENNESSEE
Bank of Tennessee's deposits are insured by the FDIC to the maximum
extent provided by law. Bank of Tennessee is also subject to numerous state and
federal statutes and regulations that affect its business, activities and
operations, and it is supervised and examined by the FDIC and the Tennessee
Department of Financial Institutions. The FDIC and the Tennessee Department of
Financial Institutions regularly examine the operations of Bank of Tennessee and
have the authority to approve or disapprove mergers, the establishment of
branches, and similar corporate actions. Both regulatory agencies also have the
power to prevent the continuance or development of unsafe or unsound banking
practices or other violations of law.
PAYMENT OF DIVIDENDS
BancTenn Corp. is a legal entity separate and distinct from Bank of
Tennessee. The principal source of BancTenn Corp.'s cash flow, including cash
flow to pay dividends to its shareholders, is dividends that it receives from
Bank of Tennessee. Statutory and regulatory limitations apply to Bank of
Tennessee's payment of dividends to BancTenn Corp. as well as to BancTenn
Corp.'s payment of dividends to its shareholders.
If, in the opinion of the FDIC, Bank of Tennessee were engaged in or
about to engage in an unsafe or unsound practice, the FDIC could require, after
notice and a hearing, that it cease and desist from its practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991, a depository institution may not pay any dividend if payment would
cause it to become undercapitalized or if it already is undercapitalized.
Moreover, the federal agencies have issued policy statements that provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings. See "--Prompt Corrective Action" on page 70.
Tennessee law prohibits state banks such as Bank of Tennessee from
paying dividends other than from undivided profits. Under Tennessee law, the
directors of Bank of Tennessee, after making proper deduction for all
expenditures, expenses, taxes, losses, bad debts, and any write-offs or other
deductions required by the Tennessee Department of Financial Institutions, may
credit net profits to the bank's undivided profits account, and may declare a
dividend quarterly, semi-annually or annually in such amount as they deem
appropriate. In determining the amount available for declaration of a dividend,
the directors must deduct the amount of any net loss and they must transfer
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to the bank's surplus account (1) the amount, if any, required to raise the
surplus to 50% of the bank's capital stock, and (2) the amount, if any, required
to make the paid-in-surplus account equal the capital stock account. In any
event, the declaration of a dividend cannot adversely impair the bank's required
reserves against deposits.
A Tennessee bank, with the approval of the Tennessee Department of
Financial Institutions, may transfer funds from its undivided profits (retained
earnings) account or any part of its paid-in-capital account. The payment of
dividends by any bank depends upon its earnings and financial condition and, in
addition to the limitations described above, is subject to the statutory power
of state and federal regulatory agencies to act to prevent what they deem unsafe
or unsound banking practices.
In addition to the limitations under Tennessee law, federal banking
regulations require that Bank of Tennessee maintain specified levels of capital
in relation to Bank of Tennessee's total assets. These regulations have the
effect of further limiting the amount of dividends that Bank of Tennessee can
pay. See "Capital Adequacy" below.
CAPITAL ADEQUACY
We are required to comply with the capital adequacy standards
established by the Federal Reserve in the case of BancTenn Corp. and the FDIC in
the case of Bank of Tennessee. The Federal Reserve has established two basic
measures of capital adequacy for bank holding companies -- a risk-based measure
and a leverage measure. A bank holding company must satisfy all applicable
capital standards to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%. At least one-half of total capital must comprise common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and specified other intangible assets.
This portion of total capital is referred to as Tier 1 capital. The remainder
may consist of subordinated debt, other preferred stock, and a limited amount of
loan loss reserves and is referred to as Tier 2 capital. At June 30, 2000, our
consolidated ratio of total capital to risk-weighted assets was 9.66% and our
consolidated ratio of Tier 1 capital to risk-weighted assets was 8.53%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified criteria
including having the highest regulatory rating. All other bank holding companies
generally are required to maintain a leverage ratio of at least 3%, plus an
additional cushion of 100 to 200 basis points. Our leverage ratio at June 30,
2000 was 6.93%. The guidelines also provide that bank holding companies
experiencing internal growth, or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels
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without significant reliance on intangible assets. Furthermore, the Federal
Reserve has indicated that it will consider a bank holding company's Tier 1
capital leverage ratio, after deducting all intangibles, and other indicators of
capital strength in evaluating proposals for expansion or new activities.
Bank of Tennessee is subject to risk-based and leverage capital
requirements adopted by the FDIC, which are substantially similar to those
adopted by the Federal Reserve for bank holding companies.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. The FDIC can impose
substantial additional restrictions on FDIC-insured depository institutions that
fail to meet applicable capital requirements. See "Prompt Corrective Action"
below.
SUPPORT OF SUBSIDIARY INSTITUTIONS
Under Federal Reserve policy, we are expected to act as a source of
financial strength for, and to commit resources to support, Bank of Tennessee as
well as Paragon Commercial Bank, located in Raleigh, North Carolina. We and our
affiliates own a total of 29.62% of Paragon Commercial Bank's outstanding common
stock. This support may be required at times when, without this Federal Reserve
policy, we might not be inclined to provide it. In addition, any capital loans
by a bank holding company to its subsidiary bank will be repaid only after the
bank's deposits and specified other indebtedness are repaid in full. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a banking
subsidiary will be assumed by the bankruptcy trustee and entitled to a priority
of payment.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. The banking regulators are required to take mandatory
supervisory actions, and are authorized to take other discretionary actions,
relating to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulators must
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to limitations. The controlling
holding company's obligation to fund a capital restoration plan is limited to
the lesser of 5% of an undercapitalized subsidiary's assets or the amount
required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except
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under an accepted capital restoration plan or with FDIC approval. In addition,
the appropriate federal banking agency may treat an undercapitalized institution
in the same manner as it treats a significantly undercapitalized institution, if
it determines that those actions are necessary.
At June 30, 2000, Bank of Tennessee's and Paragon Commercial Bank's
capital levels placed them in the well-capitalized category.
FDIC INSURANCE ASSESSMENTS
The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: well capitalized,
adequately capitalized and undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns an
institution to one of three supervisory subgroups within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation that the institution's primary federal regulator provides
to the FDIC and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. The FDIC determines an institution's insurance assessment rate based on
the institution's capital category and supervisory category. Under the
risk-based assessment system, there are nine combinations of capital groups and
supervisory subgroups to which different assessment rates are applied.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup.
Effective January 1, 1997, the FDIC imposed assessments to help repay
the $780 million in annual interest payments on the $8 billion of Financing
Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC adjusts these assessments quarterly. For the
second quarter of 2000, the assessment is 2.08 cents per $100 of deposits.
The FDIC may terminate an institution's deposit insurance if it finds
that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
PROPOSED LEGISLATION AND REGULATORY ACTION
New statutes and regulations are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. We cannot predict whether
or in what form any proposed statute or regulation will be adopted or the extent
to which our business may be affected by any new statute or regulation.
71
<PAGE> 75
LEGAL MATTERS
Hunter, Smith & Davis, LLP, counsel for BancTenn Corp., will pass upon
the validity of the shares of common stock offered by this prospectus. Powell,
Goldstein, Frazer & Murphy LLP, Atlanta, Georgia, has acted as special counsel
to BancTenn Corp. in connection with this offering.
EXPERTS
Hazlett, Lewis & Bieter, PLLC, independent auditors, Chattanooga,
Tennessee, have audited BancTenn Corp.'s consolidated financial statements for
the years ended December 31, 1999 and 1998 included in this prospectus. BancTenn
Corp.'s financial statements are included in this prospectus in reliance on
Hazlett, Lewis & Bieter, PLLC's report, given on their authority as experts in
accounting and auditing.
REPORTS TO SHAREHOLDERS
Upon the effective date of the Registration Statement on Form SB-2 that
registers the shares of common stock offered by this prospectus with the
Securities and Exchange Commission, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, which include requirements
to file annual reports on Form 10-KSB and quarterly reports on Form 10-QSB with
the Securities and Exchange Commission. This reporting obligation will exist for
at least one year and will continue for fiscal years thereafter, except that
these reporting obligations may be suspended for any subsequent fiscal year if
at the beginning of the year the common stock of BancTenn Corp. is held of
record by less than 300 persons.
At any time that we are not a reporting company, we will furnish our
shareholders with annual reports containing audited financial information for
each fiscal year on or before the date of the annual meeting of shareholders as
required by the FDIC. Our fiscal year ends on December 31. Additionally, we will
also furnish such other reports as we may determine to be appropriate or as
otherwise may be required by law.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission the
Registration Statement under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the Registration Statement. For further information
and our common stock, reference is made to the Registration Statement and its
exhibits about us. The Registration Statement may be examined and copied at the
public reference facilities maintained by the Securities and Exchange Commission
at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549
and at the regional offices of the Securities and Exchange Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and Seven World Trade Center, 13th Floor, New York, New York 10048.
You may read and copy our registration statement, and any other materials filed
by us with the Securities and Exchange Commission, at the Securities and
Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain information on the operation of the
Public Reference Room by calling 1-800-SEC-0330. The Securities and Exchange
72
<PAGE> 76
Commission also maintains a Web site (http://www.sec.gov) that contains
registration statements, reports, proxy and information statements and other
information regarding registrants, such as BancTenn Corp., that file
electronically with the Securities and Exchange Commission.
73
<PAGE> 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BANCTENN CORP.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Statements of Financial Condition as of June 30, 2000
(unaudited) and December 31, 1999 and 1998 F-3
Consolidated Statements of Income for the six months ended June 30, 2000 and
June 30, 1999 (unaudited) and for the years ended December 31, 1999
and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999 and 1998 and for the six months ended
June 30, 2000 (unaudited) F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and
1999 (unaudited) and for the years ended December 31, 1999
and 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors
BancTenn Corp.
Kingsport, Tennessee
We have audited the accompanying consolidated balance sheets of
BancTenn Corp. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 BancTenn
Corp. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Hazlett, Lewis & Bieter, PLLC
Chattanooga, Tennessee
February 4, 2000
F-2
<PAGE> 79
BANCTENN CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------- June 30,
1999 1998 2000
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 12,860,890 $ 10,557,215 $ 13,086,610
Federal funds sold 2,094,000 -- 10,605,000
Securities available for sale 32,582,480 26,397,949 42,124,029
Securities held to maturity 3,019,171 3,361,349 2,049,386
Loans, net of unearned interest and
allowance for loan losses 238,149,056 203,994,630 274,856,943
Accrued interest receivable 1,477,665 1,474,708 1,892,471
Premises and equipment 7,650,789 7,774,077 7,587,839
Other assets 1,793,125 1,130,957 2,263,900
------------- ------------- -------------
Total assets $ 299,627,176 $ 254,690,885 $ 354,466,178
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 30,045,692 $ 34,100,270 $ 30,972,136
NOW accounts 47,452,421 44,381,119 44,084,297
Money market accounts 17,204,559 17,241,515 14,022,627
Savings accounts 13,484,771 14,412,730 24,246,365
Time deposits 155,385,267 110,758,973 192,191,130
------------- ------------- -------------
Total deposits 263,572,710 220,894,607 305,516,555
Securities sold under agreements to repurchase 9,574,336 9,087,829 16,593,521
Federal funds purchased -- 3,775,000 --
Note payable 3,000,000 -- 7,250,000
Accrued interest payable 1,089,324 807,331 1,620,184
Other liabilities 198,131 150,542 321,427
------------- ------------- -------------
Total liabilities 277,434,501 234,715,309 331,301,687
------------- ------------- -------------
Stockholders' equity:
Preferred stock, $1.00 par value; 250,000
shares authorized; no shares issued -- -- --
Common stock, $8.00 par value; 6,000,000
shares authorized; 1,468,626 shares
outstanding at June 30, 2000;
1,468,601 shares outstanding at
December 31, 1999; 1,141,861 shares
outstanding at December 31, 1998 11,748,808 9,134,888 11,749,008
Additional paid-in capital 2,422,320 2,251,598 2,422,715
Retained earnings 8,348,330 8,456,482 9,355,916
Accumulated other comprehensive income (326,783) 132,608 (363,148)
------------- ------------- -------------
Total stockholders' equity 22,192,675 19,975,576 23,164,491
------------- ------------- -------------
Total liabilities and stockholders' equity $ 299,627,176 $ 254,690,885 $ 354,466,178
============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these statements.
F-3
<PAGE> 80
BANCTENN CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------------- -------------------------------
1999 1998 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 18,028,657 $ 15,208,071 $ 11,050,317 $ 8,507,083
Securities 1,654,635 1,871,742 1,129,634 790,710
Federal funds sold 33,980 187,985 115,114 21,575
------------ ------------ ------------ ------------
19,717,272 17,267,798 12,295,065 9,319,368
INTEREST EXPENSE 9,743,315 8,470,206 6,913,915 4,529,095
------------ ------------ ------------ ------------
Net interest income 9,973,957 8,797,592 5,381,150 4,790,273
Provision for loan losses 665,000 611,000 766,000 310,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 9,308,957 8,186,592 4,615,150 4,480,273
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges, fees, and commissions 1,679,554 1,556,400 743,608 748,016
Service revenue 1,158,703 945,632 1,103,150 700,233
Other (113,823) 69,447 (9,380) (105,544)
------------ ------------ ------------ ------------
2,724,434 2,571,479 1,837,378 1,342,705
------------ ------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employee benefits 4,916,106 4,262,234 2,813,027 2,352,710
Occupancy expenses 531,784 522,096 290,582 243,499
Other operating expenses 3,132,347 2,919,581 1,756,206 1,442,166
------------ ------------ ------------ ------------
8,580,237 7,703,911 4,859,815 4,038,375
------------ ------------ ------------ ------------
Income before income taxes 3,453,154 3,054,160 1,592,713 1,784,603
Income taxes 1,218,360 1,111,613 526,383 633,869
------------ ------------ ------------ ------------
Net income $ 2,234,794 $ 1,942,547 $ 1,066,330 $ 1,150,734
============ ============ ============ ============
EARNINGS PER SHARE
Basic $ 1.56 $ 1.37 $ 0.73 $ 0.81
Diluted 1.48 1.31 0.69 0.76
============ ============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE> 81
BANCTENN CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Total Additional Other
Comprehensive Stockholders' Common Paid-in Retained Comprehensive
Income Equity Stock Capital Earnings Income
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ 17,785,618 $ 9,042,088 $ 2,112,514 $ 6,570,449 $ 60,567
Comprehensive income:
Net income $ 1,942,547 1,942,547 -- -- 1,942,547 --
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities available for sale, net
of reclassification adjustment 72,041 72,041 -- -- -- 72,041
------------
Total comprehensive income $ 2,014,588
============
Cash dividend (56,514) -- -- (56,514) --
Issuance of 11,600 common shares pursuant
to employee stock purchase and stock
option plan 231,884 92,800 139,084 -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 19,975,576 9,134,888 2,251,598 8,456,482 132,608
Comprehensive income:
Net income $ 2,234,794 2,234,794 -- -- 2,234,794 --
Other comprehensive income, net of
tax:
Unrealized holding gains (losses) on
securities available for sale, net of
reclassification adjustment (459,391) (459,391) -- -- -- (459,391)
------------
Total comprehensive income $ 1,775,403
============
Cash dividend (57,098) -- -- (57,098) --
Issuance of 285,387 common shares
pursuant to a 5 for 4 stock split (2,752) 2,283,096 -- (2,285,848) --
Issuance of 41,353 common shares
pursuant to employee stock purchase
and stock option plan 501,546 330,824 170,722 -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 22,192,675 11,748,808 2,422,320 8,348,330 (326,783)
Comprehensive income:
Net income $ 1,066,330 1,066,330 -- -- 1,066,330 --
Other comprehensive income, net
of tax:
Unrealized holding gains (losses) on
securities available for sale, net of
reclassification adjustment (36,365) (36,365) -- -- -- (36,365)
------------
Total comprehensive income $ 1,029,965
============
Cash dividend (58,744) -- -- (58,744) --
Issuance of 25 common shares pursuant
to employee stock purchase and stock
option plan 595 200 395 -- --
------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2000 (UNAUDITED) $ 23,164,491 $ 11,749,008 $ 2,422,715 $ 9,355,916 $ (363,148)
============ ============ ============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-5
<PAGE> 82
BANCTENN CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30
------------------------------ ------------------------------
1999 1998 2000 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,234,794 $ 1,942,547 $ 1,066,330 $ 1,150,734
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 700,402 654,291 354,130 324,655
Provision for loan losses 665,000 611,000 766,000 310,000
Deferred income taxes (183,019) (234,212) -- --
Other gains and losses, net (28,991) 24,429 22,714 3,815
Change in operating assets and liabilities:
Interest receivable (2,957) (363,060) (414,806) (4,030)
Interest payable 281,993 12,454 530,860 23,788
Other assets and liabilities 120,410 (539,766) (276,505) 424,356
------------ ------------ ------------ ------------
Net cash provided by operating activities 3,787,632 2,107,683 2,048,723 2,233,318
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from securities transactions:
Securities available for sale 13,420,095 10,324,252 2,897,203 7,129,862
Securities held to maturity 333,128 1,854,236 967,542 195,707
Purchase of securities available for sale (20,282,379) (10,672,223) (12,478,829) (13,404,668)
Proceeds from sale of foreclosed real estate 322,604 193,313 125,290 230,190
Net increase in loans (35,424,757) (50,904,470) (37,686,910) (12,943,092)
Purchase of premises and equipment (618,298) (787,995) (293,880) (239,001)
Proceeds from sale of other assets 28,344 176,236 2,700 18,688
------------ ------------ ------------ ------------
Net cash used in investing activities (42,221,263) (49,816,651) (46,466,884) (19,012,314)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits and NOW,
money market, and savings accounts (1,948,191) 16,887,397 5,137,982 (3,767,773)
Net increase in time deposits 44,626,294 18,183,942 36,805,863 18,403,069
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (3,288,493) 5,564,822 7,019,185 2,508,446
Proceeds from borrowings 3,000,000 -- 4,250,000 3,000,000
Issuance of common stock 501,546 231,884 595 2,513
Purchase fractional shares in connection with stock split (2,752) -- -- (2,752)
Dividends paid (57,098) (56,514) (58,744) (57,098)
------------ ------------ ------------ ------------
Net cash provided by financing activities 42,831,306 40,811,531 53,154,881 20,086,405
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,397,675 (6,897,437) 8,736,720 3,307,409
CASH AND CASH EQUIVALENTS, beginning of year 10,557,215 17,454,652 14,954,890 10,557,215
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 14,954,890 $ 10,557,215 $ 23,691,610 $ 13,864,624
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for interest $ 9,461,322 $ 8,457,752 $ 6,383,055 $ 4,505,307
Cash paid during the year for income taxes 1,734,578 1,302,890 1,192,905 1,263,823
============ ============ ============ ============
NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ 605,331 $ 295,956 $ 213,023 $ 146,798
============ ============ ============ ============
</TABLE>
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-6
<PAGE> 83
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of BancTenn Corp. (Company)
conform with generally accepted accounting principles and practices
within the banking industry. The policies that materially affect
financial position and results of operations are summarized as
follows:
Nature of operations:
Bank of Tennessee (Bank) provides a variety of financial services to
individual and commercial customers through its branch offices in the
Tri-Cities area of upper east Tennessee. The Bank's primary deposit
products are transaction accounts and certificates of deposit. Its
primary lending products are commercial loans, residential real
estate loans, and indirect automobile loans. The Bank also provides
data processing and other operating services to other financial
institutions. Other operating services include bookkeeping, item
processing, accounting, human resources, and loan review.
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Bank of Tennessee. All
material intercompany accounts and transactions have been eliminated
in consolidation.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on
loans. Management utilizes independent appraisals in connection with
the determination of the allowance for losses on loans.
While management uses available information to recognize losses on
loans, future additions to the allowance 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 Bank's allowance for losses on loans. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgment about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the allowance for loan losses may change materially in
the near term.
F-7
<PAGE> 84
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (continued)
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Securities available for sale:
Securities available for sale consist of debt and equity securities
not classified as securities held to maturity. Unrealized holding
gains and losses, net of tax, on securities available for sale are
reported as a separate component of stockholders' equity until
realized. Amortization of premiums and accretion of discounts on
securities available for sale are recorded using the interest method.
Gains and losses on the sale of securities available for sale are
recorded when realized using the specific-identification method.
Securities held to maturity:
Bonds, notes, and debentures for which the Bank has the positive
intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
Loans:
Loans are stated at unpaid principal balances, less the allowance for
loan losses and unearned interest.
Unearned interest on installment loans is recognized as income over
the term of the loans using a method that approximates the interest
method.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired by management. Any unpaid interest previously accrued
on those loans is reversed from income. Interest income generally is
not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are
applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of
interest 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. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of
recoveries.
F-8
<PAGE> 85
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (continued)
Premises and equipment:
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line
depreciation method for financial statement purposes. Premises are
depreciated over 10 to 40 years, and furniture and equipment are
depreciated over 3 to 10 years.
Additions and major renewals and betterment are capitalized and
depreciated over their estimated useful lives. Repairs, maintenance,
and minor renewals are charged to operating expense as incurred. When
property is replaced or otherwise disposed of, the cost of such
assets and the related accumulated depreciation are removed from the
accounts. The gain or loss, if any, is recorded in the statement of
income.
Securities sold under agreements to repurchase:
Securities sold under agreements to repurchase generally mature
within one to four days from the transaction date. Securities sold
under agreements to repurchase are secured by U.S. Government and
agency securities.
Deferred income taxes:
Deferred tax assets and liabilities are reflected at currently
enacted 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.
Stock options:
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the
exercise price. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
F-9
<PAGE> 86
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 2. Securities
Securities have been classified in the balance sheet according to
management's intent as either securities held to maturity or
securities available for sale.
The amortized cost and market value of securities at December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities available for sale:
Securities of U.S.
Government agencies
and corporations $ 17,441,725 $ -- $ (312,501) $ 17,129,224
Obligations of states and
political subdivisions 7,581,398 1,935 (172,687) 7,410,646
Mortgage-backed and
related securities 3,167,987 6,619 (47,301) 3,127,305
Equity securities 4,114,605 -- -- 4,114,605
Restricted securities 800,700 -- -- 800,700
------------ ------------ ------------ ------------
$ 33,106,415 $ 8,554 $ (532,489) $ 32,582,480
============ ============ ============ ============
Securities held to maturity:
Obligations of states and
political subdivisions $ 1,921,810 $ 1,836 $ (2,364) $ 1,921,282
Mortgage-backed and
related securities 1,097,361 2,409 (24,432) 1,075,338
------------ ------------ ------------ ------------
$ 3,019,171 $ 4,245 $ (26,796) $ 2,996,620
============ ============ ============ ============
</TABLE>
F-10
<PAGE> 87
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 2. Securities (continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government
Securities $ 3,994,004 $ 36,622 $ -- $ 4,030,626
Securities of U.S.
Government agencies
and corporations 10,996,347 65,216 -- 11,061,563
Obligations of states and
political subdivisions 4,719,020 67,990 -- 4,787,010
Mortgage-backed and
related securities 4,752,644 59,005 (14,950) 4,796,699
Equity securities 1,016,851 -- -- 1,016,851
Restricted securities 705,200 -- -- 705,200
------------ ------------ ------------ ------------
$ 26,184,066 $ 228,833 $ (14,950) $ 26,397,949
============ ============ ============ ============
Securities held to maturity:
Obligations of states and
political subdivisions $ 1,924,701 $ 18,462 $ -- $ 1,943,163
Mortgage-backed and
related securities 1,436,648 4,948 (6,037) 1,435,559
------------ ------------ ------------ ------------
$ 3,361,349 $ 23,410 $ (6,037) $ 3,378,722
============ ============ ============ ============
</TABLE>
F-11
<PAGE> 88
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 2. Securities (continued)
The scheduled maturities of securities available for sale and
securities held to maturity at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
----------------------------- ----------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,749,593 $ 2,754,899 $ 1,751,525 $ 1,745,972
Due from one year to
five years 14,707,236 14,415,554 940,600 928,774
Due from five years to
ten years 6,253,565 6,131,774 -- 187,892
Due after ten years 4,480,716 4,364,948 327,046 133,982
----------- ----------- ----------- -----------
28,191,110 27,667,175 3,019,171 2,996,620
Securities with no stated
maturity 4,915,305 4,915,305 -- --
----------- ----------- ----------- -----------
$33,106,415 $32,582,480 $ 3,019,171 $ 2,996,620
=========== =========== =========== ===========
</TABLE>
For purposes of the maturity table, mortgage-backed and related
securities, which are not due at a single maturity date, have been
allocated over maturity groupings based on the weighted-average
contractual maturities of underlying collateral. The mortgage-backed
and related securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Proceeds from sales of securities were $999,375 in 1998. Gross losses
realized on those sales were $1,015. There were no sales in 1999.
Securities with a book value of approximately $26,997,000 and
$20,599,000 at December 31, 1999 and 1998, respectively, were pledged
to secure various deposits.
Note 3. Loans and Allowance For Loan Losses
A summary of transactions in the allowance for loan losses for the
years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance, beginning of year $ 1,898,644 $ 1,550,533
Loans charged off and recovered, net (163,152) (262,889)
Provision charged to operating expense 665,000 611,000
----------- -----------
Balance, end of year $ 2,400,492 $ 1,898,644
=========== ===========
</TABLE>
F-12
<PAGE> 89
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 3. Loans and Allowance For Loan Losses (continued)
At December 31, 1999 and 1998, the Bank's loans consist of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Real estate loans $ 159,593 $ 119,236
Commercial and industrial loans 39,241 30,764
Loans to individuals for household,
family, and other consumer expenditures 33,815 47,503
States and political subdivisions 3,355 4,533
Other 4,561 3,891
--------- ---------
Total loans 240,565 205,927
Less - Unearned interest (16) (33)
Allowance for loan losses (2,400) (1,899)
--------- ---------
Loans, net $ 238,149 $ 203,995
========= =========
</TABLE>
In the normal course of business, the Bank makes loans to directors
and executive officers of the Bank on substantially the same terms,
including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. Loans to
directors and executive officers totaled $8,477,707 at December 31,
1999.
The Bank's only significant concentration of credit at December 31,
1999, occurred in real estate loans, which totaled approximately
$159,593,000. While real estate loans accounted for 67 percent of
total loans, these loans were primarily residential mortgage loans,
commercial loans secured by commercial properties, and consumer
loans. A minor portion of these loans were for construction, land
acquisition, and development. A significant portion of real estate
loans are secured by properties located in Tennessee.
At December 31, 1999 and 1998, loans that were specifically
classified as impaired were insignificant in relation to the Bank's
loan portfolio.
Note 4. Premises and Equipment
A summary of premises and equipment at December 31, 1999 and 1998, is
as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 1,525,702 $ 1,525,702
Buildings and leasehold improvements 6,271,496 6,050,469
Furniture and equipment 4,996,726 5,286,496
Automobiles 168,678 155,618
------------ ------------
12,962,602 13,018,285
Accumulated depreciation (5,311,813) (5,244,208)
------------ ------------
$ 7,650,789 $ 7,774,077
============ ============
</TABLE>
F-13
<PAGE> 90
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 5. Deposits
The aggregate amount of time deposits in denominations of $100,000 or
more at December 31, 1999 and 1998, were approximately $42,534,000
and $24,880,000, respectively.
At December 31, 1999, the scheduled maturities of time deposits are
as follows:
2000 $ 38,094,191
2001 101,627,753
2002 6,563,766
2003 4,472,474
2004 4,627,083
------------
$155,385,267
============
Note 6. Other Borrowed Funds
The Bank has an agreement with the Federal Home Loan Bank (FHLB)
which can provide short-term and long-term funding to the Bank in an
amount up to $16,014,000. The Bank's portfolio of one to four
single-family mortgages has been pledged as collateral for these
advances based upon an agreement to maintain a collateral to loan
ratio of 150 percent.
Note 7. Stock Option and Employee Stock Purchase Plan
The Company has a stock option plan that is administered by the Board
of Directors and provides for both incentive stock options and
nonqualified stock options. In the case of incentive stock options,
the purchase price shall not be less than 100 percent of the fair
market value of the common stock on the date of grant. In the case of
nonqualified stock options, the purchase price shall not be less than
90 percent of the fair value of the common stock on the date of
grant. The maximum number of shares that can be sold or optioned
under the plan is 179,600. At December 31, 1999, the Company had
granted to key officers and employees nonqualified stock options to
purchase the maximum number of shares authorized under the plan.
Stock options expire ten years from the date granted and vest over
service periods that range from one to five years.
F-14
<PAGE> 91
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 7. Stock Option and Employee Stock Purchase Plan (continued)
A summary of activity in the Company's stock option plan for the
years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Weighted
Average Number
Exercise Price of Shares
-------------- --------
<S> <C> <C>
Shares outstanding, December 31, 1997 $ 9.85 125,938
Stock options granted 24.75 40,000
--------
Shares outstanding, December 31, 1998 13.44 165,938
Exercised 9.08 (27,000)
--------
Shares outstanding, December 31, 1999 14.29 138,938
========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the stock option plan described above. The option
price under the stock option plan equals or exceeds the fair market
value of the common shares on the date of grant and, accordingly, no
compensation cost has been recognized under the provisions of APB
Opinion 25 for stock options. Under SFAS No. 123, compensation cost
is measured at the grant date based on the value of the award and is
recognized over the service (or vesting) period. Had compensation
cost for the Company's stock option plan been determined under SFAS
123, based on the fair market value at the grant dates, the Company's
net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30
-------------------------------- --------------------------------
1999 1998 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income
As reported $ 2,234,794 $ 1,942,547 $ 1,066,330 $ 1,150,734
Pro forma 2,072,122 1,932,959 1,027,899 1,069,368
Earnings per share - basic
As reported $ 1.56 $ 1.37 $ 0.73 $ 0.81
Pro forma 1.45 1.36 0.70 0.75
Earnings per share - diluted
As reported $ 1.48 $ 1.31 $ 0.69 $ 0.76
Pro forma 1.37 1.30 0.67 0.71
</TABLE>
F-15
<PAGE> 92
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 7. Stock Option and Employee Stock Purchase Plan (continued)
In estimating the pro forma compensation expense, the Company used
the Black-Scholes option pricing model with the following assumptions
for those options granted in 1994, 1995 and 1998:
<TABLE>
<CAPTION>
1994 1995 1998
------- ------- -------
<S> <C> <C> <C>
Expected volatility 10.00% 10.00% 10.00%
Risk free interest rate 7.80% 5.63% 5.36%
Expected dividend yield .47% .31% .16%
Expected life of options 7 Years 7 Years 7 Years
</TABLE>
Information pertaining to stock options outstanding at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------ ----------------------
Average Average
Average Exercise Exercise
Exercise Price Range Options Life Price Options Price
-------------------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 8.00 - $11.99 57,600 5.00 $ 8.25 57,600 $ 8.25
12.00 - 15.99 41,338 5.98 12.59 41,338 12.59
24.00 - 27.99 40,000 8.67 24.75 10,750 24.84
-------- ---- ------- -------- -------
138,938 6.35 $14.29 109,688 $ 11.51
======== ==== ======= ======== =======
</TABLE>
Effective January 1, 1996, the Company instituted an employee stock
purchase plan. The plan is administered by a committee designated by
the Board of Directors and provides for a maximum of 125,000 shares
of common stock to be available for purchase by eligible employees.
Substantially all full-time employees who do not own or hold options
to own five percent or more of the Company's outstanding common stock
are considered eligible. Options to purchase common stock are granted
annually to eligible employees based on compensation and are
forfeited and returned to the plan if not exercised by year-end.
During 1999 and 1998, the numbers of shares purchased under the plan
were 14,353 and 11,600 at an average per-share price of $17.87 and
$19.99, respectively.
Note 8. Profit-Sharing Plan
The Company has a salary reduction/profit-sharing plan under the
provisions of Section 401(k) of the Internal Revenue Code. All
employees may participate after having completed one full year of
service. The Plan provides for contributions by the Company in such
amounts as determined by the Board of Directors not to exceed 6
percent of the participant's annual compensation. In addition, the
Plan provides for the Company to match employee contributions to the
Plan equal to 50 percent of the first 6 percent of the participant's
annual compensation. The Company contributed $79,316 and $65,608 to
the Plan for the years ended December 31, 1999 and 1998,
respectively.
F-16
<PAGE> 93
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 9. Income Taxes
The Company files a consolidated federal income tax return with its
subsidiary, Bank of Tennessee. Under the terms of a tax-sharing
agreement, the subsidiary's allocated portion of the consolidated tax
liability is computed as if it were reporting its income and expenses
to the Internal Revenue Service as a separate entity.
The provision for income taxes in the consolidated statements of
income for the years ended December 31, 1999 and 1998, includes the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current tax expense:
Federal $ 1,159,652 $ 1,137,157
State 241,727 208,668
----------- -----------
1,401,379 1,345,825
Deferred income taxes related to:
Provision for loan losses (199,000) (232,000)
Depreciation (4,000) (30,000)
Other 19,981 27,788
----------- -----------
Provision for income taxes $ 1,218,360 $ 1,111,613
=========== ===========
</TABLE>
The income tax provision is different than the expected tax provision
computed by multiplying income before income taxes by the statutory
federal income tax rates. The reasons for this difference are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Expected tax at statutory rates $ 1,174,000 $ 1,038,000
Increase (decrease) resulting from tax effect of:
Tax exempt interest on obligations of
states and political subdivisions (143,000) (103,000)
State income taxes, net of federal
tax benefit 160,000 138,000
Other 27,360 38,613
----------- -----------
Provision for income taxes $ 1,218,360 $ 1,111,613
=========== ===========
</TABLE>
F-17
<PAGE> 94
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 9. Income Taxes (continued)
The components of the net deferred tax asset, included in other
assets, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 801,086 $ 602,554
Net unrealized loss on securities available for sale 199,096 --
---------- ----------
1,000,182 602,554
---------- ----------
Deferred tax liabilities:
Depreciation 146,682 151,070
Accretion of bond discount 5,798 7,809
FHLB Dividends 98,051 77,894
Net unrealized gain on securities available for sale -- 81,277
---------- ----------
250,531 318,050
---------- ----------
Net deferred tax asset $ 749,651 $ 284,504
========== ==========
</TABLE>
Note 10. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include various
commitments to extend credit and standby letters of credit. These
instruments expose the Bank to varying degrees of credit and interest
rate risk in excess of the amount recognized in the accompanying
balance sheet. To manage this risk, the Bank uses the same management
policies and procedures for financial instruments with
off-balance-sheet risk as it does for financial instruments whose
risk is reflected on the balance sheet.
The credit risk of all financial instruments varies based on many
factors, including the value of collateral held and other security
arrangements. To mitigate credit risk, the Bank generally determines
the need for specific covenant, guarantee, and collateral
requirements on a case-by-case basis, depending on the customer's
creditworthiness. The amount and type of collateral held to reduce
credit risk vary, but may include real estate, machinery, equipment,
inventory, and accounts receivable as well as cash on deposit,
stocks, bonds, and other marketable securities that are generally
held in the Bank's possession. This collateral is valued and
inspected on a regular basis to ensure both its existence and
adequacy. The Bank requests additional collateral when appropriate.
At December 31, 1999, commitments under standby letters of credit
were $2,289,942, and undisbursed loan commitments were $54,869,006.
The Bank's credit exposure for these financial instruments is
represented by their contractual amounts.
F-18
<PAGE> 95
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 11. Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature; involve uncertainties and matters of judgment;
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing financial instruments
without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not
considered financial instruments. The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:
Cash and cash equivalents:
For cash and cash equivalents, the carrying amount is a reasonable
estimate of fair value.
Securities:
The fair value of securities is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers.
Loans:
The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates, adjusted for credit risk and servicing costs. The estimate of
maturity is based on historical experience with repayments for each
loan classification, modified, as required, by an estimate of the
effect of current economic and lending conditions.
Deposits:
The fair value of deposits with no stated maturity, such as demand
deposits and NOW, money market, and savings accounts, is equal to the
amount payable on demand. The fair value of time deposits is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase and other borrowed
funds:
For securities sold under agreements to repurchase and other borrowed
funds, the carrying amount is a reasonable estimate of fair value.
F-19
<PAGE> 96
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 11. Fair Value of Financial Instruments (continued)
Note payable:
The carrying amount of the note payable is a reasonable estimate of
fair value.
The carrying amount and estimated fair value of the Company's
financial instruments at December 31, 1999 and 1998, are as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 14,955 $ 14,955 $ 10,557 $ 10,557
Securities 35,602 35,579 29,759 29,777
Net loans 238,149 237,112 203,995 204,347
Liabilities:
Noninterest-bearing demand deposits 30,046 30,046 34,100 34,100
NOW accounts 47,452 47,452 44,381 44,381
Savings and money market accounts 30,689 30,689 31,654 31,654
Time deposits 155,385 156,249 110,759 111,219
Securities sold under agreements to
repurchase and federal funds purchased 9,574 9,574 12,863 12,863
Note payable 3,000 3,000 -- --
</TABLE>
Note 12. Liquidity and Capital Resources
The Company's primary source of funds with which to pay its future
obligations is the receipt of dividends from its subsidiary bank.
Bank regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory authorities. It is
management's intent to limit the amount of dividends paid in order to
maintain compliance with capital guidelines and to maintain a strong
capital position in the Bank.
Note 13. Related-Party Transactions
Bank of Tennessee provides data processing and other banking
operational services to Carter County Bank, whose major shareholder
is a principal shareholder and officer of the Company. Service
revenue from Carter County Bank totaled $671,990 and $640,447 in 1999
and 1998, respectively.
F-20
<PAGE> 97
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 14. Regulatory Matters
The Bank of Tennessee is subject to various regulatory capital
requirements administered by the State of Tennessee Department of
Financial Institutions and the federal banking agencies. 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 Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.
The 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 Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the
regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes
have changed the institution's prompt corrective action category.
The Bank's actual capital amounts and ratios are also presented in
the table. Dollar amounts are presented in thousands.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
----------------------------- -----------------------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total capital
(to risk-weighted assets) $ 22,813 9.6% $ 18,925 8.0%
Tier I capital
(to risk-weighted assets) 20,412 8.6% 9,462 4.0%
Tier I capital
(to average assets) 20,412 7.1% 11,438 4.0%
As of December 31, 1998:
Total capital
(to risk-weighted assets) $ 19,656 9.9% $ 15,813 8.0%
Tier I capital
(to risk-weighted assets) 17,757 9.0% 7,906 4.0%
Tier I capital
(to average assets) 17,757 7.1% 10,017 4.0%
</TABLE>
F-21
<PAGE> 98
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 15. Other Comprehensive Income
Other comprehensive income consists of unrealized gains and losses
on securities available for sale. A summary of other comprehensive
income and the related tax effects for the years ended December 31,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- --------- ---------
<S> <C> <C> <C>
Year ended December 31, 1999:
Unrealized holding gains and losses
arising during the period $(740,476) $ 281,085 $(459,391)
Less reclassification adjustment for
losses realized in net income -- -- --
--------- --------- ---------
$(740,476) $ 281,085 $(459,391)
========= ========= =========
Year ended December 31, 1998:
Unrealized holding gains and losses
arising during the period $ 115,105 $ (43,694) $ 71,411
Less reclassification adjustment for
losses realized in net income (1,015) 385 (630)
--------- --------- ---------
$ 116,120 $ (44,079) $ 72,041
========= ========= =========
</TABLE>
Note 16. Note Payable
At December 31, 1999, the Company had a $5,000,000 line-of-credit
with First American National Bank, with outstanding borrowings under
this line of credit of $3,000,000. Interest is payable quarterly at
the 90-day LIBOR rate plus 1% and the outstanding principal is due at
maturity on September 1, 2001.
The loan agreement requires the Bank to meet certain financial
covenants. The more significant of these covenants are as follows:
1. The Bank is to maintain an equity-to-asset ratio equal to
the greater of (i) the equity-to-asset ratio imposed by
the Bank's primary regulatory agency or (ii) an
equity-to-asset ratio greater than 6.5%.
2. The Bank is to maintain a volume of non-performing assets,
including loans and other real estate owned, below 2.5% of
total loans plus other real estate owned.
3. The Bank is to maintain for each calendar half-year a
ratio of net income to total tangible assets for each
fiscal year of at least .75%.
At December 31, 1999, the Bank was in compliance with these
covenants.
F-22
<PAGE> 99
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 17. Earnings Per Common Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate to outstanding
options granted under the stock option and employee stock purchase
plan, determined using the treasury stock method.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30
----------------------------- -----------------------------
1999 1998 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $2,234,794 $1,942,547 $1,066,330 $1,150,734
Less: Preferred stock dividends -- -- -- --
---------- ---------- ---------- ----------
Net income applicable to
common stock $2,234,794 $1,942,547 $1,066,330 $1,150,734
========== ========== ========== ==========
Average number of common
shares outstanding 1,429,185 1,416,625 1,468,609 1,427,315
Effect of dilutive options 84,236 71,919 73,215 86,898
---------- ---------- ---------- ----------
Average number of common
shares outstanding used to
calculate diluted earnings per
common share 1,513,421 1,488,544 1,541,824 1,514,213
========== ========== ========== ==========
</TABLE>
Note 18. Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do
not include all information and disclosures required by generally
accepted accounting principles for complete financial statements. The
accompanying unaudited interim consolidated financial statements do
not purport to contain all the necessary financial statement
disclosures required by generally accepted accounting principles that
might otherwise be necessary in the circumstances and should be read
with the fiscal 1999 consolidated financial statements and notes.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. The results of operations for the six-month periods
ended June 30, 2000 and 1999, are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other
period.
F-23
<PAGE> 100
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 19. Condensed Parent Company Financial Statements
Financial information pertaining only to BancTenn Corp. is as
follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 497,512 $ 297,960
Securities available for sale 4,099,605 1,001,851
Other assets 561,993 804,843
Investment in subsidiary 20,087,282 17,903,777
------------ ------------
Total assets $ 25,246,392 $ 20,008,431
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 3,000,000 $ --
Other liabilities 53,717 32,855
Stockholders' equity 22,192,675 19,975,576
------------ ------------
Total liabilities and stockholders' equity $ 25,246,392 $ 20,008,431
============ ============
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Equity in subsidiary's earnings $ 2,940,035 $ 2,450,000
------------ ------------
Interest expense 145,013 --
Noninterest expense 977,901 771,964
Income tax (benefit) expense (417,673) (264,511)
------------ ------------
Total expense 705,241 507,453
------------ ------------
Net income $ 2,234,794 $ 1,942,547
============ ============
</TABLE>
F-24
<PAGE> 101
BANCTENN CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
Note 19. Condensed Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,234,794 $ 1,942,547
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of subsidiary (2,642,896) (985,964)
Change in operating assets and liabilities 263,712 (524,941)
----------- -----------
Net cash provided by (used in)
operating activities (144,390) 431,642
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (3,097,754) (723,101)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 3,000,000 --
Issuance of common stock and stock split 498,794 231,884
Dividends paid (57,098) (56,514)
----------- -----------
Net cash provided by financing activities 3,441,696 175,370
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 199,552 (116,089)
CASH AND CASH EQUIVALENTS,
beginning of year 297,960 414,049
----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 497,512 $ 297,960
=========== ===========
</TABLE>
F-25
<PAGE> 102
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS PAGE
<S> <C> <C>
Summary.......................................... 1
Risk Factors..................................... 5 BANCTENN CORP.
A Warning About Forwarding
Looking Statements............................ 10
The Offering..................................... 11 428,571
Use of Proceeds.................................. 14
Market Price of and Dividends on SHARES OF
Common Stock.................................. 15 COMMON STOCK
Dilution......................................... 16
-------------------------------------
Capitalization................................... 17
Business of BancTenn Corp. ...................... 18 PROSPECTUS
Management's Discussion and
Analysis of Financial Condition -------------------------------------
and Results of Operations..................... 25
Principal Shareholders and Stock
Ownership of Management....................... 46
Directors and Executive Officers................. 48 _________, 2000
Compensation..................................... 52
Related Party Transactions....................... 58
Description of our Capital Stock................. 59
Important Provisions of our Charter
and Bylaws.................................... 60
Shares Eligible for Future Resale................ 64
Supervision and Regulation....................... 65
Legal Matters.................................... 72
Experts.......................................... 72
Reports to Shareholders.......................... 72
Additional Information........................... 72
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Prospective investors may rely only on the information contained in
this prospectus. BancTenn Corp. has not authorized anyone to provide prospective
investors with different or additional information. This prospectus is not an
offer to sell nor is it seeking an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The information contained
in this prospectus is correct only as of the date of this prospectus, regardless
of the time of the delivery of this prospectus or any sale of these securities.
If any facts or events occur which, individually or together, represent a
material change in the information contained in this prospectus, BancTenn Corp.
is obligated to update this prospectus through additional supplement or other
appropriate means.
No action is being taken in any jurisdiction outside the United States
to permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this prospectus.
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Consistent with the applicable provisions of the laws of Tennessee, the
registrant's charter and bylaws provide that the registrant shall have the power
to indemnify its directors and officers against expenses (including attorneys'
fees) and liabilities arising from actual or threatened actions, suits or
proceedings, whether or not settled, to which they become subject by reason of
having served in such role if such director or officer acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the registrant and, with respect to a criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Advances against expenses shall be made so long as the person seeking
indemnification agrees to refund the advances if it is ultimately determined
that he or she is not entitled to indemnification. A determination of whether
indemnification of a director or officer is proper because he or she met the
applicable standard of conduct shall be made (1) by the board of directors of
the registrant, (2) in certain circumstances, by independent legal counsel in a
written opinion or, (3) by the affirmative vote of a majority of the shares
entitled to vote.
In addition, Article 16 of the registrant's charter, subject to certain
exceptions, eliminates the potential personal liability of a director for
monetary damages to the registrant and to the shareholders of the registrant for
breach of a duty as a director. There is no elimination of liability for (1) a
breach of the duty of loyalty to the registrant or its shareholders, (2) an act
or omission involving intentional misconduct or a knowing violation of law, and
(3) liability regarding unlawful distributions of corporate property. The
charter does not eliminate or limit the right of the registrant or its
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
Item 25. Other Expenses of Issuance and Distribution.
Estimated expenses, other than underwriting discounts and commissions,
of the sale of the Registrant's common stock, $8.00 par value, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 3,168
Legal Fees and Expenses 35,000
Accounting Fees and Expenses 10,000
Printing and EDGAR 30,000
Miscellaneous 21,832
--------
Total $100,000
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
The following securities have been issued by the Registrant within the
past three years without registration under the Securities Act of 1933, as
amended:
<PAGE> 104
<TABLE>
<CAPTION>
Registration
Amount of Price Per Exemption
Date Issued Type of Security Shares Share Relied Upon
----------- ---------------- --------- --------- ------------
<S> <C> <C> <C> <C>
4-10-97 Common Stock 42 $18.00 ss. 4(2)
8-31-97 Common Stock 244 $17.85 ss. 4(2)
9-30-97 Common Stock 453 $17.85 ss. 4(2)
11-28-97 Common Stock 302 $17.85 ss. 4(2)
12-31-97 Common Stock 12,478 $17.85 ss. 4(2)
3-31-98 Common Stock 30 $19.99 ss. 4(2)
5-29-98 Common Stock 48 $19.99 ss. 4(2)
7-31-98 Common Stock 348 $19.99 ss. 4(2)
8-31-98 Common Stock 422 $19.99 ss. 4(2)
11-30-98 Common Stock 630 $19.99 ss. 4(2)
12-31-98 Common Stock 10,122 $19.99 ss. 4(2)
4-30-99 Common Stock 104 $22.30 ss. 4(2)
7-30-99 Common Stock 176 $17.84 ss. 4(2)
9-30-99 Common Stock 847 $17.84 ss. 4(2)
11-30-99 Common Stock 1,228 $17.84 ss. 4(2)
12-20-99 Common Stock 27,000 $9.08 ss. 4(2)
12-31-99 Common Stock 11,998 $17.84 ss. 4(2)
5-31-00 Common Stock 25 $23.80 ss. 4(2)
</TABLE>
The securities sales listed above were made by the Registrant to its
employees in accordance with the terms of its employee stock incentive plan or
its employer stock purchase program. As indicated above, the Registrant has
relied upon the registration exemption provided in Section 4(2) of the
Securities Act of 1933, as amended, for each sale listed.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1(a) Amended and Restated Charter*
3.2 Bylaws*
4.1 Specimen Common Stock Certificate*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights of
holders of the common stock*
5.1 Legal Opinion of Hunter, Smith & Davis, LLP*
10.1 BancTenn Corp. 1992 Employee Stock Incentive Plan and Forms of Qualified and
Nonqualified Stock Option Agreements*
10.2 Amendment No. 1 to 1992 Employee Stock Incentive Plan, dated May 13, 1995*
10.3 Amendment No. 2 to 1992 Employee Stock Incentive Plan, dated November 6, 1995*
10.4 Amendment No. 3 to 1992 Employee Stock Incentive Plan dated May 23, 1997*
10.5 Amendment No. 4 to 1992 Employee Stock Incentive Plan dated May 15, 1998*
10.6 Amendment No. 5 to 1992 Employee Stock Incentive Plan dated June 1, 1999*
</TABLE>
II-2
<PAGE> 105
<TABLE>
<S> <C>
10.7 Amendment No. 6 to 1992 Employee Stock Incentive Plan dated April 24, 2000*
10.8 BancTenn Corp. 1996 Employee Stock Purchase Plan *
10.9 Amendment No. 1 to BancTenn Corp. Employee Stock Purchase Plan dated May 9, 1997*
10.10 Amendment No. 2 to BancTenn Corp. Employee Stock Purchase Plan dated May 13, 1999*
10.11 Amendment No. 3 to BancTenn Corp. Employee Stock Purchase Plan dated April 24, 2000*
10.12 BancTenn Corp. Change of Control Compensation Agreement, dated April 1, 1997
(Colon A. Terrell, Jr.)*
10.13 Bank of Tennessee Change of Control Compensation Agreement, dated April 1, 1997
(Roy L. Harmon, Jr.)*
10.14 BancTenn Corp. Directors Stock Option Plan, effective April 24, 2000*
10.15 BancTenn Corp. Directors Fee Deferral Plan, effective January 1, 2001*
10.16 Bank of Tennessee Split Dollar Insurance Plan, dated May 12, 1994*
10.17 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Colon A. Terrell, Jr.)*
10.18 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Roy L. Harmon, Jr.)*
10.19 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Kenneth H. Maloy)*
10.20 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 27, 2000
(Tony L. Howell)*
10.21 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated February 25, 2000
(Mary Mac Wilson)*
10.22 Revolving Line of Credit Note with SunTrust Bank, Nashville, N.A. executed on July 19, 1999
by BancTenn Corp., as amended*
10.23 Promissory Note dated August 19, 1998 between BancTenn Corp. and First American
National Bank (now AmSouth)*
21.1 List of Subsidiaries*
23.1 Consent of Hazlett, Lewis & Bieter, PLLC, dated September 22, 2000
23.2 Consent of Hunter, Smith & Davis, LLP (contained in Exhibit 5.1)
24.1 Power of Attorney *
27.1 Financial Data Schedule (for SEC use only) (12/31/98)*
27.2 Financial Data Schedule (for SEC use only) (12/31/99)*
27.3 Financial Data Schedule (for SEC use only) (3/31/00)*
27.4 Financial Data Schedule (for SEC use only) (6/30/00)*
99.1 Subscription Agreement (Exercise of Preemptive Rights)*
99.2 Subscription Agreement (Public Offering)*
</TABLE>
-------------------
* Previously filed.
II-3
<PAGE> 106
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes as follows:
(a) (1) To file, during any period in which it offers or
sells securities, a post-effective amendment to this Registration
Statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together, represent a
fundamental change in the information set forth in
the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities being registered that remain unsold at the end of
the offering.
II-4
<PAGE> 107
The Registrant hereby undertakes as follows:
(b) (1) For determining any liability under the Securities
Act, to treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities
Act, to treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered
in the Registration Statement, and that offering of the securities at
that time as the initial bona fide offering of those securities.
II-5
<PAGE> 108
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-B and authorized this Registration
Statement to be signed on its behalf by the undersigned in the city of
Kingsport, State of Tennessee, on September 22, 2000.
BANCTENN CORP.
By: /s/Colon A. Terrell, Jr.
--------------------------
Colon A. Terrell, Jr.
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William B. Greene, Jr.(+) Chairman of the Board September 22, 2000
-----------------------------
William B. Greene, Jr.
/s/ Colon A. Terrell, Jr. President and Chief Executive September 22, 2000
----------------------------- Officer (Principal Executive
Colon A. Terrell, Jr. Officer)
/s/ Mary Mac Wilson Executive Vice President September 22, 2000
----------------------------- (Principal Financial and
Mary Mac Wilson Accounting Officer)
/s/ Roy L. Harmon, Jr.(+) Executive Vice President September 22, 2000
----------------------------- and Director
Roy L. Harmon, Jr.
/s/ C. B. Duke, IV(+) Director September 22, 2000
-----------------------------
C. B. Duke, IV
/s/ William R. Garwood(+) Director September 22, 2000
-----------------------------
William R. Garwood
</TABLE>
II-6
<PAGE> 109
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John H. Poteat(+) Director September 22, 2000
---------------------------
John H. Poteat
/s/ John E. Seward, Jr.(+) Director September 22, 2000
---------------------------
John E. Seward, Jr.
(+) by: /s/ Colon A. Terrell, Jr.
---------------------------
Attorney-In-Fact
</TABLE>
II-7
<PAGE> 110
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1(a) Amended and Restated Charter*
3.2 Bylaws*
4.1 Specimen Common Stock Certificate*
4.2 See Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining rights
of holders of the common stock*
5.1 Legal Opinion of Hunter, Smith & Davis, LLP*
10.1 BancTenn Corp. 1992 Employee Stock Incentive Plan and Forms of Qualified and
Nonqualified Stock Option Agreements*
10.2 Amendment No. 1 to 1992 Employee Stock Incentive Plan, dated May 13, 1995*
10.3 Amendment No. 2 to 1992 Employee Stock Incentive Plan, dated November 6, 1995*
10.4 Amendment No. 3 to 1992 Employee Stock Incentive Plan dated May 23, 1997*
10.5 Amendment No. 4 to 1992 Employee Stock Incentive Plan dated May 15, 1998*
10.6 Amendment No. 5 to 1992 Employee Stock Incentive Plan dated June 1, 1999*
10.7 Amendment No. 6 to 1992 Employee Stock Incentive Plan dated April 24, 2000*
10.8 BancTenn Corp. 1996 Employee Stock Purchase Plan*
10.9 Amendment No. 1 to BancTenn Corp. Employee Stock Purchase Plan dated May 9, 1997*
10.10 Amendment No. 2 to BancTenn Corp. Employee Stock Purchase Plan dated May 13, 1999*
10.11 Amendment No. 3 to BancTenn Corp. Employee Stock Purchase Plan dated April 24, 2000*
10.12 BancTenn Corp. Change of Control Compensation Agreement, dated April 1, 1997
(Colon A. Terrell, Jr.)*
10.13 Bank of Tennessee Change of Control Compensation Agreement, dated April 1, 1997
(Roy L. Harmon, Jr.)*
10.14 BancTenn Corp. Directors Stock Option Plan, effective April 24, 2000*
10.15 BancTenn Corp. Directors Fee Deferral Plan, effective January 1, 2001*
10.16 Bank of Tennessee Split Dollar Insurance Plan, dated May 12, 1994*
10.17 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Colon A. Terrell, Jr.)*
10.18 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Roy L. Harmon, Jr.)*
10.19 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 1, 1999
(Kenneth H. Maloy)*
10.20 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated January 27, 2000
(Tony L. Howell)*
10.21 BancTenn Corp. Split Dollar Life Insurance Plan, Plan Agreement, dated February 25, 2000
(Mary Mac Wilson)*
10.22 Revolving Line of Credit Note with SunTrust Bank, Nashville, N.A. executed on July 19, 1999
by BancTenn Corp., as amended*
10.23 Promissory Note dated August 19, 1998 between BancTenn Corp. and First American
National Bank (now AmSouth)*
21.1 List of Subsidiaries*
23.1 Consent of Hazlett, Lewis & Bieter, PLLC, dated September 22, 2000
</TABLE>
<PAGE> 111
<TABLE>
<S> <C>
23.2 Consent of Hunter, Smith & Davis, LLP--(contained in Exhibit 5.1)
24.1 Power of Attorney*
27.1 Financial Data Schedule (for SEC use only) (12/31/98)*
27.2 Financial Data Schedule (for SEC use only) (12/31/99)*
27.3 Financial Data Schedule (for SEC use only) (3/31/00)*
27.4 Financial Data Schedule (for SEC use only) (6/30/00)*
99.1 Subscription Agreement (Exercise of Preemptive Rights)*
99.2 Subscription Agreement (Public Offering)*
</TABLE>
-------------------
* Previously filed.
