PROSPECTUS
1,600,000 Shares
[BANKFIRST LOGO]
Common Stock
Of the 1,600,000 shares of common stock, $2.50 par value (the "Common
Stock"), offered hereby (the "Offering"), 1,200,000 shares are being offered by
BankFirst Corporation (the "Company") and 400,000 shares are being offered by
certain shareholders (the "Selling Shareholders"). The Company will not receive
any proceeds from the sale of shares of Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders."
Prior to the Offering there has been no public market for the Common
Stock. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
The Common Stock has been approved for quotation on The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "BKFR."
See "Risk Factors" beginning on page 7 of this Prospectus for a discussion of
certain factors that should be considered by prospective purchasers of the
Common Stock offered hereby.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS OF A
BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Shareholders
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Per Share ... $12.00 $0.84 $11.16 $11.16
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Total (3) ... $19,200,000 $1,344,000 $13,392,000 $4,464,000
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(1) The Company and certain Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated offering expenses of $475,000 payable by the
Company.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 240,000 additional shares of Common Stock
on the same terms and conditions set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public will be $22,080,000, the total Underwriting Discount will
be $1,545,600, the total Proceeds to Company will be $15,400,800 and
Proceeds to Selling Shareholders will be $5,133,600. See "Underwriting."
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The shares of Common Stock are offered subject to receipt and acceptance
by the Underwriters, to prior sale, and to the Underwriters' right to reject
orders in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that certificates for the shares of Common Stock will be
available for delivery on or about September 1, 1998.
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J.C. Bradford & Co. Morgan Keegan & Company, Inc.
August 27, 1998
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[BANKFIRST BRANCH LOCATION MAP OMITTED]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON STOCK,
INCLUDING STABILIZATION AND SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless the context otherwise requires, all references herein to the "Company"
shall mean BankFirst Corporation, the holding company for BankFirst
("BankFirst") and The First National Bank and Trust Company ("Athens")
(collectively, BankFirst and Athens shall be referred to as the "Banks"). Unless
otherwise indicated, the information in this Prospectus reflects an initial
public offering price of $12.00 per share, assumes no exercise of the
Underwriters' over-allotment option and per share data reflects shares issued
upon exercise of certain stock options through June 30, 1998. Except where
expressly stated otherwise, the financial information contained herein also
reflects the merger (the "Merger") of the Company with First Franklin
Bancshares, Inc. ("First Franklin"), the former holding company of Athens, which
was consummated on July 2, 1998 and accounted for as a pooling of interests, and
reflects the five for one stock split which occurred immediately thereafter.
The Company
The Company is a bank holding company headquartered in Knoxville,
Tennessee that focuses on meeting the banking needs of East Tennessee businesses
and residents through a relationship oriented, community bank business strategy.
The Company conducts its banking business through BankFirst, a Tennessee banking
corporation with 23 offices in Knox, Sevier, Blount, Loudon and Jefferson
Counties, and through Athens, a national banking association acquired on July 2,
1998, with six offices in McMinn County. The Company's operations principally
involve commercial and residential real estate lending, commercial business
lending, consumer lending, construction lending and other financial services,
including trust operations, credit card services and brokerage services.
From 1992 to June 30, 1998, the organization has grown from a single
community bank with five offices and approximately $66 million in assets, to a
multi-bank organization with an established local banking presence in six
counties with 29 offices and approximately $707 million in assets. The Company
has broadened its mix of products and services and expanded its customer base
through a combination of internal growth and consolidation with well-established
East Tennessee banks and financial service companies. The Company's Athens
subsidiary has been in business for over 125 years, its BankFirst subsidiary
traces its history to the 1920's, and BankFirst's subsidiary, Curtis Mortgage
Co., Inc. ("Curtis Mortgage"), was established in 1944. The Company's growth has
been directed by a senior management team composed of individuals with
established networks of customers and an average of 25 years of experience in
East Tennessee banking. See "Management."
The Company operates according to the following business strategies:
Local Decision Making. The foundation of the Company's strategy is to
operate a multi-community bank organization which emphasizes decision making at
the local branch level. Each Bank has a separate board comprised of local
businessmen allowing it to be responsive to the needs and trends of the local
community. Each branch manager and individual loan officer is given significant
authority and discretion to approve loans and to price loans and services in
order to respond quickly and efficiently to the needs of Bank customers.
Central Corporate Support. The Company supports the local bank branches by
providing central management, pricing and service coordination, policy
oversight, technological support and strategic planning. Central management also
monitors the performance of individual branches and loan officers and, with the
input of local loan officers, approves all loans above certain designated
limits. The Company has recently implemented new information technology which
allows local loan officers to better identify their more profitable customers,
to expand the scope of services provided to such customers and to make more
informed pricing decisions.
Relationship Banking. The Company focuses on serving East Tennessee
businesses and individuals through relationship banking, characterized by long
term multi-service relationships. Drawing upon the experience and customer
networks of its loan officers and assisted by centralized information
technology, the Banks seek to effectively price and provide related bank
services to enhance overall profitability. The Banks compete with other
providers of financial services primarily through superior relationship
management, rather than direct price competition.
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Full Line of Banking Products. The Company's policy is to offer the
personalized service and local decision-making characteristic of community banks
while offering the wider variety of banking products associated with regional
and super-regional financial institutions. The Company continues to enhance its
product mix through both strategic acquisitions and internal development. The
addition of Athens gives the Company an established trust department and a
consumer finance subsidiary. The acquisition of Curtis Mortgage allows local
servicing of mortgages. The Company has recently added a discount brokerage
service and telephone banking and expects to offer personal computer banking.
The Company is a Tennessee corporation whose principal offices are located
at 625 Market Street, Knoxville, Tennessee 37902, and its telephone number is
(423) 595-1100.
The Offering
Common Stock offered
by the Company ....................... 1,200,000 shares
Common Stock offered by
the Selling
Shareholders ......................... 400,000 shares
Common Stock to be
outstanding after
the Offering ......................... 11,258,047 shares
Use of Proceeds ......................... The net proceeds will be used for
general corporate purposes of the
Company and its direct and indirect
subsidiaries. See "Use of Proceeds."
Nasdaq National
Market Symbol ........................ BKFR
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary financial information for the
Company as of and for the six months ended June 30, 1998 and 1997, and as of and
for the five years ended December 31, 1997, 1996, 1995, 1994 and 1993. This
information is derived from and should be read in conjunction with the
supplemental financial statements of the Company, including the notes thereto,
that appear elsewhere in this Prospectus. The supplemental consolidated
financial information has been prepared based on the pooling of interest method
of accounting.
<TABLE>
<CAPTION>
For the years ended December 31,
June 30, June 30, -----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income - tax equivalent ... $ 28,873 $ 25,321 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301
Interest expense ................... 12,456 11,112 22,652 21,238 19,082 13,537 11,963
--------- --------- --------- -------- --------- --------- ---------
Net interest income ................ 16,417 14,209 29,241 26,073 23,595 20,780 17,338
Tax equivalent adjustment (1) ...... (472) (303) (606) (613) (558) (600) (623)
--------- --------- --------- -------- --------- --------- ---------
Net interest income - adjusted ..... 15,945 13,906 28,635 25,460 23,037 20,180 16,715
Provision for loan losses .......... (1,067) (720) (2,935) (667) (553) (703) (924)
Noninterest income ................. 3,965 2,517 5,657 5,243 4,369 4,382 3,916
Noninterest expenses ............... (13,918) (10,755) (21,323) (20,799) (19,157) (17,203) (14,013)
--------- --------- --------- -------- --------- --------- ---------
Income before income taxes ......... 4,925 4,948 10,034 9,237 7,696 6,656 5,694
Income tax expense ................. 1,746 1,562 3,406 3,188 2,517 1,727 1,828
--------- --------- --------- -------- --------- --------- ---------
Net earnings ....................... $ 3,179 $ 3,386 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866
========= ========= ========= ======== ========= ========= =========
Basic earnings per share (2) ....... $ 0.31 $ 0.34 $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.53
Diluted earnings per share (2) ..... 0.29 0.31 0.61 0.59 0.59 0.61 0.52
Dividends per common share (2) ..... 0.01 0.03 0.12 0.09 0.14 0.15 0.14
Cash dividends declared -
common ........................... $ 114 $ 344 $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039
Cash dividends declared -
preferred ........................ 78 81 161 162 74 73 --
Book value per common
share (2) ........................ 6.30 5.75 6.00 6.25 5.59 4.61 4.11
Average common shares
outstanding (2) .................. 9,998,012 9,829,962 9,876,735 9,347,725 8,098,170 7,346,505 7,294,040
Selected Period-End Balances
Total assets ....................... $ 706,599 $ 630,247 $ 650,717 $595,284 $ 545,718 $ 480,687 $ 418,337
Earning assets ..................... 641,821 578,775 604,031 559,927 504,430 444,866 388,644
Total securities ................... 126,664 134,957 127,736 134,781 135,627 121,390 116,851
Loans - net of unearned income ..... 505,707 444,198 464,967 412,793 350,652 306,905 253,692
Allowance for loan losses .......... 6,805 4,783 6,098 4,723 4,690 4,526 4,054
Total deposits ..................... 588,735 533,383 549,769 516,339 480,346 430,407 376,838
Repurchase agreements and
Federal Funds purchased .......... 32,488 22,218 16,302 5,966 7,632 1,363 --
Long-term debt ..................... 12,314 11,897 12,121 12,154 8,407 8,416 3,657
Stockholders' equity ............... 62,938 56,530 59,896 53,826 42,512 34,074 29,958
Selected Average Balances
Total assets ....................... $ 686,952 $ 622,556 $ 621,719 $566,616 $ 527,495 $ 467,616 $ 399,080
Earning assets ..................... 624,648 576,428 577,178 528,179 488,834 419,005 367,538
Total securities ................... 132,685 132,007 128,796 136,600 135,509 121,352 106,584
Loans - net of unearned income ..... 479,262 443,018 442,296 379,930 339,989 282,812 243,431
Allowance for loan losses .......... 6,431 4,760 4,796 4,802 4,541 4,384 3,747
Total deposits ..................... 562,417 529,925 529,820 492,435 468,068 416,426 343,359
Stockholders' equity ............... 61,627 56,499 55,546 47,787 38,282 31,195 28,686
</TABLE>
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<TABLE>
<CAPTION>
For the years ended December 31,
June 30, June 30, --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios
Average loans to average deposits ...... 85.21% 83.60% 83.48% 77.15% 72.64% 67.91% 70.90%
Allowance to period-end loans .......... 1.35 1.08 1.31 1.14 1.34 1.47 1.60
Equity to assets ....................... 8.97 9.08 9.08 8.43 7.26 6.67 7.19
Leverage capital ratio ................. 8.68 8.98 9.73 9.60 7.80 7.77 7.37
Return on assets ....................... 0.93 1.09 1.07 1.07 0.98 1.05 0.97
Return on equity ....................... 10.32 11.99 11.75 12.66 13.53 15.80 13.48
Dividend payout ratio (3) .............. 7.17 20.32 18.77 14.88 22.56 23.33 26.87
Net interest spread .................... 4.43 4.22 4.24 4.13 4.12 N/A N/A
Net interest margin .................... 5.26 4.93 5.05 4.92 4.82 N/A N/A
Average interest earning assets to
average interest-bearing liabilities . 120.65 118.36 120.74 119.78 117.84 N/A N/A
Noninterest expense to average assets .. 4.05 3.46 3.43 3.67 3.63 3.68 3.51
Efficiency ratio - tax equivalent (1) .. 68.29 64.30 61.10 66.42 68.51 68.37 65.93
Net charge-offs to average loans ....... 0.16 0.31 0.35 0.17 0.11 0.08 0.11
Nonperforming assets to total assets ... 0.83 0.82 0.57 0.46 0.33 0.30 0.24
Nonperforming loans to total loans ..... 1.00 1.07 0.61 0.59 0.30 0.37 0.24
Allowance to total loans ............... 1.35 1.08 1.31 1.14 1.34 1.47 1.60
Allowance to total nonperforming
loans ................................ 134.38 101.04 214.27 195.33 450.10 398.77 673.42
</TABLE>
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N/A - Information is not available.
(1) Tax equivalent basis was calculated using a 34% tax rate for all periods
presented.
(2) Reflects a five for one stock split. Average common shares outstanding and
per share data has been retroactively restated for the stock split.
(3) Reflects dividends declared on common shares divided by net income
available to common shareholders.
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6
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FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" regarding planned capital
expenditures, the Company's financial position, business strategies and other
plans and objectives for future operations, are forward-looking statements. The
Company cautions readers that all forward-looking statements are necessarily
speculative and not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that
various risks and uncertainties, including without limitation, regional and
national economic conditions, changes in levels of market interest rates, credit
risks of lending activities and competitive and regulatory factors, could affect
financial performance and could cause actual results for future periods to
differ materially from those anticipated or projected. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. The forward-looking statements contained in this Prospectus are
not within the Safe Harbor for forward-looking statements contained in Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act") since this is an initial public offering.
RISK FACTORS
Prospective investors should carefully review the following risk factors,
as well as the other information contained in this Prospectus, before deciding
to make an investment in the Common Stock.
Economic Conditions; Geographic and Industry Concentration
The operations of the Banks are located and concentrated primarily in
Knox, Sevier, Blount, Loudon, Jefferson and McMinn counties in East Tennessee.
As a result of the geographic concentration, the Banks' results depend largely
upon economic conditions in these areas. A deterioration in economic conditions
could have a materially adverse impact on the quality of the Banks' loan
portfolios and the demand for Bank products and services, and, accordingly, the
Company's results of operations. The Company is also exposed to adverse changes
in demand for tourist accommodations in Sevier County, Tennessee, which is
adjacent to the Great Smoky Mountain National Park. A significant amount of the
business of BankFirst, totaling 115% of its capital and loan loss reserves and
16% of its loan portfolio, derives from customers engaged in the lodging
industry. A deterioration in the market for lodging generally or for lodging in
Sevier County specifically, could have a materially adverse impact on
BankFirst's and the Company's results of operations. See "Business."
Competition
The banking and financial services business in East Tennessee generally,
and in the market areas of the Banks specifically, is highly competitive. As of
June 30, 1997, BankFirst had 1.27% and 16.20% of the total bank deposits in Knox
County and Sevier County, respectively, which are the primary markets of
BankFirst. Athens had 27.16% of the total bank deposits in McMinn County, which
is the primary market of Athens. The competitive environment is primarily a
result of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial service
providers. The Banks compete for loans, deposits and customers and the delivery
of other financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
non-bank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader array of financial services than the Banks. There can be no
assurance that the Banks will be able to compete effectively and the results of
operations of the Company could be adversely affected as circumstances affecting
the nature or level of competition change. See "Business."
Dependence on Key Personnel
The Company's success will depend substantially on certain members of its
senior management and the senior management of the Banks, in particular, Fred R.
Lawson, R. Stephen Hagood and C. David Allen at BankFirst and L. A. Walker, Jr.,
John W. Perdue and Michael L. Bevins at Athens. The Company's business and
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financial condition could be materially adversely affected by the retirement or
other loss of the services of any of such individuals. The Company does not have
employment contracts with, and does not carry key man insurance on the lives of,
any of these officers. See "Management."
Credit Quality Risks
A significant source of risk for the Banks arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties
fail to perform in accordance with the terms of their loans. The Banks have
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses that
management of each believes are appropriate to minimize this risk by assessing
the likelihood of nonperformance, tracking loan performance and diversifying
each Bank's credit portfolio. Such policies and procedures, however, may not
prevent unexpected losses that could materially adversely affect the results of
operations of the Banks and the Company. See "Business--Lending Activities."
The Banks have emphasized commercial business and commercial real estate
loans to small businesses in their market areas. The Banks attempt to
collateralize all of their commercial loans with real estate or tangible
commercial assets. Loans secured by commercial real estate properties generally
involve a higher degree of risk than the single-family mortgages traditionally
emphasized by banking institutions engaged in residential real estate lending.
Because payments on loans secured by commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to a greater extent than single-family residential
loans to adverse conditions in the real estate market or the economy. The
repayment of commercial loans is typically dependent on the successful operation
and income stream of the borrower. Such loans can be significantly affected by
economic conditions. For these reasons, commercial and commercial real estate
lending generally requires substantially greater oversight efforts compared to
residential real estate lending. Commercial and commercial real estate loans may
also involve relatively large loan balances to single borrowers or groups of
related borrowers.
Concentration of Voting Control
Following the Offering, James L. Clayton, Chairman of the Board of the
Banks, along with his wife, will have the power to vote 36.5% of the shares of
the Common Stock of the Company on a fully diluted basis. In addition, Mr.
Clayton's relatives and affiliates will have the power to vote an additional
3.6% of the shares of the Company's common stock on a fully diluted basis.
Accordingly, Mr. Clayton has and will have the ability to significantly
influence the management and policies of the Company, and public shareholders
will have correspondingly lesser influence. Mr. Clayton will also be able to
significantly influence the outcome of all matters requiring shareholder vote
including the election of directors, adopting or amending provisions of the
Company's Charter and approving certain mergers or other similar transactions.
See "Management" and "Principal and Selling Shareholders."
Impact of Regulatory Environment on Operations
The Banks are subject to extensive regulation, supervision and examination
by the Tennessee Department of Financial Institutions ("TDFI"), in the case of
BankFirst, the Office of Comptroller of the Currency ("OCC") in the case of
Athens, and the Federal Deposit Insurance Corporation ("FDIC") in the case of
both Banks. The Company is regulated by the Federal Reserve Board. The
regulatory restrictions require minimal capital ratios and limit the businesses
in which the Company, the Banks and their subsidiaries may engage, as well as
their operations within the permitted businesses. In addition to the regulation
by these government agencies, the business of the Banks and their subsidiaries
is subject to extensive regulation, such as those applicable to various types of
consumer lending, violations of which may result in significant penalties and
damages. While the Company and its subsidiaries are currently operating
profitably and are "well capitalized" for regulatory purposes, the Company has
experienced capital deficiencies in the past and there can be no assurance that
the Company's performance or the regulatory environment will not change in a
materially adverse way. See "Regulation."
Potentially Adverse Impact of Interest Rates
The results of operations of banking institutions generally and the Banks
specifically are materially affected by general economic conditions, the
monetary and fiscal policies of the federal government and the regulatory
policies of governmental authorities and other factors that affect market rates
of interest. The results of operations
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<PAGE>
of banking institutions depend to a large extent on their level of "net interest
income," which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. Changes in interest rates can
adversely affect the Banks' cost of Funds without increasing returns on interest
earning assets, resulting in reduced net income or even losses. Although the
Banks actively manage their exposure to interest rate changes, these changes are
beyond their control and the Banks cannot fully insulate themselves from the
effect of rate changes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
No Prior Market for Common Stock; Volatility of Market Price
Prior to the Offering, there has been no public market for the Common
Stock of the Company. There can be no assurance that an active public trading
market for the Company's Common Stock will develop or be maintained in the
foreseeable future. The initial public offering price has been determined by
negotiations between the Company and the representatives of the Underwriters and
may not be indicative of the market price after the Offering. See "Underwriting"
for the factors considered in determining the initial public offering price. The
future price of the Common Stock will be determined by the market. Purchasers of
Common Stock should have a long-term investment intent and recognize that the
absence of an active and liquid trading market may make it difficult to sell the
Common Stock and may have an adverse effect on its price. See "Underwriting."
From time to time after the Offering, there may be significant volatility
in the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimates by analysts, changes in general
conditions in the economy or the financial markets, or other developments
affecting the Company or its industry or competitors could cause the market
price of the Common Stock to fluctuate substantially. In addition, recently the
stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
Therefore, the Company cannot predict the market price for the Common Stock
subsequent to the Offering.
Risks Associated with Acquisitions
The Company has experienced growth as a result of mergers and acquisitions
of businesses or assets that complement or expand its existing business, such as
the recent additions of Athens and Curtis Mortgage. The Company may engage in
selected acquisitions or strategic mergers in the future, although the Company
has no present agreements, arrangements or commitments with respect to any
acquisition. Acquisitions involve a number of special risks, including the time
associated with identifying and evaluating potential acquisitions; the Company's
ability to finance the acquisition and associated costs; the diversion of
management's attention to the integration of the assets, operations and
personnel of the acquired businesses; the introduction of new products and
services into the Company's business; possible adverse short-term effects on the
Company's results of operations; possible amortization of goodwill associated
with an acquisition; and the risk of loss of key employees of the acquired
businesses. The Company may issue equity securities and other forms of common
stock-based consideration in connection with future acquisitions, which could
cause dilution to investors purchasing Common Stock in the Offering. With
respect to recent and future acquisitions, there can be no assurance that the
Company's integration efforts will be successful. See "Business."
Immediate and Substantial Dilution
Purchasers of Common Stock in the Offering will experience an immediate
and substantial dilution of $5.30 per share in the net tangible book value of
their shares of Common Stock following the Offering. Current shareholders will
receive a material increase in the book value of their shares. If the Company
issues additional Common Stock in the future, including shares that may be
issued in connection with acquisitions, purchasers of Common Stock in the
Offering may experience further dilution in net tangible book value per share of
the Common Stock. See "Dilution."
Shares Eligible for Future Sale
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Sales of a substantial number of shares of the Company's
Common Stock in the public market following this Offering, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. Upon completion of this Offering, there will be 11,258,047 shares
of Common Stock outstanding.
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Approximately 36.5%, on a fully diluted basis, of the Common Stock after
the Offering will be owned or controlled by James L. Clayton and his wife. Mr.
Clayton may not choose to sell any of his shares and the absence of such shares
in the market may adversely affect the liquidity of the market and the price of
the Common Stock. Conversely, sales by Mr. Clayton may adversely affect the
market price of the Common Stock if the market for Common Stock is illiquid or
the market reacts negatively to the sale because of Mr. Clayton's insider
status. See "Shares Eligible for Future Sale."
Broad Discretion in Use of Proceeds
The Company has no specific use designated for the proceeds it will
receive. The eventual use of proceeds will be determined from time to time by
the Board of Directors and senior management of the Company. There can be no
assurance that any of the uses to which Offering proceeds may be applied will
generate a profitable return for the Company. See "Use of Proceeds."
No Cash Dividends on Common Stock
While First Franklin had paid dividends prior to the Merger, the Company
has not paid a cash dividend on Common Stock since 1995 and has no current plan
to do so in the foreseeable future. The ability of the Company to pay dividends
is restricted by federal laws and regulations applicable to bank holding
companies, and by Tennessee laws relating to the payment of dividends by
Tennessee corporations. Because substantially all of its operations are
conducted through its subsidiaries, the Company's ability to pay dividends
depends on the ability of its subsidiaries to pay dividends to it. The ability
of the Banks to pay dividends is also restricted by applicable regulations of
the TDFI, the OCC and the FDIC. As a result, the Company may not be able to
declare a dividend to holders of the Common Stock even if the present dividend
policy of the Company were to change. See "Dividends."
Risks Associated with the Year 2000
Like many financial institutions, the Company and the Banks rely upon
computers for the daily conduct of their business. There is concern among
industry experts that on January 1, 2000 computers will be unable to "read" the
new year, and there may be widespread computer malfunctions. The Company and the
Banks generally rely on software and hardware developed by independent third
parties. The Company believes that its internal systems and software and network
connections will be adequately programmed to address the Year 2000 issue. Based
on information currently available, management does not believe that the Company
or the Banks will incur significant costs in connection with the Year 2000
issue. Nevertheless, there can be no assurances that all hardware and software
that either the Company or the Banks use will be Year 2000 compliant, and the
Company cannot predict with any certainty the costs the Company or the Banks
will incur to respond to any Year 2000 issues. Even if the Company and the Banks
do not incur significant direct costs in connection with responding to the Year
2000 issue, there can be no assurance the failure or delay of the Banks'
customers or other third parties in addressing the Year 2000 issue or the costs
involved in such process will not have a materially adverse effect on the Banks'
business, financial condition and result of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000."
10
<PAGE>
THE COMPANY
The Company is a bank holding company headquartered in Knoxville,
Tennessee that focuses on meeting the banking needs of East Tennessee businesses
and residents through a relationship oriented, community bank business strategy.
The Company conducts its banking business through BankFirst, a Tennessee banking
corporation with 23 offices in Knox, Sevier, Blount, Loudon and Jefferson
Counties in East Tennessee, and Athens, a national banking association with six
offices in McMinn County. The Company's operations principally involve
commercial and residential real estate lending, commercial business lending,
consumer lending, construction lending and other financial services, including
trust operations, credit card services and brokerage services.
In 1992, James L. Clayton acquired control of BankFirst, then named First
Heritage Bank of Loudon County, N.A. ("First Heritage"), which was originally
chartered in 1920 as a national banking association under the name First
National Bank of Loudon, N.A. In 1992, the bank changed from a federal to a
state chartered bank. In 1993, Mr. Clayton installed a management team headed by
Fred R. Lawson and comprised of several individuals previously employed by an
established community bank in Knox County who brought to BankFirst several
significant customers in the Knox County banking market. That year, the bank
moved its headquarters from Loudon County to Knox County and changed its name to
BankFirst.
In 1996, Mr. Clayton acquired control of Smoky Mountain Bancorp, Inc.
("Smoky Mountain"). Smoky Mountain was formed in 1988 to serve as the bank
holding company for the First National Bank of Gatlinburg ("FNBG"), a national
banking association formed in 1950 which primarily served the Sevier County,
Tennessee banking market. On December 31, 1996, BankFirst and Smoky Mountain
consummated an exchange offer through which BankFirst and FNBG became
wholly-owned subsidiaries of Smoky Mountain. In March 1997, FNBG merged with and
into BankFirst.
On January 16, 1998, BankFirst acquired Curtis Mortgage in a cash
purchase. Formed in 1944, Curtis Mortgage is a Tennessee corporation which
engages in the business of issuing and servicing primarily one to four family
residential mortgages. Curtis Mortgage serves all of the banking markets in
which the Company currently operates. The Company maintains Curtis Mortgage as a
wholly-owned subsidiary of BankFirst.
On April 27, 1998, Smoky Mountain changed its name to BankFirst
Corporation. On July 2, 1998, BankFirst Corporation merged with First Franklin,
a Tennessee bank holding company formed in 1982. Prior to the merger, First
Franklin was the holding company for Athens, a national banking association
chartered in 1884 which primarily serves the McMinn County banking market. As a
result of the merger, Athens became a wholly-owned subsidiary of BankFirst
Corporation.
The Company's offices are located at 625 Market Street, Knoxville,
Tennessee 37902, and its telephone number is (423) 595-1100.
11
<PAGE>
DIVIDENDS
Although the Company and First Franklin have paid dividends in the past,
the Board of Directors of the Company does not intend to pay cash dividends on
the Common Stock in the foreseeable future. Future declaration and payment of
dividends, whether cash or stock, if any, will be determined in light of the
then current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements and
other factors deemed relevant by the Board of Directors. The ability of the
Company to pay dividends is restricted by federal laws and regulations
applicable to bank holding companies, and by Tennessee laws relating to the
payment of dividends by Tennessee corporations. Because substantially all of its
operations are conducted through its subsidiaries, the Company's ability to pay
dividends also depends on the ability of the Banks to pay dividends to it. The
ability of the Banks to pay cash dividends is restricted by applicable
regulations of the TDFI, the OCC and the FDIC. As a result, the Company may not
be able to declare a dividend to holders of the Common Stock even if the present
dividend policy of the Company were to change. See "Regulation--Tennessee
Banking Act; Federal Deposit Insurance Act; National Bank Act."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $12.9 million after deduction of the underwriting discount and
estimated expenses. The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Shareholders. The net proceeds will be
added to the general funds of the Company and used for general corporate
purposes. The Company intends to use the funds it retains to support future
expansion of operations or diversification into other banking-related businesses
and for other business or investment purposes, although the Company has not
identified any specific acquisition, expansion, diversification or investment
opportunities. A portion of the net proceeds may be transferred to the Banks and
their subsidiaries and used for their general corporate purposes, including the
origination of loans, funding the construction and/or the acquisition costs of
establishing new branch locations, enhancing the Banks' liquidity ratios and
enhancing future access to capital markets. It is expected that until needed for
other purposes, all or part of the net proceeds retained by the Company will be
invested through the investment program of the Company or used to reduce
borrowings from other financial institutions and the Federal Home Loan Bank of
Cincinnati (the "FHLB").
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1998 after giving effect to the merger with First Franklin and a
retroactive application of the five for one stock split, and the capitalization
of the Company as of that date after further giving effect to the sale of common
stock by the ESOP, the conversion of 19,434 shares of convertible preferred
stock, $5.00 par value, (the "Preferred Stock") into 60,002 shares of Common
Stock and the sale by the Company of the 1,200,000 shares offered hereby and the
application of the net proceeds therefrom (assuming no exercise of the
Underwriters over-allotment option). The information set forth below should be
read in conjunction with the financial information included elsewhere in this
Prospectus. See "Use of Proceeds."
June 30, 1998
--------------------------
Capitalization Adjusted
of for
the Company Offering
-------------- ---------
(Dollars in thousands)
Liabilities:
FHLB advances (maturity
exceeds 1 year) ............................... $ 2,314 $ 2,314
ESOP (1) ........................................... 1,745 --
Stockholders' equity:
Preferred Stock, $5.00 par value;
1,000,000 authorized shares;
215,805 shares outstanding prior
to the Offering; and 196,371
shares to be outstanding
after the Offering (1) ........................ 1,079 982
Common Stock, $2.50 par value;
15,000,000 authorized shares;
9,998,045 shares outstanding
prior to the Offering; and
11,258,047 to be outstanding
after the Offering ............................ 24,559 28,145
Additional paid-in capital ....................... 22,520 33,676
Retained earnings ................................ 13,599 13,599
Unrealized gain on securities .................... 1,181 1,181
------- -------
Total stockholders' equity ................... 62,938 77,583
------- -------
Total capitalization ......................... $66,997 $79,897
======= =======
- ----------
(1) The ESOP shares and the shares of Common Stock received upon conversion of
the Preferred Stock are part of the Common Stock offered by the Selling
Shareholders.
13
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1998 was
approximately $60.8 million, or $6.08 per share. Net tangible book value
represents the amount by which the Company's total tangible assets exceeded the
Company's total liabilities. The calculation of net tangible book value on a per
share basis is equal to net tangible book value divided by the aggregate number
of shares of Common Stock outstanding. After giving effect to the sale of the
1,200,000 shares of Common Stock offered by the Company hereby at an assumed
public offering price of $12.00 per share and the application of the net
proceeds as set forth in "Use of Proceeds", and the sale of shares held by the
ESOP and the conversion of certain preferred shares to common shares by certain
selling shareholders, the pro forma net tangible book value of the Company as of
June 30, 1998 would have been $75.4 million, or $6.70 per share. This represents
an immediate increase in net tangible book value of $0.62 per share to existing
shareholders and an immediate dilution of $5.30 per share to persons purchasing
Common Stock in the Offering. The following table illustrates this per share
dilution, after deduction of underwriting discounts and offering expenses:
Price to Public per share ........................ $12.00
Net tangible book value per share
before the Offering ......................... $6.08
Increase per share attributable
to the sale of shares by the
ESOP and the conversion of
Preferred Stock ............................. 0.12
Increase per share attributable to
the sale of shares offered hereby ........... 0.50
-----
Pro forma net tangible book value
per share after the Offering ................ 6.70
------
Dilution in pro forma net tangible
book value per share to new investors ....... $ 5.30
======
The following table sets forth, on a pro forma as adjusted basis as of
June 30, 1998, the differences between the existing shareholders and the new
investors with respect to the number of shares purchased from the Company, the
total consideration paid and the average price per share paid.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ ------------------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders (1) ........... 9,998,045 88.81 $46,497,000 76.00 $4.65
Converted preferred shares .......... 60,002 0.53 281,000 0.46 4.68
New investors ....................... 1,200,000 10.66 14,400,000 23.54 12.00
---------- ------ ----------- ------
Total ............................... 11,258,047 100.00 $61,178,000 100.00
========== ====== =========== ======
</TABLE>
- ----------
(1) Sales by the Selling Shareholders in the Offering will reduce the number
of shares held by the existing shareholders prior to the Offering to
9,658,047, or 85.8% (or 84.0% if the Underwriters' over-allotment option
is exercised in full), and will increase the number of shares held by new
investors of Common Stock in the Offering to 1,600,000, or 14.2% (or 16.0%
if the Underwriters' over-allotment option is exercised in full), of the
total number of shares of Common Stock outstanding after the Offering. See
"Principal and Selling Shareholders." The calculations do not include
486,275 shares of Common Stock issuable upon the exercise of vested stock
options granted by the Company and 606,296 shares of Common Stock issuable
upon the conversion of outstanding Preferred Stock. See
"Management--Certain Benefit Plans and Agreements" and "Description of
Capital Stock."
14
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL INFORMATION
The following table sets forth selected financial information for the
Company as of and for the six months ended June 30, 1998 and 1997, and as of and
for the five years ended December 31, 1997, 1996, 1995, 1994 and 1993. This
information is derived from and should be read in conjunction with the
supplemental financial statements of the Company, including the notes thereto,
that appear elsewhere in this Prospectus. The supplemental consolidated
financial information has been prepared based on the pooling of interest method
of accounting.
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
June 30, June 30,
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income - tax equivalent $ 28,873 $ 25,321 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301
Interest expense ............... 12,456 11,112 22,652 21,238 19,082 13,537 11,963
--------- --------- --------- -------- --------- --------- ---------
Net interest income ............ 16,417 14,209 29,241 26,073 23,595 20,780 17,338
Tax equivalent adjustment (1) .. (472) (303) (606) (613) (558) (600) (623)
--------- --------- --------- -------- --------- --------- ---------
Net interest income - adjusted . 15,945 13,906 28,635 25,460 23,037 20,180 16,715
Provision for loan losses ...... (1,067) (720) (2,935) (667) (553) (703) (924)
Noninterest income ............. 3,965 2,517 5,657 5,243 4,369 4,382 3,916
Noninterest expenses ........... (13,918) (10,755) (21,323) (20,799) (19,157) (17,203) (14,013)
--------- --------- --------- -------- --------- --------- ---------
Income before income taxes ..... 4,925 4,948 10,034 9,237 7,696 6,656 5,694
Income tax expense ............. 1,746 1,562 3,406 3,188 2,517 1,727 1,828
--------- --------- --------- -------- --------- --------- ---------
Net earnings ................... $ 3,179 $ 3,386 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866
========= ========= ========= ======== ========= ========= =========
Basic earnings per share (2) ... $ 0.31 $ 0.34 $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.53
Diluted earnings per share (2) . 0.29 0.31 0.61 0.59 0.59 0.61 0.52
Dividends per common share (2) . 0.01 0.03 0.12 0.09 0.14 0.15 0.14
Cash dividends declared -
common ....................... $ 114 $ 344 $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039
Cash dividends declared -
preferred .................... 78 81 161 162 74 73 --
Book value per common
share (2) .................... 6.30 5.75 6.00 6.25 5.59 4.61 4.11
Average common shares
outstanding (2) .............. 9,998,012 9,829,962 9,876,735 9,347,725 8,098,170 7,346,505 7,294,040
Selected Period-End Balances
Total assets ................... $ 706,599 $ 630,247 $ 650,717 $ 595,284 $ 545,718 $ 480,687 $ 418,337
Earning assets ................. 641,821 578,775 604,031 559,927 504,430 444,866 388,644
Total securities ............... 126,664 134,957 127,736 134,781 135,627 121,390 116,851
Loans - net of unearned income . 505,707 444,198 464,967 412,793 350,652 306,905 253,692
Allowance for loan losses ...... 6,805 4,783 6,098 4,723 4,690 4,526 4,054
Total deposits ................. 588,735 533,383 549,769 516,339 480,346 430,407 376,838
Repurchase agreements and
Federal Funds purchased ...... 32,488 22,218 16,302 5,966 7,632 1,363 --
Long-term debt ................. 12,314 11,897 12,121 12,154 8,407 8,416 3,657
Stockholders' equity ........... 62,938 56,530 59,896 53,826 42,512 34,074 29,958
Selected Average Balances
Total assets ................... $ 686,952 $622,556 $ 621,719 $ 566,616 $ 527,495 $ 467,616 $ 399,080
Earning assets ................. 624,648 576,428 577,178 528,179 488,834 419,005 367,538
Total securities ............... 132,685 132,007 128,796 136,600 135,509 121,352 106,584
Loans - net of unearned income . 479,262 443,018 442,296 379,930 339,989 282,812 243,431
Allowance for loan losses ...... 6,431 4,760 4,796 4,802 4,541 4,384 3,747
Total deposits ................. 562,417 529,925 529,820 492,435 468,068 416,426 343,359
Stockholders' equity ........... 61,627 56,499 55,546 47,787 38,282 31,195 28,686
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------
June 30, June 30,
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios
Average loans to average deposits ....... 85.21% 83.60% 83.48% 77.15% 72.64% 67.91% 70.90%
Allowance to period end loans ........... 1.35 1.08 1.31 1.14 1.34 1.47 1.60
Equity to assets ........................ 8.97 9.08 9.08 8.43 7.26 6.67 7.19
Leverage capital ratio .................. 8.68 8.98 9.73 9.60 7.80 7.77 7.37
Return on assets ........................ 0.93 1.09 1.07 1.07 0.98 1.05 0.97
Return on equity ........................ 10.32 11.99 11.75 12.66 13.53 15.80 13.48
Dividend payout ratio (3) ............... 7.17 20.32 18.77 14.88 22.56 23.33 26.87
Net interest spread ..................... 4.43 4.22 4.24 4.13 4.12 N/A N/A
Net interest margin ..................... 5.26 4.93 5.05 4.92 4.82 N/A N/A
Average interest earning assets to
average interest-bearing liabilities .. 120.65 118.36 120.74 119.78 117.84 N/A N/A
Noninterest expense to average assets ... 4.05 3.46 3.43 3.67 3.63 3.68 3.51
Efficiency ratio - tax equivalent (1) ... 68.29 64.30 61.10 66.42 68.51 68.37 65.93
Net charge-offs to average loans ........ 0.16 0.31 0.35 0.17 0.11 0.08 0.11
Nonperforming assets to total assets .... 0.83 0.82 0.57 0.46 0.33 0.30 0.24
Nonperforming loans to total loans ...... 1.00 1.07 0.61 0.59 0.30 0.37 0.24
Allowance to total loans ................ 1.35 1.08 1.31 1.14 1.34 1.47 1.60
Allowance to total nonperforming
loans ................................. 134.38 101.04 214.27 195.33 450.10 398.77 673.42
</TABLE>
- ---------------------
N/A - Information is not available.
(1) Tax equivalent basis was calculated using a 34% tax rate for all periods
presented.
(2) Reflects a five for one stock split. Average common shares outstanding and
per share data has been retroactively restated for the stock split.
(3) Reflects dividends declared on common shares divided by net income
available to common shareholders.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation, formerly Smoky Mountain Bancorp, Inc., and of First
Franklin Bancshares, Inc. ("First Franklin"). Unless otherwise indicated, the
discussion herein refers to BankFirst Corporation and its subsidiaries on a
consolidated basis (the "Company").
The consolidated financial information discussed herein primarily reflects
the activities of the Company's wholly-owned community bank subsidiaries,
BankFirst and The First National Bank and Trust Company ("Athens," or
collectively, the "Banks"). The discussion identifies trends and material
changes that occurred during the reported periods and should be read in
conjunction with the consolidated financial statements and accompanying notes
appearing elsewhere herein. The periods included within this discussion are the
years 1997, 1996, 1995 and the six months ending June 30, 1998 and 1997.
General
The Company is a community banking organization, headquartered in
Knoxville, Tennessee, which generates loans and deposits through its 29 branches
throughout East Tennessee. BankFirst has 23 offices in Knox, Sevier, Blount,
Loudon, and Jefferson counties, and Athens has six offices in McMinn County. The
Company's operations principally involve commercial and residential real estate
lending, commercial business lending, consumer lending, construction lending and
other financial services, including trust operations, credit card services and
brokerage services.
In the fall of 1992, James L. Clayton acquired control of BankFirst,
formerly known as First Heritage National Bank of Loudon County, N.A. ("First
Heritage"), and installed an experienced bank management team the following
year. Drawing upon management's existing relationships with loan and deposit
customers who followed management from their previous bank, BankFirst increased
its assets from approximately $60 million in 1993 to approximately $230 million
in 1996. During 1996, Mr. Clayton acquired control of Smoky Mountain Bancorp,
Inc. ("Smoky Mountain") and its wholly-owned subsidiary, First National Bank of
Gatlinburg. At year-end 1996, these entities were combined with the Company in a
share exchange accounted for in a manner similar to a pooling of interests.
Following the combination, the Company had total assets of $423 million. The
combined entity continued growth in 1997, primarily through commercial real
estate lending financed through deposit growth.
In January 1998, BankFirst purchased Curtis Mortgage Co., Inc. ("Curtis
Mortgage") for $7.5 million as an opportunity to increase mortgage originations,
which had not been a significant line of business, and as an opportunity to
diversify revenues through loan servicing. Curtis Mortgage is a 54 year old
mortgage company which originates and purchases mortgage loans for sale and
servicing. Curtis Mortgage generally has not retained loans for its portfolio,
although its servicing portfolio was approximately $451 million at the date of
acquisition. This transaction was accounted for as a purchase, and accordingly,
is not reflected in the historical financial statements of the Company for
periods prior to that time.
The Company changed its name from Smoky Mountain Bancorp, Inc. to
BankFirst Corporation following the April 27, 1998 shareholder meeting. On July
2, 1998, the Company acquired First Franklin in a statutory merger accounted for
as a pooling of interests. At year-end 1997, First Franklin had total assets of
$182 million, total equity of $21 million, and net income of $2.6 million.
Shareholders of First Franklin received 22.05 shares of Company common stock for
each share of First Franklin common stock, giving effect to the subsequent five
for one stock split. As a consequence of the merger, Athens became a separate
subsidiary of the Company, adding risk diversification and trust expertise to
the combined entity. Athens also has a small consumer finance subsidiary.
Total assets grew from $650.7 million at year-end 1997 to $706.6 million
at June 30, 1998, a $55.9 million increase. The primary changes in assets
included a $18.6 million increase in loans held for sale, a $19.7 million
increase in net loans, $7.2 million of mortgage servicing assets, and other
intangible assets which were each attributable to the purchase of Curtis
Mortgage. For the period from January 16, 1998 purchase date to June 30, 1998,
Curtis Mortgage purchased and originated $84.7 million of loans held for sale,
and had payoffs totaling $48.3 million. Total intangible assets at June 30, 1998
included goodwill from the purchase of Curtis Mortgage and approximately
$305,000 of intangibles from previous transactions.
17
<PAGE>
Total liabilities grew from $589.3 million at year-end 1997 to $641.9
million at June 30, 1998, an increase of $52.6 million. Of this growth, deposits
accounted for $38.9 million, federal funds purchased were $8.5 million, and
repurchase agreements accounted for $3.7 million. Federal funds purchased were
used to fund mortgage loans in process and held for sale.
From year-end 1997 to June 30, 1998, equity grew $3.0 million primarily
from retained net income. The leverage capital ratio fell from 9.7% at year-end
1997 to 8.7% at June 30, 1998 resulting from asset growth and goodwill recorded
in the Curtis Mortgage purchase transaction. This ratio still maintains the
Company in the "well capitalized" category. The individual Bank leverage ratios
at year-end 1997 were 8.3% for BankFirst and 11.2% for Athens.
Management expects growth to continue through expansion of retail
locations, through expansion of products and services, including mortgage
servicing opportunities by Curtis Mortgage and trust services through Athens,
and through possible future mergers or acquisitions. At the present time, the
Company has no present agreements, arrangements or commitments with respect to
any other acquisition.
Results of Operations
Six Months Ended June 30, 1998, Compared to Six Months Ended June 30, 1997
Net interest income increased $2.0 million, or 14.7%, to $15.9 million for
the six months ended June 30, 1998, from $13.9 million for the six months ended
June 30, 1997. The increase in net interest income was due primarily to an
increase in average earning assets and an increase in the percentage of average
earning assets invested in loans, the Company's highest yielding assets. Average
earning assets increased $48.2 million, or 8.4%, primarily as a result of growth
in loans.
The Company's net interest spread and net interest margin were 4.43% and
5.26%, respectively, for the six months ended June 30, 1998, as compared to
4.22% and 4.93% for the six months ended June 30, 1997. The increase in the net
interest spread and the net interest margin was primarily the result of an
increase in asset yields due to loan growth.
The provision for loan losses was $1.1 million for the six months ended
June 30, 1998, compared to $720,000 for the six months ended June 30, 1997. The
increase in the provision was attributable to general loan growth. The Company
experienced net charge-offs of $396,000 for the six months ended June 30, 1998,
resulting in a ratio of net charge-offs to average loans of 0.16%.
Noninterest income increased $1.5 million, or 57.5%, to $4.0 million for
the six months ended June 30, 1998 from $2.5 million for the six months ended
June 30, 1997, primarily attributable to operations of Curtis Mortgage, which
was acquired on January 16, 1998.
Noninterest expense increased $3.2 million, or 29.4%, to $13.9 million for
the six months ended June 30, 1998, from $10.8 million for the six months ended
June 30, 1997. The primary component of noninterest expense is salaries and
benefits, which increased $1.5 million, or 26.2%, to $7.1 million for the six
months ended June 30, 1998, from $5.6 million for the six months ended June 30,
1997. Salaries and benefits as well as other noninterest expense categories
increased primarily due to additional employees associated with Curtis Mortgage
and the opening of three additional branches. Merger expenses were $276,000 as
of June 30, 1998. Other increases in noninterest expense were due to a major
computer system conversion in the second quarter and Year 2000 costs. The
Company's efficiency ratio for the six months ended June 30, 1998, was 68.29%,
compared to 64.30% for the six months ended June 30, 1997.
Net income decreased $207,000, or 6.1%, to $3.2 million for the six months
ended June 30, 1998 from $3.4 million for the six months ended June 30, 1997.
The decrease in net income was primarily due to increases in noninterest expense
associated with increases in salaries and benefits resulting from both internal
and external growth, merger costs, costs associated with the integration of
Curtis Mortgage, the opening of three branches, computer system conversion costs
and Year 2000 costs. This was partially offset by increases in net interest
income and noninterest income.
18
<PAGE>
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Net interest income increased $3.1 million, or 12.2%, to $28.6 million in
1997 from $25.5 million in 1996. The increase in net interest income was due
primarily to an increase in average earning assets and an increase in the
percentage of average earning assets invested in loans. Average earning assets
increased $49.0 million, or 9.3%, primarily as a result of loan growth,
particularly growth of commercial business loans.
The Company's net interest spread and net interest margin were 4.24% and
5.05%, respectively, in 1997 as compared to 4.13% and 4.92% in 1996. The
increase in the net interest spread and the net interest margin was primarily
the result of the growth in the volume of loans, which are traditionally higher
yielding assets than investment securities, as a percentage of average earning
assets.
The provision for loan losses was $2.9 million in 1997 compared to
$667,000 in 1996. The increase in the provision was attributable to additional
reserves established for the risks associated with the commercial real estate
loan portfolio acquired in the merger with Smoky Mountain in December 31, 1996
and the increase in 1997 charge-offs. The Company experienced net charge-offs of
$1.6 million in 1997, resulting in a ratio of net charge-offs to average loans
of 0.35%. Management considers these recent losses to be isolated events and
does not believe that they signal the increase of a trend toward larger
percentage loan losses in the future.
Noninterest income increased $414,000, or 7.95%, to $5.7 million in 1997
from $5.2 million in 1996, primarily as a result of security gains of $309,000.
Noninterest expense increased $524,000, or 2.5%, to $21.3 million in 1997
from $20.8 million in 1996. The primary component of noninterest expense is
salaries and benefits, which increased $571,000, or 5.4%, to $11.1 million in
1997 from $10.5 million in 1996. The increase in salaries and benefits is
primarily attributable to overall growth of the Company. Data processing
expenses also increased $356,000, or 39.7%, to $1.3 million in 1997 from
$897,000 in 1996 primarily as a result of volume growth and adjustments
necessitated by the merger with Smoky Mountain. The Company's efficiency ratio
in 1997 was 61.1%, compared to 66.4% in 1996.
Net income increased $579,000 or 9.6%, to $6.6 million in 1997 from $6.0
million in 1996. The increase in net income was due primarily to an increase in
net interest income, and was reduced by the impact of increased loan loss
provisions. Return on average assets during 1997 and 1996 was 1.07%, and return
on average equity was 11.75% for 1997 compared to 12.66% for 1996.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Net interest income increased $2.4 million, or 10.5%, to $25.5 million in
1996 from $23.0 million in 1995. The increase in net interest income was due
primarily to an increase in average earning assets and an increase in the
percentage of average earning assets invested in loans, particularly higher
yielding commercial business and commercial real estate loans. Average earning
assets increased $39.5 million, or 8.0%, primarily as a result of loan growth,
particularly growth of commercial business and commercial real estate loans.
The Company's net interest spread and net interest margin were 4.13% and
4.92%, respectively, in 1996 as compared to 4.12% and 4.82% in 1995. The
increase in the net interest spread and the net interest margin was primarily
the result of the growth in the volume of loans, traditionally higher yielding
assets than investment securities, as a percentage of average earning assets.
The provision for loan losses was $667,000 in 1996 compared to $553,000 in
1995. The increase in the provision was primarily the result of general growth
in the Company's loan portfolio. The Company experienced net charge-offs of
$634,000 in 1996, resulting in a ratio of net charge-offs to average loans of
0.17%.
Noninterest income increased $874,000, or 20.0%, to $5.2 million in 1996
from $4.4 million in 1995, primarily attributable to increases in service
charges on customer accounts.
Noninterest expense increased $1.6 million, or 8.6%, to $20.8 million in
1996 from $19.2 million in 1995. The primary component of noninterest expense is
salaries and benefits, which increased $790,000, or 8.1%, to $10.5 million in
1996 from $9.7 million in 1995. Equipment expenses increased $697,000, or 41.4%,
to $2.4 million in 1996 from $1.7 million in 1995. Occupancy expenses increased
$586,000, or 38.0%, to $2.1 million in 1996 from $1.5 million in 1995. Data
processing expenses increased $223,000, or 33.09%, to $897,000 in 1996 from
$674,000 in 1995. These increases are primarily attributable to the combination
of the operations of Smoky Mountain and BankFirst. The Company's efficiency
ratio in 1996 was 66.4%, compared to 68.5% in 1995.
19
<PAGE>
Net income increased $870,000, or 16.8%, to $6.0 million in 1996 from $5.2
million in 1995. The increase in net income was due primarily to increases in
net interest income and noninterest income, and was reduced by the impact of
increased noninterest expense. Return on average assets for 1996 was 1.07%
compared to 0.98% during 1995, and return on average equity was 12.66% for 1996
compared to 13.53% during 1995.
Lending
Total loans were $465.0 million at year-end 1997, and $412.8 million at
year-end 1996. Loan growth was $52.2 million, or 12.6%, during 1997, and $62.1
million, or 17.7%, during 1996. Management was able to achieve growth from 1993
through 1996 because of long term relationships developed by current management
while at other financial institutions. Loans in all categories continued to grow
during 1997 primarily as a result of strong economic conditions in the Banks'
primary markets, with commercial lending experiencing the largest growth.
Management expects loan growth in 1998 to continue at a rate comparable to 1997.
Commercial lending will continue to be the primary focus, although management
will work to generate additional consumer loans, as well as additional
residential mortgage loans through Curtis Mortgage.
A banking company's credit risk profile is generally reflected in the
level and types of loans held, since loans are usually the highest risk assets
owned. Even though the majority of the Company's loans are commercial, which is
typically the highest risk loan type, management believes that two factors
mitigate the credit risk in this portfolio. First, 63.3% of commercial loans are
secured primarily by income producing real estate, and second, BankFirst's early
growth was generated through seasoned loan relationships. The Company's
relatively low levels of charge-offs and non-performing loans reflect the effect
of these mitigating factors.
Lending activities are under the direct supervision of the Boards of
Directors and senior management of the Banks. The Banks operate under loan
policies which state, among other things, guidelines for underwriting, credit
criteria, loan composition, concentrations and administration. See
"Business--Lending Activities" for a discussion of such policies.
Loans Outstanding
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial business ............. $ 95,143 $ 69,614 $ 53,430 $ 57,680 $ 43,448
Commercial real estate .......... 164,102 155,389 116,372 103,312 91,052
Construction loans .............. 24,977 26,379 22,021 19,431 12,153
Residential real estate ......... 120,143 110,636 108,276 81,472 73,488
Installment ..................... 59,947 50,277 50,569 45,093 33,981
Other ........................... 2,623 2,035 1,754 1,918 953
-------- -------- -------- -------- --------
Total loans ............... 466,935 414,330 352,422 308,906 255,075
Unearned income ................. (1,968) (1,537) (1,770) (2,001) (1,383)
-------- -------- -------- -------- --------
Total loans, net ....... $464,967 $412,793 $350,652 $306,905 $253,692
======== ======== ======== ======== ========
At December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial business ............. 20.38% 16.80% 15.16% 18.67% 17.03%
Commercial real estate .......... 35.14 37.50 33.02 33.44 35.70
Construction loans .............. 5.35 6.37 6.25 6.29 4.76
Residential real estate ......... 25.73 26.70 30.72 26.37 28.81
Installment ..................... 12.84 12.13 14.35 14.60 13.32
Other ........................... 0.56 0.50 0.50 0.63 0.38
----- ----- ----- ----- -----
Total loans ............... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
20
<PAGE>
Securities
The Banks use their securities portfolios primarily as a source of
liquidity and a base from which to pledge assets for repurchase agreements and
public deposits. Generation of income from securities is not a primary focus of
the Banks. Total securities were $127.7 million at year-end 1997, which is
slightly lower than the $134.8 million balance in 1996. The Banks' policy
guidelines are designed to minimize credit, market, and liquidity risk, and
securities generally must be "investment grade" or higher to be purchased. All
securities are classified as "available for sale" to provide flexibility for
asset liability management. Approximately 62.4% of year-end 1997 securities were
pledged for public deposits and repurchase agreements. Other than commitments to
originate or sell mortgage loans, the Banks do not invest in off-balance sheet
derivative financial instruments, such as interest rate swaps.
Securities
At December 31,
---------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Available for sale:
U.S. Government and agencies ............ $ 77,969 $ 91,520 $ 95,129
States and political subdivisions ....... 38,999 22,971 21,940
Mortgage-backed and asset-backed ........ 10,768 20,290 18,558
-------- -------- --------
Total available for sale ......... $127,736 $134,781 $135,627
======== ======== ========
Securities Maturity Schedule
<TABLE>
<CAPTION>
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
-------------- -------------- -------------- -------------- --------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government
& agencies .......... $ 11,978 5.87% $40,554 6.42% $24,936 6.57% $501 7.06% $77,969 6.33%
State and municipal .... 755 6.70% 5,857 6.92% 15,388 4.92% 16,999 4.97% 38,999 5.27%
Mortgage-backed
and asset-backed (1) -- -- -- -- 10,768 6.43%
------- ------- ------- ------- --------
Total available
for sale ..... $12,733 $46,411 $40,324 $17,500 $127,736 6.01%
======= ======== ======= ======= =========
</TABLE>
- --------------
(1) These securities are not identified with a specific maturity because they
do not have a defined maturity.
Deposits and Borrowings
Although deposits have been the Company's primary source of funding for
loans, although the Company also utilizes borrowed funds, including customer
repurchase agreements. See "--Liquidity" and "--Interest Rate Sensitivity." The
Company believes it has the ability to raise deposits quickly within its market
areas by slightly raising interest rates. The Company's deposit strategy,
however, has been to remain competitive in its markets, without paying the
highest yield, because of the availability and attractiveness of other sources
of funding. Customer repurchase agreements and FHLB advances, while more costly
than deposit funding, are typically the lowest cost borrowed funds available in
the marketplace, and are utilized by management to raise identified amounts of
funds with more precision than deposit solicitations. Although management
expects to continue using repurchase agreements, short-term borrowings and FHLB
advances, deposits will continue to be the Company's primary funding source.
Total deposits grew at a rate of 6.5% during 1997 and 7.5% during 1996,
resulting from an increase in deposit taking branch locations and effective
marketing strategies. Despite the increase in deposit growth, loan growth
outpaced the growth of deposit sources, resulting in an increase in the loan to
deposit ratio to 83.5% at year-end 1997, from 77.2% at year-end 1996. To supply
the needed liquidity, BankFirst increased its repurchase agreements from $6.0
million in 1996 to $16.3 million in 1997. While BankFirst actively solicits
customer repurchase agreement accounts, Athens has not used repurchase
agreements as a source of liquidity. These accounts are considered volatile
under regulatory requirements, although BankFirst has found them to be a steady
source of funding. BankFirst and Athens have both utilized the Federal Home Loan
Bank of Cincinnati ("FHLB") as a borrowing source. FHLB borrowings were $12.1
million at year-end 1997 and 1996, $10.0 million of which matures during 1998.
The FHLB will continue to be a source for funding loan growth in the future, as
BankFirst intends to draw additional borrowings to fund the Curtis Mortgage
warehouse line of credit and for other loan growth.
21
<PAGE>
Deposit Information
December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Noninterest bearing .................. $ 92,749 $ 74,161 $ 74,325
Interest bearing demand .............. 150,761 139,152 125,558
Savings deposits ..................... 37,270 36,576 41,507
Time ................................. 268,989 266,450 238,956
-------- -------- --------
Total deposits ............. $549,769 $516,339 $480,346
======== ======== ========
Maturity Ranges of Time Deposits
with Balances of $100,000
or more at December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
3 months or less .................. $25,686 $28,578 $25,508
3 through 6 months ................ 14,324 11,182 14,188
6 through 12 months ............... 21,167 19,619 11,867
Over 12 months .................... 17,083 10,089 11,352
------- ------- -------
$78,260 $69,468 $62,915
======= ======= =======
In general, large certificate of deposit customers tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding from liquidity planning purposes than core deposits. However, the
Company does not believe that its deposits of this type are materially more
sensitive to interest rate changes than its other certificates of deposits
because such certificates are principally held by long-term customers located in
the Banks' market areas.
Equity and Capital Resources
The Company and each of the Banks were "well capitalized" for regulatory
purposes during 1997, 1996 and 1995. The leverage capital ratio of the Company
was 9.7% in 1997, 9.6% in 1996 and 8.4% in 1995, with total stockholders' equity
of $59.9 million at year-end 1997. For a discussion of capital requirements see
"Regulation--Capital Requirements." The Company has issued stock upon the
exercise of stock options, conversion of preferred stock to common stock, and in
connection with a five for four common stock split in 1997 and five for one
split in 1998. During 1996, $4.5 million was raised from sales of common stock
and $1.8 million from sales of preferred stock. These stock sales were primarily
motivated by the desire to increase operating capital and to achieve and
maintain "well capitalized" levels and comply with regulatory requirements while
supporting asset growth. The cash dividends reflected in the Company's 1997 and
1996 Financial Statements were paid by First Franklin prior to the merger. The
Company does not intend to pay cash dividends on common stock in the foreseeable
future. The Company's current strategy is to support equity growth by retaining
net profits rather than paying cash dividends on common stock.
Items that represent common stock equivalents include 218,508 shares of 5%
preferred stock, $5.00 par value per share (the "Preferred Stock"), and 862,000
common stock options outstanding at year-end 1997. Each share of the Preferred
Stock is convertible into 3.0875 shares of common stock, adjustable for stock
splits and future recapitalizations. There are 1,000,000 authorized shares of
Preferred Stock; however, management currently has no plans to issue additional
shares. There are 2,067,005 additional common shares available for grant under
the stock option plan. The Company plans to continue granting stock options to
selected officers, directors and other key employees.
Net Interest Income
Net interest income is the difference between interest and fees earned on
earning assets, principally loans and investments, and the interest paid on
deposits and other interest bearing funds. It is the major component of earnings
for the Company. For analytical purposes, the interest earned on loans and
investments is measured and
22
<PAGE>
expressed on a fully tax equivalent (FTE) basis. Tax-exempt interest income is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a combined federal and state tax rate of
34%.
Net interest income is influenced primarily by market interest rates,
changes in the balance and mix of earning assets and interest-bearing
liabilities, the proportion of earning assets that are funded by demand deposits
and equity capital and the relative repricing periods for earning assets and
interest-bearing liabilities. Some of these factors are controlled to a certain
extent by management. Conditions beyond management's control may have a
significant impact on changes in net interest income from one period to another.
Examples of such external factors are Federal Reserve Board monetary policy,
introduction of new loan or deposit products by bank and non-bank financial
competitors and the fiscal and debt management policies of the federal
government.
23
<PAGE>
Average Balance Sheets and Interest Rates
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- --------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Securities
Taxable ................ $105,180 $ 6,783 6.45% $113,420 $7,213 6.36% $115,842 $6,562 5.66%
Tax-exempt (1) ....... 23,328 1,795 7.69 23,336 1,813 7.77 19,705 1,641 8.33
Unrealized gain on A.F.S. .. 288 (156) (38)
-------- ------- -------- ------ -------- ------
Total securities ........... 128,796 8,578 6.66 136,600 9,026 6.61 135,509 8,203 6.05
Loans (2) ................ 442,296 42,880 9.70 379,930 37,589 9.89 339,989 33,791 9.94
Interest bearing deposits
with other banks ....... 236 15 6.36 1,180 61 5.17 1,154 75 6.50
Federal funds sold and
other .................. 5,850 346 5.90 10,469 572 5.46 12,182 557 4.57
-------- ------- -------- ------ -------- ------
Total earning assets . 577,178 51,819 8.98 528,179 47,248 8.95 488,834 42,626 8.72
Noninterest earning assets
Allowance for loan losses (4,796) (4,802) (4,541)
Premises and equipment ... 19,769 16,961 17,395
Cash and due from banks .. 20,876 17,942 17,991
Accrued interest and
other assets ........... 8,692 8,336 7,816
-------- -------- --------
Total assets ......... $621,719 $ 566,616 $ 527,495
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand
deposits ..............$ 141,941 $ 5,007 3.53% $ 128,048 $5,185 4.05% $125,466 $ 4,866 3.88%
Savings deposits ......... 36,803 1,034 2.81 37,855 1,107 2.92 41,667 1,236 2.97
Time deposits ............ 270,782 15,063 5.56 254,448 13,805 5.43 232,640 12,115 5.21
-------- ------- -------- ------ -------- ------
Total interest-bearing \
deposits ................. 449,526 21,104 4.69 420,351 20,097 4.78 399,773 18,217 4.56
Borrowed funds
Securities sold under
agreements to repurchase 9,110 438 4.81 7,346 347 4.72 4,839 276 5.70
Other borrowings ....... 7,173 414 5.77 4,710 254 5.39 4,674 205 4.39
Long-term borrowings ... 12,214 696 5.70 8,544 540 6.32 5,553 384 6.92
-------- ------- -------- ------ -------- ------
Total borrowed funds ....... 28,497 1,548 5.43 20,600 1,141 5.54 15,066 865 5.74
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities ......... 478,023 22,652 4.74 440,951 21,238 4.82 414,839 19,082 4.60
Noninterest-bearing liabilities
Employee stock ownership
plan .................. 1,536 1,389 1,710
Noninterest-bearing demand
deposits .............. 80,294 72,084 68,295
Other liabilities ........ 6,320 4,405 4,369
Stockholders' equity. .... 55,546 47,787 38,282
-------- -------- --------
Total liabilities and
stockholders' equity .. $621,719 $566,616 $527,495
======== ======== ========
Interest margin recap
Net interest income and
interest rate spread .. $ 29,167 4.24% $26,010 4.13% $ 23,544 4.12%
======== ======= ========
Net interest income margin 5.05% 4.92% 4.82%
</TABLE>
- ---------------
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years. Tax equivalent adjustments were $532 for 1997, $550 for 1996 and
$507 for 1995.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $1,113 for 1997, $1,327 for
1996 and $1,072 for 1995.
24
<PAGE>
An analysis of the changes in net interest income from period to period is
presented in the following table. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Volume/Rate Analysis
<TABLE>
<CAPTION>
1997 change from 1996 due to 1996 change from 1995 due to
---------------------------- ---------------------------
Volume Rate Total Volume Rat Total
------ ----- ----- ------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans ........................ $ 6,281 $ (989) $ 5,292 $ 3,987 $ (189) $ 3,798
Securities
Taxable .................... (515) 85 (430) (141) 792 651
Tax-exempt ................. (1) (17) (18) 317 (145) 172
Total securities interest (516) 68 (448) 177 646 823
Interest-bearing deposits with
other banks ................ (33) (13) (46) 2 (16) (14)
Federal funds sold ........... (228) 1 (227) (118) 133 15
------- ------- ------- ------- ------- -------
Total interest income .... 5,504 (933) 4,571 4,048 574 4,622
------- ------- ------- ------- ------- -------
Interest expense
Interest-bearing demand
deposits ................... 596 (774) (178) 102 217 319
Savings deposits ............. (34) (39) (73) (111) (18) (129)
Time deposits ................ 902 356 1,258 1,169 521 1,690
Repurchase agreements ........ 85 6 91 161 (90) 71
Other borrowings ............. 141 19 160 2 47 49
Long-term borrowings ......... 251 (95) 156 222 (66) 156
------- ------- ------- ------- ------- -------
Total interest expense ... 1,941 (527) 1,414 1,544 612 2,156
------- ------- ------- ------- ------- -------
Net interest income ...... $ 3,563 $ (406) $ 3,157 $ 2,504 $ (38) $ 2,466
======= ======= ======= ======= ======= =======
</TABLE>
Net interest income (FTE) increased $3.2 million, or 12.1%, from 1996 to
1997, and $2.5 million, or 10.4%, from 1995 to 1996. Net interest margin also
improved each period, growing from 4.8% in 1995, to 4.9% in 1996 and to 5.1% in
1997. The increase in net interest income, and improvement in net interest
margin, is primarily attributable to an increase in the level of earning assets
and a change the makeup of those assets.
Average earning assets increased from $528.2 million to $577.1 million, or
9.3%, from 1996 to 1997, and from $488.8 million to $528.2 million, or 8.0%,
from 1995 to 1996. Loan growth, which was 16.4% in 1997 and 11.7% in 1996, was
the primary cause of the overall growth in earning assets. Management has been
able to achieve this growth in loans because of long term relationships
developed by current management while at other financial institutions and most
recently, as a result of strong economic conditions in the Banks' primary
markets. Management expects loan growth in 1998 to continue at a rate equivalent
to 1997.
The growth in loans has improved the net interest rate spread and net
interest margin. Loans are the highest yielding earning assets. During 1995,
loans represented 69.5% of earning assets. During 1996 this ratio increased to
71.9%, and in 1997 it increased further to 76.7%. Although the average rate
earned on loans has decreased in each of the last two years from 9.89% to 9.70%,
the yield on total interest earning assets has increased in each period. The
increased yield on securities has also supported the increase in average yield
on earning assets. The increase in yield from 1995 to 1996 of 0.56% was
consistent with general market rate increases. The increase in 1997 was
primarily attributable to the Bank's reinvesting of securities proceeds in
longer-term securities with higher yields. Average yields on investments
increased in 1997, from 6.61% to 6.66%, while general market rates declined to
some extent.
Net interest income and net interest margin have also been helped by
several factors related to funding. Most of the Company's asset growth has
continued to be funded with deposits, the least costly source of funding.
Average interest-bearing deposits grew 6.9% from 1996 to 1997, almost keeping
pace with the growth in earning
25
<PAGE>
assets. Even with this deposit growth, the average rate paid on deposits fell
from 4.78% in 1996 to 4.69% in 1997. The Company is generally asset driven,
managing funding to support assets gathered. See " -- Deposits and Borrowings."
The portion of earning assets funded by non-interest bearing deposits,
other liabilities and equity has increased from 22.7% in 1995, to 23.5% in 1996,
and to 24.6% in 1997. These sources of funding do not carry an interest cost,
and thus the amount of interest earning assets supported by non interest-bearing
liabilities has increased. This factor does not impact net interest spread, but
has a positive impact on net interest margin.
The increase in deposits plus non-interest bearing sources of funding has
been lower than the growth in earning assets. As a result, borrowed funds have
increased from 3.1% of average earning assets in 1995 to 3.9% in 1996 and 4.9%
in 1997. These funds are more costly than deposits and their increase relative
to total funding has put some downward pressure on net interest margin and
spread. In 1995, the average cost of borrowing exceeded the average cost of
deposits by 118 basis points ("bp"). In 1996, this difference fell to 76 bp, and
in 1997 it decreased further to 74 bp. The narrowing of spread between average
costs of borrowings and average costs of deposits is attributable primarily to a
deliberate shift by management of the nature of FHLB borrowings from fixed to
variable rate, as part of its overall asset/liability strategy. See "-- Deposits
and Borrowings."
Provision for Loan Losses and Asset Quality
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb losses in the loan portfolio.
Factors considered in establishing an appropriate allowance include a careful
assessment of the financial condition of the borrower; a realistic determination
of the value and adequacy of underlying collateral; the condition of the local
economy and the condition of the specific industry of the borrower; a
comprehensive analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans. The Company applies a systematic process for
determining the adequacy of the allowance for loan losses including an internal
loan review function and a monthly analysis of the adequacy of the allowance.
The monthly analysis includes determination of specific potential loss factors
on individual classified loans, historical potential loss factors derived from
actual net charge-off experience and trends in nonperforming loans, and
potential loss factors for other loan portfolio risks such as loan
concentrations, local economy, and the nature and volume of loans.
The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out recoveries
on previously charged-off assets, become net charge-offs. The Company's policy
is to charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery. The
Company's level of net charge-offs to average loans was 0.35% in 1997, 0.17% in
1996 and 0.11% in 1995. Charge-offs were relatively immaterial through 1996, but
increased to $1.8 million in 1997, due to two commercial credits charged off by
BankFirst, and a smaller increase in loan charge-offs by Athens. Management does
not believe that 1997 charge-offs are indicative of an overall deterioration in
the credit quality of the portfolio.
26
<PAGE>
Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,723 $ 4,690 $ 4,526 $ 4,054 $ 3,392
Loans charged off
Commercial business ....... (1,079) (182) (203) (234) (241)
Commercial real estate .... (161) 6 -- -- (14)
Construction loans ........ -- -- -- (45) --
Residential real estate ... (76) (55) (44) (1) (61)
Installment ............... (503) (661) (454) (291) (289)
Lease financing ........... (14) -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs ....... (1,833) (904) (701) (571) (605)
--------- --------- --------- --------- ---------
Charge-offs recovered
Commercial business ....... 41 53 146 149 184
Commercial real estate .... 2 -- -- 7 --
Construction loans ........ 33 12 -- -- --
Residential real estate ... 39 21 13 42 17
Installment ............... 158 184 153 141 142
Lease financing ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries ........ 273 270 312 339 343
--------- --------- --------- --------- ---------
Net loans charged off ....... (1,560) (634) (389) (232) (262)
Current year provision ...... 2,935 667 553 704 924
--------- --------- --------- --------- ---------
Balance at end of year ...... $ 6,098 $ 4,723 $ 4,690 $ 4,526 $ 4,054
========= ========= ========= ========= =========
Loans, net at year end ...... $ 464,967 $ 412,793 $ 350,652 $ 306,905 $ 253,692
Ratio of allowance to loans at
year end .................. 1.31% 1.14% 1.34% 1.47% 1.60%
Average loans ............... $ 442,296 $ 379,930 $ 339,989 $ 282,812 $ 243,431
Ratio of net loans charged off
to average loans .......... 0.35% 0.17% 0.11% 0.08% 0.11%
</TABLE>
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in the credit portfolio. Non-performing
loans include non-accrual loans, restructured loans and loans delinquent 90 days
or more. Loans are classified as non-accrual when management believes that
collection of interest is doubtful but principal is considered collectible. When
loans are placed on nonaccrual status, all unpaid accrued interest is reversed.
Another element associated with asset quality is other real estate owned (OREO),
which represents properties reacquired through loan defaults by customers.
Non-performing loans were 0.61% of loans in 1997 and 0.59% of loans in 1996, and
the allowance for loan losses is more than double the amount of non-performing
loans at year-end 1997. The dollar increase in non-performing loans during 1997
is due to the maturing portfolio, and less attributable to conditions in the
marketplace. The Company considers commercial loans on nonaccrual or classified
as doubtful under the internal grading system to be impaired. See "Business--
Lending Activities." For these loans, a specific reserve is computed using
discounted expected cash flows or conversion of collateral. There were no
material impaired loans at year-end 1997.
Even though the Company has relatively low levels of non-performing loans
and has experienced low charge-offs, management has sought to maintain the
allowance for loan losses at a level adequate to cover credit losses inherent in
the portfolio. Management's judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events which it believes to be
reasonable, but are likely to change. There can be no
27
<PAGE>
assurance that charge-offs in future periods will not exceed the allowance or
that additional increases in the allowance will not be required. During 1997,
BankFirst recorded a provision for loan losses of $2.9 million, which was
substantially higher than the two preceding years. Factors which gave rise to
the 1997 increased provision and the resultant 29.1% increase in the allowance
included a 36.6% increase in commercial business loans during the year and a
146.1% increase in net charge-offs during the year, which increased the
historical loss factors applied to the portfolio.
Non-Performing Assets
As of December 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Principal balance
Nonaccrual ................... $1,141 $ 900 $ 581 $ 871 $ 477
90 days or more past due
and still accruing ......... 1,705 1,518 461 264 125
------ ------ ------ ------ ------
Total non-performing loans $2,846 $2,418 $1,042 $1,135 $ 602
====== ====== ====== ====== ======
Non-perf. as a percent of loans 0.61% 0.59% 0.30% 0.37% 0.24%
Other real estate owned ....... $ 878 $ 309 $ 770 $ 317 $ 396
OREO as a percent of loans .... 0.19% 0.07% 0.22% 0.10% 0.16%
Allowance as a percent of
nonperforming loans ......... 214.27% 195.33% 450.10% 398.77% 673.42%
The 1997 loan portfolio was 55.5% commercial and commercial real estate
loans, which represent higher risk than residential mortgage and consumer loans
because of their larger size and greater dependency on cash flow. The Company
also has a concentration of commercial real estate loans to the hospitality
industry, substantially in Sevier County, Tennessee. Management has determined
that a total allowance level of $6.1 million, or 1.31% of total loans for 1997,
is adequate for losses inherent in the total portfolio. Future provisions for
loan losses will be dependent on loan growth, loan mix, portfolio credit risk
and actual losses incurred. Provisions during 1998 are expected to be less than
1997 levels.
Allowance Allocation
As of December 31,
---------------------------------------------
1997 1996 1995 1994 1993
----- ------ ----- ------ ------
(Dollars in thousands)
Commercial business .......... $1,231 $ 801 $ 714 $ 617 $ 754
Commercial real estate ....... 1,874 1,366 1,263 1,187 1,161
Construction loans ........... 244 338 276 273 167
Residential real estate ...... 839 1,126 1,227 1,063 811
Installment .................. 986 666 709 764 409
Unallocated .................. 924 426 501 622 752
------ ------ ------ ------ ------
Total ...................... $6,098 $4,723 $4,690 $4,526 $4,054
====== ====== ====== ====== ======
28
<PAGE>
Noninterest Income and Expense
Noninterest Income and Expense
<TABLE>
<CAPTION>
% change % change
1997 from `96 1996 from `95 1995
---- -------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest Income
Deposit service charges and fees $ 3,811 0.40% $ 3,796 14.86% $ 3,305
Trust department income ........ 704 13.55 620 6.53 582
Other .......................... 607 (0.98) 613 107.10 296
Realized gain on sale of loans . 226 (3.42) 234 29.28 181
Security gains/(losses) ........ 309 1,645.00 (20) (500.00) 5
-------- -------- --------
Total noninterest income ..... $ 5,657 7.90% $ 5,243 20.00% $ 4,369
======== ======== ========
Noninterest Expense
Salaries and employee benefits . $ 11,110 5.42% $ 10,539 8.10% $ 9,749
Occupancy expenses ............. 1,716 (19.40) 2,129 37.98 1,543
Equipment expenses ............. 2,537 6.51 2,382 41.36 1,685
Office expenses ................ 775 108.90 371 (49.59) 736
Data processing expenses ....... 1,253 39.69 897 33.09 674
FDIC assessments ............... 48 (88.18) 406 (45.06) 739
Other .......................... 3,884 (4.69) 4,075 1.09 4,031
-------- -------- --------
Total noninterest expense .... $ 21,323 2.52% $ 20,799 8.57% $ 19,157
======== ======== ========
</TABLE>
The primary recurring source of noninterest income is service charges on
deposit accounts. Service charges on deposit accounts increased 0.4% from 1996
to 1997, and increased 14.9% from 1995 to 1996. Trust department income provided
$704,000 in 1997, an increase of 13.6% from 1996. The majority of this trust
income is generated by Athens; however, management expects that the combined
trust departments of both Banks will provide future growth in trust income to
the Company.
Another component of noninterest income is gains on sales of securities
and loans. The Company classifies all of its securities as "available for sale"
to provide flexibility for asset liability management. Security sales were $35.5
million in 1997, generating $309,000 in gains. There were $13.0 million of
security sales in 1996, resulting in $20,000 in losses. In 1995, security sales
of $14.1 combined with $8.2 million sales of trading securities by BankFirst in
generating $5,000 in gains. BankFirst discontinued trading securities during
1995, and current policies do not permit trading. Gains from loan sales of
$226,000 in 1997, $234,000 in 1996 and $181,000 in 1995 were solely gains
realized from sales of mortgage loan servicing to private investors. Proceeds
from sales of these mortgage loans were $15.5 million during 1997. BankFirst
generally has not retained mortgage loans in its portfolio. With the acquisition
of Curtis Mortgage, BankFirst expects to utilize its various retail locations as
a source for expanded mortgage loan origination volume. Curtis Mortgage, through
increased volume, is expected to provide a significant increase in gains on loan
sales as well as to enhance earnings from loan servicing income.
Noninterest expense increased 2.5% in 1997 from 1996. Increases in office
administration and data processing costs were offset by declines in occupancy
and FDIC assessments. The Company's FDIC insurance rate is at the lowest level
charged by the FDIC, which is currently close to zero. Noninterest expenses
increased 8.6% from 1995 to 1996, primarily from occupancy, equipment and data
processing expenses resulting from the combination of Smoky Mountain's and
BankFirst's operations, offset by a decline in FDIC assessments and other
expenses. Future occupancy expenses are expected to increase as a result of new
branch locations currently being constructed, and the 1997 purchase of
additional main office space. Data processing expenses are expected to increase
with growth and from new software purchased by BankFirst during 1998. In 1998,
noninterest expense will include costs associated with the First Franklin
merger, which are estimated to be $500,000.
29
<PAGE>
Income Taxes
The Company's effective income tax rate has remained fairly constant, at
34% in 1997, 34.5% in 1996, and 32.7% in 1995. The Company had deferred tax
liabilities of $756,000 at year-end 1997 and $437,000 at year-end 1996. Note 9
to the consolidated financial statements contains additional analysis of income
taxes.
Interest Rate Sensitivity
A key element in the financial performance of financial institutions is
the level and type of interest rate risk assumed. The single most significant
measure of interest rate risk is the relationship of the repricing periods of
earning assets and interest-bearing liabilities. The more closely the repricing
periods are correlated, the less interest rate risk assumed by the Company. In
general, community bank customer preferences tend to push the average repricing
period for costing liabilities to a shorter time frame than the average
repricing period of earning assets, resulting in a net liability sensitive
position in time frames less than one year. A summary of the repricing schedule
of the Company's interest earning assets and interest bearing liabilities
("GAP") at year-end 1997 follows:
Liquidity and Interest Rate Sensitivity
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------
1 - 90 91 - 365 1 - 5 Over 5
Days Days Years Years Total
----- -------- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net ......................... $ 186,527 $ 68,914 $ 168,081 $ 41,445 $ 464,967
Securities available for sale
Taxable .......................... 2,425 12,202 49,476 26,837 90,940
Tax-exempt ....................... 50 613 4,330 31,826 36,819
--------- --------- --------- --------- ---------
Total securities ................... 2,475 12,815 53,806 58,663 127,759
Federal funds sold ................. 7,000 -- -- -- 7,000
--------- --------- --------- --------- ---------
Total interest earning assets .... $ 196,002 $ 81,729 $ 221,887 $ 100,108 $ 599,726
========= ========= ========= ========= =========
Interest bearing liabilities
Interest-bearing demand deposits ... $ 150,762 $ -- $ -- $ -- $ 150,762
Savings deposits ................... 37,269 -- -- -- 37,269
Time deposits ...................... 67,566 128,028 73,070 325 268,989
Repurchase agreements and other
borrowed funds ................... 17,303 458 500 -- 18,261
Long-term borrowings ............... 25 10,072 384 1,640 12,121
--------- --------- --------- --------- ---------
Total interest bearing liabilities $ 272,925 $ 138,558 $ 73,954 $ 1,965 $ 487,402
========= ========= ========= ========= =========
Rate sensitive gap ................... (76,923) (56,829) 147,933 98,143
Rate sensitive cumulative gap ........ (76,923) (133,752) 14,181 112,324 112,324
Cumulative gap as a percentage
of earning assets .................. (12.83)% (22.30)% 2.36% 18.73%
</TABLE>
30
<PAGE>
As shown in the table, the Company has a cumulative negative GAP of
approximately 13% and 22% at the end of 90 days and one year, respectively.
Management believes that this level of negative GAP is appropriate since many of
the liabilities which are contractually immediately repricable can be
effectively repriced more slowly than the assets which are contractually
immediately repricable in a rising rate environment. Conversely, those
liabilities can often be repriced downward more rapidly than contractually
required assets repricing in a downward rate environment. The degree to which
management can control the rate of change in deposit liabilities which are
contractually immediately repricable is affected to a large extent by the speed
and amount of interest rate movements. Management's estimates regarding the
actual repricing of contractually immediately repricable liabilities is
incorporated into the Company's earnings simulation model.
The Company uses an earnings simulation model to analyze the net interest
income sensitivity. Potential changes in market interest rates and their
subsequent effect on interest income is then evaluated. The model projects the
effect of instantaneous movements in interest rates of 100 and 200 bp.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to interest rates are also incorporated in the model. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes, as well as changes in market conditions and
the application of various management strategies.
Market Risk
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
--------------------------- -----------------------------
200 100 Level 100 200
Basis Points Basis Points Rates Basis Points Basis Points
----------- ----------- ------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Projected Interest Income
Loans ............................. $42,721 $45,240 $47,763 $50,286 $52,809
Investments ....................... 9,138 9,266 9,396 9,523 9,653
Federal funds sold ................ 77 96 115 135 155
------- ------- ------- ------- -------
Total interest income ............. 51,936 54,602 57,274 59,944 62,617
Projected Interest Expense
Deposits .......................... 19,420 20,999 22,463 24,041 25,609
FHLB term advances ................ 554 611 668 725 782
Federal funds purchased
and other ....................... 878 1,117 1,364 1,603 1,843
------- ------- ------- ------- -------
Total interest expense ............ 20,852 22,727 24,495 26,369 28,234
------- ------- ------- ------- -------
Net interest income ............... $31,084 $31,875 $32,779 $33,575 $34,383
Change from level rates ........... (1,695) (904) 796 1,604
% change from level rates ......... (5.17)% (2.76)% 2.43% 4.89%
</TABLE>
In the event of an immediate 100 bp upward shift in the yield curve, it is
estimated that net interest income would increase by $796,000 compared to an
increase of $1.6 million in the event of a similar 200 bp rate movement. These
changes represent 2.4% and 4.9% of net interest income, respectively. Downward
rate movements result in estimated decreases in net interest income of similar
amounts and percentages.
Even though the Company's cumulative GAP at one year is negative, the
earnings simulation model indicates that an increase in interest rates of 100 bp
and 200 bp would result in increased net interest income. This occurs because
management believes that if overall market interest rates increase modestly, the
market would not require an immediate, corresponding repricing of non-term
deposit liabilities.
Liquidity
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets and long and
short term borrowing, based upon management's consideration of expected loan
demand, expected deposit flows and securities sold under repurchase agreements
(which are generally deposit equivalents arising from a corporate cash
management program offered by the Company). Management looks to deposits and
other borrowings as its primary sources of liquidity. See " -- Deposits and
Borrowings." The Banks' Asset/Liability Committees evaluate funding sources on a
quarterly basis, set funding policy, and evaluate repricing and maturity of the
Banks' assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on the Banks' net interest income.
31
<PAGE>
Funding Uses and Sources
<TABLE>
<CAPTION>
1997 1996
--------------------------------- -----------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
-------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Funding Uses
Loans, net of unearned income ... $442,296 $62,366 16.42% $379,930 $39,941 11.75%
Taxable securities .............. 105,180 (8,240) (7.27) 113,420 (2,422) (2.09)
Tax exempt securities ........... 23,328 (8) (0.03) 23,336 3,631 18.43
Federal funds sold .............. 5,850 (4,619) (44.12) 10,469 (1,713) (14.06)
-------- ------- ----- -------- ------- -----
Total uses .................. $576,654 $49,499 9.39% $527,155 $39,437 8.09%
======== ======= ===== ======== ======= =====
Funding Sources
Noninterest bearing deposits .... $ 80,294 $ 8,210 11.39% $ 72,084 $ 3,789 5.55%
Interest bearing demand ......... 141,941 13,893 10.85 128,048 2,582 2.06
Savings deposits ................ 36,803 (1,052) (2.78) 37,855 (3,812) (9.15)
Time deposits ................... 270,782 16,334 6.42 254,448 21,808 9.37
Repurchase agreements ........... 9,110 1,764 24.01 7,346 2,507 51.81
Other borrowings ................ 7,173 2,463 52.29 4,710 36 0.77
Long-term borrowings ............ 12,214 3,670 42.95 8,544 2,991 53.86
-------- ------- ----- -------- ------- -----
Total sources ............... $558,317 $45,282 8.83% $513,035 $29,901 6.19%
======== ======= ===== ======== ======= =====
</TABLE>
The Company believes it has the ability to raise deposits quickly within
its market area by slightly raising interest rates, but has typically been able
to achieve deposit growth without paying above market interest rates. The
current strategy calls for the Banks to be no higher than second highest in
their pricing as compared to their primary competitors. Deposit growth has
funded most of the significant asset growth in the past several years, but has
decreased modestly as a percent of total funding. The Company does not solicit
brokered deposits. Included in certificates of deposit over $100,000 at year-end
1997 are $9 million in deposits from the State of Tennessee. During 1998,
management intends to reduce this relationship by $1 million per month,
replacing these deposits with other sources of funds, because of the restrictive
nature of the pledging requirements associated with these deposits.
The Company actively solicits customer cash management relationships which
often includes a securities repurchase agreement feature. Under these
agreements, commercial customers are able to generate earnings on otherwise idle
funds on deposits with the Banks. These accounts are considered volatile under
regulatory requirements, although the Company has found them to be a steady
source of funding. The Company has been able to increase customer relationships
because of its strong business lending program. While more costly than deposit
funding, these deposit-related accounts are typically the lowest cost borrowed
funds available to the Company.
Although it had no borrowings of this type outstanding at year-end 1997,
the Company maintains significant lines of credit with other financial
institutions. At that date total borrowing capacity under those lines amounted
to approximately $36 million under agreements with six commercial banks. The
Banks also have the capacity to borrow an additional $49.0 million from the FHLB
without purchasing additional FHLB stock.
Sales and maturities of assets are another source of funds. Proceeds from
maturities of securities were $32.2 million, $87.3 million and $45.6 million in
1997, 1996 and 1995, respectively. While management is currently extending the
average maturity of its securities for interest rate risk purposes, substantial
liquidity is available from normal maturities of securities. The Company also
has $127.7 million in securities classified as "available for sale" at year-end
1997. The ability to sell such securities is another potential source of
liquidity, although management generally does not use this source of funding
frequently. To the extent such securities are pledged to outstanding borrowings,
they are not available for liquidity purposes. Proceeds from the maturities of
loans are another steady source of funding, although on a net basis the demands
for new loans and renewal have exceeded funds provided by maturing loans.
32
<PAGE>
Loan Liquidity
<TABLE>
<CAPTION>
Loan Maturities at December 31, 1997
---------------------------------------------------
1 year 1 - 5 Over 5
and less years years Total
----------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial business ............................... $ 43,546 $ 37,358 $ 14,239 $ 95,143
Commercial real estate ............................ 25,443 38,901 99,758 164,102
Real estate - construction and residential ........ 31,892 45,377 67,851 145,120
Installment and Other ............................. 13,854 43,377 5,339 62,570
-------- -------- -------- --------
Total selected loans .............................. $114,735 $165,013 $187,187 $466,935
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates .............................. $177,774
Floating interest rates ........................... 174,426
--------
$352,200
========
</TABLE>
The liquidity discussion above has described the Company's liquidity needs
on a consolidated basis. In general, the deposit and borrowing capacity
described above is at the bank level, while the equity based sources of funding
are at the holding company level. Substantial liquidity can be moved between the
Banks and the holding company, although there are certain regulatory
restrictions on such flows, particularly from the Banks to the holding company,
as described in note 12 to the financial statements. At year-end 1997, the Banks
had the ability to transfer approximately $9.1 million in dividends to the
holding company without special regulatory approval. The holding company
currently has no borrowings, and management's current policy is to not pay
dividends on common stock; rather earnings are retained to provide capital to
support the Company's growth. As a result, the holding company's independent
liquidity needs result primarily from holding company only expenses, which are
quite small in relation to its sources of liquidity.
Subsequent Events
At August 1, 1998, the Company's total assets were $710.3 million, and for
the period from January 1, 1998 through August 1, 1998, net income was $3.9
million. The Company's basic earnings per share were $0.39 and diluted earnings
per share were $0.35 for the same period.
Year 2000
The Company has implemented plans to address Year 2000 compliance. The
issue arises from the fact that may existing computer programs use only a two
digit field to identify the year. These programs were designed without
considering the impact once the calendar rolls over to "00". If not corrected,
computer applications could fail or create inaccurate results by or at the Year
2000. The Company must not only evaluate and test its own Year 2000 readiness,
it must also coordinate with other entities with which it routinely interacts
such as suppliers, creditors, borrowers, customers, and other financial service
organizations. Regulations require the Company and the Banks to accomplish
specific Year 2000 actions by specific dates. Management believes that the
Company and the Banks are currently in compliance with each applicable directive
issued by the Bank Regulatory Authorities.
The Company has initiated an implementation plan providing for Year 2000
readiness by the end of 1998. Management believes the plan is on target with the
goals established by its regulators. The Banks have completed the awareness and
assessment phases and have substantially completed the remediation phase of the
plan. BankFirst's data processing service bureau implemented new software which
has been Year 2000 certified, and BankFirst completed its conversion to this new
software in April, 1998. Conversion to the new host system necessitated an
upgrade of BankFirst's personal computers and their operating systems, which
have been tested for Year 2000 compliance. Prior to the Merger, Athens
implemented its own Year 2000 preparedness plan. The Company is entering the
testing phase of its implementation plan, which is scheduled to be substantially
completed by year-end 1998. A contingency plan for Year 2000 has been developed
to address mission critical systems.
33
<PAGE>
The Company has determined that the Year 2000 issue may be critical to its
operations; however, management does not believe customer readiness is or will
be material to its overall performance. Management believes that the total costs
of becoming Year 2000 compliant will not be material. Through 1997, expenditures
for Year 2000 were immaterial, and Year 2000 related expenditures for 1998 are
projected to be $235,000.
Effects of Inflation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Nearly all of the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Company's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the prices of goods and services.
New Accounting and Reporting Requirements
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Comprehensive
income is defined as all changes in equity other than those resulting from
investments by owners or distributions to owners. The most common items of other
comprehensive income include unrealized gains or losses on securities available
for sale. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Statement No. 130 is effective for 1998. The only
item of comprehensive income for the Company is a change in unrealized gains on
securities, which was $625,000 in 1997 and $(605,000) in 1996.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 is effective for public companies' interim and
year-end financial statements for reporting periods following the first required
full fiscal year disclosure. This Statement establishes new guidance for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable operating segments in interim financial reports
issued to shareholders. SFAS No. 131 supersedes the industry approach to segment
disclosures previously required by SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing it with a method of segment
reporting which is based on the structure of an enterprise's internal
organization reporting. The Statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to include segment reporting in the year-end 1999 financial
statements.
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities." SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivative and whether it qualifies for hedge accounting, gains or losses
from changes in the values of those derivatives would either be recorded as a
component of net income or as a change in stockholders' equity. BankFirst is
required to adopt the new standard January 1, 2000. Management has not yet
determined the impact of this standard.
FDIC Improvement Act (FDICIA) of 1991. The FDICIA stipulates many
responsibilities of financial institutions, its boards of directors and
accountants. Many of the provisions have already been effective for the Company;
however there are certain filing requirements which are only applicable to banks
with assets over $500 million. This threshold is measured on an individual bank
basis, not on consolidated assets. BankFirst, taken alone, had total year-end
1997 assets of $468.8 million, and is expected to exceed $500 million during
1998. As a result, the Bank will be required to comply with the FDICIA reporting
requirements during 1999. Athens had total year-end assets of $182 million, and
will not be subject to the FDICIA reporting requirements for the foreseeable
future.
34
<PAGE>
BUSINESS
General
The Company is a bank holding company headquartered in Knoxville, Tennessee
that focuses on meeting the banking needs of East Tennessee businesses and
residents through a relationship oriented, community bank business strategy. The
Company conducts its banking business through BankFirst, a Tennessee banking
corporation with 23 offices in Knox, Sevier, Blount, Loudon and Jefferson
Counties, and through Athens, a national banking association acquired on July 2,
1998 with six offices in McMinn County. The Company's operations principally
involve commercial and residential real estate lending, commercial business
lending, consumer lending, construction lending and other financial services,
including trust operations, credit cards services and brokerage services.
From 1992 to June 30, 1998, the organization has grown from a single
community bank with five offices and approximately $66 million in assets, to a
multi-bank organization with an established local banking presence in six
counties with 29 offices and approximately $707 million in assets. The Company
has broadened its mix of products and expanded its customer base through a
combination of internal growth and the consolidation of well-established East
Tennessee banks and financial service companies. The Company's Athens subsidiary
has been in business for over 125 years, its BankFirst subsidiary traces its
history to the 1920's and BankFirst's subsidiary, Curtis Mortgage, was
established in 1944. The Company's growth has been directed by a senior
management team composed of individuals with established networks of customers
and an average of 25 years of experience in East Tennessee banking. See
"Management."
The Company operates according to the following business strategies:
Local Decision Making. The foundation of the Company's strategy is to
operate a multi-community bank organization which emphasizes decision making at
the local branch level. Each Bank has a separate board comprised of local
businessmen allowing it to be responsive to the needs and trends of the local
community. Each branch manager and individual loan officer is given significant
authority and discretion to approve loans to price loans and services in order
and to otherwise respond quickly and efficiently to the needs of Bank customers.
Central Corporate Support. The Company supports the local bank branches by
providing central management, pricing and service coordination, policy
oversight, technological support and strategic planning. Central management also
monitors the performance of individual branches and loan officers, and with the
input of local loan officers, approves all loans above certain designated
limits. The Company has recently implemented new information technology which
allows local loan officers to better identify their more profitable customers,
to expand the scope of services provided to such customers and to make more
informed pricing decisions.
Relationship Banking. The Company focuses on serving East Tennessee
businesses and individuals through relationship banking, characterized by long
term multi-service relationships. Drawing upon this experience and the customer
networks of its loan officers and assisted by centralized information
technology, the Banks seek to effectively price and provide related bank
services to enhance overall profitability. The Banks compete with other
providers of financial services primarily through superior relationship
management, rather than direct price competition.
Full Line of Banking Products. The Company's strategy is to offer the
personalized service and local decision-making characteristic of community banks
while providing the wider variety of banking products associated with regional
and super-regional financial institutions. The Company continues to enhance its
product mix through both strategic acquisitions and internal development. The
addition of Athens gives the Company an established trust department and a
consumer finance subsidiary. The acquisition of Curtis Mortgage allows local
servicing of mortgages. The Company has recently added a discount brokerage
service and telephone banking and expects to offer personal computer banking.
Market Areas
The Company operates principally in three market areas: (i) Knox County,
Tennessee; (ii) Sevier County, Tennessee; and (iii) McMinn County, Tennessee.
The Company also operates in Blount, Loudon and Jefferson Counties, Tennessee.
The following discussion of market areas contains the most recent information
available from the Tennessee Economic Development Center (the "TEDC").
Population figures are estimated as of 1997, per capita income is estimated as
of 1995 and unemployment rate is estimated as of March 1998.
35
<PAGE>
Knox County. The Company's largest market area is Knox County which is
served through BankFirst. Since 1994, total deposits for all commercial banks,
savings institutions and branches of foreign banks in the Knox County market
have increased 56%, from $2.69 billion to $4.20 billion. The Company has eight
offices in Knox County and approximately 15.9% of its deposits are located
there. BankFirst is focusing on expanding its current 1.2% share of bank
deposits in this market where it competes with several regional and
super-regional banking institutions as well as the numerous smaller community
banks.
Knox County had an estimated population of 365,626, the third most populous
county in Tennessee, and had an estimated per capita income of approximately
$23,107, the fifth highest per capita income in the State of Tennessee. The
unemployment rate for the county was 2.9%.
The economic base of Knox County is a mix of government, manufacturing and
professional services, with the University of Tennessee and its Medical Center
being the largest employer with more than 10,000 employees. DeRoyal Industries,
a manufacturer of medical devices, is the largest industrial employer.
Sevier County. The Company serves the Sevier County market through
BankFirst, drawing upon the experience and established presence of its FNBG
roots. Since 1994, total deposits for all commercial banks, savings institutions
and branches of foreign banks in Sevier County have increased 39%, from $686
million to $956 million. The Company currently has six branch offices in Sevier
County and 24.2% of the Company's deposits are located there. As of June 30,
1997, BankFirst had an 18.2% share of the Sevier County bank deposit market.
Sevier County is located adjacent to the Great Smoky Mountain National Park
which is the most frequently visited of all national parks. The largest cities
in Sevier County are Gatlinburg and Pigeon Forge. Sevier County had an estimated
population of 62,601, a per capita income of $19,127 and an unemployment rate of
13.4%.
The economic base for the county is primarily tourism, retail shopping,
entertainment and lodging. The largest employer is Dollywood Amusements, an
amusement park. The largest industrial employers are Dan River, Inc., a producer
of cotton fabrics, Charles Blalock & Sons, a manufacturer of hot mix asphalt,
and TRW-Fuji Valve, a manufacturer of engine valves and components.
McMinn County. The Company entered the McMinn County market through the
acquisition of Athens. Since 1994, total deposits for all commercial banks,
savings institutions and branches of foreign banks in McMinn County have
increased 59%, from $320.9 million to $509.3 million. The Company has six
offices located in this market, and approximately 27.3% of its deposits are
located there. Athens is the second largest locally-based independent commercial
bank in McMinn County and as of June 30, 1997 had a 27.2% share of the bank
deposit market.
Athens, Tennessee is the largest city in McMinn County and is the site of
Tennessee Wesleyan College. The county had an estimated population of 45,890 and
a per capita income of $16,473. The unemployment rate for McMinn County was
6.8%.
The economic base in McMinn County is primarily manufacturing, with Bowater
Newsprint, Athens Furniture Industries, Mayfield Dairy Farms, Inc. and Textron
Automotive Interiors being the largest industrial employers.
Lending Activities
General. Through the Banks, the Company offers a range of lending services,
including commercial and residential real estate and commercial and consumer
loans to small businesses and individuals and other organizations that are
located in or conduct a substantial portion of their business in the Banks'
market areas. The interest rates charged on loans vary with the degree of risk,
maturity and amount of the loan, and are further subject to competitive
pressures, money market rates, availability of funds, and government
regulations. The Company has no foreign loans or loans for highly leveraged
transactions.
The Company's primary focus has been on commercial and installment lending
to individuals and small to medium-sized businesses in its market areas. These
loans totaled approximately $249 million, and constituted approximately 49% of
the Company's loan portfolio, at June 30, 1998.
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The following table sets forth the composition of the Company's loan
portfolio for each of the five years in the period ended December 31, 1997.
Loans Outstanding
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial business ........ $95,143 $69,614 $53,430 $57,680 $43,448
Commercial real estate ..... 164,102 155,389 116,372 103,312 91,052
Construction loans ......... 24,977 26,379 22,021 19,431 12,153
Residential real estate .... 120,143 110,636 108,276 81,472 73,488
Installment ................ 59,947 50,277 50,569 45,093 33,981
Other ...................... 2,623 2,035 1,754 1,918 953
------------------------------------------------------------
Total loans ............. 466,935 414,330 352,422 308,906 255,075
Unearned income ............ (1,968) (1,537) (1,770) (2,001) (1,383)
------------------------------------------------------------
Total loans, net ........ $464,967 $412,793 $350,652 $306,905 $253,692
============================================================
</TABLE>
Commercial Real Estate Loans. The Banks' commercial real estate loans
include permanent mortgage loans on commercial and industrial properties and
development loans. These loans are originated on both a one-year line of credit
basis and on a fixed-term basis generally ranging from three to five years on a
15-year amortization. The Banks generally lend not more than 80% of the
appraised value of the property. In making lending decisions, the Banks
generally consider, among other things, the overall quality of the loan, the
credit of the borrower, the value of the real estate, the projected income
stream of the property and the reputation and quality of management constructing
or administering the property. No one factor is determinative and such factors
may be accorded different weights in any particular lending decision. As a
general rule, the Banks also require that these loans be guaranteed by one or
more of the individuals who have a significant equity investment in the
property. Commercial real estate loans generally have prime-based interest rates
which adjust more rapidly to interest rate fluctuations and bear higher rates of
interest than other types of loans. Accordingly, income from this type of loan
should be more responsive to changes in the general level of interest rates.
Residential Real Estate Loans. Both of the Banks have traditionally
originated one to four family residential loans and sold the servicing rights to
third parties. Residential mortgage loans must satisfy underwriting standards
which typically require that the homes pledged to secure the loans must be
either owner occupied or investor properties which are single family residences,
the value of which has been determined by appraisal, and subject to down
payments and financial responsibility of the buyer. The loans generally are
fixed rate or adjustable rate first mortgages with terms of 15 to 30 years.
In January 1998, BankFirst acquired Curtis Mortgage, a company engaged
primarily in originating and servicing mortgage loans. Curtis Mortgage is an
approved seller of FHA, VA, GNMA and THDA loans. With the acquisition of Curtis
Mortgage, the Banks expect to transfer their loan originating services to Curtis
Mortgage which will retain the servicing rights to the loans. Curtis Mortgage
will utilize the Banks' existing customer bases to create additional referrals.
The Company intends to maintain the separate identity of Curtis Mortgage in
order to promote and foster its established reputation and relationships in the
communities it serves. In addition to maintaining its own office, Curtis
Mortgage will station employees in certain Bank branches to originate and
service mortgage loans.
The Company intends to actively market the ability of Curtis Mortgage to
locally service mortgage loans to existing customers of the Banks as well as to
other community banks in East Tennessee. The fees derived from servicing
mortgage loans include mortgage servicing fees as well as return check and late
charge fees. The amount of revenue earned from loan servicing is dependent on
the prepayments of the underlying loans. Generally, as interest rates fall, loan
prepayments accelerate, resulting in lower net revenues earned on loan servicing
rights as well as write-offs of purchased mortgage servicing rights. A decline
in the value of purchased mortgage servicing rights may also reduce regulatory
capital. See "Regulation." Conversely, as interest rates rise, loan prepayments
decline, resulting in higher net revenues earned on loan servicing rights. As of
the date of the acquisition, Curtis Mortgage serviced approximately 7,600 loans
having an aggregate principal balance of approximately $450 million.
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<PAGE>
Commercial Business Loans. The Banks' commercial lending activities
generally involve small to medium-sized companies located in Knox, Sevier,
Blount, Loudon, Jefferson and McMinn Counties, Tennessee. The Banks make both
secured and unsecured loans for working capital, equipment purchases, and other
general purposes, although the majority of such lending is done on a secured
basis. The average balance of commercial business loans is in excess of
$175,000, and such loans are generally secured by the receivables, inventory,
equipment, and/or general corporate assets of the borrowers. These loans are
originated on both a one year line of credit basis and on a fixed-term basis
ranging from one to three years. Commercial business loans generally have annual
maturities and prime-based interest rates. However, commercial business loans
generally have a higher degree of credit risk than residential loans because
they are more likely to be adversely affected by unfavorable economic
conditions. The development of ongoing customer relationships with commercial
borrowers is an important part of the Company's efforts to attract more
low-interest and non-interest bearing demand deposits and to generate other
fee-based, non-lending services.
Consumer Loans. The Banks originate consumer loans bearing both fixed and
prime-based interest rates primarily ranging in terms up to five years,
excluding second mortgage loans, directly through its branch banks. Consumer
loans typically involve a higher degree of credit risk than one to four family
residential loans secured by first mortgages, but they generally carry higher
yields and have shorter terms to maturity. Second mortgage loans generally are
originated on both a line of credit basis and on a fixed term basis ranging from
five to 15 years. Consumer loans may be secured by various forms of collateral,
both real and personal, or to a minimal extent, may be made on an unsecured
basis.
Construction Loans. The Banks originate construction loans secured by
income-producing properties (or for residential development or land
acquisition). These loans are originated both on a fixed and variable basis for
a term generally of one year. This type of lending is generally considered to
have higher credit risks than traditional single-family residential lending
because the principal is concentrated in a limited number of loans and borrowers
and repayment of these loans is dependent on the successful operation of the
related real estate project and thus may be subject, to a greater extent, to
adverse conditions in the real estate market or the economy, generally. The
Banks' risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's sell-out value upon
completion of the project and the estimated cost of the project. If the
estimated cost of construction or development proves to be inaccurate, the Banks
may be compelled to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of value proves to be
inaccurate, the Banks may be confronted, at or prior to the maturity of the
loan, with a project value which is insufficient to assure full repayment. As
loan payments become due, the cash flow from the project may not be adequate to
service total debt and the borrower may seek to modify the terms of the loan. In
addition, the nature of these loans is such that they are generally less
predictable and more difficult to evaluate and monitor and collateral may be
difficult to dispose of. The Banks have sought to minimize these risks by
lending primarily to established entities and generally restricting such loans
to their primary market area.
Loan Commitments. The Banks issue commitments to make residential and
commercial real estate loans and commercial business loans on specified terms
which are conditioned upon the occurrence of stated events. Loan commitments are
generally issued in connection with (i) the origination of loans for the
financing of residential properties by prospective purchasers, (ii) construction
or permanent loans secured by commercial and multi-unit residential
income-producing properties, (iii) loans to corporate borrowers in connection
with loans secured by corporate assets and (iv) the origination of loans for the
refinancing of residential properties by existing owners.
The commitment procedure followed by the Banks depends on the type of loan
underlying the commitment. Residential loan commitments are generally limited to
60 days and are issued after the loan is approved. However, loan commitments may
be extended based on the circumstances. The Banks offer interest rate "locks"
for periods of up to 60 days. The Banks also issue short-term commitments on
commercial real estate loans and commercial business loans. The Banks usually
charge a commitment fee of 1/2% to 1% on commitments relating to commercial real
estate loans and commercial business loans.
Other Financial Activities
Trust Activities. The Athens trust department, established in 1946,
provides a full array of trust services including personal trusts and estates,
employee benefit programs and individual retirement accounts. On June 30, 1998,
the department had approximately $156.3 million in trust assets under
administration in
38
<PAGE>
approximately 350 accounts. BankFirst's trust department is significantly
smaller than that of Athens. The Company plans to combine the operations of the
two trust departments into a separate trust company which will serve the
customers of both Banks.
Friendly Finance Company. Friendly Finance, a wholly-owned subsidiary of
Athens, is chartered as a Tennessee industrial loan and thrift company and
operates as a consumer finance company. Established in 1997, Friendly Finance
has taken a conservative approach to acquiring new accounts. At June 30, 1998,
it had outstanding loans of approximately $298,000.
Eastern Life Insurance. Eastern Life Insurance Co., a subsidiary of
BankFirst, provides credit life insurance. All insurance policies are written by
Bank employees and are sold to a third-party life insurance company which
manages the insurance operations. For the year ended December 31, 1997,
contributions to Company income by Eastern Life were minimal.
Credit Card Operations. Both Banks offer credit card services to their
customers and to merchants. At June 30, 1998, BankFirst had approximately 3,000
card holders and BankFirst and Athens had approximately 600 and 60 credit card
merchant accounts, respectively. Athens traditionally provided credit cards to
its customers through a third party provider for a small monthly fee per credit
card originated. With the Merger, management expects Athens to offer its own
credit card, utilizing the infrastructure developed by BankFirst.
Brokerage Services. The Banks offer a full array of brokerage products,
including stocks, bonds, mutual funds, IRAs and annuities. Licensed Bank
employees take orders directly from customers and then place the orders through
a third party discount brokerage firm. The Banks receive a commission for each
transaction.
Lending Procedures and Loan Approval Process
Lending Procedures. The lending procedures of Athens and BankFirst reflect
the Company's philosophy of local control and decision making. Although the
overall lending policy of the Banks is set by the Board of Directors of the
Company and is subject to the oversight and control of the Board of Directors,
the Company depends to a great degree upon the judgment of its loan officers and
bank senior management to assess and control lending risks.
Individual loan officers have discretionary authority to approve certain
loans at both Athens and BankFirst without prior approval. The discretionary
limit at BankFirst varies by loan officer based upon seniority, with certain
senior officers having discretionary approval authority up to $200,000. At
Athens, certain individual loan officers have discretionary approval authority
up to $100,000.
Each Bank utilizes a loan committee to review loan requests exceeding the
discretionary limit of the loan officer or branch manager, or for which the loan
officer or branch manager chooses not to exercise his or her discretionary
authority. Each of the Banks has its own officer loan committee, reflecting the
Company's emphasis on local control and decision-making.
At BankFirst, loans to borrowers with a total debt level over $200,000 but
less than $500,000 must be approved by two members of the Officers' Loan
Committee ("OLC"). Loans to borrowers with a debt level of $500,000 but less
than $750,000 must be approved by three members of the OLC, including the Senior
Loan Officer ("SLO"). Loans to borrowers with debt levels over $750,000 but less
than $1 million must be approved by four members of the OLC, including the SLO.
Loans to borrowers with debt levels over $1 million must be approved by the OLC
for loan amounts up to $200,000 and by the Directors' Loan Committee for any
individual loan exceeding $200,000.
At Athens, loans over $100,000 up to $800,000 must be approved by the
Internal Lending Committee. Loans in excess of $800,000 must be approved by the
full Board of Directors or the Executive Committee.
Credit Review. Credit risk and exposure to loss are inherent to the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures. The
loan review procedures are set to monitor adherence to the established criteria
and to ensure that on a continuing basis such standards are enforced and
maintained. Management's objective in establishing lending and investment
standards is to manage the risk of loss and to provide for income generation
through pricing policies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Lending."
39
<PAGE>
Defaults. In the event that a borrower fails to make a required payment on
a loan, the Banks attempt to have the deficiency cured by communicating with the
borrower. In most cases, deficiencies are cured promptly. In certain cases, the
Banks may institute appropriate legal action to collect the loan, including
foreclosing on any collateral securing the loan and obtaining a deficiency
judgment against the borrower, if appropriate.
Investment Activities
The Banks maintain separate investment portfolios consisting primarily of
investment grade securities, including federal agency obligations, corporate
bonds and asset-backed securities. Federal regulations limit the types and
quality of instruments in which the Banks may invest.
BankFirst contracts with an investment advisor to manage its investment
portfolio. BankFirst has provided the investment advisor with guidelines for
authorized investments, classification of investment securities, unsuitable
investment practices, investment responsibilities, conflicts of interest and
exceptions to policy. BankFirst's Chief Financial Officer is responsible for
monitoring the procedures and supplying its investment advisor with liquidity
and interest rate risk guidelines. BankFirst maintains its investment portfolio
primarily for liquidity purposes and all securities held are classified as
"available for sale."
Athens manages its own investment portfolio. The Athens Trust Committee has
set guidelines for authorized investments, classification of investment
securities and unsuitable investment practices. Athens maintains its investment
portfolio with the goal of maximizing returns for Athens within acceptable
risks, while maintaining sufficient liquidity to meet fluctuations in loan
demand and deposit structure.
Sources of Funds
Historically, deposits have been the principal source of the Banks' funds
for use in lending and for other general business purposes. Loan repayments,
sales of securities, capital contributions from the Company, sale of mortgage
loans, advances from the FHLB, other borrowings and the use of customer
repurchase agreements have been additional sources of funds. Loan amortization
payments and deposit inflows and outflows are significantly influenced by
general interest rates. Borrowings may be used by the Banks on a short-term
basis to compensate for reductions in normal sources of funds such as savings
inflows, and to provide additional liquidity for investments. On a long-term
basis, borrowings may support expanded lending activities. Historically, the
Banks have borrowed primarily from the FHLB and through unsecured federal fund
lines of credit with certain financial institutions.
Deposit Activities. The Banks offer several types of deposit programs
designed to attract both short-term and long-term funds from the general public
by providing an assortment of accounts and rates. The Company believes that its
product line is comparable to that offered by regional banks and superior to
that offered by competing community banks. The Banks offer the following
accounts: commercial and retail demand deposit accounts; regular passbook and
statement savings accounts; fixed-rate, fixed-maturity certificates of deposit
ranging in maturity from 14 days to five years; and various NOW accounts. The
Banks also offer IRA retirement accounts. The Banks' deposit accounts are
insured by the FDIC up to a maximum of $100,000 for each insured depositor.
The following table summarizes the Banks' deposits:
Deposit Information
At December 31,
--------------------------------------
1997 1996 1995
-------- --------- ---------
(Dollars in thousands)
Noninterest bearing ............... $ 92,749 $ 74,161 $ 74,325
Interest bearing demand ........... 150,761 139,152 125,558
Savings deposits .................. 37,270 36,576 41,507
Time .............................. 268,989 266,450 238,956
-------- -------- --------
Total deposits ........... $549,769 $516,339 $480,346
======== ======== ========
40
<PAGE>
Maturity Ranges of Time Deposits with
Balances of $100,000 or more
At December 31,
-------------------------------------
1997 1996 1995
-------- ------- -------
(Dollars in thousands)
3 months or less .................. $25,686 $28,578 $25,508
3 through 6 months ................ 14,324 11,182 14,188
6 through 12 months ............... 21,167 19,619 11,867
Over 12 months .................... 17,083 10,089 11,352
------- ------- -------
$78,260 $69,468 $62,915
======= ======= =======
From time to time, the Banks seek to attract deposits through a variety of
methods including image and product advertising in newspapers of general
circulation and on radio and television. Most of the depositors of BankFirst are
residents of Knox, Sevier, Blount, Loudon and Jefferson Counties, Tennessee.
Most of the depositors of Athens are residents of McMinn County, Tennessee,
although Athens attracts deposits from surrounding counties.
Borrowings. The Banks are members of the FHLB and are authorized to apply
for advances from the FHLB secured by first mortgage balances. See "Regulation."
The Banks use advances from the FHLB to repay other borrowings, meet deposit
withdrawals and expand its lending and short-term investment activities. See
Note 7 to the Consolidated Financial Statements. Additionally, the Banks have
federal funds lines of credit of approximately $36 million with certain
commercial banking institutions.
The Bank has utilized customer repurchase agreements as a means of
retaining depositors, increasing liquidity and meeting customer demand. In a
repurchase transaction, BankFirst sells a portion of its current investment
portfolio at a negotiated rate and agrees to repurchase the same assets on a
specified date. Proceeds of such transactions are treated as secured borrowings
pursuant to the applicable regulations.
Competition
The Banks have substantial competition in attracting and retaining deposits
and in lending funds. The primary factors in competing for deposits are the
range and quality of financial services offered, the ability to offer attractive
rates and the availability of convenient office locations. There is direct
competition for deposits from credit unions and commercial banks and other
savings institutions. Additional significant competition for savings deposits
comes from other investment alternatives, such as money market mutual funds and
corporate and government securities. The primary factors in competing for loans
are the range and quality of lending services offered, interest rates and loan
origination fees. Competition for the origination of loans normally comes from
other savings and financial institutions, commercial banks, credit unions,
insurance companies and other financial service companies. The Company believes
that its strategy of relationship banking and local autonomy in the communities
it serves allows flexibility in rates and products offered in response to local
needs. The Company believes this is its most effective method of competing with
both the larger regional bank holding companies and with smaller community
banks.
Employees
At June 30, 1998, BankFirst and its subsidiaries employed 279 full-time
equivalent employees and Athens and its subsidiaries employed 99 full-time
equivalent employees. The Company does not have any employees who are not also
employees of BankFirst or Athens, or their subsidiaries. Management believes
that its relations with its employees are good. The employees are not
represented by any collective bargaining group.
Properties
The Company's principal and executive offices are located at 625 Market
Street, Knoxville, Tennessee 37902. BankFirst currently conducts business at 23
offices located in Knox, Sevier, Blount, Loudon and Jefferson Counties,
Tennessee. Athens currently conducts business at six offices all located in
McMinn County, Tennessee. The Company owns the land and building on which its
executive offices are located and also owns 23 of its office locations. The
remaining six branch office locations are leased.
41
<PAGE>
Legal Proceedings
The nature of the banking business generates a certain amount of litigation
against the Company and the Banks involving matters in the ordinary course of
business. None of the legal proceedings currently pending or threatened to which
the Company or its subsidiaries is a party or to which any of their properties
are subject will have, or have, in the opinion of management, a material effect
on the business or financial condition of the Company.
On November 24, 1997, BankFirst filed a lawsuit in the Chancery Court for
Sevier County, Tennessee against Electronic Communications Corporation ("ECC")
and Steve Newland, bearing Case No. 97-11-328, which was later amended to join
Paymentech Merchant Services, Inc. ("Paymentech") as a defendant. The lawsuit
alleges that Paymentech made unauthorized and unreported deletions from wire
transfers to BankFirst in the aggregate amount of $544,393. Paymentech filed a
counterclaim and a cross-claim against ECC in the lawsuit, alleging that
Paymentech inadvertently overpaid BankFirst the total sum of $3,967,907. On
March 18, 1998, the parties reached a partial settlement in which Paymentech
agreed to reduce its counterclaim to $544,393 and BankFirst agreed to transfer
$3,423,514 to Paymentech which had been retained by BankFirst. With respect to
the matters not settled, management expects to proceed to trial in 1998 if the
matters are not resolved by summary judgment. Management has established certain
reserves against possible losses in amounts it deems adequate and believes that
the possibility of any additional exposure is remote.
42
<PAGE>
REGULATION
The Company and the Banks are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of their
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. The following summaries of statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. Such summaries are qualified in their entirety by reference to the
statutes and regulations described.
Bank Holding Company Act of 1956
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require. The Company's activities are limited to managing or controlling
banks, furnishing services to or performing services for its subsidiaries, and
engaging in other activities that the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
With certain limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve before (i) acquiring
substantially all the assets of any bank, (ii) acquiring direct or indirect
ownership or control of any voting shares of any bank if after such acquisition
it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares), or (iii) merging or
consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person acquires 10% or
more but less than 25% of any class of voting securities and either the Company
has registered securities under Section 12 of the Exchange Act or no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHCA, a bank 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 the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include marking or servicing loans and certain types of leases,
engaging in approved insurance and discount brokerage activities, performing
qualifying data processing services, acting in certain circumstances as a
fiduciary or investment or financial adviser, owning savings associations, and
making investments in qualifying corporations or projects designed primarily to
promote community welfare.
The Federal Reserve Board has imposed certain capital requirements on bank
holding companies under the BHCA, including a minimum leverage ratio and a
minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Requirements."
In accordance with Federal Reserve Board policy, the Company is expected
to act as a source of financial strength to the Banks and to commit resources to
support the Banks in circumstances in which the Company might not otherwise do
so. Under the BHCA, the Federal Reserve Board may require a bank holding company
to terminate any activity or relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition.
The Federal Reserve Board has the power to prohibit dividends by bank
holding companies if their actions constitute unsafe or unsound practices. The
Federal Reserve Board has issued a policy statement on the payment
43
<PAGE>
of cash dividends by bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company experiencing earnings weaknesses should
not pay cash dividends that exceed its net income or that could only be funded
in ways that weaken the bank holding company's financial health, such as by
borrowing.
In approving acquisitions by bank holding companies of banks and companies
engaged in the banking-related activities described above, the Federal Reserve
considers a number of factors, including the expected benefits to the public
such as greater convenience, increased competition, or gains in efficiency, as
weighed against the risks of possible adverse effects such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Federal Reserve is also empowered to
differentiate between new activities and activities commenced through the
acquisition of a going concern.
The Attorney General of the United States may, within 15 days after
approval by the Federal Reserve Board of an acquisition, bring an action
challenging such acquisition under the federal antitrust laws, in which case the
effectiveness of such approval is stayed pending a final ruling by the courts.
Failure of the Attorney General to challenge an acquisition does not, however,
exempt the holding company from complying with both state and federal antitrust
laws after the acquisition is consummated or immunize the acquisition from
future challenge under the anti-monopolization provisions of the Sherman Act.
A bank holding company and its subsidiaries are also prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or provision of any property or service. Thus, an affiliate of a bank
holding company may not extend credit, lease, sell property, or furnish any
services or fix or vary the consideration for these on the condition that (i)
the customer must obtain or provide some additional credit, property, or
services from or to its bank holding company or subsidiaries thereof or (ii) the
customer may not obtain some other credit, property, or services from a
competitor, except to the extent reasonable conditions are imposed to assure the
soundness of the credit extended. Proposals to allow some exceptions to these
rules recently have been enacted, and additional regulatory relief on this issue
is pending.
Tennessee Banking Act; Federal Deposit Insurance Act; National Bank Act
BankFirst is incorporated under the banking laws of the State of Tennessee
and, as such, is subject to the applicable provisions of those laws. BankFirst
is subject to the supervision of the TDFI and to regular examination by that
department. Athens is incorporated under the National Bank Act, as amended, and
is subject to the applicable provisions of that law. Athens is also subject to
the supervision of the OCC and to regular examination by that agency. Both
BankFirst's and Athens' deposits are insured by the FDIC through the Bank
Insurance Fund ("BIF"), and they are therefore subject to the provisions of the
Federal Deposit Insurance Act and to examination by the FDIC.
The TDFI, OCC and the FDIC (the "Bank Regulatory Authorities") will
regulate or monitor virtually all areas of the Banks' operations, including
security devices and procedures, adequacy of capitalization and loss reserves,
loans, investments, borrowings, deposits, mergers, issuances of securities,
payment of dividends, interest rates payable on deposits, interest rates or fees
chargeable on loans, establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training to carry on
safe lending and deposit gathering practices. The federal Bank Regulatory
Authorities have established regulatory standards for all insured depository
institutions and depository institution holding companies relating, among other
things, to: (i) internal controls, information systems, and audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
and (v) asset quality. The Bank Regulatory Authorities also require the Banks to
maintain certain capital ratios. The Banks are required to prepare periodic
reports on their financial condition and to conduct an annual audit of their
financial affairs in compliance with minimum standards and procedures prescribed
by the Bank Regulatory Authorities. The Banks undergo regular on-site
examinations by each Bank Regulatory Authority having jurisdiction over them.
Deposit Insurance. The FDIC establishes rates for the payment of premiums
by federally insured banks and thrifts for deposit insurance. A separate Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") are
maintained for commercial banks and thrifts, respectively, with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. Insured depository institutions like the Banks pay for
deposit insurance under a risk-based premium system. Under the premium system, a
depositor institution pays premiums to BIF or SAIF ranging from $0.00 to $0.27
per $100 of insured deposits depending on its capital levels and risk profile,
as determined by its primary federal regulator on a semi-annual
44
<PAGE>
basis. The assessment rate for both Banks is currently $0.00 per $100 of insured
deposits. Increases in deposit insurance premiums will increase the Banks' cost
of funds, and there can be no assurance that such cost can be passed on to the
Banks' customers.
Transactions with Affiliates and Insiders. The Banks are subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and to all affiliates, 20% of the bank's
capital and surplus. Furthermore, within the foregoing limitations as to amount,
each covered transaction must meet specified collateral requirements. Compliance
is also required with certain provisions designed to avoid the taking of low
quality assets.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act which, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies. The Banks are subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
Dividends. There are certain limitations under federal and Tennessee law
on the payment of dividends by banks. Under Tennessee law, the directors of a
state bank, after making proper deduction for all expenditures, expenses, taxes,
losses, bad debts, and any write-offs or other deductions required by the TDFI,
may credit net profits to the bank's undivided profits account, and may
quarterly, semi-annually, or annually declare a dividend in such amount as they
shall judge expedient after deducting any net loss from the undivided profits
account and transferring to the bank's surplus account (i) the amount (if any)
required to raise the surplus ("Additional Paid-in-Capital Account") to 50% of
the capital stock and (ii) the amount required (if any), but not less than 10%
of net profits, until the paid-in-surplus account equals the capital stock
account, provided that the bank is adequately reserved against deposits and such
reserves will not be impaired by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from its
surplus account to the undivided profits (retained earnings) account or any part
of its paid-in-capital account. The payment of dividends by any bank is
dependent upon its earnings and financial condition and, in addition to the
limitations referred to above, is subject to the statutory power of certain
federal and state regulatory agencies to act to prevent what they deem unsafe or
unsound banking practices. The payment of dividends could, depending upon the
financial condition of the Bank, be deemed to constitute such an unsafe or
unsound practice. Tennessee law prohibits state banks from paying dividends
other than from undivided profits, and when the surplus account is less than the
capital stock account, imposes certain other restrictions on dividends. The FDIA
prohibits a state bank, the deposits of which are insured by the FDIC, from
paying dividends if it is in default in the payment of any assessments due the
FDIC.
Various federal statutory provisions limit the amount of dividends that
Athens can pay to the Company without regulatory approval. The approval of the
OCC is required for any dividend by a national bank to its holding company if
the total of all dividends declared by such bank in any calendar year would
exceed the total of its net profits, as defined by the OCC, for that year
combined with its retained net profits for the preceding two years less any
required transfers to surplus or a fund for the retirement of any preferred
stock. In addition, a national bank may not pay a dividend in an amount greater
than its net profits then on hand after deducting its loan losses and bad debts.
For this purpose, bad debts are defined to include, generally, the principal
amount of loans which are in arrears with respect to interest by six months or
more or loans which are past due as to payment of principal (in each case to the
extent that such debts are in excess of the reserve for possible credit losses).
The payment of dividends by any bank also may be affected by other factors, such
as the maintenance of adequate capital for such subsidiary bank. Furthermore,
the OCC also has authority to prohibit the payment of dividends by a national
bank when it determines such payment to be an unsafe and unsound banking
practice.
Branching. Tennessee law imposes limitations on the ability of a state
bank to establish branches in Tennessee. National banks are required by the
National Bank Act to adhere to branch office banking laws applicable to state
banks in the states in which they are located. Under current Tennessee law, any
Tennessee bank or national bank domiciled in Tennessee may establish branch
offices at any location in any county in the state.
45
<PAGE>
Furthermore, Tennessee and federal law permits out-of-state acquisitions by bank
holding companies, interstate merging by banks, and de novo branching by
interstate banks, subject to certain conditions. These powers may result in an
increase in the number of competitors in the Banks' markets. The Company
believes the Banks can compete effectively in the market despite any impact of
these branching powers, but there can be no assurance that future developments
will not affect the Banks' ability to compete effectively.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the federal Bank Regulatory Authorities evaluate the
record of the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions and applications to open a branch
or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Banks are subject to state usury laws and certain federal
laws concerning interest rates. The Banks' loan operations are also subject to
certain state and federal laws applicable to credit transactions, such as the
federal Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution will be fulfilling its obligation to
help meet the housing needs of the community it serves; the Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit; the Fair Credit Reporting Act of 1978,
governing the use and provision of information to credit reporting agencies; the
Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Banks also are subject to both state and
federal Right to Financial Privacy Acts, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that act, which governs automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
Enforcement Powers. Federal law makes strong civil and criminal penalties
available for use by the Federal Regulatory Agencies against depository
institutions and certain "institution-affiliated parties" (primarily including
management, employees and agents of a financial institution, independent
contractors such as attorneys and accountants and others who participate in the
conduct of the financial institution's affairs). These practices can include the
failure of an institution to timely file required reports or the filing of false
or misleading information or the submission of inaccurate reports. Civil
penalties may be as high as $1,000,000 a day for such violations. Criminal
penalties for some financial institution crimes have been increased to 20 years.
In addition, regulators are provided with considerable flexibility to commence
enforcement actions against institutions and institution-affiliated parties.
Possible enforcement actions include the termination of deposit insurance.
Furthermore, regulators have broad power to issue cease and desist orders that
may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be
appropriate. The TDFI has similar enforcement powers.
Capital Requirements
The federal regulatory agencies use capital adequacy guidelines in their
examination and regulation of banks. If the capital falls below the minimum
levels established by these guidelines, the Banks may be denied approval to
acquire or establish additional banks or non-bank businesses, or to open
facilities, or the Banks may be subject to other regulatory restrictions or
actions.
Risk-Based Capital Requirements. All of the federal regulatory agencies
have adopted risk-based capital guidelines for banks and bank holding companies.
The risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profile among 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 weights. The resulting capital ratios represent
capital
46
<PAGE>
as a percentage of total risk-weighted assets and off-balance sheet items. The
ratios are minimums. The guidelines require all federally regulated banks to
maintain a minimum risk-based total capital ratio of 8%, of which at least 4%
must be Tier 1 capital (see the description of Tier 1 capital and Tier 2 capital
below).
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital is an amount equal to the sum of: (i) common
shareholders' equity (including adjustments for any surplus or deficit); (ii)
non-cumulative perpetual preferred stock; and (iii) the company's minority
interests in the equity accounts of consolidated subsidiaries. Intangible assets
generally must be deducted from Tier 1 capital, subject to limited exceptions
for goodwill arising from certain supervisory acquisitions. Other intangible
assets may be included in an amount up to 25% of Tier 1 capital, provided that
the asset meets each of the following criteria: (i) the asset must be able to be
separated and sold apart from the banking organization or the bulk of its
assets; (ii) the market value of the asset must be established on an annual
basis through an identifiable stream of cash flows and there must be a high
degree of certainty that the asset will hold this market value notwithstanding
the future prospects of the banking organization; and (iii) the banking
organization must demonstrate that a liquid market exists for the asset.
Intangible assets in excess of 25% of Tier 1 capital generally are deducted from
a banking organization's regulatory capital. At least 50% of the banking
organization's total regulatory capital must consist of Tier 1 capital.
Tier 2 capital is an amount equal to the sum of (i) the allowance for
possible credit losses in an amount up to 1.25% of risk-weighted assets; (ii)
cumulative perpetual preferred stock with an original maturity of 20 years or
more and related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) in an amount up to 50% of Tier 1 capital,
eligible term subordinated debt and intermediate-term preferred stock with an
original maturity of five years or more, including related surplus. The
inclusion of the foregoing elements of Tier 2 capital are subject to certain
requirements and limitations of the banking regulators.
Investments in unconsolidated banking and finance subsidiaries,
investments in securities subsidiaries and reciprocal holdings of capital
instruments must be deducted from capital. The federal banking regulators may
require other deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheets assets and
certain off-balance sheet items, such as standby letters of credit, are assigned
to one of four risk weight categories (0%, 20%, 50%, or 100%) according to the
nature of the asset and its collateral or the identity of any obligor or
guarantor. For example, cash is assigned to the 0% risk category, while loans
secured by one-to-four family residences are assigned to the 50% risk category.
The aggregate amount of such asset and off-balance sheet items in each risk
category is adjusted by the risk weight assigned to that category to determine
weighted values, which are added together to determine the total risk-weighted
assets for the banking organization. Accordingly, an asset, such as a commercial
loan, which is assigned to a 100% risk category is included in risk-weighted
assets at its nominal face value, whereas a loan secured by a single-family home
mortgage is included at only 50% of its nominal face value. The application
ratios are equal to capital, as determined, divided by risk-weighted assets, as
determined.
Leverage Capital Requirements. The banking regulators have issued a final
regulation requiring certain banking organizations to maintain additional
capital of 1% to 2% above a 3% minimum Tier 1 Leverage Capital Ratio (Tier 1
capital, less intangible assets, to total assets). In order for an institution
to operate at or near the minimum Tier 1 leverage capital requirement of 3%, the
banking regulators expect that such institution would have well-diversified
risk, no undue rate risk exposure, excellent asset quality, high liquidity and
good earnings. In general, the bank would have to be considered a strong banking
organization, rated in the highest category under the bank rating system and
have no significant plans for expansion. Higher Tier 1 leverage capital ratios
of up to 5% will generally be required if all of the above characteristics are
not exhibited, or if the institution is undertaking expansion, seeking to engage
in new activities, or otherwise faces unusual or abnormal risks.
The rule provides that institutions not in compliance with the regulation
are expected to be operating in compliance with a capital plan or agreement with
the regulator. If they do not do so, they are deemed to be engaging in an unsafe
and unsound practice and may be subject to enforcement action. Failure to
maintain capital of at least 2% of assets constitutes an unsafe and unsound
practice and may be subject to enforcement action Failure to maintain capital of
at least 2% of assets constitutes an unsafe and unsound condition justifying
termination of FDIC insurance.
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<PAGE>
Agreements with Bank Regulatory Authorities. At the time James L. Clayton
acquired control of Smoky Mountain, it and FNBG, its bank subsidiary, had
certain deficiencies relating to capital, asset quality, earnings and
management. These deficiencies led to agreements with the Bank Regulatory
Authorities which required, among other things, the submission of quarterly
financial reports, and permission from the Bank Regulatory Authorities to pay
dividends, incur additional debt or redeem stock. In June 1996, shortly after
Mr. Clayton acquired control of Smoky Mountain, the OCC lifted its restrictions
on FNBG finding that its previous concerns with asset quality, capital, earnings
and management were alleviated as a result of the change in control and a
subsequent infusion of capital. In September 1996, the FRB lifted all
restrictions on Smoky Mountain.
In May 1993, BankFirst entered into an Agreed Order with the TDFI (amended
in 1995), to ensure that the Bank maintained sufficient capital in light of
expected growth and expansion into additional capital markets. Mr. Clayton
agreed to infuse immediate capital and thereafter the Bank agreed to maintain
Tier 1 capital levels at no less than 10%. The Agreed Order was withdrawn
effective February 27, 1996.
Effects of Governmental Policies
The Banks' earnings will be affected by the difference between the
interest earned by the Banks on their loans and investments and the interest
paid by the Banks on their deposits or other borrowings. The yields on its
assets and the rates paid on its liabilities are sensitive to changes in
prevailing market rates of interest. Thus, the earnings and growth of the Bank
will be influenced by general economic conditions, fiscal policies of the
federal government, and the policies of regulatory agencies, particularly the
Federal Reserve, which establishes national monetary policy. The nature and
impact of any future changes in fiscal or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various regulatory
authorities, including the Federal Reserve. An important function of the Federal
Reserve is to regulate the national supply of bank credit. Among the instruments
of monetary policy used by the Federal Reserve to implement these objections are
open market operations in U.S. Government securities, changes in reserve
requirements on bank deposits, changes in the discount rate on bank borrowings,
and limitations on interest rates that banks may pay on time and savings
deposits. The Federal Reserve uses these means in varying combinations to
influence overall growth of bank loans, investments and deposits, and also to
affect interest rates charged on loans, received on investments or paid for
deposits.
The monetary and fiscal policies of regulatory authorities, including the
Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
Government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of the Banks.
From time to time, various federal and state laws, rules and regulations,
and amendments to existing laws, rules and regulations, are enacted that affect
banks and bank holding companies. Future legislation and regulation could
significantly change the competitive environment for banks and bank holding
companies. The Company cannot predict the likelihood or effect of any such
legislation or regulation.
Year 2000 Compliance
Financial institutions are highly dependent on complex computer systems
and networks to conduct their business. Financial institutions are also
adversely affected by developments that adversely affect the businesses or
operations of their customers. For these reasons, the potential inability of
computers to recognize the Year 2000 presents a major challenge to the Company
and the Banks. In recognition of the potential effect of the Year 2000 problem,
the Federal Reserve Board and the Bank Regulatory Authorities have issued
numerous directives to bank holding companies and financial institutions
requiring comprehensive investigation and remediation of possible Year 2000
problems. These directives address the computer systems used by the banks and
those used by customers and vendors. Management believes that the Company and
the Banks are currently in compliance with each applicable directive issued by
the Bank Regulatory Authorities, and the Company does not believe that the costs
it will incur to ensure the Year 2000 compliance of its computer systems will be
significant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Year 2000."
48
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table provides certain information regarding the directors
of the Company.
<TABLE>
<CAPTION>
Director Principal Occupation for
Name Age Positions Since previous 5 years
---- --- --------- ------ -----------------------
<S> <C> <C> <C>
James L. Clayton ........... 64 Chairman of the Board 1996 Chairman, Clayton Homes, Inc.
Director
Fred R. Lawson ............. 62 President, Director 1996 President and CEO, BankFirst
C. Warren Neel ............. 59 Director 1996 Dean, University of Tennessee
School of Business Administration
Charles Earl Ogle, Jr ...... 58 Director 1994 Real Estate Investor
Geoffrey A. Wolpert ........ 42 Director 1990 Restauranteur
L. A. Walker, Jr. .......... 62 Director 1998 Chairman and CEO of Athens
W. David Sullins, Jr. ...... 55 Director 1998 Optometrist
C. Scott Mayfield, Jr. ..... 47 Director 1998 President, Mayfield Dairies, Inc.
</TABLE>
No director is related to any other director. No current director of the
Company is a director or executive officer of another bank holding company,
bank, savings and loan association, or credit union, other than the Banks. James
L. Clayton, C. Warren Neel and director nominee W. D. Sullins, Jr. serve as
directors for publicly traded companies. Mr. Clayton is on the board of
directors of Clayton Homes, Inc., Dollar General Corporation and Chateau
Communities, Inc. Mr. Neel is a director of Clayton Homes Inc., American
Healthcorp, Inc., O'Charley's Inc., Promus Companies, Inc. and Proffitts, Inc.
Mr. Sullins serves on the board of directors of TLC The Laser Center, Inc.
Directors of the Company are elected annually and each director holds office
until his or her successor is elected and qualified.
The following is a brief description of the business experience of the
executive officers of the Company.
Fred R. Lawson. Mr. Lawson is the President of the Company and has been
the President and Chief Executive Officer of BankFirst since 1993. Prior to
joining BankFirst, Mr. Lawson was the President of Bank of East Tennessee,
having previously served as the President of Blount National Bank and the
President of Tennessee National Bancshares.
R. Stephen Hagood. Mr. Hagood joined BankFirst in 1993 as Executive Vice
President. Prior to joining BankFirst, Mr. Hagood was employed by Bank of East
Tennessee as Senior Vice President of Commercial Lending and Mortgage Banking in
Knoxville.
C. David Allen. Mr. Allen joined BankFirst as Vice President in 1990 and
has served as Senior Vice President and Chief Financial Officer since 1993.
Prior to joining BankFirst, Mr. Allen was employed by Third National Bank in
Loudon County as Vice President and Cashier.
L. A. Walker, Jr. Mr. Walker is a Director of the Company and has been the
Chairman of the Board and Chief Executive Officer of Athens since 1980. He is a
past president of the Tennessee Bankers Association and is a member of the Board
of the Federal Reserve Bank of Atlanta.
John W. Perdue. Mr. Perdue is the President and Chief Operating Officer of
Athens. He has been with Athens for 20 years.
Michael L. Bevins. Mr. Bevins has been an Executive Vice President and
Senior Trust Officer of Athens since 1975.
Directors' Compensation
During 1997 and 1998, each director of the Company received $500 for each
board meeting attended. Each non-employee director of BankFirst received $300
for each board meeting attended, $500 for each executive committee meeting
attended and $100 for all other committee meetings attended. Each non-employee
director of Athens received $500 per board meeting attended and $150 per
committee meeting attended; employee directors of Athens were compensated only
for board meetings at a rate of $500 per meeting.
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<PAGE>
Executive Compensation
The following table sets forth the compensation paid by the Banks for
services rendered in all capacities during the fiscal year ended December 31,
1997 by the Chief Executive Officer and each other executive officer of the
Banks whose annual salary and bonus for such fiscal year was in excess of
$100,000 (each, a "Named Executive Officer"). No compensation is paid to
officers of the Company for their services to the Company.
1997 Annual Compensation
<TABLE>
<CAPTION>
Securities All
Other Annual Underlying Other
Name Position Salary Bonus Compensation Options(#) Compensation
---- -------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Fred R. Lawson ............President, Chief Executive $209,349 $ 25,000 $498,213(1) 34,375 $ 5,267(2)
Officer of BankFirst
R. Stephen Hagood .........Executive Vice President of 110,619 11,000 105,021(1) 6,250 2,421(2)
BankFirst
L. A. Walker, Jr ..........Chairman and Chief Executive 115,050 30,856 11,427(3) -- 21,046(4)
Officer of Athens
John W. Perdue ............President and Chief Operating 87,740 23,530 2,228(3) -- 14,758(4)
Officer of Athens
Jerry L. French ...........Senior Vice President of 90,480 10,000 -- 3,125 3,307(2)
Operations
</TABLE>
- ----------
(1) Earnings on sale of stock from options exercised in 1997.
(2) Contributions by BankFirst to 401(k) Plan.
(3) Insurance and automobile.
(4) Contributions by First Franklin to 401(k) Plan and attributed
contributions to Athens' defined benefit plan.
The following table sets forth certain information with respect to the
grant of stock options under the Company's Option Plans to the Named Executive
Officers for the year ended December 31, 1997.
Individual Option Grants In 1997
<TABLE>
<CAPTION>
Percent of
Number of Total Options
Securities Granted in Exercise
Underlying Fiscal of Base Expiration Grant Date
Name Options Granted Year Price ($/Sh) Date Present Value(1)
------- --------------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Fred R. Lawson ..... 31,250 19.01% $7.68 1/25/2007 $40,555
3,125 1.90 7.68 3/21/2007 11,102
R. Stephen Hagood .. 6,250 3.80 7.68 3/21/2007 22,204
Jerry L. French .... 3,125 1.90 7.68 3/21/2007 11,102
</TABLE>
- ----------
(1) The fair value of the option grants is estimated on the date of the grant
using the Black-Scholes option pricing model with the following
assumptions: risk free interest rate of 6.90% for March 21, 1997 grants and
6.17% for January 25, 1997 grant, and expected years until exercise of nine
years and three years, respectively, based on management's estimate. No
assumption was made for estimated volatility since it is not practical to
determine this assumption for a non-public company whose stock is not
actively traded.
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<PAGE>
The following table sets forth certain information with respect to options
exercised during 1997 and the value of unexercised options held by the Named
Executive Officers of the Company.
Aggregated Option Exercises In 1997
And 1997 Year End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number of Options at Fiscal In-the-Money Options
Shares Year-End at Fiscal Year-End
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- ----- ---------- --------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Fred R. Lawson ................ 102,495 $498,213 206,495/128,125 $1,165,559/369,250(1)
R. Stephen Hagood ............. 21,880 105,021 47,085/6,250 290,606/14,500(1)
Jerry L. French ............... -- --- 2,345/3,870 8,278/9,880(1)
</TABLE>
(1) Value based on $50 per share (pre-split), which is the last known
transaction price prior to year-end 1997.
The following table estimates the annual benefits payable upon retirement
for the specified compensation and years of service classifications under
Athens' defined benefit pension plan.
Athens Pension Plan Table
Years of Service
-------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------- ------- ------- ------- -------
85,000 ............. 31,875 42,500 55,250 55,250 55,250
95,000 ............. 35,625 47,500 57,000 57,000 57,000
105,000 ............. 39,375 52,500 63,000 63,000 63,000
125,000 ............. 46,875 62,500 75,000 75,000 75,000
150,000 ............. 56,250 75,000 90,000 90,000 90,000
175,000 ............. 65,625 87,500 105,000 105,000 105,000
200,000 ............. 75,000 100,000 120,000 120,000 120,000
225,000 ............. 84,375 112,500 135,000 135,000 135,000
250,000 ............. 93,750 125,000 150,000 150,000 150,000
275,000 ............. 103,125 137,500 165,000 165,000 165,000
The defined benefit plan will annually pay the employee 60 percent of the
employee's average annual compensation beginning at the time of his or her
retirement at age 65, if the employee has at least 24 years of service. See
"--Certain Benefit Plans and Agreements." The percentage is reduced
proportionally for less than 24 years of service. Average annual compensation is
the average of the five highest consecutive compensation years during an
employee's service.
The only Named Executive Officers which participate in the defined benefit
plan are Mr. Walker and Mr. Perdue. Mr. Walker has 31 years of service with
Athens, and Mr. Perdue has 18 years of service. Their 1997 annual compensation
for purposes on the defined benefit plan is the sum of the salary and bonus
columns of the 1997 Annual Compensation table plus the employer's pension plan
contribution as noted in Note 4 to that table. The amounts payable under the
defined benefit plan are not subject to deductions for any offset amounts such
as Social Security.
Compensation Committee Interlocks and Insider Participation
No compensation is paid to the officers of the Company for their services
to the Company. The Company's compensation decisions are made by the Executive
Committees of BankFirst and Athens. The Executive Committees do not use any
formal compensation policies or standards in making such compensation decisions.
Both the BankFirst and Athens Executive Committees are composed of a majority of
outside directors. The BankFirst Executive Committee is composed of James L.
Clayton, Fred R. Lawson, C. Warren Neel, Charles Earl Ogle, Jr. and Geoffrey A.
Wolpert. Mr. Lawson is an officer of BankFirst. The Athens Executive Committee
is composed of L.A. Walker, Jr., Charles W. Bivens, Hal Buttram, John W. Perdue,
Jerry Richardson, C. Scott Mayfield, Jr. and W.D. Sullins, Jr. Messrs. Walker
and Perdue are officers of Athens.
51
<PAGE>
Securities Law Limitations
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Company, the Company has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Certain Benefit Plans and Agreements
Retirement Plans. BankFirst has a 401(k) profit sharing plan which covers
substantially all employees. Employee contributions are voluntary and employer
contributions are discretionary. Employee contributions are fully vested and
employer contributions are fully vested after five years. Contributions by
BankFirst were $135,000 and $75,000 for 1997 and 1996, respectively.
Athens also has a 401(k) profit sharing plan which covers all employees
over 21 years old with one year of service and who work in excess of 1,000 hours
per year. Employee contributions are voluntary and become fully vested after
seven years. Employer contributions vest at 20% after three years and an
additional 20% for each succeeding year until fully vested. Contributions were
$78,245 and $112,464 for 1997 and 1996, respectively.
Athens also has a defined benefit plan which covers all employees over
21years old with one year of service and who work in excess of 1000 hours per
year. Employer contributions vest at 20% after three years and an additional 20%
for each succeeding year until fully vested. Contributions in 1997 were $237,833
and the net periodic pension cost was $110,726.
Employee Stock Ownership Plan. The Company has an Employee Stock Ownership
Plan (ESOP) which enables employees who have met minimum service and age
requirements to acquire shares of the Company's Common Stock. The cost of the
Plan is borne by the Company through discretionary contributions to an employee
stock ownership trust. Shares of common stock are allocated to each
participating employee and are held in trust until the employee's termination,
retirement or death. The Company made no contribution to the ESOP in 1997. The
Company contributed $30,000 to the ESOP in 1996. No contribution was made to the
ESOP in 1995. The Company's intention is to terminate the ESOP.
Stock Option Plans. As of December 31, 1997, the Company has an incentive
stock option plan for officers, directors and key employees (the "ISO
Plan")within the meaning of Section 422A of the Internal Revenue Code of 1986,
as amended. The ISO Plan was approved by the Company shareholders on April 27,
1998. A total of 1,944,410 shares of the Company's Common Stock have been
reserved for issuance under the ISO Plan.
Under the terms of the ISO Plan, options are granted at market value as
determined by the Company's Board on the date of grant. Twenty percent of the
shares covered by the option vest on the first anniversary date of the grant of
the option and on each of the next four anniversary dates of the grant of the
option an additional 20% of the covered shares vest. Options under the ISO Plan
expire 10 years from the date of the grant. On January 2, 1998, the Company
granted 142,000 shares under the ISO Plan.
The Company has granted stock options under two previous stock option
plans dated March 14, 1995 and October 11, 1995. The exercise price of each
option under each plan is the market value of the Company's common stock on the
date of the grant as determined by the Company's Board. The maximum term of the
options under both plans is 10 years from the date of the grant. The options
under the October 11, 1995 plan vest at an annual rate of 20%. Options granted
under the March 14, 1995 plan were immediately exercisable on issuance.
Management does not expect to issue any additional options under the March 14,
1995 and October 11, 1995 plans.
As of June 30, 1998, the Company had a total of 980,310 outstanding
options, 486,275 of which are currently exercisable.
Employment Agreements
The Company does not have employment agreements with any of the Company's
or the Banks' executive officers.
52
<PAGE>
CERTAIN TRANSACTIONS
The Company has and expects to have in the future banking and other
business transactions in the ordinary course of its banking business with
directors, officers, and 10% beneficial owners of the Company and their
affiliates, including members of their families or corporations, partnerships,
or other organizations in which such officers or directors have a controlling
interest, on substantially the same terms (including price, or interest rates
and collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Any such banking transactions will not involve more than the
normal risk of collectibility nor present other unfavorable features to the
Company. As of June 30, 1998, the amount of these loans (including amounts
available under lines of credit) by BankFirst and Athens to the Company
affiliates was 2.76% of the Banks' total loans.
The Company engaged in certain transactions regarding its Knoxville
headquarters in 1997. BankFirst was a 50% partner in Heritage-Clayton
Partnership with CMH Services, a subsidiary of Clayton Homes, Inc., the purpose
of which was to own and operate the building at 625 Market Street, Knoxville,
Tennessee. James L. Clayton is the Chairman of the Company's Board and a
significant shareholder and Chairman of Clayton Homes, Inc. The Company's main
offices occupy a portion of this building. During 1997, BankFirst purchased CMH
Services' interest in the building at its fair market value of $923,817, based
on an independent appraisal. The partnership dissolved upon BankFirst purchase
of CMH Services' interest. Clayton Homes, Inc. continued to lease eight floors
of the building through May 1998 at an average rate of $7.98 per square foot,
for a total of $209,568 per year. Management believes that neither the sale
price nor the lease rate was more favorable than market rates. The lease has now
been terminated.
53
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of June 30, 1998, and as adjusted to reflect the sale of
the shares of the Common Stock offered hereby by the Company and the Selling
Shareholders, for (i) each person who will beneficially own more than 5% of the
Common Stock, (ii) each director and executive officer of the Company, (iii) all
executive officers and directors of the Company as a group, and (iv) each of the
Selling Shareholders.
<TABLE>
<CAPTION>
Beneficial Ownership of Beneficial Ownership of
Common Stock Prior to Offering Common Stock After Offering
-------------------------------------- ---------------------------
Percentage Percentage
of Number of of
Number of Outstanding Shares Number of Outstanding
Name Shares(1) Shares (2) Offered Shares Shares (3)
- ----- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
James L. Clayton .......................... 5,071,731 (4) 45.5% 123,618 4,948,113 40.1%
Fred R. Lawson ............................ 425,447 (5) 3.8 60,000 (13) 365,447 3.0
C. Warren Neel ............................ 295,865 (6) 2.7 40,000 (14) 255,865 2.1
Charles Earl Ogle, Jr. .................... 70,535 (7) * 5,000 (15) 65,535 *
Geoffrey A. Wolpert ....................... 184,495 (8) 1.7 168,882 (16) 9,920 (17) *
R. Stephen Hagood ......................... 127,550 (9) 1.1 -- 127,550 1.0
Jerry L. French ........................... 27,035(10) * -- 27,035 *
L. A. Walker, Jr. ......................... 12,017(11) * -- 12,017 *
W. David Sullins, Jr. ..................... 8,820(11) * -- 8,820 *
C. Scott Mayfield, Jr. .................... 7,034(11) * -- 7,034 *
John W. Perdue ............................ 4,653(11) * -- 4,653 *
Michael L. Bevins ......................... 42,446(11) * -- 42,446 *
Directors and Executive Officers
as a group (12 persons) ................. 6,277,628 56.3 397,500 5,874,435 47.6
Employee Stock Ownership Plan ............. 174,575 1.6 168,882 (17) -- --
Andrew A. Ogle ............................ 5,160 * 2,500 2,660
Charles Earl Ogle, Sr. .................... 22,575 * 5,000 17,575 *
</TABLE>
- ----------
* Less than one percent.
(1) Under the rules of the Securities and Exchange Commission, 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 such security, or "investment power," which includes the power
to dispose or direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership within 60 days. Under these
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 has no beneficial interest. For purposes of
calculating the percent of Common Stock beneficially owned, all shares
that are subject to options that are exercisable within 60 days are
deemed to be presently outstanding.
(2) Percentages based on a total class of 11,150,618 shares, including
9,998,045 issued and outstanding shares of Common Stock, 215,805 shares
of convertible Preferred Stock, which are presently convertible into
666,298 shares of Common Stock and 486,275 shares of Common Stock for
which there are vested options presently exercisable at the option of the
holders.
(3) Includes 11,150,618 shares determined as specified in Note 2 plus
1,200,000 shares issued in the Offering.
(4) Includes 443,684 shares beneficially owned by Mr. Clayton's sons,
daughter, daughter-in-law, son-in-law, father-in-law and grandson, as to
which Mr. Clayton disclaims any beneficial interest, and includes 385,550
shares held in three separate trusts which benefit Mr. Clayton's family
and grandchildren, of which Mr. Clayton's son serve as trustee, as to
which Mr. Clayton also disclaims any beneficial interest. Also includes
116,828 shares that Mr. Clayton has the right to acquire upon the
conversion of the 37,839 shares of Preferred Stock owned by him, and
includes 13,424 shares that Mr. Clayton's son has the right to acquire
upon conversion of the 4,348 shares of Preferred Stock owned by him, the
latter as to which Mr. Clayton disclaims any beneficial interest. Also
includes 19,330 shares that Mr. Clayton has the right to purchase upon
the exercise of stock options owned by him. Mr. Clayton's address is c/o
Clayton Homes, Inc., P. O. Box 15169, Knoxville, Tennessee 37901.
54
<PAGE>
(5) Includes 500 shares owned by Mr. Lawson's wife. Also includes 233,000
shares that Mr. Lawson has the right to purchase upon the exercise of
stock options and 167,617 shares that Mr. Lawson has the right to acquire
upon the conversion of the 54,289 shares of Preferred Stock owned by him.
Mr. Lawson will convert 19,434 shares of his 54,289 shares of Preferred
Stock to Common Stock to sell in the Offering. Mr. Lawson's address is
c/o BankFirst, P. O. Box 10, Knoxville, Tennessee 37901.
(6) Includes 20,800 shares beneficially owned, directly or indirectly, by Mr.
Neel's brothers, as to which Mr. Neel disclaims any beneficial interest.
Also includes 134,055 shares that Mr. Neel has the right to purchase upon
the exercise of stock options owned by him and 83,807 shares that Mr.
Neel has the right to acquire upon the conversion of the 27,144 shares of
Preferred Stock owned by him. Mr. Neel's address is 2409 Craig Cove Road,
Knoxville, Tennessee 37919.
(7) Includes 50,310 shares owned by Mr. Ogle's father, mother and daughter,
as to which Mr. Ogle disclaims any beneficial interest. Also includes
1,610 shares owned by ILM Rentals, L.P., in which Mr. Ogle has an
ownership interest, and 6,875 shares that Mr. Ogle has the right to
purchase upon exercise of stock options owned by him. Mr. Ogle's address
is c/o HMO, Inc./ILM, 644 Parkway, Suite 1, Gatlinburg, Tennessee 37738.
(8) Includes 174,575 shares in the Company's ESOP, of which Mr. Wolpert
serves as one of three trustees. Also includes 1,285 shares owned by
Steaks Sophisticated, Inc., which is owned by Mr. Wolpert and 3,750
shares that he has the right to purchase upon the exercise of stock
options. Mr. Wolpert's address is 1110 Parkway, Gatlinburg, Tennessee
37738
(9) Includes 48,335 shares that Mr. Hagood has the right to purchase upon the
exercise of stock options owned by him and 33,561 shares that Mr. Hagood
has the right to acquire upon the conversion of the 10,870 shares of
Preferred Stock owned by him. Mr. Hagood's address is c/o BankFirst, P.
O. Box 10, Knoxville, Tennessee 37901.
(10) Includes 3,220 shares that Mr. French has the right to purchase upon the
exercise of stock options owned by him and 16,688 shares that Mr. French
has the right to acquire upon the conversion of the 5,405 shares of
Preferred Stock owned by him. Mr. French's address is c/o BankFirst, P.
O. Box 10, Knoxville, Tennessee 37901.
(11) The address for Messrs. Walker, Sullins, Mayfield, Perdue and Bevins is
The First National Bank and Trust Company, 204 Washington Avenue, Athens,
Tennessee 37371-0100.
(12) Includes beneficial ownership for all directors and officers listed above
and incorporates Notes 3 through 10.
(13) In the event that the Underwriters' overallotment option is exercised,
Mr. Lawson has agreed to sell an additional 40,000 shares of Common
Stock.
(14) In the event that the Underwriters' overallotment option is exercised,
Mr. Neel has agreed to sell an additional 20,000 shares of Common Stock.
(15) The 5,000 shares will be sold by Mr. Ogle's father, Charles Earl Ogle,
Sr. Mr. Ogle disclaims any beneficial interest to such shares.
(16) Reflects the sale of the 168,882 shares in the Company's ESOP, of which
Mr. Wolpert serves as one of three trustees. See Note 17.
(17) The remaining 5,693 shares were distributed by the ESOP subsequent to
June 30, 1998, but prior to the Offering.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
The total amount of authorized capital stock of the Company consists of
15,000,000 shares of Common Stock $2.50 par value per share, and 1,000,000
shares of Preferred Stock, $5.00 par value per share. Upon consummation of the
Offering, 11,258,047 shares of Common Stock will be issued and outstanding and
196,371 shares of Preferred Stock will be outstanding. The following summary of
certain provisions of the Company's capital stock describes certain material
provisions of, but does not purport to be complete and is subject to and
qualified in its entirety by, the Charter and the Bylaws of the Company that are
included as exhibits to the Registration Statement of which this Prospectus
forms a part and by the provisions of applicable law.
Common Stock
The issued and outstanding shares of Common Stock are validly issued,
fully paid and nonassessable. Subject to the prior rights of any Preferred
Stock, the holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may from time to time determine. The
declaration and payment of dividends by the Company's Board of Directors is
subject to the rules and regulations of the FRB governing the amount of
dividends which may be paid to shareholders, the manner in which dividends may
be paid and the methods, if any, by which capital stock and surplus may be
retired and reduced. See "Dividends."
The shares of Common Stock are not redeemable or convertible, and the
holders thereof have no preemptive or subscription rights to purchase any
securities of the Company. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive pro rata the assets
of the Company which are legally available for distribution after payment of all
debts and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of shareholders. The
Common Stock has been approved for quotation on The Nasdaq Stock Market's
National Market under the symbol "BKFR."
Convertible Preferred Stock
The Company has 215,805 shares of Preferred Stock issued and outstanding.
Holders of the Preferred Stock are entitled to receive noncumulative dividends
at an annual rate of 5% of the initial sale price at the option of the Company's
Board and subject to the rules and regulations of the FRB regarding dividends.
The Preferred Stock is convertible at any time at the option of the holder into
Common Stock at the conversion rate of 3.0875 shares of Common Stock for each
Preferred Share. The Preferred Stock has no voting, redemption or preemptive
rights.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is the Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Sales of a substantial number of shares of the Company's
Common Stock in the public market following this Offering, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. Upon completion of this Offering, there shall be 11,258,047 shares
of Common Stock outstanding.
Of the 11,258,047 shares of Common Stock to be outstanding after the
Offering, 6,379,465 are "restricted securities" within the meaning of Rule 144
under the Securities Act and may only be sold subject to the provisions of Rule
144. In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including affiliates, who has beneficially owned
shares for at least one year (including holding periods of prior owners other
than affiliates) is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock (approximately 112,580 shares
immediately after this Offering) or (ii) the average weekly trading volume in
the Company's Common Stock during the four calendar weeks preceding such sale. A
person (or persons whose shares are aggregated) who is not deemed to be an
affiliate of the Company and who has beneficially owned shares for at least two
years (including holding periods of prior owners other than affiliates) is
entitled to sell such shares under Rule 144 without regard to the volume
limitations described above.
In addition to the restrictions described above, 4,399,046 of such
outstanding Common Stock, or approximately 39%, are subject to lock-up
agreements entered into by certain officers, directors and other shareholders of
the Company (the "Lock-up Agreements"), whereby they and the Company have, among
other things, agreed not to, directly or indirectly offer for sale, sell, pledge
or otherwise dispose of any Common Stock or securities convertible into or
exchangeable for Common Stock, with certain exceptions for a period of 150 days
after the date of this Prospectus without the prior written consent of J.C.
Bradford & Co. on behalf of the Representatives.
In connection with the Company's merger with First Franklin, 723,673
pre-split shares of Common Stock (3,618,365 post-split) were issued, pursuant to
the Company's Registration Statement, on Form S-4 No. 333-52051. All of the
shares of Common Stock issued in the merger will be freely transferable under
the Securities Act, except for shares issued to those shareholders who were
"affiliates" of First Franklin for purposes of Rule 145 under the Securities
Act. Such affiliates may not sell the shares of Common Stock which they acquired
in the merger except in compliance with Rule 145(d) or another applicable
exemption from the registration requirements of the Securities Act. In general,
under the provisions of Rule 145(d), persons who received Common Stock pursuant
to the merger of First Franklin and the Company and who were affiliates of First
Franklin but are not affiliates of the Company, may only resell such Common
Stock in accordance with the Rule 144 requirements and limitations discussed
above for a period of one year after receipt. After the Rule 145 affiliates have
held the Common Stock which they received in the merger for one year, they may
resell it without limitation, unless subject to the restrictions discussed
above.
The Company intends to file a Registration Statement under the Securities
Act on Form S-8 covering 1,944,410 shares of Common Stock reserved for issuance
under its Incentive Stock Option Plan. See "Management--Certain Benefit Plans
and Agreements." Such registration statement is expected to be filed as soon as
practicable after the date of this Prospectus and will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market, unless such shares are
subject to vesting restrictions with the company or the contractual restrictions
described above.
Approximately 36.5%, on a fully diluted basis, of the Common Stock after
the Offering will be directly owned or controlled by James L. Clayton and his
wife. Mr. Clayton may not choose to sell any of his shares and the absence of
such shares in the market may adversely affect the liquidity of the market and
the price of the Common Stock. Conversely, sales by Mr. Clayton may adversely
affect the market price of the Common Stock if the market for Common Stock is
illiquid or the market reacts negatively to the sale because of Mr. Clayton's
insider status.
57
<PAGE>
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below have agreed to purchase from
the Company the respective number of shares of Common Stock set forth below.
Name of Underwriter Number of Shares
------------------- ----------------
J.C. Bradford & Co. ...................................... 675,000
Morgan Keegan & Company, Inc. ............................ 675,000
J.J.B. Hilliard, W.L. Lyons, Inc. ........................ 50,000
Edgar M. Norris & Co. Inc. ............................... 50,000
The Robinson-Humphrey Company, LLC ....................... 50,000
Scott & Stringfellow, Inc. ............................... 50,000
Wheat First Securities, Inc. ............................. 50,000
-------------
Total ............................................ 1,600,000
=============
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less a concession not in excess of $0.50 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share to certain other dealers. After the Offering, the public
offering price and such concessions may be changed. The Representatives have
informed the Company that the Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority.
The Offering of the Common Stock is made for delivery when, as, and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation, or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company and certain Selling Shareholders have granted to the
Underwriters an option, expiring on the close of business on the 30th day after
the date of this Prospectus, to purchase up to 240,000 additional shares at the
initial public offering price less the underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. Such option may be
exercised only to cover over-allotments in the sale of the shares of Common
Stock. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Common Stock has been approved for quotation on The Nasdaq Stock
Market's National Market under the symbol "BKFR," subject to official notice of
issuance. The public offering price has been determined by negotiation among the
Company and the Representatives. In determining such price, consideration was
given to, among other things, the financial and operating history and trends of
the Company, the experience of its management, the position of the Company in
its industry, the Company's prospects, and the Company's financial results. In
addition, consideration was given to the status of the securities markets,
market conditions for new offerings of securities, and the prices of similar
securities of comparable companies.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters or any such controlling persons may be required to make in
respect thereof.
The Company and the directors, executive officers, and organizers of the
Company and the Banks have each agreed with the Underwriters that they will not,
for a period of 180 days for the Company, and 150 days for the others, from the
date of this Prospectus, without the prior written consent of J.C. Bradford &
Co., on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any security or other instrument which by its terms is
convertible
58
<PAGE>
into, exercisable for, or exchangeable for shares of such Common Stock, other
than through bona fide gifts to persons who agree in writing to be bound by this
Agreement if such writing is delivered to J.C. Bradford & Co., on behalf of the
Underwriters, within five days after such gift or pledge, and, in the case of
the Company, Common Stock issued pursuant to the exercise of outstanding
options.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the Offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities and may end any of these
activities at any time.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by Baker, Donelson, Bearman & Caldwell, P.C., Nashville, Tennessee.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Waller Lansden Dortch & Davis, A Professional Limited
Liability Company, Nashville, Tennessee.
EXPERTS
The Supplemental Consolidated Financial Statements of BankFirst
Corporation for 1997, have been included herein in reliance on the report of
Crowe, Chizek and Company LLP, independent certified public accountants, on
their audit of BankFirst Corporation as of December 31, 1997, and on the report
of Crowe, Chizek and Company LLP as to their audit of the business combination
with First Franklin Bancshares, Inc. for 1997, 1996 and 1995. Crowe, Chizek and
Company LLP's report on the business combination is based on the financial
statements of First Franklin Bancshares, Inc. audited by G.R. Rush & Company,
P.C., independent accountants, for 1997, 1996 and 1995, as stated in their
report thereon, and based on the financial statements of BankFirst Corporation
(formerly Smoky Mountain Bancorp. Inc.) audited by PriceWaterhouseCoopers LLP,
independent accountants, for 1996 and 1995, as stated in their report thereon.
PriceWaterhouseCoopers LLP refers to their reliance on the report of Hazlett,
Lewis & Bieter, P.L.L.C., independent accountants, on their audit of BankFirst
Corporation (formerly Smoky Mountain Bancorp, Inc.) for 1995, as stated in their
report thereon. The reports of Crowe, Chizek and Company, LLP,
PriceWaterhouseCoopers LLP, Hazlett, Lewis & Bieter, P.L.L.C., and G.R. Rush &
Company, P.C. are given on the authority of these firms as experts on auditing
and accounting.
Change in Accountants
The Company previously disclosed a change in its accountants in its S-4
Registration Statement No. 333-52051 filed with the SEC on May 7, 1998.
59
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
(File No. 333-57147) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC at 7 World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the SEC at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the SEC
maintains a Worldwide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC through the SEC's Electronic Data Gathering Analysis and Retrieval
("EDGAR") System, including the Company. The address for the SEC's Worldwide
Website is "http://www.sec.gov." The statements contained in this Prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, a brief description thereof and are
not necessarily complete; each such statement is qualified by reference to such
contract or document.
The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith, files reports, proxy statements and other
information with the SEC. Copies of such reports, proxy statements and other
information can be obtained from the SEC by the methods discussed above. In
addition, reports, proxy statements and other information can be inspected at
the offices of The Nasdaq Stock Market, Inc., 1735 K Street, NW, Washington, DC
20006-1500.
60
<PAGE>
INDEX TO FINANCIAL INFORMATION
Page
----
Supplemental Consolidated Financial Statements of BankFirst Corporation
1997, 1996 and 1995 (audited)
Report of Independent Accountants for 1997 F-2
Report of Independent Accountants for 1996 and 1995 F-3
Report of Independent Auditors for 1995 F-4
Independent Auditors' Report F-5
Supplemental Consolidated Balance Sheets F-6
Supplemental Consolidated Statements of Income F-7
Supplemental Consolidated Statements of Changes in Stockholders'
Equity F-8
Supplemental Consolidated Statements of Cash Flows F-9
Notes to Supplemental Consolidated Financial Statements F-10
Financial Statements of BankFirst Corporation June 30, 1998 (unaudited)
Consolidated Balance Sheet F-25
Consolidated Statements of Income F-26
Consolidated Statement of Changes in Stockholders' Equity F-27
Consolidated Statements of Cash Flows F-28
Notes to Consolidated Financial Statements F-29
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
BankFirst Corporation
Knoxville, Tennessee
We have audited the accompanying supplemental consolidated balance sheet of
BankFirst Corporation as of December 31, 1997, and the related supplemental
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year then ended. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental financial statements based on our audit. We did
not audit the financial statements of First Franklin Bancshares, Inc. which
statements reflect total assets constituting approximately 28% of the related
1997 total and net income constituting 39% of the related 1997 total. The First
Franklin Bancshares, Inc. financial statements were audited by other auditors,
whose report dated January 22, 1998 thereon has been furnished to us and our
opinion expressed herein, insofar as it relates to the amounts included for
First Franklin Bancshares, Inc. in the supplemental consolidated financial
statements, is based solely on the report of the other auditors.
We conducted our audit 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 balance sheet presentation. We
believe our audit provides a reasonable basis for our opinion.
The supplemental financial statements for 1997, 1996 and 1995 give retroactive
effect to a business combination with First Franklin Bancshares, Inc. on July 2,
1998, which has been accounted for using the pooling of interests method, as
described in Note 2 to the supplemental consolidated financial statements.
Generally accepted accounting principles do not allow giving effect to a
consummated business combination accounted for using the pooling of interests
method in historical financial statements that do not include the date of the
consummation. These supplemental financial statements do not extend through the
date of the consummation; however, they will become the historical consolidated
financial statements of BankFirst Corporation after financial statements
covering the date of the consummation of the business combination are issued.
In our opinion, based on our audit and the report of other auditors, the 1997
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BankFirst Corporation as of
December 31, 1997, and its results of operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
The 1996 and 1995 financial statements of BankFirst Corporation were audited by
other auditors. The report of the other auditors, dated February 6, 1997, stated
that they expressed an unqualified opinion on those statements for 1996 and that
for 1995 they had expressed an unqualified opinion on the financial statements
of BankFirst Corporation prior to its 1996 combination with Smoky Mountain
Bancorp, Inc., which financial statements represented 43% of the then-reported
1995 net income total and for which they relied on the report of other auditors
dated January 24, 1996, and that they had audited the combination of the
financial statements for 1995 for that merger. The 1996 and 1995 financial
statements of First Franklin Bancshares, Inc. were audited by other auditors
whose report, dated January 22, 1998, expressed an unqualified opinion on those
statements. We also audited the combination of the accompanying supplemental
consolidated balance sheets as of December 31, 1996 and the supplemental
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995, for the July 2, 1998
pooling of interests between BankFirst Corporation and First Franklin
Bancshares, Inc. as discussed above. In our opinion, such supplemental
consolidated statements for 1996 and 1995 have been properly combined on the
basis described in Note 2 of the notes to the supplemental consolidated
financial statements.
Crowe, Chizek and Company LLP
Louisville, Kentucky
July 2, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
BankFirst Corporation (formerly known as Smoky Mountain Bancorp, Inc.)
We have audited the accompanying consolidated balance sheet of BankFirst
Corporation (formerly known as Smoky Mountain Bancorp, Inc.) and Subsidiaries as
of December 31, 1996, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the year then ended, prior to the
restatement for the 1998 combination with First Franklin Bancshares, Inc.
accounted for using the pooling of interests method. 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 audit. The
consolidated financial statements give retroactive effect to a business
combination with BankFirst, which has been accounted for in a manner similar to
a pooling of interest, as described in Note 2 to the consolidated financial
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BankFirst Corporation (formerly known as Smoky Mountain Bancorp, Inc.) and
Subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
We previously audited and reported on the balance sheet, statements of income,
changes in stockholders' equity and cash flows of BankFirst as of and for the
year ended December 31, 1995, prior to the restatement for the 1996 combination
accounted for in a manner similar to a pooling of interest. The contribution of
BankFirst to interest income and net income represented 46% and 57% of the
respective 1995 restated totals. Separate consolidated financial statements of
Smoky Mountain Bancorp, Inc. included in the 1995 restated consolidated balance
sheet and statements of income, changes in stockholders' equity and cash flows
were audited and reported on separately by other auditors. We also audited the
combination of the accompanying consolidated balance sheet and statements of
income, changes in stockholders' equity and cash flows as of and for the year
ended December 31, 1995, after restatement for the 1996 pooling of interest; in
our opinion, such consolidated statements have been properly combined on the
basis described in Note 2 of the notes to the consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 6, 1997
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors BankFirst Corporation (formerly Smoky
Mountain Bancorp, Inc.)
We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows of BankFirst Corporation (formerly Smoky Mountain
Bancorp, Inc.) and subsidiary for the year ended December 31, 1995, prior to the
restatement for the 1998 combination with First Franklin Bancshares, Inc.
accounted for using the pooling of interest method, and the 1996 combination
with BankFirst accounted for in a manner similar to a pooling interest. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.) and subsidiary
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles, prior to the restatement for the 1998 combination with
First Franklin Bancshares, Inc. accounted for using the pooling of interest
method, and the 1996 combination with BankFirst accounted for in a manner
similar to a pooling of interest.
/s/ Hazlett, Lewis & Bieter
Chattanooga, Tennessee
January 24, 1996
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Franklin Bancshares, Inc. and Subsidiary
Athens, Tennessee
We have audited the consolidated balance sheets of First Franklin Bancshares,
Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform these audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Franklin
Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
G. R. RUSH & COMPANY, P.C.
Chattanooga, Tennessee
January 22, 1998
(except for Note 16, as to which the
date is March 19, 1998)
F-5
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks .................................... $ 24,290 $ 15,432
Federal funds sold ......................................... 7,000 9,700
-------- --------
Total cash and cash equivalents ........................ 31,290 25,132
Securities available for sale, at fair value ............... 127,736 134,781
Loans, net ................................................. 458,869 408,070
Premises, furniture and equipment, net ..................... 21,466 17,043
Federal Home Loan Bank Stock, at cost ...................... 3,046 2,552
Accrued interest receivable and other assets ............... 8,310 7,706
-------- --------
Total assets ........................................... $650,717 $595,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ............................... $ 92,749 $ 74,161
Interest-bearing deposits .................................. 457,020 442,178
-------- --------
Total deposits ......................................... 549,769 516,339
Securities sold under agreements to repurchase ............. 16,302 5,966
Other borrowed funds ....................................... 1,959 1,264
Advances from the Federal Home Loan Bank ................... 12,121 12,154
Accrued interest payable and other liabilities ............. 9,134 4,346
-------- --------
Total liabilities ...................................... 589,285 540,069
Employee Stock Ownership Plan ................................... 1,539 1,389
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares authorized,
9,995,519 and 8,616,159 shares outstanding in 1997 and 1996 24,553 3,886
Noncumulative convertible preferred stock: $5 par value,
1,000,000 shares authorized, 218,508 and 225,559 shares
outstanding in 1997 and 1996 .............................. 1,093 1,128
Additional paid-in capital ................................. 22,674 22,484
Retained earnings .......................................... 10,612 25,992
Unrealized gain on securities available for sale ........... 961 336
-------- --------
Total stockholders' equity ............................. 59,893 53,826
-------- --------
Total liabilities and stockholders' equity ............. $650,717 $595,284
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
1997 1996 1995
------- -------- --------
Interest income
Interest and fees on loans ............. $ 42,880 $ 37,589 $ 33,799
Taxable securities ..................... 6,874 7,288 6,614
Nontaxable securities .................. 1,173 1,188 1,074
Other .................................. 360 633 632
-------- -------- --------
51,287 46,698 42,119
Interest expense
Deposits ............................... 21,104 20,097 18,216
Short-term borrowings .................. 744 562 177
Long-term borrowings ................... 804 579 689
-------- -------- --------
22,652 21,238 19,082
Net interest income ......................... 28,635 25,460 23,037
Provision for loan losses ................... 2,935 667 553
-------- -------- --------
Net interest income after provision
for loan losses ........................... 25,700 24,793 22,484
Noninterest income
Service charges and fees ............... 3,811 3,796 3,305
Net securities gains ................... 309 (20) 5
Net gain on loan sales ................. 226 234 181
Trust department income ................ 704 620 582
Other .................................. 607 613 296
-------- -------- --------
5,657 5,243 4,369
Noninterest expenses
Salaries and employee benefits ......... 11,110 10,539 9,749
Occupancy expense ...................... 1,716 2,129 1,543
Equipment expense ...................... 2,537 2,382 1,685
Office expense ......................... 775 371 736
Data processing fees ................... 1,253 897 674
FDIC assessments ....................... 48 406 739
Other .................................. 3,884 4,075 4,031
-------- -------- --------
21,323 20,799 19,157
Income before income taxes .................. 10,034 9,237 7,696
Provision for income taxes .................. 3,406 3,188 2,517
-------- -------- --------
Net income .................................. $ 6,628 $ 6,049 $ 5,179
======== ======== ========
Earnings per share:
Basic .................................. $ .66 $ .63 $ .63
Diluted ................................ $ .61 $ .59 $ .59
See accompanying notes to supplemental consolidated financial statements.
F-7
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
------- ------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ................... $ 3,286 $ 641 $15,288 $17,599 $(2,740) $ 34,074
Sales of common stock, 40,379 shares ....... 101 -- 1,207 -- -- 1,308
Cash dividends on preferred stock .......... -- -- -- (74) -- (74)
Cash dividends on common stock ............. -- -- -- (1,152) -- (1,152)
Repurchased common stock, 5,292 shares ..... (13) -- (107) -- -- (120)
Net income ................................. -- -- -- 5,179 -- 5,179
Reclassification of ESOP shares subject to
put options ................................ -- -- (385) -- -- (385)
Change in unrealized gains (losses) ........ -- -- -- -- 3,681 3,681
------- ------ ------- ------- ------- -------
Balance, January 1, 1996 ................... 3,374 641 16,003 21,552 941 42,511
Sales of preferred stock, 97,297 shares .... -- 487 1,314 -- -- 1,801
Sales of common stock, 159,606 shares ...... 399 -- 4,073 -- -- 4,472
Conversion of debenture into
common stock, 25,000 shares ................ 63 -- 437 -- -- 500
Cash dividends on preferred stock .......... -- -- -- (162) -- (162)
Cash dividend on common stock .............. -- -- -- (876) -- (876)
Common stock dividend, 12,695 shares ....... 31 -- 540 (571) -- --
Repurchased common stock, 5,402 shares ..... (14) -- (171) -- -- (185)
Net income ................................. -- -- -- 6,049 -- 6,049
Reclassification of ESOP shares subject to
put options ................................ 33 -- 288 -- -- 321
Change in unrealized gains (losses) ........ - -- -- -- (605) (605)
------- ------ ------- ------- ------- -------
Balance, January 1, 1997 ................... 3,886 1,128 22,484 25,992 336 53,826
Sales of common stock, 1,177 shares ....... 4 -- 39 -- -- 43
Stock options exercised, 23,659 shares ..... 59 -- 465 -- -- 524
Conversion of 7,051 shares preferred
stock into 3,482 shares common stock ....... 9 (35) 26 -- -- --
Cash dividends on preferred stock .......... -- -- -- (161) -- (161)
Cash dividends on common stock ............. -- -- -- (1,214) -- (1,214)
Common stock split, 253,727 shares ......... 634 -- -- (634) -- -
Cash paid for fractional shares in stock
split ...................................... -- -- -- (3) -- (3)
Repurchased common stock, 6,173 shares, as
restated for pooling of interests .......... (16) -- (209) -- -- (225)
Net income ................................. -- -- -- 6,628 -- 6,628
Reclassification of ESOP shares subject
to put options ............................. 6 -- (156) -- -- (150)
Change in unrealized gains (losses) ........ -- -- -- -- 625 625
Common stock split, 7,988,436 shares ....... 19,971 -- 25 (19,996) -- --
------- ------ ------- ------- ------- -------
Balance, December 31, 1997 ................. $24,553 $1,093 $22,674 $10,612 $ 961 $59,893
======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-8
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ........................................................ $ 6,628 $ 6,049 $ 5,179
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses ..................................... 2,935 667 553
Depreciation .................................................. 1,754 1,415 1,181
Amortization and accretion, net ............................... (120) (293) (72)
Net (gains) losses on securities sales ........................ (309) 20 (5)
Gain on sale of mortgage loans ................................ (226) (234) (181)
Proceeds from sales of mortgage loans ......................... 15,491 12,297 10,462
Originations of mortgage loans held for sale .................. (15,562) (12,267) (10,436)
Proceeds from sale of trading securities ...................... -- -- 8,169
Purchase of trading securities ................................ -- -- (8,115)
Net (gains) losses on sales of assets ......................... 77 620 (1)
Changes in assets and liabilities
Accrued interest receivable and other assets ............. (571) (115) (139)
Accrued interest payable and other liabilities ........... 4,340 174 843
------- ------- --------
Net cash flows provided by operating activities ........ 14,437 8,333 7,438
Cash flows from investing activities
Time deposits in other banks ...................................... -- -- 1,350
Purchase of securities ............................................ (59,276) (100,924) (67,905)
Proceeds from maturities of securities ............................ 32,224 87,269 45,573
Proceeds from sales of securities ................................. 35,530 12,995 14,089
Net increase in loans ............................................. (53,437) (62,737) (44,773)
Purchase of FHLB stock ............................................ (494) -- --
Premises and equipment expenditures, net .......................... (6,255) (2,242) (3,182)
------- ------- --------
Net cash used in investing activities ......................... (51,708) (65,639) (54,848)
Cash flows from financing activities
Net change in deposits ............................................ 33,430 35,993 49,938
Net change under repurchase agreements and other borrowed funds ... 11,068 (554) 4,917
Advances from the Federal Home Loan Bank .......................... 2,000 10,000 --
Repayments of advances from Federal Home Loan Bank ................ (2,033) (3,009) (8)
Payments of notes payable ......................................... -- (3,244) --
Preferred stock dividends paid .................................... (161) (162) (74)
Common stock dividends paid ....................................... (1,214) (876) (1,152)
Cash paid for fractional shares in stock split .................... (3) -- --
Sales of stock and stock options exercised ........................ 567 6,273 1,308
Repurchase of common stock ........................................ (225) (186) (120)
------- ------- --------
Net cash provided by financing activities ......................... 43,429 44,235 54,809
------- ------- --------
Net change in cash and cash equivalents ................................ 6,158 (13,071) 7,399
Cash and cash equivalents, beginning of year ........................... 25,132 38,203 30,804
------- ------- --------
Cash and cash equivalents, end of year ................................. $31,290 $25,132 $ 38,203
Supplemental disclosures:
Interest paid ..................................................... 22,619 21,312 18,089
Income taxes paid ................................................. 3,186 3,473 2,729
Loans converted to other real estate .............................. 1,082 373 789
Debenture converted to common stock ............................... -- 500 --
Preferred stock converted to common stock ......................... 35 -- --
Reclassification of ESOP shares ................................... (150) 321 (385)
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-9
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The supplemental consolidated financial statements
of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.) (the "Company")
have been prepared to give retroactive effect to the merger with First Franklin
Bancshares, Inc. on July 2, 1998. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not extend
through the date of consummation. These financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of BankFirst Corporation after financial
statements covering the date of consummation of the business combination are
issued.
Principles of Consolidation: The consolidated financial statements include
the accounts of BankFirst Corporation and its wholly-owned subsidiaries,
BankFirst and First National Bank and Trust Company (together referred to as the
"Banks"). In April, 1998, the Company changed its name to BankFirst Corporation.
All significant inter-company balances and transactions have been eliminated in
consolidation.
Nature of Operations: The Bank generates commercial, mortgage and
installment loans, and receives deposits from customers located throughout East
Tennessee. The majority of the loans are secured by specific items of collateral
including business assets, real property and consumer assets. Borrowers' cash
flow is expected to be a primary source of repayment. Real estate loans are
secured by both residential and commercial real estate.
Substantially all operations are in the banking industry.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. Estimates that are more
susceptible to change in the near term include the allowance for loan losses and
fair values of securities.
Cash Flow Reporting: Cash and cash equivalents include cash on hand,
balances due from banks, and federal funds sold. Net cash flows are reported for
customer loan and deposit transactions and other borrowed funds.
Securities: Securities are classified as held to maturity and are carried
at amortized cost when management has the positive intent and ability to hold to
maturity. Securities are classified as available for sale when they might be
sold prior to maturity for liquidity, asset-liability management, or other
reasons. Available for sale securities are carried at fair value, with
unrealized gains or losses included as a separate component of equity, net of
tax. Trading securities are carried at fair value, with changes in unrealized
holding gains and losses included in income. Realized gains or losses are
determined based on the amortized cost of the specific security sold. Interest
income includes amortization of purchase premium or discounts. Securities are
written down to fair value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs. Interest income on real estate, commercial and
consumer loans is accrued over the term of the loans based on the principal
outstanding. Interest income is not reported when full loan repayment is in
doubt.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loans are considered impaired if full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at the
fair value of the collateral if the loan is collateral dependent.
F-10
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A portion of the allowance for loan losses is allocated to impaired loans. Loans
are evaluated for impairment when payments are delayed, or when the internal
grading system indicates a doubtful classification. Payments on such loans are
reported as principal reductions.
Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at
the lower of aggregate cost or market. The cost of mortgage loans held for sale
is the mortgage note amount plus certain net origination costs less discounts
collected. The aggregate cost of mortgage loans held for sale at year-end 1997
and 1996, is less than their aggregate net realizable value.
Premises, Furniture and Equipment: Premises, furniture and equipment are
stated at cost less accumulated depreciation. Depreciation expense is computed
using the straight line and declining-balance methods over the estimated useful
lives of the assets. Maintenance and repairs are expensed and major improvements
are capitalized. These assets are reviewed for impairment when events indicate
the carrying amount may not be recoverable.
Other Real Estate: Real estate acquired through foreclosure or acceptance
of a deed in lieu of foreclosure is recorded at the lower of cost (fair value at
date of foreclosure) or fair value less estimated selling costs. Expenses
incurred in carrying other real estate are charged to operations as incurred.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers that are not covered by federal
deposit insurance and are secured by securities owned.
Income Taxes: The Company files consolidated federal and state income tax
returns. Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Loss Contingencies: The Company is involved in various legal actions. In
the opinion of management, the outcome of these matters will not have a material
effect on the Company's financial position, results of operations, or cash
flows.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
disclosed in Note 15. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Preferred Stock: The preferred stock pays dividends at a rate of 5%, and
is noncumulative, nonvoting, and each share is convertible into 3.0875 shares of
common stock at the option of the holder. The conversion ratio of preferred
stock into common stock is adjusted for common stock dividends and splits.
Preferred stock has equal liquidation rights to common stock.
Earnings Per Common Share: Basic earnings per share is based on weighted
average common shares outstanding. Diluted earnings per share further assumes
issuance of any dilutive potential common shares.
Earnings per share are restated for all subsequent stock dividends and splits.
Reclassifications: Certain items in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 presentation.
Current Accounting Issues: Statement of Financial Accounting Standard
(SFAS) No. 130, "Reporting Comprehensive Income" was issued in June 1997. This
Statement requires that certain items be reported in a separate statement of
comprehensive income, be included as a separate, additional component of the
statement of income, or be added to the statement of stockholders' equity. Such
items include foreign currency translations,
F-11
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accounting for futures contracts, accounting for defined benefit pension plans,
and accounting for certain investments in debt and equity securities. The
periodic change in net appreciation or depreciation on securities available for
sale reported in the Company's balance sheet is an element of comprehensive
income under this standard. This Statement is effective for the Company in 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This Statement changes the way public
companies report information about operating segments in annual financial
statements and requires that those companies report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Operating segments are parts of a company for which separate
information is available which is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in evaluating
performance. Required disclosures for operating segments include total segment
revenues, total segment profit or loss, and total segment assets. The Statement
also requires disclosures regarding revenues derived from products and services
(or similar groups of products or services), countries in which the company
derives revenue or holds assets, and about major customers, regardless of
whether this information is used in operating decision making. The Company is
required to adopt the disclosure requirements in its 1998 annual report, and in
interim periods in 1999. The 1999 interim period disclosures are required to
include comparable 1998 information.
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities." SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivative and whether it qualifies for hedge accounting, gains or losses
resulting from changes in the values of those derivatives would either be
recorded as a component of net income or as a change in stockholders' equity.
BankFirst is required to adopt this new standard January 1, 2000. Management has
not yet determined the impact of this standard.
NOTE 2 -- BUSINESS COMBINATION
At the close of business on December 31, 1996, BankFirst stockholders
exchanged 1,154,652 shares of its common stock for 570,380 shares of BankFirst
Corporation (formerly Smoky Mountain Bancorp, Inc.) common stock. In addition,
outstanding employee stock options to purchase 1,107,330 shares of BankFirst
common stock were converted into options to purchase approximately 547,020
shares of BankFirst Corporation common stock, as adjusted for subsequent stock
splits. The combination has been accounted for in a manner similar to a pooling
of interests and, accordingly, the Company's consolidated financial statements
were restated in 1996 and 1995 to include the accounts and operations of
BankFirst for the period prior to the combination. Smoky Mountain Bancorp,
Inc.'s wholly owned subsidiary, First National Bank of Gatlinburg, was merged
into BankFirst in March 1997.
On July 2, 1998, BankFirst Corporation acquired all of the outstanding
common stock of First Franklin Bancshares, Inc. ("First Franklin") in a business
combination accounted for as a pooling of interest. Stockholders of First
Franklin exchanged 164,125 shares of stock for 723,693 shares of the Company's
common stock. In the business combination, First Franklin was merged into
BankFirst Corporation, and its wholly-owned subsidiary, First National Bank and
Trust Company, remains a subsidiary of BankFirst Corporation. These supplemental
consolidated financial statements give retroactive effect to the merger, and as
a result, the financial statements are presented as if the combining companies
had been consolidated for all periods presented. As required by generally
accepted accounting principles, the supplemental consolidated financial
statements will become the historical financial statements upon issuance of the
financial statements for the period that includes the date of the merger.
F-12
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 2 -- BUSINESS COMBINATION (Continued)
Separate interest income and net income of the merged entities are as
follows:
1997 1996 1995
------- ------- -------
Interest income
BankFirst Corporation ................ $37,625 $17,081 $15,934
BankFirst ............................ -- 16,503 13,315
First Franklin ....................... 13,662 13,114 12,870
------- ------- -------
$51,287 $46,698 $42,119
======= ======= =======
Net income
BankFirst Corporation ................ $ 4,066 $ 1,450 $ 1,224
BankFirst ............................ -- 2,214 1,601
First Franklin ....................... 2,562 2,385 2,354
------- ------- -------
$ 6,628 $ 6,049 $ 5,179
======= ======= =======
<TABLE>
<CAPTION>
January 1, January 1,
1995 Effect of Effect of 1995
As Previously BankFirst First Franklin As
Reported Combination Combination Restated
------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Stockholders' equity
Common stock ................. $ 464 $ 1,303 $ 1,519 $ 3,286
Noncumulative convertible
preferred stock ........... -- 641 -- 641
Additional paid-in capital ... 2,167 10,177 2,944 15,288
Retained earnings ............ 3,818 1,550 12,231 17,599
Unrealized loss on
securities available
for sale .................. (668) (618) (1,454) (2,740)
-------- -------- -------- --------
Total $ 5,781 $ 13,053 $ 15,240 $ 34,074
======== ======== ======== ========
</TABLE>
NOTE 3 -- SECURITIES
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1997
U.S. Treasury securities ............................. $ 31,250 $ 360 $ (41) $ 31,569
Obligations of U.S.government agencies ............... 45,948 492 (40) 46,400
Obligations of states and political subdivisions .... 38,292 715 (8) 38,999
Mortgage-backed securities ........................... 10,696 134 (62) 10,768
--------- --------- --------- ---------
$ 126,186 $ 1,701 $ (151) $ 127,736
========= ========= ========= =========
1996
U.S. Treasury securities ............................. $ 25,997 $ 133 $ (156) $ 25,974
Obligations of U.S.government agencies ............... 65,571 284 (309) 65,546
Obligations of states and political subdivisions ..... 22,328 667 (24) 22,971
Mortgage-backed securities ........................... 20,342 80 (132) 20,290
--------- --------- --------- ---------
$ 134,238 $ 1,164 $ (621) $ 134,781
========= ========= ========= =========
</TABLE>
The amortized cost and estimated market value of debt securities available
for sale at year-end 1997, by contractual maturity, is shown below. Securities
not due at a single maturity date, primarily mortgage-backed securities, are
shown separately.
F-13
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 3 -- SECURITIES (Continued)
Amortized Fair
Cost Value
--------- --------
Due in one year or less .................... $ 12,744 $ 12,733
Due after one year through five years ...... 45,906 46,411
Due after five years through ten years ..... 39,677 40,324
Due after ten years ........................ 17,163 17,500
-------- --------
Mortgage-backed securities ................. 10,696 10,768
Total maturities ........................... $126,186 $127,736
======== ========
1997 1996 1995
---- ---- ----
Sales of securities available for sale
Realized gains ................................ $343 $ 33 $ 20
Realized losses ............................... 34 53 88
Sales of trading securities
Realized gains ................................ $-- $-- $ 75
Realized losses ............................... -- -- 2
Securities with a carrying value of 79,650 and 79,415 at year-end 1997 and
1996, were pledged for public deposits and securities sold under agreements to
repurchase.
NOTE 4 -- LOANS AND ALLOWANCE FOR LOANS LOSSES
At year-end 1997 and 1996, loans consisted of the following:
1997 1996
-------- --------
Commercial, industrial and agricultural .... $ 95,143 $ 69,614
Commercial real estate ..................... 164,102 155,389
Real estate construction ................... 24,977 26,379
Residential real estate .................... 120,143 110,636
Loans to individuals ....................... 59,947 50,277
Lease financing ............................ 1,845 1,055
Mortgage loans held for sale ............... 395 324
Other ...................................... 383 656
-------- --------
Total loans ............................ 466,935 414,330
Less: Unearned interest income and fees (1,968) (1,537)
Allowance for loan losses ............ (6,098) (4,723)
-------- --------
$458,869 $408,070
======== ========
Activity in the allowance for loan losses is as follows:
1997 1996 1995
------- ------- -------
Beginning balance .................... $ 4,723 $ 4,690 $ 4,526
Provision ............................ 2,935 667 553
Loans charged off .................... (1,833) (904) (701)
Recoveries of loans charged off ...... 273 270 312
------- ------- -------
Balance, end of year ................. $ 6,098 $ 4,723 $ 4,690
======= ======= =======
F-14
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 4 -- LOANS AND ALLOWANCE FOR LOANS LOSSES (Continued)
Impaired loans consisted of the following at year-end:
1997 1996
---- ----
Impaired loans
Loans with allowance allocated ....................... $552 $616
Amount of allowance for loan losses allocated ........ 61 216
Loans with no allowance allocated .................... 615 275
1997 1996 1995
---- ---- ----
Impaired loans
Average balance during the year ............. $1,312 $941 $189
Interest income recognized thereon .......... 30 50 7
Cash-basis interest income recognized ....... 30 50 7
The aggregate amount of loans to executive officers and directors of the
Company and their related interests was approximately $18,443 and $10,821 at
year-end 1997 and 1996. During 1997 and 1996, new loans aggregating
approximately $9,761 and $1,782 and amounts collected of approximately $2,139
and $1,794 were transacted with such parties.
NOTE 5 -- PREMISES, FURNITURE, AND EQUIPMENT
A summary of premises and equipment as of year-end 1997 and 1996 is as
follows:
1997 1996
---- ----
Land ........................................... $ 5,246 $ 4,565
Premises ....................................... 14,255 11,289
Furniture, fixtures and equipment .............. 10,390 8,810
Construction in progress ....................... 963 360
-------- --------
Total cost ..................................... 30,854 25,024
Accumulated depreciation ....................... (9,388) (7,981)
-------- --------
$ 21,466 $ 17,043
======== ========
NOTE 6 -- DEPOSITS
Certificates of deposit of $100 thousand or more were $78,260 and $69,468
at year-end 1997 and 1996.
At year-end 1997, maturities of time deposits with a term of over one year
were as follows, for the next five years.
1998 ................................ $195,578
1999 ................................ 48,341
2000 ................................ 15,759
2001 ................................ 7,045
2002 ................................ 1,941
Thereafter .......................... 325
The aggregate amount of deposits to executive officers and directors of
the Company and their related interests was approximately $2,477 and $1,376 at
year end 1997 and 1996.
F-15
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 7 -- BORROWINGS
Securities sold under agreements to repurchase and treasury tax and loan
deposits are financing arrangements. Securities involved with the agreements are
recorded as assets and are held by a safekeeping agent and the obligations to
repurchase the securities are reflected as liabilities. Securities sold under
agreements to repurchase consist of short term excess funds from repurchase
agreements and overnight liabilities to deposit customers arising from a cash
management program. While effectively deposit equivalents, such arrangements are
in the form of repurchase agreements. Other borrowed funds were comprised of
treasury tax and loan deposits which bear interest at the federal funds rate
less .25%.
Information concerning securities sold under agreements to repurchase at
year-end 1997 and 1996 is summarized as follows:
1997 1996
---- ----
Average month-end balance during the year .......... $ 9,137 $ 7,365
Average interest rate during the year .............. 4.76% 4.84%
Maximum month-end balance during the year .......... $16,302 $ 9,715
The aggregate amount of securities sold under agreements to repurchase
from executive officers and directors of the Company and their related interests
were $4,014 and $-0- at year-end 1997 and 1996.
Federal Home Loan Bank advances consist of the following at year-end 1997
and 1996:
1997 1996
---- ----
6.40% fixed rate advance, interest only
monthly, principal due at maturity on
April 25, 1997 ............................. $ -- $1,000
6.60% fixed rate advance, interest only
monthly, principal due at maturity on
October 24, 1997 ........................... -- 1,000
Variable rate, interest only monthly,
principal due at maturity on
September 30, 1998 ......................... 5,000 5,000
Variable rate, interest only monthly,
principal due at maturity on
April 30, 1998 ............................. 5,000 5,000
6.75% fixed rate advance, principal and
interest monthly, maturing on
September 1, 2012 .......................... 743 --
6.51% fixed rate advance, principal and
interest monthly, maturing on
January 1, 2013 ............................ 500 --
7.20% fixed rate advance, principal and
interest monthly, maturing on
June 1, 2012 ............................... 490 --
6.80% fixed rate advance, principal and
interest monthly, maturing on
March 1, 2012 .............................. 243 --
5.95% fixed rate advance, principal and
interest monthly, maturing on
August 1, 2008 ............................. 80 85
5.70% fixed rate advance, principal and
interest monthly, maturing on
September 1, 2008 .......................... 65 69
------- -------
$12,121 $12,154
======= =======
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $18,182 and $18,231 at year-end 1997 and 1996.
At year-end 1997, the Company had approximately $33,350 of federal funds
lines of credit available from correspondent institutions, $8,680 unused lines
of credit with the Federal Home Loan Bank, and $2,000 unused line of credit with
the Federal Reserve Bank of Atlanta.
F-16
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 8 -- RETIREMENT PLANS
A 401(k) profit sharing plan covers substantially all BankFirst
Corporation and BankFirst employees. Employee contributions are voluntary and
employer contributions are discretionary. Employee contributions are fully
vested and employer contributions are fully vested after five years.
Another 401(k) profit sharing plan covers substantially all First National
Bank and Trust Company employees. Employee contributions are voluntary. If a
participant elects to make a contribution to the Plan, the employer must make a
matching contribution of 50% of the first 3% of the participants annual
contributions. In addition, the employer may award a bonus match. Employee
contributions are immediately vesting and employer contributions are vested 20%
immediately, 40% after four years, 60% after five years, 80% after six years,
and 100% after seven years.
Expense for both Plans was $218, $187 and $162 for 1997, 1996 and 1995.
The Company has an Employee Stock Ownership Plan (ESOP) which enables
employees who have met minimum service and age requirements to acquire shares of
the Company's common stock. Cost of the Plan is borne by the Company through
discretionary contributions to an employee stock ownership trust. All shares
under the plan were allocated at year end 1997, 1996 and 1995. Shares of common
stock are allocated to each participating employee and are held in trust until
the employee's termination, retirement or death. The Company's contribution to
the ESOP was $30 in 1996. There was no contribution in 1997 or 1995.
Upon withdrawal from the plan, participants are entitled to require the
Company to repurchase the stock (referred to as a put option). At year-end 1997,
1996, and 1995, the fair value of ESOP shares subject to repurchase was $1,539,
$1,389, and $1,710, the fair value per share was $8.80, $7.68, and $6.96, and
shares held by the ESOP were 174,845, 180,845, and 245,725. The value of shares
subject to the put option have been presented outside of stockholders' equity
since no active market existed for the Company's common stock.
The First National Bank and Trust Company has a defined benefit pension
plan covering substantially all employees. The following sets forth the plan's
funded status at December 31, 1997, 1996 and 1995 and the components of net
pension expense:
1997 1996 1995
---- ---- ----
Accumulated benefit obligation
(including vested benefits of
$ 3,924, $ 2,708,and $ 2,396 ......... $(3,976) $(2,735) $(2,421)
======= ======= =======
Plan assets at fair value ............... $ 4,927 $ 4,177 $ 3,733
Projected benefit obligation for
service rendered to date ............. (5,239) (3,786) (3,431)
Unrecognized loss ....................... 959 150 152
Unrecognized transition asset ........... (150) (171) (193)
------- ------- -------
Prepaid accrued pension expense ......... $ 497 $ 370 $ 261
======= ======= =======
Net pension expense for the year included the following:
1997 1996
---- ----
Service cost for the period ................. $ 173 $ 159
Interest cost on projected benefit
obligation ................................ 318 287
Actual return on plan assets ................ (629) (305)
Other ....................................... 249 (21)
----- -----
$ 111 $ 120
===== =====
Contribution expense was $238, $229, and $243 for the years ending 1997,
1996, and 1995.
Significant assumptions made in computing pension liability and expense
for each year ended 1997, 1996, and 1995 include a weighted average discount
rate of 8.5%, increase in compensation of 6.5%, and long-term rate of return of
8.5%.
F-17
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 9 -- INCOME TAXES
Income tax expense is summarized as follows:
1997 1996 1995
---- ---- ----
Current ......................... $3,612 $3,134 $2,434
Deferred ........................ (206) 54 83
------ ------ ------
$3,406 $3,188 $2,517
====== ====== ======
Federal ......................... $2,817 $2,643 $2,174
State ........................... 589 545 343
------ ------ ------
$3,406 $3,188 $2,517
====== ====== ======
Deferred income taxes reflect the effect of "temporary differences"
between values recorded for assets and liabilities for financial reporting
purposes and values utilized for measurement in accordance with tax laws. The
tax effects of the primary temporary differences giving rise to the Company's
net deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Allowance for loan losses .................... $1,154 $ -- $619 $ --
Unearned loan income ......................... 57 -- 68 --
Unrealized gain on securities ................ -- (589) -- (207)
Depreciation ................................. -- (832) -- (732)
Other real estate ............................ 19 -- 19 --
FHLB dividends ............................... -- (201) -- (124)
Defined benefit plan ......................... -- (189) -- --
Other ........................................ 86 (261) 89 (169)
------ ------- ---- -------
Total deferred income taxes ............... $1,316 $(2,072) $795 $(1,232)
====== ======= ==== =======
</TABLE>
A reconciliation of expected income tax expense at the statutory federal
income tax rate of 34% with the actual effective income tax rates, is as
follows:
1997 1996 1995
---- ---- ----
Statutory federal tax rate ........... 34.0% 34.0% 34.0%
State income tax, net of
federal benefit .................... 4.0 4.0 4.0
Tax exempt income .................... (3.7) (4.6) (5.7)
Other ................................ (0.4) 1.1 0.4
---- ---- ----
33.9% 34.5% 32.7%
==== ==== ====
NOTE 10 -- COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
The Banks are party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These financial instruments include loan commitments and standby letters of
credit. The substantial majority of these instruments are with parties in the
Knoxville and surrounding East Tennessee area. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the financial statements.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
are used for on-balance-sheet instruments. There are no significant
concentrations of credit risk with any individual counterparty to originate
loans.
F-18
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 10 -- COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
Financial instruments whose contract amounts represent credit risk at
year-end 1997 and 1996 were as follows:
1997 1996
---- ----
Loan commitments ............................ $ 9,016 $ 1,574
Standby letters of credit ................... 6,760 9,256
Unused lines of credit ...................... 64,667 60,104
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. Each customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property,
plant, and equipment, and/or income-producing commercial properties.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The aggregate
amount of loan commitments and standby letters of credit to executive officers
and directors of the Company was approximately $3,165 and $1,752 at year-end
1997 and 1996.
NOTE 11 -- RELATED PARTY TRANSACTIONS
BankFirst was a 50% partner with a related party, the purpose of which was
to own and operate a building in downtown Knoxville, Tennessee. BankFirst's main
offices occupy a portion of this building. During 1997, BankFirst purchased the
other partner's interest in the building at a fair market value of $924 based on
an independent appraisal. The partnership was dissolved following the
consummation of the transaction. Total payments received from tenants of the
buildings other than BankFirst totaled $105 in 1997. BankFirst's contributions
to the partnership expenses were approximately $169, $313 and $192 in 1997, 1996
and 1995.
NOTE 12 -- REGULATORY MATTERS
The Company and Banks are subject to regulatory capital requirements
administered by federal and state banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. The prompt corrective action regulations
provide five classifications, including well capitalized, adequately
capitalized, under capitalized, significantly under capitalized, and critically
under capitalized, although these terms are not used to represent overall
financial condition. If under capitalized, capital distributions are limited, as
is asset growth and expansion, and plans for capital restoration are required.
At year-end, the capital requirements were met. Actual capital levels (in
millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Amounts to
be Well Capitalized
Minimum Required Under Prompt
Actual for Capital Corrective Action
------------------ Adequacy Purposes Provisions
Actual Ratio Actual Ratio Actual Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997
Total Capital (to Risk Weighted Assets)
Consolidated ........................... $61.4 12.8% $38.4 8.0% $48.0 10.0%
BankFirst .............................. 42.5 11.6 29.2 8.0 36.5 10.0
First National Bank and Trust Co. ...... 21.3 18.8 9.1 8.0 11.3 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ........................... $60.1 12.5% $19.2 4.0% $28.8 6.0%
BankFirst .............................. 37.9 10.4 14.6 4.0 21.9 6.0
First National Bank and Trust Co. ...... 20.2 17.8 4.5 4.0 6.8 6.0
</TABLE>
F-19
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 12 -- REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
Minimum Amounts to
be Well Capitalized
Minimum Required Under Prompt
Actual for Capital Corrective Action
------------------ Adequacy Purposes Provisions
Actual Ratio Actual Ratio Actual Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 (continued)
Tier 1 Capital (to Average Assets)
Consolidated ........................... $60.1 9.7% $24.9 4.0% $31.1 5.0%
BankFirst .............................. 37.9 8.3 18.3 4.0 22.9 5.0
First National Bank and Trust Co. ...... 20.2 11.2 7.2 4.0 9.0 5.0
1996
Total Capital (to Risk Weighted Assets)
Consolidated ........................... $55.2 13.1% $33.8 8.0% $42.3 10.0%
BankFirst .............................. 22.2 13.1 13.6 8.0 17.0 10.0
FNB of Gatlinburg ...................... 15.3 9.9 12.3 8.0 15.4 10.0
First National Bank and Trust Co. ...... 20.2 20.0 8.1 8.0 10.1 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ........................... $54.5 12.9% $16.9 4.0% $25.4 6.0%
BankFirst .............................. 20.3 12.0 6.8 4.0 10.2 6.0
FNB of Gatlinburg ...................... 13.7 8.9 6.2 4.0 9.2 6.0
First National Bank and Trust Co. ...... 19.1 18.9 4.0 4.0 6.1 6.0
Tier 1 Capital (to Average Assets)
Consolidated ........................... $54.5 9.6% $22.7 4.0% $28.3 5.0%
BankFirst .............................. 20.3 9.4 8.6 4.0 10.8 5.0
FNB of Gatlinburg ...................... 13.7 6.5 8.4 4.0 10.6 5.0
First National Bank and Trust Co. ...... 19.1 11.3 6.8 4.0 8.5 5.0
</TABLE>
The Company and subsidiary banks were well capitalized at year-end 1997.
The Company's primary source of funds to pay dividends to stockholders is
the dividends it receives from the Banks. The Banks are subject to certain
regulations on the amount of dividends it may declare without prior regulatory
approval. Under these regulations, the amount of dividends that may be paid in
any year is limited to that year's net profits, as defined, combined with the
retained net profits of the preceding two years, less dividends declared during
those periods. At year-end 1997, $9,057 of retained earnings was available for
dividends in future periods.
The Banks were required to have approximately $4,659 and $3,542 of cash on
hand to meet regulatory reserve requirements at year-end 1997 and 1996.
NOTE 13 -- STOCK OPTIONS
The Company maintains a stock option plan, which is administered by the
Executive Committee of the Board of Directors. A maximum of 3,125,000 stock
options may be issued to selected directors, officers, and other key employees.
The exercise price of each option is the fair market value of the Company's
common stock on the date of grant. The maximum term of the options is ten years.
Certain options may be exercised immediately upon grant, and certain options
vest at an annual rate of 20%, allowing 20% of the options to be exercised at
each grant anniversary date. At year-end 1997, 2,067,005 shares are authorized
for future grant.
F-20
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 13 -- STOCK OPTIONS (Continued)
A summary of the Company's option activity, and related information for
the year-ended 1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ........ 887,645 $5.21 547,020 $4.25 469,830 $3.72
Granted ................................. 164,380 7.68 340,625 6.96 77,190 6.48
Exercised ............................... (140,765) 3.72 -- -- --
Forfeited ............................... (49,260) 7.12 -- -- -- --
-------- ---- ------- ---- ------- ----
Outstanding at end of year .............. 862,000 6.19 887,645 5.21 547,020 4.11
Options exercisable at year-end ......... 461,030 4.55 541,590 4.09 540,230 4.08
-------- ---- ------- ---- ------- ----
Weighted-average fair value of
options granted during the year ........ $3.09 $2.46 $2.92
======== ======= =======
</TABLE>
Options outstanding at year-end 1997 had a range of exercise prices from
$3.72 to $7.68 and had a weighted average remaining life of seven years. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995: risk-free interest rate of
6.75%, 7.03% and 7.04%, and expected lives of seven, eight and nine years. No
assumption was made for estimated volatility since it is not feasible to
determine this assumption for a non-public entity whose stock is not actively
traded. With estimated volatility excluded, the option pricing model produces
the option's minimum value.
No expense for stock options is recorded, as the grant price equals the
market price of the stock at grant date. The following disclosures show the
effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. If additional options are granted, the
proforma effect will increase in the future.
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
As As As
Reported Proforma Reported Proforma Reported Proforma
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income ................................ $6,628 $6,400 $6,049 $6,046 $5,179 $4,971
Basic earnings per share .................. $.66 $.63 $.63 $.63 $.63 $.60
Diluted earnings per share ................ .61 .58 .59 .58 .59 .51
</TABLE>
F-21
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 14 -- EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations are
presented below.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Earnings Per Share
Net income ............................ $ 6,628 $ 6,049 $ 5,179
Less: Dividends declared
on preferred stock .......... (161) (162) (74)
----------- ----------- ----------
Net income available to
common stockholders .............. $ 6,467 $ 5,887 $ 5,105
=========== =========== ==========
Weighted average common
shares outstanding ................. 9,876,735 9,347,725 8,098,170
=========== =========== ==========
Earnings per share ................. $ .66 $ .63 $ .63
=========== =========== ==========
Earnings Per Share Assuming Dilution
Net income available to
common stockholders ................ $ 6,467 $ 5,887 $ 5,105
Add back dividends upon assumed
conversion of preferred stock ...... 161 162 74
----------- ----------- ----------
Net income available to
common stockholders
assuming conversion .............. $ 6,628 $ 6,049 $ 5,179
=========== =========== ==========
Weighted average common
shares outstanding ................. 9,876,735 9,347,725 8,098,170
Add: Dilutive effects of assumed
conversions and exercises:
Convertible preferred stock ........ 685,830 696,415 397,610
Convertible debenture .............. -- 39,065 39,065
Stock options ......................... 313,025 158,165 199,240
----------- ----------- ----------
Weighted average common and
dilutive potential common
shares outstanding ................. 10,875,590 10,241,370 8,734,085
----------- ----------- ----------
Earnings per share assuming dilution $ .61 $ .59 $ .59
=========== =========== ==========
</TABLE>
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments are as follows at year-end 1997 and 1996.
1997 1996
------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ----------------------------------
Financial assets:
Cash and cash
equivalents .............. $31,290 $31,290 $25,132 $25,132
Securities available
for sale ................. 127,736 127,736 134,781 134,781
Loans, net ................. 458,869 462,168 408,070 407,499
Financial liabilities:
Demand, savings, and money
market accounts .......... 280,781 280,781 249,890 249,890
Certificate of deposits .... 268,988 268,347 266,449 267,045
Advances from FHLB ......... 12,121 12,005 12,154 11,265
Repurchase agreement
and other ................ 18,261 18,261 7,230 7,230
F-22
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair
values for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits, liabilities for
borrowed money, and variable rate loans or deposits that reprice frequently and
fully. Securities available for sale fair values are based on quoted market
prices or, if no quotes are available, on the rate and term of the security and
on information about the issuer. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits,
the fair value is estimated by discounted cash flow analysis using current
market rates for the estimated life and credit risk. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable. Liabilities for borrowed money are estimated using
rates of debt with similar terms and remaining maturities.
NOTE 16 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEETS
Years ended December 31, 1997 and 1996
1997 1996
------- -------
Assets
Cash and cash equivalents ........................... $ 2,019 $ 121
Interest bearing deposit ............................ -- 1,200
Investment in subsidiary banks ...................... 59,329 53,674
Other ............................................... 516 356
------- -------
Total assets .................................. $61,864 $55,351
======= =======
Total liabilities ................................... 432 136
Employee stock ownership plan .......................... 1,539 1,389
Stockholders' equity
Common stock ........................................ 24,553 3,886
Preferred stock ..................................... 1,093 1,128
Additional paid-in capital .......................... 22,674 22,484
Retained earnings ................................... 10,612 25,992
Unrealized gain on securities ....................... 961 336
------- -------
Total stockholders' equity .................... 59,893 53,826
------- -------
Total liabilities and
stockholders' equity ....................... $61,864 $55,351
======= =======
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------- ------- -------
Dividends from subsidiary banks ................ $ 1,593 $ 1,470 $ 1,725
Other income ................................... 220 178 134
------- ------- -------
Total income ............................. 1,813 1,648 1,859
Interest expense ............................... -- 120 296
Other expense .................................. 213 350 867
------- ------- -------
Total expenses ........................... 213 470 1,163
------- ------- -------
Income before income taxes ..................... 1,600 1,178 696
Income tax expense (benefit) ................... 2 (105) (379)
------- ------- -------
Income before equity in
undistributed income
of subsidiaries .............................. 1,598 1,283 1,075
Equity in undistributed net
income of subsidiaries ....................... 5,030 4,766 4,104
------- ------- -------
Net income ..................................... $ 6,628 $ 6,049 $ 5,179
======= ======= =======
F-23
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 16 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net income ........................................ $ 6,628 $ 6,049 $ 5,179
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed net income of subsidiaries ....... (5,030) (4,766) (4,104)
Change in assets ............................... (160) 7 38
Change in liabilities .......................... 296 (9) (24)
------- ------- -------
Net cash provided by operating activities ... 1,734 1,281 1,089
Net cash used in investment activities
Change in time deposit with other banks ........... 1,200 (1,200) --
------- ------- -------
Financing activities
Payments of notes payable ......................... -- (3,244) --
Preferred stock dividends paid .................... (161) (162) (74)
Common stock dividends paid ....................... (1,214) (876) (1,152)
Cash paid for fractional shares in stock split .... (3) -- --
Effect of internal reorganization ................. -- (1,846) (1,235)
Sales of common stock and stock options exercised . 567 6,273 1,308
Repurchase of common stock ........................ (225) (186) (120)
------- ------- -------
Net cash provided by (used in) financing activities (1,036) (41) (1,273)
------- ------- -------
Net change in cash and cash equivalents .............. 1,898 40 (184)
Cash and cash equivalents, beginning of year ......... 121 81 265
------- ------- -------
Cash and cash equivalents, end of year ............... $ 2,019 $ 121 $ 81
======= ======= =======
</TABLE>
NOTE 17 -- SUBSEQUENT EVENTS
On January 16, 1998, the Bank acquired a mortgage loan origination and
servicing company for $7.5 million cash in a business combination accounted for
as a purchase. The mortgage company's primary asset was loan servicing rights of
approximately $7.0 million. The excess of the purchase price over the fair value
of net asset acquired, $1.9 million, will be amortized on a straight-line basis
over 15 years. In July, 1998, the Company effected a 5 for 1 common stock split,
which has been reflected in the Consolidated Statements of Changes in
Stockholders' Equity. All per share information has been retroactively restated
for this stock split.
F-24
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except share and per share data)
June 30, 1998
-------------
(Unaudited)
ASSETS
Cash and due from banks ...................................... $ 28,453
Federal Funds Sold ........................................... 9,450
Securities available for sale, at fair value ................. 126,664
Mortgage loans held for sale ................................. 18,999
Loans, net ................................................... 478,222
Premises and equipment, net .................................. 22,888
Mortgage servicing rights .................................... 7,191
Federal Home Loan Bank Stock, at cost ........................ 3,078
Intangible assets ............................................ 2,147
Accrued interest receivable and other asset .................. 9,507
--------
Total assets ............................................. $706,599
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ................................. $103,031
Interest-bearing deposits .................................... 485,704
--------
Total deposits .............................................. 588,735
Securities sold under agreements to repurchase ............... 22,888
Federal funds purchased and other borrowings ................. 9,600
Advances from the Federal Home Loan Bank ..................... 12,314
Accrued interest payable and other liabilities ............... 8,379
--------
Total liabilities ........................................ 641,916
Employee Stock Ownership Plan ................................... 1,745
Stockholders' equity
Common stock: $2.50 par value, 15,000,000
shares authorized, 9,998,045 shares
outstanding ................................................ 24,559
Noncumulative convertible preferred stock:
$5 par value, 1,000,000 shares authorized,
215,805 shares outstanding ................................. 1,079
Additional paid-in capital ................................... 22,520
Retained earnings ............................................ 13,599
Unrealized gain on securities available for sale ............. 1,181
--------
Total stockholders' equity .................................. 62,938
--------
Total liabilities and stockholders' equity .................. $706,599
========
See accompanying notes to the consolidated financial statements.
F-25
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
Six months
ended June 30,
(Unaudited)
1998 1997
---- ----
Interest income
Interest and fees on loans ......................... $ 24,390 $ 20,618
Taxable securities ................................. 2,969 3,701
Nontaxable securities .............................. 917 589
Other .............................................. 125 110
-------- --------
28,401 25,018
Interest expense
Deposits ........................................... 11,106 10,418
Short-term borrowings .............................. 872 330
Long-term borrowings ............................... 478 364
-------- --------
12,456 11,112
-------- --------
Net interest income ................................... 15,945 13,906
Provision for loan losses ............................. 1,067 720
-------- --------
Net interest income after provision
for loan losses .................................... 14,878 13,186
Noninterest income
Service charges and fees ........................... 2,308 2,022
Loan servicing income, net of amortization ......... 625 --
Net gain on loan sales ............................. 463 95
Trust department income ............................ 347 300
Other .............................................. 222 100
-------- --------
3,965 2,517
Noninterest expenses
Salaries and employee benefits ..................... 7,146 5,664
Occupancy expense .................................. 1,111 673
Equipment expense .................................. 1,290 938
Office expense ..................................... 904 583
Data processing fees ............................... 752 613
FDIC assessments ................................... 39 34
Merger expense ..................................... 276 --
Other .............................................. 2,400 2,250
-------- --------
13,918 10,755
-------- --------
Income before income taxes ............................ 4,925 4,948
Provision for income taxes ............................ 1,746 1,562
-------- --------
Net income ............................................ $ 3,179 $ 3,386
======== ========
Other comprehensive income (loss), net of tax
Change in unrealized gain (loss) on securities ..... 220 (37)
Reclassification of realized amount ................ -- 18
-------- --------
Comprehensive income .................................. $ 3,399 $ 3,367
======== ========
Earnings per share:
Basic .............................................. $ .31 $ .34
Diluted ............................................ $ .29 $ .31
See accompanying notes to the consolidated financial statements.
F-26
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months ended June 30, 1998
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
----- ----- ------ -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ................ $24,553 $1,093 $22,674 $10,612 $961 $59,893
Sales of common stock, 428 shares ....... 1 -- 15 -- -- 16
Stock options exercised, 857 shares ..... 1 -- 27 -- -- 28
Conversion of 2,703 shares of
preferred stock into 1,669 shares
common stock ......................... 4 (14) 10 -- -- --
Cash dividend on preferred stock
($0.36 per share) .................... -- -- -- (78) -- (78)
Cash dividend on common stock
($0.01 per share) .................... -- -- -- (114) -- (114)
Net income .............................. -- -- -- 3,179 -- 3,179
Reclassification of ESOP shares
subject to put options ............... -- -- (206) -- -- (206)
Change in unrealized gains (losses) ..... -- -- -- -- 220 220
------- ------ ------- ------- ------ -------
Balance, June 30, 1998 .................. $24,559 $1,079 $22,520 $13,599 $1,181 $62,938
======= ====== ======= ======= ====== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-27
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
Six months
ended June 30,
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities
Net income ........................................... $ 3,179 $ 3,386
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses ......................... 1,067 720
Depreciation ...................................... 1,042 667
Security amortization and accretion, net .......... 62 114
Gain on sale of mortgage loans .................... (463) (95)
Proceeds from sales of mortgage loans
held for sale ................................... 56,767 3,000
Purchases of mortgage loans held for sale ......... (20,482) --
Originations of mortgage loans held for sale ...... (69,778) (16,159)
Changes in assets and liabilities
Accrued interest receivable and other assets ...... (3,018) 2,028
Accrued interest payable and other liabilities .... (738) 630
-------- --------
Net cash used in operating activities .......... (32,362) (5,709)
Cash flows from investing activities
Net cash paid for mortgage company ................... (7,449) --
Purchase of securities ............................... (12,098) (26,545)
Proceeds from maturities of securities ............... 13,555 17,747
Proceeds from sale of securities ..................... -- 7,963
Net increase in loans ................................ 2,110 (10,782)
Purchase of FHLB stock ............................... (86) (2,255)
Premises and equipment expenditures, net ............. (1,868) (1,224)
-------- --------
Net cash used in investing activities ............. (5,836) (15,096)
Cash flows from financing activities
Net change in deposits ............................... 38,965 17,744
Net change in securities sold
under agreements to repurchase ..................... (6,252) 6,883
Net change in federal funds purchased ................ 7,851 1,500
Increase in other borrowed funds ..................... 650 386
Repayment of other borrowed funds .................... (6,505) (7)
Advances from the FHLB ............................... 15,500 1,000
Repayment of notes payable ........................... (5,250) (251)
Preferred stock dividends paid ....................... (78) (81)
Common stock dividends paid .......................... (114) (344)
Stock options exercised .............................. 28 --
Repurchase of common stock ........................... 16 (156)
-------- --------
Net cash provided by financing activities ......... 44,811 26,674
Net change in cash and cash equivalents ................. 6,613 5,869
Cash and cash equivalents, beginning of period .......... 31,290 25,132
-------- --------
Cash and cash equivalents, end of period ................ $ 37,903 $ 31,001
======== ========
Supplemental disclosures:
Interest paid ........................................ $ 12,232 $ 11,230
Income taxes paid .................................... 1,692 827
Loans converted to other real estate ................. 178 107
Preferred stock converted to common stock ............ 14 --
Reclassification of ESOP shares ...................... 209 --
See accompanying notes to the consolidated financial statements.
F-28
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
Principles of Consolidation: The consolidated financial statements include
the accounts of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.)
(the "Company") and its wholly-owned subsidiaries, BankFirst and First National
Bank and Trust Company (the "Banks"), and BankFirst's wholly-owned subsidiary,
Curtis Mortgage Company. These financial statements have been prepared to give
retroactive effect to the merger with First Franklin Bancshares, Inc. on July 2,
1998. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not extend through the date of
consummation. These financial statements do not extend through the date of
consummation, however, they will become the historical consolidated financial
statements of BankFirst Corporation after financial statements covering the date
of consummation of the business combination are issued.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month periods
ended June 30, 1998 and 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998, or for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included BankFirst's supplemental consolidated
financial statements for the year ended December 31, 1997.
Mortgage Banking Activities: Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or estimated
aggregate market value. Mortgage loans are sold into the secondary market at
market prices, which includes consideration for normal servicing fees. The total
cost of mortgage loans purchased or originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing, based on their relative fair values. The capitalized cost of loan
servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. Mortgage servicing rights are
periodically evaluated for impairment by stratifying them based on predominant
risk characteristics of the underlying serviced loans, such as loan type, term
and note rate. Impairment represents the excess of cost of an individual
mortgage servicing rights stratum over its fair value, and is recognized through
a valuation allowance.
Comprehensive Income: The Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income", effective for the
interim period ended June 30, 1998. This Standard requires reporting of
comprehensive income, defined as changes in equity other than those resulting
from investments by or distributions to stockholders. Net income, plus or minus
"other comprehensive income" results in comprehensive income. The only item of
other comprehensive income applicable to the Company is the change in unrealized
gain or loss on securities available for sale. Comprehensive income is reported
on the statement of income. The period ended June 30, 1997 was restated to meet
the current reporting format.
Purchase Transaction: On January 16, 1998, the Bank acquired Curtis
Mortgage Company, a mortgage loan origination and servicing company, for $7,500
in a business combination accounted for as a purchase. The results of operations
of Curtis Mortgage Company is included in the accompanying financial statements
since the date of acquisition. The excess of the purchase price over the fair
value of net assets acquired resulted in $1,900 of goodwill, which is being
amortized on a straight-line basis over 15 years. Upon the transaction, $6,065
of the purchase price was allocated to mortgage servicing rights, which are
being amortized on a level-yield basis over the life of the underlying loans.
Assets and liabilities acquired were:
Cash ....................................................... $ 51
Loans held for sale ........................................ 6,267
Mortgage servicing rights .................................. 7,000
Furniture and equipment .................................... 165
Accrued interest receivable and other assets ............... 375
Notes payable .............................................. (5,798)
Accrued and other liabilities .............................. (2,460)
F-29
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
Earnings Per Share: Basic earnings per share is based on weighted average
common shares outstanding. Diluted earnings per share further assumes issuance
of any dilutive potential common shares. Earnings per share are restated for all
subsequent stock dividends and splits.
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations are
presented below
Six months ended
June 30,
(Unaudited)
1998 1997
---- ----
Earnings Per Share
Net income ................................... $ 3,179 $ 3,386
Less: Dividends declared on preferred stock . (78) (81)
------------ ------------
Net income available to common
stockholders ............................ $ 3,101 $ 3,305
============ ============
Weighted average common shares outstanding ... 9,998,012 9,829,962
============ ============
Earnings per share ........................ $ .31 $ .34
============ ============
Earnings Per Share Assuming Dilution
Net income available to common stockholders .. $ 3,101 $ 3,305
Add back dividends upon assumed conversion
of preferred stock ........................ 78 81
------------ ------------
Net income available to common stockholders
assuming conversion .................... $ 3,179 $ 3,386
============ ============
Weighted average common shares outstanding ... 9,998,012 9,829,962
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock ............... 666,298 696,413
Stock options ............................. 380,898 286,066
Weighted average common and dilutive
potential common shares outstanding ........ 11,045,208 10,812,441
------------ ------------
Earnings per share assuming dilution ............ $ .29 $ .31
============ ============
F-30
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, the Selling Shareholders or any of the Underwriters. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy the shares of Common Stock offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the persons
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to the date hereof.
Until September 21, 1998, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a Prospectus. This delivery requirement is in addition to the obligation
of dealers to deliver a Prospectus when acting as Underwriters and with respect
to their unsold allotments or subscriptions.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Forward-Looking Statements ................................................ 7
Risk Factors .............................................................. 7
The Company ............................................................... 11
Dividends ................................................................. 12
Use of Proceeds ........................................................... 12
Capitalization ............................................................ 13
Dilution .................................................................. 14
Selected Consolidated Financial
Information .............................................................. 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ................................................ 17
Business .................................................................. 35
Regulation ................................................................ 43
Management ................................................................ 49
Certain Transactions ...................................................... 53
Principal and Selling Shareholders ........................................ 54
Description of Capital Stock .............................................. 56
Shares Eligible for Future Sale ........................................... 57
Underwriting .............................................................. 58
Legal Matters ............................................................. 59
Experts ................................................................... 59
Additional Information .................................................... 60
Index to Financial Statements ............................................. F-1
================================================================================
================================================================================
1,600,000 Shares
BankFirst
-Corporation-
Common Stock
----------
PROSPECTUS
----------
J.C. Bradford&Co.
Morgan Keegan
& Company, Inc.
August 27, 1998
================================================================================
