As filed with the Securities and Exchange Commission on June __, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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BANKFIRST CORPORATION
(exact name of registrant as specified in its Charter)
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Tennessee 6712 58-1790903
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Classification Identification No.)
organization) Code Number)
625 Market Street
Knoxville, Tennessee 37902
(423) 595-1100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Fred R. Lawson
President and Chief Executive Officer
625 Market Street
Knoxville, Tennessee 37902
(423) 595-1100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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With Copies to:
Robert G. McCullough, Esq. Ralph W. Davis, Esq.
Baker, Donelson, Bearman & Caldwell, P.C Waller Lansden Dortch & Davis, PLLC
511 Union Street, Suite 1700 511 Union Street, Suite 2100
Nashville, Tennessee 37219 Nashville, Tennessee 37219
(615) 726-5600 (615) 244-6380
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Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the same
offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of this prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum Proposed
Offering Maximum Amount of
Title of each Class of Amount to be Price Per Aggregate Registration
Securities to be Registered Registered (1) Share(2) Offering Price(2) Fee
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<S> <C> <C> <C> <C>
Common Stock
$2.50 par Value............. 1,840,000 shs. $13.50 $24,840,000 $7,327.80
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</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering, after giving effect to the underwriter's overallotment
option.
(2) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 18, 1998
PROSPECTUS
1,600,000 Shares
BANKFIRST CORPORATION
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. It is currently anticipated that the initial public offering price for
the Common Stock will be between $11.50 and $13.50 per share. See "Underwriting"
for a discussion of the factors considered in determining the initial public
offering price.
The Company has applied to have the Common Stock 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 .....
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Total (3) ......
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(1) The Company and the 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 $___________ 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 $_______, the total Underwriting Discount will be
$_______, the total Proceeds to Company will be $_______ and Proceeds to
Selling Shareholders will be $_________. See "Underwriting."
------------------
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 August _____, 1998.
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J.C. Bradford & Co. Morgan Keegan & Company, Inc.
August __, 1998
<PAGE>
BRANCH LOCATIONS
[GRAPHIC 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."
2
<PAGE>
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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 assumes an initial
public offering price of $12.50 per share, assumes no exercise of the
Underwriters' over-allotment option and reflects a five for one stock split.
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 June __, 1998 and accounted for as a pooling of
interests.
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 June
_____, 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.
Since 1992, 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 $701 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.
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
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3
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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 ............................. 11,258,422 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."
Proposed Nasdaq National
Market Symbol ............................ BKFR
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4
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary financial information for the
Company and First Franklin combined as of and for the three months ended March
31, 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 historical financial statements of the Company and First
Franklin, including the notes thereto, that appear elsewhere in this Prospectus
and with the consolidated financial statements of the Company, which give effect
to the Merger. The consolidated condensed financial information has been
prepared based on the pooling of interest method of accounting.
<TABLE>
<CAPTION>
For the years ended December 31,
March 31, March 31, ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------- ---------- -----------
(Dollar amounts in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income - tax equivalent...... $ 13,968 $ 12,343 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301
Interest expense...................... 6,000 5,500 22,652 21,238 19,082 13,537 11,963
---------- ---------- ---------- --------- ---------- ---------- -----------
Net interest income................ 7,968 6,843 29,241 26,073 23,595 20,780 17,338
Tax equivalent adjustment (1)......... (172) (98) (606) (613) (558) (600) (623)
---------- ---------- ---------- --------- ---------- ---------- -----------
Net interest income - adjusted..... 7,796 6,745 28,635 25,460 23,037 20,180 16,715
Provision for loan losses............. (534) (360) (2,935) (667) (553) (703) (924)
Noninterest income.................... 1,959 1,298 5,657 5,243 4,369 4,382 3,916
Noninterest expenses.................. (6,638) (5,340) (21,323) (20,799) (19,157) (17,203) (14,013)
---------- ---------- ---------- --------- ---------- ---------- -----------
Income before income taxes............ 2,583 2,343 10,034 9,237 7,696 6,656 5,694
Income tax expense.................... 880 776 3,406 3,188 2,517 1,727 1,828
---------- ---------- ---------- --------- ---------- ---------- -----------
Net earnings ......................... $ 1,703 $ 1,567 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866
========== ========== ========== ========= ========== ========== ===========
Basic earnings per share (2).......... $ 0.17 $ 0.16 $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.53
Diluted earnings per share (2)........ 0.16 0.14 0.61 0.59 0.59 0.61 0.52
Dividends per common share (2)........ -- -- 0.12 0.09 0.14 0.15 0.14
Cash dividends declared - common...... $ -- $ -- $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039
Cash dividends declared - preferred... 39 40 161 162 74 73 --
Book value per common share (2)....... 6.18 5.51 6.00 6.25 5.59 4.61 4.11
Average common shares outstanding (2). 9,988,925 9,829,470 9,876,735 9,347,725 8,098,170 7,346,505 7,294,040
Selected year-end balances
Total assets.......................... $ 701,432 $ 620,603 $ 650,717 $ 595,284 $ 545,718 $ 480,687 $ 418,337
Earning assets........................ 638,838 571,242 604,031 559,927 504,430 444,866 388,644
Total Securities...................... 130,740 131,327 127,736 134,781 135,127 121,390 116,851
Loans - net of unearned income........ 479,330 429,482 464,967 412,793 350,652 306,905 253,692
Allowance for loan losses............. 6,411 4,790 6,098 4,723 4,690 4,526 4,054
Total deposits........................ 567,228 528,110 549,769 516,339 480,346 430,407 376,838
Repurchase agreements and
Federal Funds purchased........... 34,775 19,561 16,302 5,966 7,632 1,363 --
Long-term debt........................ 27,351 12,402 12,121 12,154 8,407 8,416 3,657
Stockholders' equity.................. 61,724 54,140 59,896 53,826 42,512 34,074 29,958
Selected average balances
Total assets.......................... $ 662,988 $ 602,175 $ 621,719 $ 566,616 $ 527,495 $ 467,616 $ 399,080
Earning assets........................ 600,526 565,912 577,178 528,179 488,834 419,005 367,538
Total securities...................... 131,604 136,505 128,796 136,600 135,509 121,352 106,584
Loans - net of unearned income........ 472,844 422,420 442,296 379,930 339,989 282,812 243,431
Allowance for loan losses............. 6,348 4,696 4,796 4,802 4,541 4,384 3,747
Total deposits........................ 547,480 516,656 529,820 492,435 468,068 416,426 343,359
Stockholders' equity.................. 60,554 54,677 56,430 47,787 38,282 31,195 28,686
</TABLE>
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5
<PAGE>
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<TABLE>
<CAPTION>
For the years ended December 31,
March 31, March 31, ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios
Average loans to average deposits..... 86.37% 81.76% 83.48% 77.15% 72.64% 67.91% 70.90%
Allowance to year end loans........... 1.34 1.12 1.31 1.14 1.34 1.47 1.60
Equity to assets...................... 9.13 9.08 9.08 8.43 7.26 6.67 7.19
Leverage capital ratio................ 8.78 9.05 9.73 9.60 8.35 7.50 8.60
Return on assets...................... 1.03 1.04 1.07 1.07 0.98 1.05 0.97
Return on equity...................... 11.25 11.46 11.75 12.66 13.53 15.80 13.48
Dividends payout ratio (3)............ -- -- 18.77 14.88 22.56 23.33 26.87
Net interest spread................... 4.35 3.99 4.24 4.13 4.12 N/A N/A
Net interest margin................... 5.13 4.77 5.05 4.92 4.82 N/A N/A
Average interest earning assets to
average interest-bearing liabilities 119.95 120.20 120.74 119.78 117.84 N/A N/A
Noninterest expense to average
assets............................. 4.00 3.55 3.43 3.67 3.63 3.68 3.51
Efficiency ratio - tax equivalent (1). 66.87 65.59 61.10 66.42 68.51 68.37 65.93
Net charge-offs to average loans...... 0.05 0.07 0.35 0.17 0.11 0.08 0.11
Nonperforming assets to total assets.. 0.56 0.52 0.57 0.46 0.33 0.30 0.24
Nonperforming loans to total loans.... 0.66 0.71 0.61 0.59 0.30 0.37 0.24
Allowance to total loans..............
Allowance to total nonperforming loans 1.34 1.12 1.31 1.14 1.34 1.47 1.60
202.56 157.93 214.27 195.33 450.10 398.77 673.42
</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) Dividends declared on common shares divided by net income available to
common shareholders.
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6
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forwarding-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). 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 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 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 market share in Knox County
and Sevier County, respectively, which are the primary markets of BankFirst.
Athens had 27.16% of the market share 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."
7
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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
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
Company, along with his wife, will have the power to vote 35.3% of the
outstanding shares of the Common Stock of the Company (36.5% if he and his wife
were to convert their Preferred Stock and he were to exercise his stock
options). In addition, Mr. Clayton's relatives and affiliates will have the
power to vote an additional 3.4% of the outstanding shares of the Company's
common stock (3.5% if the Preferred Stock owned by Mr. Clayton's relatives were
converted). 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
8
<PAGE>
experienced capital deficiencies in the past and there can be no assurance that
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
Company 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. These factors are beyond the control of the Company. The results of
operations 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. 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 $5.86 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
9
<PAGE>
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 11,258,422 shares
of Common Stock outstanding.
Approximately 35.3% of the outstanding 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 will rely upon
computers for the daily conduct of their business and for information systems
processing. 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 to provide the information
systems used by the Company and the Banks. 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 material 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 became the majority shareholder 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 a majority interest in 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 Co., Inc. ("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 June __, 1998, BankFirst Corporation merged with First Franklin
Bancshares, Inc. ("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. After 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 its bank subsidiaries 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
"Regulations--Dividends."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $13.5 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
March 31, 1998 after giving effect to the merger with First Franklin and a
retroaclive 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 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 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."
March 31, 1998
---------------------------
Capitalization Adjusted
of for
the Company Offering
----------- --------
(Dollars in thousands)
Liabilities:
FHLB advances (maturity exceeds 1 year) ........ $ 2,351 $ 2,351
ESOP (1) ......................................... 1,745 --
Stockholders' equity:
Preferred Stock, $5.00 par value; 1,000,000
authorized shares; 215,805 shares to be
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;
9,998,420 shares outstanding prior to the
Offering; and 11,258,422 to be outstanding
after the Offering ........................... 24,560 28,146
Additional paid-in capital ..................... 22,494 34,250
Retained earnings .............................. 12,300 12,300
Unrealized gain on securities .................. 1,291 1,291
---------- -------
Total stockholders' equity ................... 61,724 76,969
---------- -------
Total capitalization .................... $ 65,820 $79,320
========== =======
- ----------
(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 March 31, 1998 was
approximately $59.5 million, or $5.95 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 $12.50 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 to common by certain selling
shareholders, the pro forma net tangible book value of the Company as of March
31, 1998 would have been $74.8 million, or $6.64 per share. This represents an
immediate increase in net tangible book value of $0.69 per share to existing
shareholders and an immediate dilution of $5.86 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................................... $12.50
Net tangible book value per share before Offering......... $5.95
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 ........................................ 0.57
-----
Pro forma net tangible book value per share after
Offering .................................................. 6.64
------
Dilution in pro forma net tangible book value per
share to new investors ................................... $ 5.86
======
The following table sets forth, on a pro forma as adjusted basis as of
March 31, 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.
Shares Purchased Total Consideration
------------------ ---------------------
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing
shareholders (1)..... 9,998,420 88.81 $46,472,000 75.25 $ 4.65
Converted preferred
shares .............. 60,002 0.53 281,000 0.46 4.69
New investors ......... 1,200,000 10.66 15,000,000 24.29 12.50
---------- ------ ----------- ------
Total ........ 11,258,422 100.00 $61,753,000 100.00
========== ====== =========== ======
- ----------
(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
9,658,422, or 85.8% (or 84.0% if the 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
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 488,140 shares of Common
Stock issuable upon the exercise of vested stock options granted by the
Company and 614,641 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 tables set forth summary financial information for the
Company and First Franklin combined as of and for the three months ended March
31, 1998, 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 historical financial statements of the Company and First
Franklin, including the notes thereto, that appear elsewhere in this Prospectus
and with the consolidated financial statements of the Company, which give effect
to the Merger. The consolidated financial information has been prepared based on
the pooling of interest method of accounting.
<TABLE>
<CAPTION>
For the years ended December 31,
March 31, March 31, ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ----------- ----------- ----------- ----------- -----------
(Dollar amounts in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Interest income - tax equivalent...... $ 13,968 $ 12,343 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301
Interest expense...................... 6,000 5,500 22,652 21,238 19,082 13,537 11,963
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income................ 7,968 6,843 29,241 26,073 23,595 20,780 17,338
Tax equivalent adjustment (1)......... (172) (98) (606) (613) (558) (600) (623)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income - adjusted..... 7,796 6,745 28,635 25,460 23,037 20,180 16,715
Provision for loan losses............. (534) (360) (2,935) (667) (553) (703) (924)
Noninterest income.................... 1,959 1,298 5,657 5,243 4,369 4,382 3,916
Noninterest expenses.................. (6,638) (5,340) (21,323) (20,799) (19,157) (17,203) (14,013)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Income before income taxes............ 2,583 2,343 10,034 9,237 7,696 6,656 5,694
Income tax expense.................... 880 776 3,406 3,188 2,517 1,727 1,828
---------- ---------- ----------- ----------- ----------- ----------- -----------
Net earnings ......................... $ 1,703 $ 1,567 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866
========== ========== =========== =========== =========== ========== ===========
Basic earnings per share (2).......... $ 0.17 $ 0.16 $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.53
Diluted earnings per share (2)........ 0.16 0.14 0.61 0.59 0.59 0.61 0.52
Dividends per common share (2)........ -- -- 0.12 0.09 0.14 0.15 0.14
Cash dividends declared - common...... $ -- $ -- $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039
Cash dividends declared - preferred... 39 40 161 162 74 73 --
Book value per common share (2)....... 6.18 5.51 6.00 6.25 5.59 4.61 4.11
Average common shares outstanding (2). 9,988,925 9,829,470 9,876,735 9,347,725 8,098,170 7,346,505 7,294,040
Selected year-end balances
Total assets.......................... $ 701,432 $ 620,603 $ 650,717 $ 595,284 $ 545,718 $ 480,687 $ 418,337
Earning assets........................ 638,838 571,242 604,031 559,927 504,430 444,866 388,644
Total Securities...................... 130,740 131,327 127,736 134,781 135,127 121,390 116,851
Loans - net of unearned income........ 479,330 429,482 464,967 412,793 350,652 306,905 253,692
Allowance for loan losses............. 6,411 4,790 6,098 4,723 4,690 4,526 4,054
Total deposits........................ 567,228 528,110 549,769 516,339 480,346 430,407 376,838
Repurchase agreements and
Federal Funds purchased........... 34,775 19,561 16,302 5,966 7,632 1,363 --
Long-term debt........................ 27,351 12,402 12,121 12,154 8,407 8,416 3,657
Stockholders' equity.................. 61,724 54,140 59,896 53,826 42,512 34,074 29,958
Selected average balances
Total assets.......................... $ 662,988 $ 602,175 $ 621,719 $ 566,616 $ 527,495 $ 467,616 $ 399,080
Earning assets........................ 600,526 565,912 577,178 528,179 488,834 419,005 367,538
Total securities...................... 131,604 136,505 128,796 136,600 135,509 121,352 106,584
Loans - net of unearned income........ 472,844 422,420 442,296 379,930 339,989 282,812 243,431
Allowance for loan losses............. 6,348 4,696 4,796 4,802 4,541 4,384 3,747
Total deposits........................ 547,480 516,656 529,820 492,435 468,068 416,426 343,359
Stockholders' equity.................. 60,554 54,677 56,430 47,787 38,282 31,195 28,686
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
March 31, March 31, ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios
Average loans to average deposits..... 86.37% 81.76% 83.48% 77.15% 72.64% 67.91% 70.90%
Allowance to year end loans........... 1.34 1.12 1.31 1.14 1.34 1.47 1.60
Equity to assets...................... 9.13 9.08 9.08 8.43 7.26 6.67 7.19
Leverage capital ratio................ 8.78 9.05 9.73 9.60 8.35 7.50 8.60
Return on assets...................... 1.03 1.04 1.07 1.07 0.98 1.05 0.97
Return on equity...................... 11.25 11.46 11.75 12.66 13.53 15.80 13.48
Dividends payout ratio (3)............ -- -- 18.77 14.88 22.56 23.33 26.87
Net interest spread................... 4.35 3.99 4.24 4.13 4.12 N/A N/A
Net interest margin................... 5.13 4.77 5.05 4.92 4.82 N/A N/A
Average interest earning assets to
average interest-bearing liabilities 119.95 120.20 120.74 119.78 117.84 N/A N/A
Noninterest expense to average
assets............................. 4.00 3.55 3.43 3.67 3.63 3.68 3.51
Efficiency ratio - tax equivalent (1). 66.87 65.59 61.10 66.42 68.51 68.37 65.93
Net charge-offs to average loans...... 0.05 0.07 0.35 0.17 0.11 0.08 0.11
Nonperforming assets to total assets.. 0.56 0.52 0.57 0.46 0.33 0.30 0.24
Nonperforming loans to total loans.... 0.66 0.71 0.61 0.59 0.30 0.37 0.24
Allowance to total loans..............
Allowance to total nonperforming loans 1.34 1.12 1.31 1.14 1.34 1.47 1.60
202.56 157.93 214.27 195.33 450.10 398.77 673.42
</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 have been retroactively restated for the stock split.
(3) 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"), as if they were combined for all
periods presented. 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 three months ending March 31, 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 and a group of investors acquired a
majority interest in 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 June
_____, 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. 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 $701.4 million
at March 31, 1998, a $50.7 million increase. The primary changes in assets
included a $19.6 million increase in loans held for sale, a $14.1 million
increase in net loans, $6.9 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 March 31, 1998,
Curtis Mortgage purchased and originated $42.9 million of loans held for sale,
and had sales totaling $29.8 million. Total intangible assets at March 31, 1998
included goodwill from the purchase of Curtis Mortgage and approximately
$275,000 of intangibles from previous transactions.
17
<PAGE>
Total liabilities grew from $589.3 million at year-end 1997 to $638.0
million at March 31, 1998, an increase of $48.7 million. Of this growth,
deposits accounted for $17.5 million, federal funds purchased were $14.5
million, repurchase agreements accounted for $4.0 million, and BankFirst
borrowed $15 million of overnight FHLB advances. Federal funds purchased and the
additional FHLB advances were used to fund mortgage loans in process and held
for sale.
From year-end 1997 to March 31, 1998, equity grew $1.8 million primarily
from retained net income. The leverage capital ratio fell from 9.7% at year-end
1997 to 8.8% at March 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
Three Months Ended March 31, 1998, Compared to Three Months Ended March 31, 1997
Net interest income increased $1.1 million or 18.3%, to $7.8 million for
the three months ended March 31, 1998, from $6.7 million for the three months
ended March 31, 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 $41.5 million, or 7.3%, primarily as a result
of growth in loans.
The Company's net interest spread and net interest margin were 4.35% and
5.13%, respectively, for the three months ended March 31, 1998, as compared to
3.99% and 4.77% for the three months ended March 31, 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 $534,000 for the three months ended
March 31, 1998, compared to $360,000 for the three months ended March 31, 1997.
The increase in the provision was attributable to general loan growth. The
Company experienced net charge-offs of $221,000 for the three months ended March
31, 1998, resulting in a ratio of net charge-offs to average loans of 0.05%.
Noninterest income increased $661,000, or 50.9%, to $1.9 million for the
three months ended March 31, 1998 from $1.3 million for the three months ended
March 31, 1997, primarily attributable to operations of Curtis Mortgage, which
was acquired on January 15, 1998.
Noninterest expense increased $1.3 million, or 24.3%, to $6.6 million for
the three months ended March 31, 1998, from $5.3 million for the three months
ended March 31, 1997. The primary component of noninterest expense is salaries
and benefits, which increased $848,000, or 30.3%, to $3.6 million for the three
months ended March 31, 1998, from $2.8 million for the three months ended March
31, 1997. The increase is primarily attributable to increase in salaries for
additional employees and salaries associated with Curtis Mortgage. The Company's
efficiency ratio for the three months ended March 31, 1998, was 66.89%, compared
to 65.59% for the three months ended March 31, 1997.
Net income increased $136,000, or 8.7%, to $1.7 million for the three
months ended March 31, 1998 from $1.6 million for the three months ended March
31, 1997. The increase in net income was primarily due to increases in net
interest income and noninterest income, partially offset by increases in
noninterest expense. Annualized return on average assets for the three months
ended March 31, 1998, was 1.03% compared to 1.04% for the three months ended
March 31, 1997,
18
<PAGE>
and annualized return on average equity was 11.25% for the three months ended
March 31, 1998, compared to 11.46% for the three months ended March 31, 1997.
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%.
19
<PAGE>
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.
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 has been 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
========= ========= ========= ========= =========
</TABLE>
20
<PAGE>
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 3.50 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 ................. 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
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 62.2% 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
-------- -------- --------
Available for sale (Dollars in thousands)
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
--------------- --------------- --------------- --------------- ----------------
Available for sale Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------ --------------- --------------- --------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
21
<PAGE>
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.
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.
22
<PAGE>
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, and 864,430 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 preferred shares; however,
management currently has no plans to issue additional shares. There are
2,063,015 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 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)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 42,881 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..... 5,850 345 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.......... 22,045 17,942 18,776
Accrued interest and other
assets 7,523 8,336 7,031
--------- --------- ---------
Total assets.............. $ 621,719 $ 566,616 $ 527,495
========= ========= =========
LIABILITIES AND
SHAREHOLDERS' 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
Shareholders' equity............. 55,546 47,787 38,282
--------- --------- --------
Total liabilities and
shareholders' 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 $74 for 1997, $105 for 1996 and $123
for 1995.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $704 for 1997, $987 for 1996 and
$691 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 Rate 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 re-investing of securities proceeds in
25
<PAGE>
longer-term securities with higher yields. Average yields on investments
increased in 1997, from 6.61% to 6.69%, 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 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 earnings 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 0.34% 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 ............. (1,709) (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.
27
<PAGE>
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 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
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Principal balance (Dollars in thousands)
Nonaccrual............................ $ 1,414 $ 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%
</TABLE>
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
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
========== ========= =========== =========== ===========
</TABLE>
28
<PAGE>
Noninterest Income and Expense
Noninterest Income & 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)............ 309 100.00 (20) (500.00) 5
------------ ------------ ------------
Total noninterest income..... $ 5,657 7.90% $ 5,243 20.00% $ 4,369
============ ============ ============
<CAPTION>
% change % change
1997 from '96 1996 from '95 1995
------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
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 $15.4 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
29
<PAGE>
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.
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)% 2.42% 4.67%
</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 4.7% of net interest income, respectively. Downward
rate movements result in estimated decreases in net interest income of similar
amounts and percentages.
31
<PAGE>
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.
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
32
<PAGE>
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.
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............... $ 114,733 $ 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.
33
<PAGE>
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. For a discussion of these
requirements see "Regulation-Year 2000 Compliance."
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 chief personal computers and their operating systems,
which have been tested for Year 2000 compliance. Athens has been examined by the
OCC for compliance with OCC preparedness guidelines and with its own Year 2000
Preparedness Plan and has received a rating of "satisfactory." The Company is
entering the testing phase of the 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.
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 have been 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
34
<PAGE>
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.
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.
35
<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 June
______, 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.
Since 1992, 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 $701 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.
36
<PAGE>
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, the latest date for
which such information is available from TEDC.
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 13.9% of its deposits are located
there. BankFirst is focusing on expanding its current 1.2% market share 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 26.6% of the Company's deposits are located there. As of June 30,
1997, BankFirst had an 18.2% share of the Sevier County 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 27.6% 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 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.
37
<PAGE>
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 $260 million, and constituted approximately 54% of
the Company's loan portfolio, at March 31, 1998.
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
38
<PAGE>
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 $457 million.
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
5 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
39
<PAGE>
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 March 31, 1998,
the department had approximately $147.1 million in trust assets under
administration in approximately 363 accounts. BankFirst's trust department is
significantly smaller than that of Athens. With the Merger, management expects
to actively market the services of the Athens trust department in the areas
served by BankFirst.
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 March 31, 1998,
it had outstanding loans of approximately $270,000.
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 March 31, 1998, BankFirst had approximately 3,000
card holders and BankFirst and Athens had approximately 620 and 63 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 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.
40
<PAGE>
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."
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 Martin & Company, L.P., a subsidiary of First
Tennessee Bank, N.A., to manage its investment portfolio. BankFirst has provided
Martin & Company 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 Martin & Company 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
41
<PAGE>
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 5 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,
--------------------------------------
(Dollars in thousands)
1997 1996 1995
-------- -------- --------
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
======= ======= =======
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.
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<PAGE>
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 March 31, 1998, BankFirst and its subsidiaries employed 258 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.
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 has filed
a counterclaim and a cross-claim against ECC in the lawsuit, alleging that
Paymentech inadvertently overpaid BankFirst the total sum of $3,967,907.77. 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
$3,423,514.77 to Paymentech which had been retained by BankFirst. With respect
to the matters not settled, management expects to proceed to trial in 1998.
Management has established certain reserves against possible losses in amounts
it deems adequate and believes that the possibility of any additional exposure
is remote.
43
<PAGE>
REGULATION
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 Regulations."
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 of cash
dividends
44
<PAGE>
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 Banking 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 Banking 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 Banking 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
45
<PAGE>
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 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.
46
<PAGE>
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. 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.
47
<PAGE>
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 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 I capital (core capital) and Tier II capital (supplementary
capital). Tier I 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 I 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 I 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 I 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 I capital.
Tier II 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 I 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 II 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.
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<PAGE>
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 I Leverage Capital Ratio (Tier I
capital, less intangible assets, to total assets). In order for an institution
to operate at or near the minimum Tier I 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 I 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.
Agreements with Bank Regulatory Authorities. At the time James L. Clayton
acquired a majority interest in the Company, 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 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 the infusion of capital. In September
1996, the FRB lifted all restrictions on Smoky Mountain.
In May 1993, BankFirst entered into an Agreed Order with TDFI (amended in
1995), to insure 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.
49
<PAGE>
Year 2000 Compliance
The Year 2000 poses serious challenges to the banking industry. Many
experts believe that even the most prepared organizations may encounter some
implementation problems. The federal banking agencies are concerned that
financial institutions avoid major disruptions to service and operations. All
national banks are required to have an action plan to address Year 2000 issues
which must include an indication of management awareness of the problems and the
commitment to solutions; identification of external risks; and operational
issues that are relevant to a bank's Year 2000 planning. The Banks are also
required to coordinate with other entities with which they routinely interact
such as suppliers, creditors, borrowers, customers and other financial service
organizations to ensure Year 2000 compliance.
The OCC issued Advisory Letter 97-6, dated May 16, 1997, which outlines
comprehensive guidance for banks to effect a Year 2000 compliant system. AL 97-6
established the following target time frames to accomplish critical actions
concerning Year 2000 compliance:
* By September 30, 1997, all existing national banks should have identified
affected applications and databases. Mission critical applications should
be identified and an action plan set for Year 2000 work.
* By December 31, 1998, code enhancements and revisions, hardware upgrades,
and other associated changes should be largely completed by all national
banks. In addition, for mission critical applications, programming
changes should be largely completed and testing should be well underway.
* Between January 1, 1999 and December 31, 1999, national banks should be
testing and implementing their Year 2000 conversion programs.
Additionally, the Federal Financial Institutions Examinations Council has
issued a statement concerning testing for Year 2000 readiness which describes
the requirements for the testing strategies and plans of financial institutions
and outlines target dates for all testing as follows:
* By June 30, 1998, institutions should complete the development of their
written testing strategies and plans.
* By September 1, 1998, institutions processing in-house, and service
providers, should have commenced testing of internal mission-critical
systems.
* By December 31, 1998, testing of internal mission-critical systems should
be substantially complete. Service providers should be ready to test with
customers.
* By March 31, 1999, testing by institutions relying on service providers
for mission-critical systems should be substantially complete. External
testing with "material" other third parties should have begun.
* By June 30, 1999, testing of mission-critical systems should be complete
and implementation should be substantially complete.
To date, the Company and the Banks have met each target date.
50
<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> <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.
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<PAGE>
Directors' Compensation
During 1997, 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.
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
Other Annual Underlying All Other
Name Position Salary Bonus Compensation Options(#) Compensation
- ---- -------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fred R. Lawson President, Chief Executive $209,349 $25,000 $498,213 (1) 34,375 $ 4,912 (2)
Officer of BankFirst
R. Stephen Hagood Executive Vice President of 110,619 11,000 105,251 (1) 6,250 1,217 (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 2,068 (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.
52
<PAGE>
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
Total Options
Number of Granted to
Securities Employees in Exercise
Underlying in 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.
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 87,675 $498,213 206,825/136,250 $1,144,196/396,450 (1)
R. Stephen Hagood 17,505 105,021 48,335/10,500 290,411/21,100 (1)
Jerry L. French -- -- 3,220/8,000 8,265/19,383 (1)
</TABLE>
- ----------
(1) Value based on $50 per share (pre-split), which is the last known
transaction price prior to year-end 1997.
53
<PAGE>
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 18 years of service with
Athens, and Mr. Perdue has 20 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 and W.D. Sullins, Jr. Messrs. Bivens, Walker and Perdue are
officers of Athens.
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.
54
<PAGE>
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 21
years 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 make no further contributions.
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 1,921,015 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 March 31, 1998, the Company had a total of 1,006,430 outstanding
options, 488,140 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.
55
<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 March 31, 1998, the amount of these loans (including amounts
available under lines of credit) by BankFirst to the Company affiliates was
1.22% of BankFirst's total loans. Athens has no outstanding loans to affiliates
of the Company.
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.
56
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of March 31, 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 of Number of Percentage of
Number of Outstanding Shares Number of Outstanding
Name Shares(1) Shares (2) Offered Shares Shares (3)
- ---- --------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
James Clayton 5,066,280 (4) 45.4% 117,925 4,948,355 40.0%
Fred Lawson 399,275 (5) 3.6 60,000 (13) 339,275 2.7
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 -- 45,000 1.5
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 6,241,030 (12) 56.0 -- 6,241,030 50.5
a group (12 persons)
Employee Stock Option Plan 174,575 1.6 174,575 -- --
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 11,152,858 shares, including
9,998,420 issued and outstanding shares of Common Stock, 215,805 shares of
convertible Preferred Stock, which is presently convertible into 666,298
shares of Common Stock and 488,140 shares of Common Stock for which there
are vested options presently exercisable at the option of the holders.
(3) Includes 11,152,858 shares plus 1,200,000 shares issued in the Public
Offering.
57
<PAGE>
(4) Includes 67,190 shares owned by Mr. Clayton's wife, sons, daughter,
daughter-in-law, son-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 26,849
shares that Mr. Clayton's wife and son have the right to acquire upon
conversion of the 8,696 shares of Preferred Stock owned by them, 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.
(5) Includes 400 shares owned by Mr. Lawson's wife. Also includes 206,825
shares that Mr. Lawson has the right to purchase upon the exercise of
stock options and 107,615 shares that Mr. Lawson has the right to acquire
upon the conversion of the 34,855 shares of Preferred Stock owned by him.
Mr. Lawson's address is c/o BankFirst, P. O. Box 10, Knoxville, Tennessee
37901. Mr. Lawson will convert 19,434 shares of Preferred Stock to sell in
the Offering.
(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 139,660 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 and additional 40,000 shares of Common Stock.
(14) In the event that the underwriters' overallotment option is exercised, Mr.
Neel has agreed to sell and 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.
58
<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 (the "Preferred Stock").
Upon consummation of the Offering, 11,258,422 shares of Common Stock will be
issued and outstanding and 199,074 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 "Dividend Policy."
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
Company has applied for listing of its Common Stock on the Nasdaq National
Market under the symbol "BKFR."
Convertible Preferred Stock
The Company has 199,074 shares of noncumulative Convertible Preferred
Stock, $5.00 par value (the "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.
59
<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 11,258,422 shares
of Common Stock outstanding.
Of the 11,258,422 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 111,984 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, 6,146,060 of such
outstanding Common Stock, or 55%, will be subject to lock-up agreements entered
into by certain officers, directors and other shareholders of the Company (the
"Lock-up Agreements"). The Company and its officers, directors, and certain
other shareholders have, among other things, agreed not to, directly or
indirectly (i) offer for sale, sell, pledge or otherwise dispose of any Common
Stock or securities convertible into or exchangeable for Common Stock, with
certain exceptions; (ii) sell or grant options, right or warrants with respect
to any shares of Common Stock or securities convertible into or exchangeable for
Common Stock, with certain limited exceptions; or (iii) enter into any swap or
other derivatives transaction that transfers to another, in whole or in part,
any of the economic benefits or risks of ownership of such shares of Common
Stock, 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.
Such consent has been obtained by those of the Selling Shareholders so bound for
the sale of the shares offered hereby by them.
In connection with the Company's merger with First Franklin, 723,791
pre-split shares of Common Stock (3,618,955 post-split) were registered with the
Securities and Exchange Commission ("SEC") under the Securities Act by the
Company's Registration Statement, on Form S-4 No. 333-52051. Of the 3,618,955
post-split shares, 175,363 shares are subject to a lock-up agreement entered
into by the former directors of First Franklin. Such former directors have,
among other things, agreed not to sell or otherwise reduce the risk of ownership
of the shares of Common Stock which they received in the merger until
consolidated financial statements reflecting at least 30 days of post merger
combined operations of the Company have been published. After the term of the
lockup agreement, all of the shares of Common Stock issued in the merger will be
freely transferable under the Securities Act, except for shares issued to any
shareholder who was deemed to be an "affiliate" 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 1,921,015 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.
60
<PAGE>
Approximately 36.3% of the Common Stock outstanding after the Offering
will be directly owned or controlled by James L. Clayton. 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.
61
<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..........................................
Morgan Keegan & Company, Inc................................
----------
Total................................................ 1,600,000
==========
The underwriting discount has been calculated on the basis of a commission
rate of __% with respect to an aggregate of _________ shares of Common Stock to
be sold by the Company to the public.
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 Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances, the
purchase commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has 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 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 $____ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $____ 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 Common Stock has been approved for listing on the Nasdaq 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 150 days 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 into, exercisable for, or
exchangeable for shares of such Common Stock, other than through bona
62
<PAGE>
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 and Davis, PLLC, Nashville, Tennessee.
EXPERTS
The Consolidated Financial Statements of First Franklin Bancshares, Inc.
and subsidiaries included herein have been so included in reliance on the report
of G.R. Rush & Company, P.C., Chattanooga, Tennessee, independent certified
public accountants, given on the authority of said firm as experts in auditing
and accounting.
The Consolidated Financial Statements of BankFirst Corporation and
subsidiaries as of December 31, 1997 have been included herein in reliance on
the report of Crowe, Chizek and Company LLP, Louisville, Kentucky, independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing. The consolidated financial statements of BankFirst
Corporation (formerly known as Smoky Mountain Bancorp, Inc.) as of December 31,
1996 and 1995 and for the two years then ended have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The report of Coopers & Lybrand L.L.P. with respect to BankFirst
Corporation's (formerly known as Smoky Mountain Bancorp, Inc.) consolidated
financial statements as of December 31, 1995 and for the year then ended makes
reference to the fact that separate financial statements of Smoky Mountain
Bancorp, Inc. included in the 1995 restated consolidated balance sheet and
statements of income, stockholders' equity and cash flows of BankFirst
Corporation (formerly known as Smoky Mountain Bancorp, Inc.) were audited by
Hazlett, Lewis & Bieter, P.L.L.C., independent accountants. The report of
Hazlett, Lewis & Bieter, P.L.L.C. with respect to Smoky Mountain Bancorp, Inc.'s
consolidated financial statements as of and for the year ended December 31, 1995
has been included herein, given on the authority of that firm as experts in
accounting and auditing.
Change in Accountants
The Company previously disclosed its change in accountants in its S-4
Registration Statement No. 333-52051 filed with the SEC on May 7, 1998.
63
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
(File No. 333-_____) 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 75 Park Place,
Fourteenth Floor, New York, New York 10007 and Room 3190, John C. Kluczynski
Building, 230 South Dearborn Street, Chicago, Illinois 60604. 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 intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent accountants
and to make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited interim information.
64
<PAGE>
INDEX TO FINANCIAL INFORMATION
Page
----
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
Consolidated Balance Sheets...........................................F-5
Consolidated Statements of Income.....................................F-6
Consolidated Statements of Changes in Stockholders' Equity............F-7
Consolidated Statements of Cash Flows.................................F-8
Notes to Consolidated Financial Statements............................F-9
Financial Statements of BankFirst Corporation March 31, 1998 (unaudited)
Consolidated Balance Sheet............................................F-24
Consolidated Statements of Income.....................................F-25
Consolidated Statement of Changes in Stockholders' Equity.............F-26
Consolidated Statements of Cash Flows.................................F-27
Notes to Consolidated Financial Statements............................F-28
Financial Statements of First Franklin Bancshares, Inc.
1997, 1996 and 1995 (audited)
Independent Auditors' Report .........................................F-30
Consolidated Balance Sheets...........................................F-31
Consolidated Statements of Income.....................................F-32
Consolidated Statements of Changes in Stockholders' Equity............F-33
Consolidated Statements of Cash Flows.................................F-34
Notes to Consolidated Financial Statements............................F-35
Financial Statements of First Franklin Bancshares, Inc.
March 31, 1998 (unaudited)
Consolidated Balance Sheets...........................................F-47
Consolidated Statements of Income.....................................F-48
Consolidated Statements of Changes in Stockholders' Equity............F-49
Consolidated Statements of Cash Flows.................................F-50
Notes to Consolidated Financial Statements............................F-51
Financial Statements of BankFirst Corporation restated to reflect the
merger with First Franklin Bancshares, Inc. 1997, 1996 and 1995 (unaudited)
Consolidated Balance Sheets ...........................................F-52
Consolidated Statements of Income .....................................F-53
Consolidated Statements of Changes in Stockholders' Equity ............F-54
Consolidated Statements of Cash Flows .................................F-55
Notes to Consolidated Financial Statements ............................F-56
Financial Statements of BankFirst Corporation restated to reflect the
merger with First Franklin Bancshares, Inc. March 31, 1998 (unaudited)
Consolidated Balance Sheet ............................................F-76
Consolidated Statements of Income .....................................F-77
Consolidated Statement of Changes in Stockholders' Equity .............F-78
Consolidated Statements of Cash Flows .................................F-79
Notes to Consolidated Financial Statements ............................F-80
Pro Forma Financial Information March 31, 1998, December 31, 1997, 1996 and 1995
Pro Forma Financial Information .......................................F-83
Pro Forma Condensed Consolidated Balance Sheet March 31, 1998 .........F-84
Pro Forma Condensed Consolidated Balance Sheet December 31, 1997 ......F-85
Pro Forma Condensed Consolidated Statement of Income March 31, 1997 ...F-86
Pro Forma Condensed Consolidated Statement of Income
December 31, 1997 ..................................................F-87
Pro Forma Condensed Consolidated Statement of Income
December 31, 1996 ..................................................F-88
Pro Forma Condensed Consolidated Statement of Income
December 31, 1995 ..................................................F-89
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
BankFirst Corporation
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheet of BankFirst
Corporation (formerly Smoky Mountain Bancorp, Inc.) as of December 31, 1997 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 balance sheet 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 financial position of BankFirst
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
February 6, 1998, except for Note 17
as to which the date is March 19, 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. 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 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 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>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
1997 1996
-------- --------
ASSETS
Cash and due from banks ............................. $ 17,363 $ 9,195
Federal funds sold .................................. 7,000 3,800
-------- --------
Total cash and cash equivalents ................. 24,363 12,995
Securities available for sale, at fair value ........ 71,912 76,474
Loans, net .......................................... 345,564 311,679
Premises, furniture and equipment, net .............. 18,737 14,195
Federal Home Loan Bank Stock, at cost ............... 2,380 1,926
Accrued interest receivable and other assets ........ 5,794 5,724
-------- --------
Total assets .................................... $468,750 $422,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ........................ $ 66,426 $ 47,301
Interest-bearing deposits ........................... 328,726 319,050
-------- --------
Total deposits .................................. 395,152 366,351
Securities sold under agreements to repurchase ...... 16,302 5,966
Other borrowed funds ................................ 209 550
Advances from the Federal Home Loan Bank ............ 10,000 12,000
Accrued interest payable and other liabilities ...... 6,672 2,583
-------- --------
Total liabilities ............................... 428,335 387,450
Employee Stock Ownership Plan ............................ 1,536 1,389
Stockholders' equity
Common stock: $2.50 par value, 3,000,000 shares
authorized, 1,273,410 and 993,683 shares
outstanding in 1997 and 1996 ...................... 3,099 2,394
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 .......................... 20,112 19,818
Retained earnings ................................... 14,013 10,745
Unrealized gain on securities available for sale .... 562 69
-------- --------
Total stockholders' equity ...................... 38,879 34,154
-------- --------
Total liabilities and stockholders' equity ...... $468,750 $422,993
======== ========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BANKFIRST CORPORATION
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 ............... $32,769 $28,227 $24,628
Taxable securities ....................... 4,513 4,815 4,049
Nontaxable securities .................... 122 172 200
Other .................................... 221 370 372
------- ------- -------
37,625 33,584 29,249
Interest expense
Deposits ................................. 15,044 14,108 12,640
Short-term borrowings .................... 744 562 177
Long-term borrowings ..................... 686 529 599
------- ------- -------
16,474 15,199 13,416
------- ------- -------
Net interest income .......................... 21,151 18,385 15,833
Provision for loan losses .................... 2,250 517 378
------- ------- -------
Net interest income after provision
for loan losses ............................ 18,901 17,868 15,455
Noninterest income
Service charges and fees ................. 2,640 2,615 2,181
Net securities gains ..................... 175 -- 73
Net gain on loan sales ................... 226 199 181
Other .................................... 379 583 254
------- ------- -------
3,420 3,397 2,689
Noninterest expenses
Salaries and employee benefits ........... 7,986 7,392 6,746
Occupancy expense ........................ 1,312 1,724 1,142
Equipment expense ........................ 2,028 1,884 1,213
Office expense ........................... 625 371 576
Data processing fees ..................... 981 735 535
FDIC assessments ......................... 48 134 505
Other .................................... 2,804 3,172 3,128
------- ------- -------
15,784 15,412 13,845
------- ------- -------
Income before income taxes ................... 6,537 5,853 4,299
Provision for income taxes ................... 2,471 2,189 1,474
------- ------- -------
Net income ................................... $ 4,066 $ 3,664 $ 2,825
======= ======= =======
Earnings per share:
Basic .................................... $ 3.12 $ 3.06 $ 3.07
Diluted .................................. $ 2.80 $ 2.77 $ 2.76
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BANKFIRST CORPORATION
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 ................. $ 1,767 $ 641 $ 12,344 $ 5,368 $ (1,286) $ 18,834
Sales of common stock, 40,379 shares ..... 101 -- 1,207 -- -- 1,308
Cash dividends on preferred stock ........ -- -- -- (74) -- (74)
Cash dividends on common stock ........... (305) (305)
Net income ............................... -- -- -- 2,825 -- 2,825
Reclassification of ESOP shares subject
to put options ......................... -- -- (385) -- -- (385)
Change in unrealized gains (losses) ...... -- -- -- -- 1,873 1,873
-------- -------- -------- -------- -------- --------
Balance, January 1, 1996 ................. 1,868 641 13,166 7,814 587 24,076
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)
Common stock dividend, 12,695 shares ..... 31 -- 540 (571) -- --
Net income ............................... -- -- -- 3,664 -- 3,664
Reclassification of ESOP shares subject
to put options ......................... 33 -- 288 -- -- 321
Change in unrealized gains (losses) ...... -- -- -- -- (518) (518)
-------- -------- -------- -------- -------- --------
Balance, January 1, 1997 ................. 2,394 1,128 19,818 10,745 69 34,154
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)
Common stock split, 253,727 shares ....... 634 -- -- (634) -- --
Cash paid for fractional shares in stock
split .................................. -- -- -- (3) -- (3)
Repurchased common stock, 1,141 shares ... (3) -- (44) -- -- (47)
Net income ............................... -- -- -- 4,066 -- 4,066
Reclassification of ESOP shares subject
to put options ......................... 6 -- (153) -- -- (147)
Change in unrealized gains (losses) ...... -- -- -- -- 493 493
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ............... $ 3,099 $ 1,093 $ 20,112 $ 14,013 $ 562 $ 38,879
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BANKFIRST CORPORATION
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 ........................................... $ 4,066 $ 3,664 $ 2,825
Adjustments to reconcile net income to net
cash from operating activities
Provision for loan losses ......................... 2,250 517 378
Depreciation ...................................... 1,381 1,071 849
Amortization and accretion, net ................... (156) (329) (108)
Gain on securities sales .......................... (175) -- (73)
Loss (gain) on sale of assets ..................... 85 625 (3)
Gain on sale of mortgage loans .................... (226) (199) (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)
Changes in assets and liabilities
Accrued interest receivable and other assets ... (70) (74) (303)
Accrued interest payable and other liabilities . 3,788 177 708
-------- -------- --------
Net cash provided by operating activities .. 10,872 5,482 4,172
Cash flows from investing activities
Time deposits in other banks ......................... -- -- 1,350
Purchase of securities ............................... (32,378) (71,380) (54,474)
Proceeds from maturities of securities ............... 24,173 73,437 36,563
Proceeds from sales of securities .................... 13,893 -- --
Net increase in loans ................................ (35,839) (62,094) (31,856)
Purchase of FHLB stock ............................... (454) -- --
Premises and equipment expenditures, net ............. (6,008) (1,988) (2,820)
-------- -------- --------
Net cash used in investing activities .......... (36,613) (62,025) (51,237)
Cash flows from financing activities
Net change in deposits ............................... 28,801 36,437 44,863
Net change under repurchase agreements
and other borrowed funds ........................... 9,995 (1,116) 5,519
Advances from the Federal Home Loan Bank ............. -- 10,000 --
Repayments of advances from Federal Home Loan Bank ... (2,000) (3,000) --
Payments of notes payable ............................ -- (3,244) --
Preferred stock dividends paid ....................... (161) (162) (74)
Common stock dividends paid .......................... -- -- (305)
Cash paid for fractional shares in stock split ....... (3) -- --
Sales of stock and stock options exercised ........... 524 6,273 1,308
Repurchase of common stock ........................... (47) -- --
-------- -------- --------
Net cash provided by financing activities ...... 37,109 45,188 51,311
-------- -------- --------
Net change in cash and cash equivalents .................. 11,368 (11,355) 4,246
Cash and cash equivalents, beginning of year ............. 12,995 24,350 20,104
-------- -------- --------
Cash and cash equivalents, end of year ................... $ 24,363 $ 12,995 $ 24,350
======== ======== ========
Supplemental disclosures:
Interest paid ........................................ $ 16,480 $ 15,264 $ 12,630
Income taxes paid .................................... 2,203 2,372 1,677
Loans converted to other real estate ................. 422 133 789
Debenture converted to common stock .................. -- 500 --
Preferred stock converted to common stock ............ 35 -- --
Reclassification of ESOP shares ...................... (147) 321 (385)
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (the Bank) and
First National Bank of Gatlinburg. In April, 1998, the Company changed its name
to BankFirst Corporation. First National Bank of Gatlinburg was merged into
BankFirst in March 1997. 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
Eastern 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. 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
F-9
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 .6175 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, 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.
F-10
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 221,466 shares of BankFirst
common stock were converted into options to purchase approximately 109,404
shares of BankFirst Corporation common stock, as adjusted for the 1997 stock
split. 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.
Separate interest income and net income of the merged entities are as
follows:
1996 1995
------- -------
Interest income
BankFirst Corporation .................. $17,081 $15,934
BankFirst .............................. 16,503 13,315
------- -------
$33,584 $29,249
======= =======
Net income
BankFirst Corporation .................. $ 1,450 $ 1,224
BankFirst .............................. 2,214 1,601
------- -------
$ 3,664 $ 2,825
======= =======
January 1, January 1,
1995 Effect 1995
As Previously of As
Reported Combination Restated
------------- ----------- --------
Stockholders' equity
Common stock ................... $ 464 $ 1,303 $ 1,767
Noncumulative convertible
preferred stock .............. -- 641 641
Additional paid-in capital ..... 2,167 10,177 12,344
Unrealized loss on securities
available for sale ........... (668) (618) (1,286)
Retained earnings .............. 3,818 1,550 5,368
-------- -------- --------
Total ...................... $ 5,781 $ 13,053 $ 18,834
======== ======== ========
F-11
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 3 - SECURITIES
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 19,172 $ 272 $ -- $ 19,444
Obligations of U.S.
government agencies ............ 43,946 492 (29) 44,409
Obligations of states and
political subdivisions ......... 6,145 91 -- 6,236
Mortgage-backed securities ....... 1,742 83 (2) 1,823
----------- ----------- ----------- -----------
$ 71,005 $ 938 $ (31) $ 71,912
=========== =========== =========== ===========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ......... $ 12,422 $ 45 $ (52) $ 12,415
Obligations of U.S.
government agencies ............ 60,884 265 (261) 60,888
Obligations of states and
political subdivisions ......... 2,596 117 (1) 2,712
Mortgage-backed securities ....... 459 -- -- 459
----------- ----------- ----------- -----------
$ 76,361 $ 427 $ (314) $ 76,474
=========== =========== =========== ===========
</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.
Amortized Fair
Cost Value
--------- ---------
Due in one year or less ...................... $ 8,195 $ 8,201
Due after one year through five years ........ 33,754 34,156
Due after five years through ten years ....... 26,440 26,840
Due after ten years .......................... 874 892
--------- ---------
Mortgage-backed securities ................... 1,742 1,823
--------- ---------
Total maturities ........................ $ 71,005 $ 71,912
========= =========
1997 1996 1995
------- ------- -------
Sales of securities available for sale
Realized gains ............................ $ 206 $ -- $ --
Realized losses ........................... 31 -- --
Sales of trading securities
Realized gains ............................ $ -- $ -- $ 75
Realized losses ........................... -- -- 2
Securities with a carrying value of $62,097 and $61,415 at year-end 1997
and 1996, were pledged for public deposits and securities sold under agreements
to repurchase .
F-12
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
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 ..... $ 65,681 $ 50,286
Commercial real estate ...................... 144,876 140,048
Real estate construction .................... 18,082 20,894
Residential real estate ..................... 81,235 72,471
Loans to individuals ........................ 39,092 30,782
Lease financing ............................. 1,845 1,055
Mortgage loans held for sale ................ 395 324
Other ....................................... 115 261
--------- ---------
Total loans ............................. 351,321 316,121
Less: Unearned interest income and fees ..... (755) (872)
Allowance for loan losses ............. (5,002) (3,570)
--------- ---------
$ 345,564 $ 311,679
========= =========
Activity in the allowance for loan losses is as follows:
1997 1996 1995
------- ------- -------
Beginning balance ....................... $ 3,570 $ 3,407 $ 3,282
Provision ............................... 2,250 517 378
Loans charged off ....................... (878) (439) (400)
Recoveries of loans charged off ......... 60 85 147
------- ------- -------
Balance, end of year .................... $ 5,002 $ 3,570 $ 3,407
======= ======= =======
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 ...... -- --
1997 1996 1995
---- ---- ----
Impaired loans
Average balance during the year ........ $549 $627 $ --
Interest income recognized thereon ..... -- 28 --
Cash-basis interest income recognized .. -- 28 --
The aggregate amount of loans to executive officers and directors of the
Company and their related interests was approximately $17,157 and $9,595 at
year-end 1997 and 1996. During 1997 and 1996, new loans aggregating
approximately $9,006 and $605 and amounts collected of approximately $1,444 and
$1,569 were transacted with such parties.
F-13
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
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 ....................................... $ 4,908 $ 4,227
Premises ................................... 11,796 8,855
Furniture, fixtures and equipment .......... 7,352 5,978
Construction in progress ................... 963 360
-------- --------
Total cost ............................ 25,019 19,420
Accumulated depreciation ................... (6,282) (5,225)
-------- --------
$ 18,737 $ 14,195
======== ========
NOTE 6 - DEPOSITS
Certificates of deposit of $100 thousand or more were $61,937 and $55,772
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 ....................... $ 149,247
1999 ....................... 22,406
2000 ....................... 7,081
2001 ....................... 847
2002 ....................... 1,941
Thereafter ................. 325
The aggregate amount of deposits to executive officers and directors of
the Company and their related interests was approximately $1,395 and $912 at
year end 1997 and 1996.
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.
F-14
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 7 - BORROWINGS (Continued)
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
------- -------
$10,000 $12,000
======= =======
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $15,000 and $18,000 at year-end 1997 and 1996.
At year-end 1997, the Company had approximately $29,000 of federal funds
lines of credit available from correspondent institutions, and $2,200 unused
lines of credit with the Federal Home Loan Bank.
NOTE 8 - RETIREMENT PLANS
A 401(k) profit sharing plan 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. Expense was $135, $75 and $56 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). Withdrawn
participants are entitled to exercise the put option for a period of not more
than 60 days following the date of distribution of the stock. At year-end 1997,
1996, and 1995, the fair value of ESOP shares subject to repurchase was $1,536,
$1,389, and $1,710, the fair value per share was $44.00, $38.40, $34.80, and
shares held by the ESOP were 34,915, 36,169, and 49,145. 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.
NOTE 9 - INCOME TAXES
Income tax expense is summarized as follows:
1997 1996 1995
------- ------- -------
Current .................... $ 2,706 $ 2,209 $ 1,404
Deferred ................... (235) (20) 70
------- ------- -------
$ 2,471 $ 2,189 $ 1,474
======= ======= =======
Federal .................... $ 2,080 $ 1,852 $ 1,338
State ...................... 391 337 136
------- ------- -------
$ 2,471 $ 2,189 $ 1,474
======= ======= =======
F-15
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 9 - INCOME TAX (Continued)
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:
1997 1996
--------------------- ---------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
Allowance for loan losses ....... $ 1,059 $ -- $ 516 $ --
Unearned loan income ............ -- -- 44 --
Unrealized gain on securities ... -- (345) -- (44)
Depreciation .................... -- (623) -- (511)
Other real estate ............... 19 -- 19 --
FHLB dividends .................. -- (144) -- (82)
Other ........................... -- (261) -- (169)
--------- --------- --------- ---------
Total deferred income taxes. $ 1,078 $ (1,373) $ 579 $ (806)
========= ========= ========= =========
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 ........................ (0.1) (1.4) (3.4)
Other .................................... (0.1) 0.8 (.3)
------ ------ ------
37.8% 37.4% 34.3%
====== ====== ======
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
The Bank is 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.
Financial instruments whose contract amounts represent credit risk at
year-end 1997 and 1996 were as follows:
1997 1996
------- -------
Loan commitments ............................ $ 8,702 $ 1,400
Standby letters of credit ................... 6,589 9,052
Unused lines of credit ...................... 50,287 50,015
F-16
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
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 $2,832 and $1,718 at year-end
1997 and 1996.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Bank was a 50% partner with a related party, the purpose of which was
to own and operate a building in downtown Knoxville, Tennessee. The Bank's main
offices occupy a portion of this building. During 1997, the Bank 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 the Bank totaled $105 in 1997. The Bank's contributions to
the partnership expenses were approximately $169, $313 and $192 in 1997, 1996
and 1995.
NOTE 12 - REGULATORY MATTERS
The Company and Bank 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
for Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------- ----------------- ------------------
Actual Ratio Actual Ratio Actual Ratio
------ ----- ------ ----- ------ -----
1997
- ----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Consolidated ......................... $ 40.4 11.1% $ 29.2 8.0% $ 36.5 10.0%
BankFirst ............................ 42.5 11.6 29.2 8.0 36.5 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ......................... $ 39.6 10.8% $ 14.6 4.0% $ 21.9 6.0%
BankFirst ............................ 37.9 10.4 14.6 4.0 21.9 6.0
Tier 1 Capital (to Average Assets)
Consolidated ......................... $ 39.6 8.6% $ 18.3 4.0% $ 22.9 5.0%
BankFirst ............................ 37.9 8.3 18.3 4.0 22.9 5.0
</TABLE>
F-17
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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
for Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------- ----------------- ------------------
Actual Ratio Actual Ratio Actual Ratio
------ ----- ------ ----- ------ -----
1996
- ----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Consolidated ......................... $ 38.8 12.0% $ 25.9 8% $ 32.4 10%
BankFirst ............................ 22.2 13.1 13.6 8 17.0 10
FNB of Gatlinburg .................... 15.3 9.9 12.3 8 15.4 10
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ......................... $ 35.1 10.9% $ 12.9 4% $ 19.5 6%
BankFirst ............................ 20.3 12.0 6.8 4 10.2 6
FNB of Gatlinburg .................... 13.7 8.9 6.2 4 9.2 6
Tier 1 Capital (to Average Assets)
Consolidated ......................... $ 35.2 8.3% $ 17.1 4% $ 21.3 5%
BankFirst ............................ 20.3 9.4 8.6 4 10.8 5
FNB of Gatlinburg .................... 13.7 6.5 8.4 4 10.6 5
</TABLE>
The Company and subsidiary bank 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 Bank. The Bank is 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, $6,200 of retained earnings was available for
dividends in future periods.
The Bank was required to have approximately $3,516 and $2,517 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 625,000 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, 423,961 shares are authorized for
future grant.
F-18
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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 ............................ 177,529 $ 26.03 109,404 $ 21.24 93,966 $ 18.62
Granted .............................. 32,876 38.40 68,125 34.80 15,438 32.39
Exercised ............................ (28,153) 18.62 -- -- -- --
Forfeited ............................ (9,366) 35.60 -- -- -- --
----------- -------- ----------- ------- ----------- --------
Outstanding at end of year ........... 172,886 30.94 177,529 26.03 109,404 20.55
Options exercisable at year-end ...... 92,443 22.75 108,318 20.45 108,046 20.41
----------- ----------- -----------
Weighted-average fair value of
options granted during the year ..... $ 15.44 $ 12.32 $ 14.59
=========== =========== ===========
</TABLE>
Options outstanding at year-end 1997 had a range of exercise prices from
$18.62 to $38.40 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, 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 ..................... $ 4,066 $ 3,838 $ 3,664 $ 3,661 $ 2,825 $ 2,544
Basic earnings per share ....... $ 3.12 $ 2.94 $ 3.06 $ 3.05 $ 3.07 $ 2.84
Diluted earnings per share ..... 2.80 2.57 2.77 2.69 2.76 2.10
</TABLE>
F-19
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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 ................................... $ 4,066 $ 3,664 $ 2,825
Less: Dividends declared on preferred stock . (161) (162) (74)
----------- ----------- -----------
Net income available to common
stockholders ............................ $ 3,905 $ 3,502 $ 2,751
=========== =========== ===========
Weighted average common shares outstanding ... 1,251,556 1,145,754 895,843
=========== =========== ===========
Earnings per share ........................ $ 3.12 $ 3.06 $ 3.07
=========== =========== ===========
Earnings Per Share Assuming Dilution
Net income available to common stockholders .. $ 3,905 $ 3,502 $ 2,751
Add back dividends upon assumed conversion
of preferred stock ......................... 161 162 74
----------- ----------- -----------
Net income available to common
stockholders assuming conversion ........ $ 4,066 $ 3,664 $ 2,825
=========== =========== ===========
Weighted average common shares outstanding ... 1,251,556 1,145,754 895,843
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock ............... 137,106 139,283 79,522
Convertible debenture ..................... -- 7,813 7,813
Stock options ............................. 62,605 31,633 39,848
Weighted average common and dilutive
potential common shares outstanding ........ 1,451,267 1,324,483 1,023,026
----------- ----------- -----------
Earnings per share assuming dilution ...... $ 2.80 $ 2.77 $ 2.76
=========== =========== ===========
</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 ....... $ 24,363 $ 24,363 $ 12,995 $ 12,995
Securities available for sale ... 71,912 71,912 76,474 76,474
Loans, net ...................... 345,564 348,229 311,679 310,065
Financial liabilities:
Demand, savings, and money
market accounts ............... 213,306 213,306 183,483 183,483
Certificate of deposits ......... 181,846 180,856 182,868 183,026
Advances from FHLB .............. 10,000 9,884 12,000 11,111
Repurchase agreement and other .. 16,511 16,511 6,516 6,516
F-20
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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 ............................ $ 1,604 $ 9
Interest bearing deposit ............................. -- 1,200
Investment in subsidiary banks ....................... 38,753 34,370
Other ................................................ 58 5
------- -------
Total assets ..................................... $40,415 $35,584
======= =======
Total liabilities .................................... -- 41
------- -------
Employee stock ownership plan ........................... 1,536 1,389
Stockholders' equity
Common stock ......................................... 3,099 2,394
Preferred stock ...................................... 1,093 1,128
Additional paid-in capital ........................... 20,112 19,818
Retained earnings .................................... 14,013 10,745
Unrealized gain on securities ........................ 562 69
------- -------
Total stockholders' equity ....................... 38,879 34,154
------- -------
Total liabilities and stockholders' equity ....... $40,415 $35,584
======= =======
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------- ------- -------
Dividends from subsidiary banks ................ $ 173 $ 380 $ 700
Other income ................................... 149 141 120
------- ------- -------
Total income ............................ 322 521 820
Interest expense ............................... -- 120 296
Other expense .................................. 143 301 788
------- ------- -------
Total expenses .......................... 143 421 1,084
------- ------- -------
Income before income taxes ..................... 179 100 (264)
Income tax expense (benefit) ................... 3 (106) (366)
------- ------- -------
Income before equity in undistributed
income of subsidiaries ........................ 176 206 102
Equity in undistributed net income
of subsidiaries ............................... 3,890 3,458 2,723
------- ------- -------
Net income ..................................... $ 4,066 $ 3,664 $ 2,825
======= ======= =======
F-21
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(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 ............................................ $ 4,066 $ 3,664 $ 2,825
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of subsidiaries .......... (3,890) (3,458) (2,723)
Change in assets .................................. (53) (23) 2
Change in liabilities ............................. (41) (10) --
------- ------- -------
Net cash provided by operating activities .... 82 173 104
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 ........................... -- -- (305)
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 ..... 524 6,273 1,308
Repurchase of common stock ............................ (47) -- --
------- ------- -------
Net cash provided by (used in) financing
activities ...................................... 313 1,021 (306)
------- ------- -------
Net change in cash and cash equivalents .................. 1,595 (6) (202)
Cash and cash equivalents, beginning of year ............. 9 15 217
------- ------- -------
Cash and cash equivalents, end of year ................... $ 1,604 $ 9 $ 15
======= ======= =======
</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.
On March 19, 1998, the Company and First Franklin Bancshares, Inc. ("First
Franklin") agreed in principle that all of the outstanding common stock of First
Franklin would be acquired by the Company in a business combination to be
accounted for as a pooling of interest. At December 31, 1997, First Franklin had
total assets of $182.0 million and total equity of $21.0 million. Upon
consummation of the transaction, stockholders of First Franklin will receive
4.41 shares of the Company's common stock for each share of First Franklin
common stock. Historical financial information presented in future reports will
be restated to include First Franklin. Consummation of the transaction is
subject to regulatory and stockholder approval.
F-22
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollar amounts in thousands, except share and per share data)
NOTE 17 - SUBSEQUENT EVENTS (Continued)
The following summarized operating data gives effect to the acquisition
had it occurred on January 1, 1995:
1997 1996 1995
------------ ------------ ----------
Net interest income ............... $ 28,635 $ 25,460 $ 23,037
============ ============ ==========
Net income ........................ $ 6,628 $ 6,049 $ 5,179
============ ============ ==========
Basic earnings per share .......... $ 3.27 $ 3.14 $ 3.14
============ ============ ==========
Diluted earnings per share ........ $ 3.05 $ 2.94 $ 2.95
============ ============ ==========
F-23
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except share and per share data)
March 31, 1998
--------------
(Unaudited)
ASSETS
Cash and due from banks ..................................... $ 23,711
Securities available for sale, at fair value ................ 75,206
Mortgage loans held for sale ................................ 19,969
Loans, net .................................................. 361,029
Premises and equipment, net ................................. 19,202
Mortgage servicing rights ................................... 6,992
Federal Home Loan Bank Stock, at cost ....................... 2,422
Intangible assets ........................................... 2,120
Accrued interest receivable and other asset ................. 6,176
--------
Total assets ............................................... $516,827
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ............................... $ 75,992
Interest-bearing deposits .................................. 334,133
--------
Total deposits .......................................... 410,125
Federal funds purchased .................................... 14,500
Securities sold under agreements
to repurchase ........................................... 19,175
Advances from the Federal Home Loan Bank ................... 25,000
Accrued interest payable and other liabilities ............. 6,280
--------
Total liabilities ....................................... 475,080
Employee Stock Ownership Plan .................................. 1,745
Stockholders' equity
Common stock: $2.50 par value, 3,000,000
shares authorized, 1,275,893 shares
outstanding .............................................. 3,105
Noncumulative convertible preferred stock: $5 par value,
1,000,000 shares authorized, 215,805 shares outstanding .. 1,079
Additional paid-in capital ................................. 19,938
Retained earnings .......................................... 15,206
Unrealized gain on securities available for sale ........... 674
--------
Total stockholders' equity .............................. 40,002
--------
Total liabilities and stockholders' equity .............. $516,827
========
See accompanying notes to the consolidated financial statements.
F-24
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
Three months ended March 31,
----------------------------
(Unaudited)
1998 1997
---- ----
Interest income
Interest and fees on loans .................... $ 9,088 $ 7,753
Taxable securities ............................ 1,089 1,181
Nontaxable securities ......................... 57 32
Other ......................................... 46 59
------- -------
10,280 9,025
Interest expense
Deposits ...................................... 3,774 3,694
Short-term borrowings ......................... 484 168
Long-term borrowings .......................... 144 169
------- -------
4,402 4,031
------- -------
Net interest income ............................... 5,878 4,994
Provision for loan losses ......................... 225 300
------- -------
Net interest income after
provision for loan losses ...................... 5,653 4,694
Noninterest income
Service charges and fees ...................... 466 537
Loan servicing income, net of amortization .... 325 --
Net gain on loan sales ........................ 206 52
Trust department income ....................... 24 14
Other ......................................... 452 260
------- -------
1,473 863
Noninterest expenses
Salaries and employee benefits ................ 2,820 1,988
Occupancy expense ............................. 434 261
Equipment expense ............................. 496 495
Office expense ................................ 327 70
Data processing fees .......................... 285 239
FDIC assessments .............................. 11 29
Merger expnese ................................ 39 --
Other ......................................... 736 838
------- -------
5,148 3,920
------- -------
Income before income taxes ........................ 1,978 1,637
Provision for income taxes ........................ 746 577
------- -------
Net income ........................................ $ 1,232 $ 1,060
======= =======
Other comprehensive income (loss),
net of tax
Change in unrealized
gain (loss) on securities ................... 112 (545)
------- -------
Comprehensive income .............................. $ 1,344 $ 515
======= =======
Earnings per share:
Basic ......................................... $ 0.94 $ 0.82
Diluted ....................................... $ 0.84 $ 0.74
See accompanying notes to the consolidated financial statements.
F-25
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months ended March 31, 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 ................... $3,099 $1,093 $20,112 $14,013 $562 $38,879
Stock options exercised, 814 shares ........ 2 -- 25 -- -- 27
Conversion of 2,703 shares of
preferred stock into 1,669 shares
common stock .............................. 4 (14) 10 -- -- --
Cash dividend on preferred stock ........... -- -- -- (39) -- (39)
Net income ................................. -- -- -- 1,232 -- 1,232
Reclassification of ESOP shares
subject to put options .................... -- -- (209) -- -- (209)
Change in unrealized gains ................. -- -- -- -- 112 112
(losses)
------ ------ ------- ------- ---- -------
Balance, March 31, 1998 .................... $3,105 $1,079 $19,938 $15,206 $674 $40,002
====== ====== ======= ======= ==== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-26
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
Three months
ended March 31,
----------------
1998 1997
---- ----
(Unaudited)
Cash flows from operating activities
Net income ......................................... $ 1,232 $ 1,060
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses ........................ 225 300
Depreciation ..................................... 303 289
Amortization and accretion, net .................. (343) (40)
Gain on sale of mortgage loans ................... (206) (52)
Proceeds from sales of mortgage loans ............ 29,806 1,899
Purchases of mortgage loans held for sale ........ (11,944) --
Originations of mortgage loans held for sale ..... (30,963) (2,140)
Changes in assets and liabilities
Accrued interest receivable and other assets ... (2,124) (731)
Accrued interest payable and other liabilities . (691) 583
-------- --------
Net cash provided by (used in)
operating activities ...................... (14,705) 1,168
Cash flows from investing activities
Net cash paid for mortgage company ................. (7,449) --
Purchase of securities ............................. (4,095) (3,522)
Proceeds from maturities of securities ............. 1,000 6,573
Net increase in loans .............................. (16,085) (16,091)
Purchase of FHLB stock ............................. (42) (556)
Premises and equipment expenditures, net ........... (603) (1,670)
-------- --------
Net cash used in investing activities ............ (27,274) (15,266)
Cash flows from financing activities
Net change in deposits ............................. 14,973 10,274
Net change in securities sold
under agreements to repurchase ................... 2,873 295
Net change in federal funds purchased .............. 14,291 10,450
Advances from the FHLB ............................. 15,000 --
Repayment of notes payable ......................... (5,798) --
Preferred stock dividends paid ..................... (39) (40)
Stock options exercised ............................ 27 --
-------- --------
Net cash provided by financing activities ........ 41,327 20,979
-------- --------
Net change in cash and cash equivalents ............... (652) 6,881
Cash and cash equivalents, beginning of period ........ 24,363 12,995
-------- --------
Cash and cash equivalents, end of period .............. $ 23,711 $ 19,876
======== ========
Supplemental disclosures:
Interest paid ...................................... $ 2,013 $ 1,827
Income taxes paid .................................. 250 131
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-27
<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 subsidiary, BankFirst (the "Bank"), and the
Bank's wholly-owned subsidiary, Curtis Mortgage Company. In April, 1998, the
Company changed its name to BankFirst Corporation.
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 three month periods
ended March 31, 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 consolidated financial
statements for the year ended December 31, 1997.
Mortgage Banking Activities: Mortgage loans are 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.
Borrowings: Federal funds purchased are overnight borrowings. Advances
from the Federal Home Loan Bank are comprised of $15,000 overnight, $5,000 due
April 30, 1998, and $5,000 due September 30, 1998.
Comprehensive Income: The Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income", effective for the
interim period ended March 31, 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 March 31, 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-28
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
Subsequent Event: On March 19, 1998, the Company and First Franklin
Bancshares, Inc. ("First Franklin") agreed in principle that all of the
outstanding common stock of First Franklin would be acquired by the Company in a
business combination to be accounted for as a pooling of interest. At March 31,
1998, First Franklin had total assets of $185 and total equity of $22. Upon
consummation of the transaction, stockholders of First Franklin will receive
4.41 shares of the Company's common stock for each share of First Franklin
common stock. Historical financial information presented in future reports will
be restated to include First Franklin. Consummation of the transaction is
subject to regulatory and stockholder approval.
The following summarized operating data gives effect to the acquisition
had it occurred on January 1, 1997:
Three months ended March 31,
1998 1997
---- ----
Net interest income .................... $7,796 $6,745
Net income ............................. $1,703 $1,567
Basic earnings per share ............... $.83 $.78
Diluted earnings per share ............. $.78 $.72
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
Three months ended
March 31,
-------------------
1998 1997
---- ----
(Unaudited)
Earnings Per Share
Net income ................................... $ 1,232 1,060
Less: Dividends declared on preferred stock . (39) (40)
----------- -----------
Net income available to common
stockholders ............................ $ 1,193 $ 1,020
=========== ===========
Weighted average common shares outstanding ... 1,273,994 1,242,103
=========== ===========
Earnings per share ........................ $ 0.94 $ 0.82
=========== ===========
Earnings Per Share Assuming Dilution
Net income available to common stockholders .. $ 1,193 $ 1,020
Add back dividends upon assumed conversion
of preferred stock ......................... 39 40
----------- -----------
Net income available to common
stockholders assuming conversion ........ $ 1,232 $ 1,060
=========== ===========
Weighted average common shares outstanding ... 1,273,994 1,242,103
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock ............... 134,371 139,847
Stock options ............................. 58,939 57,213
Weighted average common and dilutive
potential common shares outstanding ........ 1,467,304 1,439,163
----------- -----------
Earnings per share assuming dilution ............. $ 0.84 $ 0.74
=========== ===========
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Franklin Bancshares, Inc. and Subsidiary
Athens, Tennessee
We have audited the accompanying 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-30
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
--------- --------
(In Thousands of Dollars)
ASSETS
Cash and due from banks ......................... $ 6,927 $ 6,237
Federal funds sold .............................. -- 5,900
-------- --------
Total cash and cash equivalents ............ 6,927 12,137
Securities available for sale,
at fair value ................................. 56,490 58,933
Loans, net ...................................... 113,305 96,391
Premises and equipment, net ..................... 2,729 2,848
Accrued interest receivable
and other assets .............................. 2,516 1,982
-------- --------
Total assets ............................... $181,967 $172,291
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits .................... $ 26,323 $ 26,860
Interest-bearing deposits ....................... 128,294 123,128
-------- --------
Total deposits ............................. 154,617 149,988
Other borrowed funds ............................ 1,750 714
Advances from the Federal
Home Loan Bank ................................ 2,121 154
Accrued interest payable and
other liabilities ............................. 2,462 1,763
-------- --------
Total liabilities .......................... 160,950 152,619
-------- --------
Stockholders' equity
Common stock: $5.00 par value,
400,000 shares authorized,
164,028 and 164,902 shares
outstanding in 1997 and 1996 .................. 820 825
Additional paid-in capital ...................... 3,203 3,333
Retained earnings ............................... 16,595 15,247
Net unrealized gain on securities
available for sale ............................ 399 267
-------- --------
Total stockholders' equity ................. 21,017 19,672
-------- --------
Total liabilities and
stockholders' equity ..................... $181,967 $172,291
======== ========
See notes to consolidated financial statements.
F-31
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------- -------- --------
(In Thousands of Dollars,
Except Per Share Amounts)
INTEREST INCOME
Interest and fees on loans ............ $ 10,111 $ 9,362 $ 9,171
Taxable securities .................... 2,361 2,473 2,565
Nontaxable securities ................. 1,051 1,016 874
Other ................................. 139 263 260
-------- -------- --------
13,662 13,114 12,870
-------- -------- --------
INTEREST EXPENSE
Deposits .............................. 6,060 5,989 5,576
Borrowings ............................ 118 50 90
-------- -------- --------
6,178 6,039 5,666
-------- -------- --------
NET INTEREST INCOME ....................... 7,484 7,075 7,204
PROVISION FOR LOAN LOSSES ................. 685 150 175
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ....................... 6,799 6,925 7,029
-------- -------- --------
NONINTEREST INCOME
Service charges and fees .............. 1,171 1,181 1,124
Net securities gains (losses) ......... 134 (20) (68)
Net gain on loan sales ................ -- 35 --
Trust department income ............... 622 572 551
Prepaid pension cost adjustment ....... 222 -- --
Other ................................. 88 78 73
-------- -------- --------
2,237 1,846 1,680
-------- -------- --------
NONINTEREST EXPENSES
Salaries and employee benefits ........ 3,124 3,147 3,003
Occupancy expense ..................... 404 405 401
Equipment expense ..................... 509 498 472
FDIC assessments ...................... -- -- 160
Office expense ........................ 150 162 139
Data processing fees .................. 272 272 234
Other ................................. 1,080 903 903
-------- -------- --------
5,539 5,387 5,312
-------- -------- --------
INCOME BEFORE INCOME TAXES ................ 3,497 3,384 3,397
PROVISION FOR INCOME TAXES ................ 935 999 1,043
-------- -------- --------
NET INCOME ................................ $ 2,562 $ 2,385 $ 2,354
======== ======== ========
EARNINGS PER SHARE:
Basic ................................. $ 15.62 $ 14.40 $ 14.15
See notes to consolidated financial statements.
F-32
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional Net Unrealized Total
Common Paid-in Retained Gains (Losses) Stockholders'
Stock Capital Earnings on Securities Equity
---------- ---------- -------- -------------- -------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ......................... $ 837 $ 3,627 $ 12,231 $ (1,454) $ 15,241
Retirement of repurchased
shares, 1,200 shares ......................... (6) (114) -- -- (120)
Cash dividends on common stock ................... -- -- (847) -- (847)
Net income ....................................... -- -- 2,354 -- 2,354
Change in unrealized gains
(losses) ..................................... -- -- -- 1,808 1,808
-------- -------- -------- -------- --------
Balance, January 1, 1996 ......................... 831 3,513 13,738 354 18,436
Retirement of repurchased
shares, 1,225 shares ......................... (6) (180) -- -- (186)
Cash dividends on common stock ................... -- -- (876) -- (876)
Net income ....................................... -- -- 2,385 -- 2,385
Change in unrealized gains
(losses) ..................................... -- -- -- (87) (87)
-------- -------- -------- -------- --------
Balance, January 1, 1997 ......................... 825 3,333 15,247 267 19,672
Sales of common stock,
267 shares ................................... 1 42 -- -- 43
Retirement of repurchased
shares, 1,141 shares ......................... (6) (172) -- -- (178)
Cash dividends on common stock ................... -- -- (1,214) -- (1,214)
Net income ....................................... -- -- 2,562 -- 2,562
Change in unrealized gains
(losses) ..................................... -- -- -- 132 132
-------- -------- -------- -------- --------
Balance, December 31, 1997 ....................... $ 820 $ 3,203 $ 16,595 $ 399 $ 21,017
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Inflows (Outflows) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from operating activities
Net income ..................................................... $ 2,562 $ 2,385 $ 2,354
Adjustment to reconcile net income to net cash
provided by operating activities
Provision for loan losses ................................ 685 150 175
Depreciation ............................................. 373 344 332
Amortization ............................................. 36 36 36
Net (gains) losses on securities sales ................... (134) 20 68
Net (gains) losses on sales of premises and equipment .... (8) (5) 2
Gain on sale of loans .................................... -- (35) --
Deferred tax provision ................................... 29 74 13
Accrued interest receivable and other assets ............. (570) (115) 151
Accrued interest payable and other liabilities ........... 552 (3) 135
-------- -------- --------
Net cash flows from operating activities ............ 3,525 2,851 3,266
-------- -------- --------
Cash flows from investing activities
Purchases of securities ........................................ (26,898) (29,544) (13,431)
Proceeds from maturities of securities ......................... 8,051 13,832 9,010
Proceeds from sales of securities .............................. 21,637 12,995 14,089
Net increase in loans .......................................... (17,598) (643) (12,917)
Proceeds from sales of premises and equipment .................. 8 20 --
Acquisition of premises and equipment .......................... (255) (274) (362)
-------- -------- --------
Net cash flows from investment activities ........... (15,055) (3,614) (3,611)
-------- -------- --------
Cash flows from financing activities
Net change in deposits ......................................... 4,629 (444) 5,075
Advances from Federal Home Loan Bank ........................... 2,000 -- --
Repayments of advances from Federal Home Loan Bank ............. (33) (9) (8)
Net change in other borrowed funds ............................. 1,073 562 (602)
Purchase of common stock ....................................... (178) (186) (120)
Sales of common stock .......................................... 43 -- --
Common stock dividends paid .................................... (1,214) (876) (847)
-------- -------- --------
Net cash flows from financing activities ............ 6,320 (953) 3,498
-------- -------- --------
Cash and cash equivalents
Net cash inflow (outflow) ...................................... (5,210) (1,716) 3,153
Balance
Beginning of year ........................................... 12,137 13,853 10,700
-------- -------- --------
End of year ................................................. $ 6,927 $ 12,137 $ 13,853
======== ======== ========
Supplemental disclosures:
Interest ....................................................... $ 6,139 $ 6,048 $ 5,459
Income taxes ................................................... 983 1,101 1,052
Total increase in unrealized
appreciation (depreciation) on
securities available for sale ............................... 132 (87) 1,808
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Principles of consolidation. The consolidated financial statements include
the accounts of the parent company and its wholly owned subsidiary, First
National Bank and Trust Company. All significant intercompany transactions and
balances are eliminated in the consolidation.
Nature of operations. The Company provides a variety of financial services
to individuals and corporate customers through its various branches in the
McMinn County, Tennessee region. The Company's primary deposit products are
demand deposits, NOW accounts, savings accounts and certificates of deposit. Its
primary lending products are commercial and single-family residential loans.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. Management's
determination of the allowance for loan losses is based on various factors
described below under the caption "Loans and allowance for loan losses".
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably possible
that the allowance for loan losses may change materially in the near term.
Cash and cash equivalents. For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Securities available for sale. The Company classified all investments as
securities available for sale. No investments were classified under the other
categories of trading securities and held to maturity securities. Available for
sale securities are reported at fair value, with unrealized holding gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity.
All investment securities are initially recorded at cost, with adjustments
made for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. Gains and losses on disposition
are based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.
Unrealized holding gains and losses, net of deferred tax, on securities
available for sale are reported as a net amount in a separate component of
stockholders' equity until realized. At December 31, 1997 and 1996, the deferred
tax liability was $244 thousand and $163 thousand, respectively.
Loans and allowance for loan losses. Loans are stated at the amount of
unpaid principal, reduced by unearned discount, unamortized loan fees and an
allowance for loan losses. Interest on loans is calculated by using the simple
interest method on daily balances of the principal amount outstanding. Loan fees
are recognized as an adjustment of yield over the lives of the related loans.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may
F-35
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued).
affect the borrowers' ability to pay. Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that collection of interest is doubtful.
Loans are considered impaired in 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
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. If impaired
loans are significant to management, 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 substandard or
doubtful classification. Payment on such loans are reported as principal
reductions.
Depreciation. Office equipment and buildings are stated at cost less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases.
Amortization. Intangible assets of the parent company are being amortized
on the straight-line method over a fifteen year period.
Income taxes. Income taxes are allocated based upon each entity's portion
of net income at the applicable tax rate. Deferred income taxes are reported for
timing differences between items of income or expense reported in the financial
statements and those reported for income tax purposes. The differences relate
principally to the basis of available for sale securities, depreciation methods,
defined benefit pension plan, and the provision for loan losses.
Fair value of financial instruments. Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
disclosed in Note 11. 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.
Repurchased common stock. All repurchased shares are retired in accordance
with Tennessee statutes and are available for issuance.
Earnings per share. Basic earnings per share are computed under a new
accounting standard effective in the quarter ended December 31, 1997. All prior
amounts conform to the new standard and do not require restatement. Basic
earnings per share is based upon net income divided by the weighted average
number of shares outstanding during the year.
Reclassifications. Certain amounts in 1995 and 1996 have been reclassified
to conform with the 1997 presentation.
Future accounting changes. New accounting standards have been issued which
will require future reporting of comprehensive income (net income plus changes
in holding gains and losses on available for sale securities) and may require
redetermination of industry segment financial information.
F-36
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SECURITIES AVAILABLE FOR SALE.
Carrying amounts and approximate market values of securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
U.S. Treasury .......................... $ 12,078 $ 88 $ (41) $ 12,125
Obligations of other U.S. government
agencies:
Mortgage-backed securities ...... 4,481 39 (29) 4,491
Collateralized mortgage
obligations .................. 4,473 12 (31) 4,454
Other ........................... 2,002 -- (11) 1,991
Obligations of states and political
subdivisions ........................ 32,147 624 (8) 32,763
FHLB and FRB stock ..................... 666 -- -- 666
-------- -------- -------- --------
$ 55,847 $ 763 $ (120) $ 56,490
======== ======== ======== ========
<CAPTION>
December 31, 1996
------------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
U.S. Treasury .......................... $ 13,575 $ 88 $ (104) $ 13,559
Obligations of other U.S. government
agencies:
Mortgage-backed securities ...... 13,182 58 (48) 13,192
Collateralized mortgage
obligations .................. 6,701 22 (84) 6,639
Other ........................... 4,687 19 (48) 4,658
Obligations of states and political
subdivisions ........................ 19,732 550 (23) 20,259
FHLB and FRB stock ..................... 626 -- -- 626
-------- -------- -------- --------
$ 58,503 $ 737 $ (307) $ 58,933
======== ======== ======== ========
</TABLE>
Securities with par amounts of approximately $17,375 thousand and $17,869
thousand for 1997 and 1996, respectively, were pledged to secure deposits and
other liabilities of $7,117 thousand and $2,969 thousand. The market value of
the pledged securities was $17,553 thousand and $18,000 thousand at December 31,
1997 and 1996, respectively.
The maturities of securities at December 31, 1997, were as follows:
Amortized Market
Cost Value
----------- -----------
(In Thousands of Dollars)
Due in one year or less ......................... $ 4,549 $ 4,532
Due after one year through five years ........... 12,588 12,691
Due after five years through ten years .......... 15,122 15,369
Due after ten years ............................. 22,922 23,232
Other securities ................................ 666 666
----------- -----------
$ 55,847 $ 56,490
=========== ===========
1997 1996 1995
------ ------ ------
(In Thousands of Dollars)
Sales of available for sale securities
Realized gains ............................... $ 137 $ 33 $ 20
Realized losses .............................. 3 53 88
F-37
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. NET LOANS.
Major classifications of loans at December 31, are as follows:
1997 1996
--------- ---------
(In Thousands of Dollars)
Commercial loans ................................. $ 29,462 $ 19,328
Real estate loans
Construction and development .................. 6,895 5,485
Commercial .................................... 19,226 15,341
Residential ................................... 38,908 38,165
Installment loans ................................ 20,855 19,495
Other ............................................ 268 395
--------- ---------
Total loans ................................... 115,614 98,209
Less -
Unearned interest income ...................... (1,062) (603)
Allowance for loan losses ..................... (1,096) (1,153)
Unamortized loan fees ......................... (151) (62)
--------- ---------
Net loans ........................................ $ 113,305 $ 96,391
========= =========
Impaired loans on which the accrual of interest has been discontinued or
reduced had balances of $615 thousand and $275 thousand at December 31, 1997 and
1996, respectively. If interest on those loans had been accrued, such income
would have approximated $56 thousand and $12 thousand for the above years.
Interest income on this type of loan is recorded only when received.
Changes in the allowance for loan losses were as follows:
1997 1996 1995
------- ------- -------
(In Thousands of Dollars)
Balance, beginning of year ........... $ 1,153 $ 1,283 $ 1,244
Provision ......................... 685 150 175
Loans charged off ................. (955) (465) (301)
Recoveries of loans charged off ... 213 185 165
------- ------- -------
Balance, end of year ................. $ 1,096 $ 1,153 $ 1,283
======= ======= =======
4. PREMISES AND EQUIPMENT.
Major classifications of these assets are as follows:
1997 1996
---------- ----------
(In Thousands of Dollars)
Land ........................................ $ 338 $ 338
Buildings ................................... 1,697 1,687
Leasehold improvements ...................... 762 747
Furniture, fixtures and equipment ........... 3,038 2,832
---------- ----------
5,835 5,604
Less - accumulated depreciation ............. 3,106 2,756
---------- ----------
$ 2,729 $ 2,848
========== ==========
F-38
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. INTANGIBLE ASSETS.
Included in the caption "Accrued interest receivable and other assets" are
intangible assets consisting of goodwill which is being amortized on the
straight-line method over its useful life:
Unamortized Cost Amortization
---------------- -------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(In Thousands of Dollars)
Goodwill .................. $ 85 $ 121 $ 36 $ 36 $ 36
======= ======= ======= ======= =======
6. DEPOSITS.
Certificates of deposit of $100 thousand or more were $16,323 thousand and
$13,696 thousand at December 31, 1997 and 1996, respectively.
At December 31, 1997, scheduled maturities of time deposits were as
follows (in thousands of dollars):
1998 ................................................... $ 46,331
1999 ................................................... 25,935
2000 ................................................... 8,678
2001 ................................................... 6,198
----------
$ 87,142
==========
7. BORROWINGS.
Other borrowed funds consist of treasury tax and loan deposits, which are
held under a note option with the Federal Home Loan Bank, and federal funds
purchased. The note option has a maximum indebtedness of $1,100 thousand, bears
an interest rate equivalent to the federal funds rate, and generally matures
within seven to fourteen days. Other borrowed funds at December 31, 1997 and
1996 were comprised of the following:
1997 1996
--------- -------
(In Thousands of Dollars)
Treasury tax and loan note option ............. $ 1,100 $ 714
Federal funds purchased ....................... 650 --
--------- -------
$ 1,750 $ 714
========= =======
Federal Home Loan Bank advances consisted of the following at December 31,
1997 and 1996:
1997 1996
------- -------
(In Thousands of Dollars)
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
------- ------
$ 2,121 $ 154
======= ======
These advances are collateralized by a blanket pledge of the subsidiary's
qualifying residential mortgage loans which have a carrying value that
significantly exceeds the maximum FHLB note amounts.
F-39
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. PROVISION FOR INCOME TAXES.
The provision for income taxes is as follows:
1997 1996 1995
------- ------- --------
(In Thousands of Dollards)
Currently payable -
Federal ......................... $ 713 $ 728 $ 825
State ........................... 193 197 205
------- ------- -------
906 925 1,030
Deferred provision -
Federal and state ............... 29 74 13
------- ------- -------
$ 935 $ 999 $ 1,043
======= ======= =======
Temporary differences which give rise to the net deferred tax liability at
December 31, are as follows:
1997 1996
-------- --------
(In Thousands of Dollars)
Deferred tax assets:
Allowance for loan losses ............. $ 95 $ 103
Deferred compensation ................. 86 89
Deferred loan fees .................... 57 24
------- -------
Total deferred tax assets ....... 238 216
------- -------
Deferred tax liabilities:
Net unrealized appreciation
on securities available
for sale ........................... 244 163
Depreciation .......................... 209 221
Defined benefit plan .................. 189 --
Other ................................. 57 42
------- -------
Total deferred tax liabilities ..... 699 426
------- -------
Net deferred tax asset (liability) . $ (461) $ (210)
======= =======
The net deferred tax asset (liability) amounts are included in the caption
"Accrued interest receivable and other assets" and "Accrued interest payable and
other liabilities", respectively. The parent company's tax liabilities or
expenses were not significant for 1997 or 1996.
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 ..................... (10.3) (10.2) (8.7)
Other ................................. (1.0) 1.7 1.4
---- ---- ----
26.7% 29.5% 30.7%
==== ==== ====
F-40
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. RETIREMENT PLANS.
The First National Bank and Trust Company has defined benefit pension and
defined contribution profit sharing plans covering substantially all employees.
The benefits for the pension plan are based primarily upon years of service and
career average pay. The Bank's funding policy is to make annual contributions as
required by applicable regulations. The Bank has charged pension costs as
accrued, based on an actuarial valuation and funded the plans through
contributions to trust funds that are kept apart from Bank funds.
The pertinent assumptions and calculations covering the pension plan are
summarized below as of December 31:
1997 1996
------- -------
(In Thousands of Dollars)
Assumptions:
Discount rate ............................... 8.5% 8.5%
Salary increase rate ........................ 6.5% 6.5%
Expected rate of return on plan assets ...... 8.5% 8.5%
Net periodic pension cost:
Service cost ............................. $ 173 $ 159
Interest cost ............................ 318 287
Return on plan assets .................... (629) (305)
Other .................................... 249 (21)
------- -------
Net periodic pension cost ........ $ 111 $ 120
======= =======
1997 1996
------- -------
(In Thousands of Dollars)
Actuarial present value of --
Vested benefit obligation ................ $ (3,924) $ (2,708)
Nonvested benefit obligation ............. (52) (27)
--------- ---------
Accumulated benefit obligation ........... (3,976) (2,735)
Effect of projected future compensation .. (1,263) (1,051)
--------- ---------
Projected benefit obligation ............. (5,239) (3,786)
Plan assets at fair value ................... 4,927 4,177
--------- ---------
Plan assets in excess of or (less
than) projected benefit obligation ....... (312) 391
Unrecognized transition amount .............. (150) (171)
Unrecognized net loss ....................... 959 150
--------- ---------
Net prepaid pension cost .................... $ 497 $ 370
========= =========
Plan assets consist principally of U.S. Treasury notes, government
agencies, corporate bonds and notes, and common stocks. Contributions to the
plans are as follows:
1997 1996 1995
------- ------- -------
(In Thousands of Dollars)
Pension plan .......................... $ 238 $ 229 $ 243
Profit sharing plan ................... 83 112 106
F-41
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. CONTINGENT LIABILITIES.
The consolidated financial statements do not reflect various commitments
and contingent liabilities which arise in the normal course of business and
which involve elements of credit risk, interest rate risk and liquidity risk.
These commitments and contingent liabilities are commitments to extend credit,
letters of credit, and home equity lines of credit. A summary of the unused
portion of these commitments and contingent liabilities at December 31, 1997, is
as follows (in thousands of dollars):
Commercial lines of credit ................................. $ 7,541
Real estate construction lines of credit ................... 5,151
Personal lines of credit ................................... 472
Home equity lines of credit ................................ 1,216
Other commitments to extend credit ......................... 314
Standby letters of credit .................................. 171
---------
Total ............................................... $ 14,865
=========
All of the above commitments and contingent liabilities include exposure
to some credit loss in the event of nonperformance of the customer. The credit
policies and procedures for these items are the same as those for extensions of
credit that are recorded in the consolidated balance sheets. Because the
majority of these instruments have fixed maturity dates and all commitments are
not utilized before expiration, they do not generally present any significant
liquidity risk to the bank. No significant losses have been incurred on its
commitments in either 1997 or 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The fair value of financial instruments is disclosed to comply with
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure about
Fair Value of Financial Instruments". For the purposes of this disclosure, the
estimated fair value of financial instruments with immediate and shorter-term
maturities (generally 90 days or less) is assumed to be the same as the recorded
book value. At December 31, 1997 and 1996, these instruments include the
consolidated balance sheet lines captioned "Cash and cash equivalents", interest
receivable included in "Accrued interest receivable and other assets" (of $1,192
thousand and $1,245 thousand, respectively), "Noninterest-bearing deposits", NOW
account and savings deposits included in "Interest-bearing deposits" (of $41,152
thousand and $39,547 thousand, respectively), "Other borrowed funds", "Advances
from the Federal Home Loan Bank", and interest payable included in "Accrued
interest payable and other liabilities" (of $944 thousand and $896 thousand,
respectively). Investment securities consist entirely of available for sale
securities and are recorded at fair value on the consolidated balance sheet.
The carrying amounts and estimated fair values of other financial
instruments at December 31, 1997 and 1996, are summarized as follows:
1997 1996
------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands of Dollars)
Financial assets:
Loans, less allowance for
loan losses .................. $113,305 $113,939 $ 96,391 $ 97,434
Financial liabilities:
Time deposits .................. $ 87,142 $ 87,491 $ 83,581 $ 84,020
Off-balance sheet:
Commitments to extend
credit and standby letters
of credit .................... $ -- $ -- $ -- $ --
F-42
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Loans. The fair values of variable rate loans that reprice frequently and
have no significant change in credit risk are assumed to approximate carrying
amounts. The fair value of other loans (e.g., commercial, commercial real
estate, certain mortgage loans and consumer loans) are estimated using
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality and estimates of
maturity based on actual maturity dates.
Time deposits. The fair value for fixed-rate time deposits with stated
maturities was estimated using discounted cash flow analyses, using current
market rates for instruments with similar maturities.
Off-balance sheet instruments. These instruments include home equity and
personal lines of credit, commercial lines of credit and standby letters of
credit. Because the majority of these instruments are not utilized before
expiration and generally have maturity dates of less than one year, they do not
generally represent any significant financial instrument for the Company.
12. RELATED PARTY TRANSACTIONS.
At December 31, 1997 and 1996, respectively, related party transactions
between the subsidiary bank and its officers and board members were as follows:
1997 1996
--------- ---------
(In Thousands of Dollars)
Loans ..................................... $ 1,912 $ 1,226
Deposits .................................. 1,082 464
Trust assets (market value):
Benefit plans .......................... $ 8,568 $ 6,952
Other .................................. 11,482 9,977
13. REGULATORY MATTERS.
The Company and subsidiary bank are each independently subject to various
regulatory capital requirements administered by their primary federal
regulators, the Federal Reserve Bank (FRB) and the Office of Comptroller of the
Currency (OCC). Failure to meet the minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and subsidiary bank must each individually meet specific capital
guidelines involving quantitative measures of their respective assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and subsidiary bank's capital amounts and
classification under the prompt corrective action guidelines are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and subsidiary bank to maintain minimum amounts and ratios
of total risk-based capital and Tier 1 capital to risk-weighted assets (as
defined in the regulations), and Tier 1 capital to adjusted total assets (as
defined). Management believes, as of December 31, 1997, that both the Company
and subsidiary bank exceed all the respective capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the OCC
categorized both the Company and subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized as well
capitalized, the Company and subsidiary bank will have to maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the
table below. There are no conditions or events since the most recent
notification that management believes have changed the Company's or the
subsidiary bank's prompt corrective action category.
F-43
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Total Capital (to Risk
Weighted Assets):
Consolidated .............. $21,629 19.1% $9,069 =>8.0% $11,337 =>10.0%
Subsidiary bank ........... $21,312 18.8% $9,063 =>8.0% $11,329 =>10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated .............. $20,533 18.1% $4,534 =>4.0% $ 6,802 => 6.0%
Subsidiary bank ........... $20,216 17.8% $4,531 =>4.0% $ 6,797 => 6.0%
Tier 1 Capital (to Adjusted
Total Assets):
Consolidated .............. $20,533 11.4% $5,397 =>3.0% $ 8,996 => 5.0%
Subsidiary bank ........... $20,216 11.2% $5,396 =>3.0% $ 8,993 => 5.0%
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Total Capital (to Risk
Weighted Assets):
Consolidated .............. $20,437 20.2% $8,098 =>8.0% $10,123 =>10.0%
Subsidiary bank ........... $20,229 20.0% $8,094 =>8.0% $10,118 =>10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated .............. $19,284 19.1% $4,049 =>4.0% $ 6,074 =>6.0%
Subsidiary bank ........... $19,076 18.9% $4,047 =>4.0% $ 6,070 =>6.0%
Tier 1 Capital (to Adjusted
Total Assets):
Consolidated .............. $19,284 11.4% $5,084 =>3.0% $ 8,474 =>5.0%
Subsidiary bank ........... $19,076 11.3% $5,082 =>3.0% $ 8,471 =>5.0%
</TABLE>
The subsidiary bank, as a National Bank, is subject to the dividend
restrictions set forth by the Comptroller of the Currency. Under such
restrictions, the bank may not, without prior approval of the Comptroller of the
Currency, declare dividends in excess of the sum of current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years. The
bank was in compliance with these regulations as of December 31, 1997 and 1996.
14. CONCENTRATIONS OF CREDIT RISK.
Substantially all of the subsidiary bank's loans, commitments and letters
of credit have been granted to customers in the bank's market area and are
depositors of the bank. Investments in state and municipal securities generally
involve governmental entities within Tennessee. Concentrations by type of loan
are described in Note 3. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The subsidiary bank, as a matter of policy,
strives to limit loans to one individual, related group of borrowers, or one
industry to twenty-five percent of capital. In addition, the subsidiary bank had
the following individual concentrations at December 31:
1997 1996
-------- --------
(In Thousands of Dollars)
Par value of securities issued by governmental
entities outside of Tennessee .................... $ 14,470 $ 3,485
Correspondent bank balances .......................... 39 8,276
-------- --------
$ 14,509 $ 11,761
======== ========
F-44
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The correspondent bank balances represent federal funds sold of $0 and
$5,900 thousand, respectively, and due from accounts in excess of federal
deposit insurance limits amounting to $39 thousand and $2,376 thousand,
respectively. The subsidiary bank's Interbank Liability Policy requires the bank
to monitor the amount of credit exposure to each correspondent bank on a
quarterly basis and to report any policy exceptions to the board of directors.
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY.
CONDENSED BALANCE SHEETS
December 31
1997 1996
---- ----
(In Thousands of Dollars)
ASSETS
Cash ............................................. $ 415 $ 112
Other assets ..................................... 458 351
Investment in subsidiary bank .................... 20,615 19,343
------- -------
$21,488 $19,806
======= =======
LIABILITIES ......................................... $ 432 $ 95
EQUITY .............................................. 21,056 19,711
------- -------
$21,488 $19,806
======= =======
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31
1997 1996 1995
---- ---- ----
(In Thousands of Dollars)
Dividends from subsidiary bank ................. $1,420 $1,090 $1,025
Equity in subsidiary undistributed income ...... 1,272 1,221 3,189
Other income ................................... 71 37 14
Other operating expenses ....................... (70) (49) (79)
Income tax (provision) benefit ................. 1 ( 1) 13
------ ------ ------
Net income ..................................... $2,694 $2,298 $4,162
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
1997 1996 1995
---- ---- ----
(In Thousands of Dollars)
Cash flows from operating activities:
Net income .................................... $ 2,694 $ 2,298 $ 4,162
Reconciling items:
Equity in undistributed net income ........ (1,272) (1,221) (3,189)
Change in assets .......................... (107) 30 36
Change in liabilities ..................... 337 1 (24)
------- ------- -------
Net cash from operating
activities ......................... 1,652 1,108 985
Cash flows from financing activities:
Cash dividends on common stock ................ (1,214) (876) (847)
Sales of common stock ......................... 43 -- --
Retirement of repurchased shares .............. (178) (186) (120)
------- ------- -------
Net cash from financing
activities ......................... (1,349) (1,062) (967)
------- ------- -------
Net change in cash and equivalents ............... 303 46 18
Beginning cash and equivalents ................... 112 66 48
------- ------- -------
Ending cash and equivalents ...................... $ 415 $ 112 $ 66
======= ======= =======
Amount of dividends that could be paid
from bank subsidiary without
regulatory approval ........................... $ 7,364
=======
F-45
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. SUBSEQUENT EVENT.
On March 19, 1998, the Company entered into an "Agreement and Plan of
Merger" with Bankfirst Corporation (formerly Smoky Mountain Bancorp, Inc.). The
merger agreement requires that all of the outstanding common stock of the
Company be acquired by BankFirst Corporation in a business combination to be
accounted for as a pooling of interest. Upon consummation of the transaction,
shareholders of the Company will receive 4.41 shares of BankFirst Corporation's
common stock for each share of Company common stock. Consummation of the
transaction is subject to regulatory and stockholder approval.
F-46
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
UNAUDITED
(In Thousands of Dollars)
-------------------------
1998 1997
---- ----
ASSETS
Cash and due from banks .......................... $ 5,404 $ 7,477
Federal funds sold ............................... 5,700 6,400
Commercial paper ................................. -- 1,548
--------- ---------
Total cash and cash equivalents ............. 11,104 15,425
Securities available for sale, at fair value ..... 56,211 57,209
Loans, net ....................................... 111,890 96,929
Premises and equipment, net ...................... 2,703 2,777
Accrued interest receivable and other assets ..... 2,697 1,993
--------- ---------
Total assets ................................ $ 184,605 $ 174,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ..................... $ 25,640 $ 25,834
Interest-bearing deposits ........................ 131,463 125,651
--------- ---------
Total deposits .............................. 157,103 151,485
Other borrowed funds ............................. 1,100 1,100
Advances from the Federal Home Loan Bank ......... 2,351 402
Accrued interest payable and other liabilities ... 2,329 1,835
--------- ---------
Total liabilities ........................... 162,883 154,822
--------- ---------
Stockholders' equity
Common stock: $5.00 par value, 400,000 shares
authorized, 164,125 and 163,761 shares
outstanding in 1998 and 1997 .................. 821 819
Additional paid-in capital ....................... 3,218 3,161
Retained earnings ................................ 17,066 15,754
Net unrealized gain (loss) on securities
available for sale ............................. 617 (223)
--------- ---------
Total stockholders' equity .................. 21,722 19,511
--------- ---------
Total liabilities and stockholders' equity .. $ 184,605 $ 174,333
========= =========
F-47
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
UNAUDITED
(In Thousands of Dollars,
Except Per Share Amounts)
-------------------------
1998 1997
---- ----
INTEREST INCOME
Interest and fees on loans ..................... $ 2,734 $ 2,300
Taxable securities ............................. 351 605
Nontaxable securities .......................... 397 256
Other .......................................... 34 59
------- -------
3,516 3,220
------- -------
INTEREST EXPENSE
Deposits ....................................... 1,547 1,458
Borrowings ..................................... 51 11
------- -------
1,598 1,469
------- -------
NET INTEREST INCOME ................................ 1,918 1,751
PROVISION FOR LOAN LOSSES .......................... 309 60
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ................................ 1,609 1,691
------- -------
NONINTEREST INCOME
Service charges and fees ....................... 301 264
Trust department income ........................ 161 147
Other .......................................... 24 24
------- -------
486 435
------- -------
NONINTEREST EXPENSES
Salaries and employee benefits ................. 826 810
Occupancy expense .............................. 107 98
Equipment expense .............................. 167 149
Office expense ................................. 28 35
Data processing fees ........................... 80 59
Other .......................................... 282 269
------- -------
1,490 1,420
------- -------
INCOME BEFORE INCOME TAXES ......................... 605 706
PROVISION FOR INCOME TAXES ......................... 134 199
------- -------
NET INCOME ......................................... $ 471 $ 507
------- -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Change in unrealized gain (loss) on securities . 218 (490)
------- -------
COMPREHENSIVE INCOME ............................... $ 689 $ 17
======= =======
EARNINGS PER SHARE:
Basic .......................................... $ 2.87 $ 3.09
F-48
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNAUDITED
(In Thousands of Dollars)
--------------------------------------------------------------
Additional Net Unrealized Total
Common Paid-in Retained Gains (Losses) Stockholders'
Stock Capital Earnings on Securities Equity
----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ...... $ 825 $ 3,333 $ 15,247 $ 267 $ 19,672
Sales of common stock ......... -- -- -- -- --
Retirement of repurchased
shares, 1,141 shares ...... (6) (172) -- -- (178)
Cash dividends on common stock. -- -- -- -- --
Net income .................... -- -- 507 -- 507
Change in unrealized gains
(losses) .................. -- -- -- (490) (490)
-------- -------- -------- -------- --------
Balance, March 31, 1997 ....... $ 819 $ 3,161 $ 15,754 $ (223) $ 19,511
======== ======== ======== ======== ========
Balance, January 1, 1998 ...... $ 820 $ 3,203 $ 16,595 $ 399 $ 21,017
Sales of common stock,
97 shares ................. 1 15 -- -- 16
Retirement of repurchased
shares .................... -- -- -- -- --
Cash dividends on common stock. -- -- -- -- --
Net income .................... -- -- 471 -- 471
Change in unrealized gains
(losses) .................. -- -- -- 218 218
-------- -------- -------- -------- --------
Balance, March 31, 1998 ....... $ 821 $ 3,218 $ 17,066 $ 617 $ 21,722
======== ======== ======== ======== ========
</TABLE>
F-49
<PAGE>
FIRST FRANKLIN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Inflows (Outflows) in Cash and Cash Equivalents
UNAUDITED
(In Thousands of Dollars)
-------------------------
1998 1997
---- ----
Cash flows from operating activities
Net income ....................................... $ 471 $ 507
Adjustment to reconcile net income to net cash
provided by operating activities
Provision for loan losses .................. 309 60
Depreciation ............................... 108 95
Amortization ............................... 9 9
Net (gains) losses on securities sales ..... -- --
Net (gains) losses on sales of premises
and equipment ............................ (10) (8)
Gain on sale of loans ...................... -- --
Deferred tax provision (benefit) ........... (40) (25)
Accrued interest receivable and other
assets ................................... (190) (20)
Accrued interest payable and other
liabilities .............................. (227) 396
-------- --------
Net cash flows from operating
activities .......................... 430 1,014
-------- --------
Cash flows from investing activities
Purchases of securities .......................... (10) (158)
Proceeds from maturities of securities ........... 641 1,093
Proceeds from sales of securities ................ -- --
Net increase in loans ............................ 1,106 (598)
Proceeds from sales of premises and equipment .... 14 8
Acquisition of premises and equipment ............ (86) (24)
-------- --------
Net cash flows from investment
activities ......................... 1,665 321
-------- --------
Cash flows from financing activities
Net change in deposits ........................... 2,486 1,497
Advances from Federal Home Loan Bank ............. 250 250
Repayments of advances from Federal Home
Loan Bank ...................................... (20) (2)
Net change in other borrowed funds ............... (650) 386
Purchase of common stock ......................... -- (178)
Sales of common stock ............................ 16 --
Common stock dividends paid ...................... -- --
-------- --------
Net cash flows from financing
activities .......................... 2,082 1,953
-------- --------
Cash and cash equivalents
Net cash inflow (outflow) ........................ 4,177 3,288
Balance
Beginning of year ............................. 6,927 12,137
-------- --------
End of year ................................... $ 11,104 $ 15,425
======== ========
Supplemental disclosures:
Interest ......................................... $ 1,470 $ 1,331
Income taxes ..................................... 48 51
Total increase in unrealized appreciation
(depreciation) on securities available
for sale ....................................... 218 (490)
F-50
<PAGE>
FIRST FRANKLIN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three month periods
ended March 31, 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 First Franklin's consolidated
financial statements for the year ended December 31, 1997.
F-51
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS - Unaudited
December 31, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1997 1996
---- ----
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 1,536 1,389
Stockholders' equity
Common stock: $2.50 par value, 15,000,000
shares authorized, 9,986,005 and
8,606,645 shares outstanding in
1997 and 1996 24,554 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 22,652 22,484
Retained earnings 10,636 25,992
Unrealized gain on securities available for sale 961 336
-------- --------
Total stockholders' equity 59,896 53,826
-------- --------
Total liabilities and stockholders' equity $650,717 $595,284
======== ========
See accompanying notes to consolidated financial statements.
F-52
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME - Unaudited
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 3,844 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 consolidated financial statements.
F-53
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - Unaudited
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 -- (153) -- -- (147)
Change in unrealized gains (losses) -- -- -- -- 625 625
Common stock split, 7,988,804 shares 19,972 -- -- (19,972) -- --
--------- -------- -------- --------- --------- ---------
Balance, December 31, 1997 $ 24,554 $ 1,093 $ 22,652 $ 10,636 $ 961 $ 59,896
========= ======== ======== ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
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 (147) 321 (385)
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (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 Eastern and
Southeastern 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.
- --------------------------------------------------------------------------------
(Continued)
F-56
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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.
- --------------------------------------------------------------------------------
(Continued)
F-57
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 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.
- --------------------------------------------------------------------------------
(Continued)
F-58
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 June 30, 1998, the 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 723,791 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. The Company's
financial statements have been restated to include the accounts and operations
of First Franklin.
- --------------------------------------------------------------------------------
(Continued)
F-59
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(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 Financial 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
Unrealized loss on securities
available for sale (668) (618) (1,454) (2,740)
Retained earnings 3,818 1,550 12,231 17,599
-------- -------- --------- ---------
Total $ 5,781 $ 13,053 $ 15,240 $ 34,074
======== ========= ========= =========
</TABLE>
NOTE 3 - SECURITIES
Securities available for sale are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ---- ---- ----- ------ -----
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
======== ======= ========= ========
- --------------------------------------------------------------------------------
(Continued)
F-60
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- ---- ---- ----- ------ -----
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
======== ======= ========= ========
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.
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 .
- --------------------------------------------------------------------------------
(Continued)
F-61
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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
======= ======= =======
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
- --------------------------------------------------------------------------------
(Continued)
F-62
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
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 39,854 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.
- --------------------------------------------------------------------------------
(Continued)
F-63
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(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
- --------------------------------------------------------------------------------
(Continued)
F-64
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 7 - BORROWINGS (Continued)
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.
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.
- --------------------------------------------------------------------------------
(Continued)
F-65
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLANS (Continued)
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). Withdrawn participants
are entitled to exercise the put option for a period of not more than 60 days
following the date of distribution of the stock. At year-end 1997, 1996, and
1995, the fair value of ESOP shares subject to repurchase was $1,536, $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 174,575, 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
===== =====
- --------------------------------------------------------------------------------
(Continued)
F-66
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLANS (Continued)
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%.
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:
1 9 9 7 1 9 9 6
---------------------- --------------------
Assets Liabilities Assets Liabilities
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)
======= ======== ===== ========
- --------------------------------------------------------------------------------
(Continued)
F-67
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
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 and Southeast 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.
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
- --------------------------------------------------------------------------------
(Continued)
F-68
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
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.
- --------------------------------------------------------------------------------
(Continued)
F-69
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
At year-end, the capital requirements were met. Actual capital levels (in
millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Amounts to be
Minimum Required Well Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action 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
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
Minimum Amounts to be
Minimum Required Well Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------- -------------------
Actual Ratio Actual Ratio Actual Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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.
- --------------------------------------------------------------------------------
(Continued)
F-70
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
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, 2,063,015 shares are authorized
for future grant.
A summary of the Company's option activity, and related information for the
year-ended 1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
------------------- -------------------- -------------------
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 (46,830) 7.12 -- -- -- --
--------- -------- -------- ------- -------- --------
Outstanding at end of year 864,430 6.19 887,645 5.21 547,020 4.11
Options exercisable at year-end 462,215 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>
- --------------------------------------------------------------------------------
(Continued)
F-71
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (Continued)
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 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>
1 9 9 7 1 9 9 6 1 9 9 5
------------------ ------------------ -------------------
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>
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
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
F-72
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER SHARE (Continued)
<TABLE>
<S> <C> <C> <C>
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.
1 9 9 7 1 9 9 6
---------------- ------------------
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
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.
- --------------------------------------------------------------------------------
(Continued)
F-73
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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 1,536 1,389
Stockholders' equity
Common stock 24,554 3,886
Preferred stock 1,093 1,128
Additional paid-in capital 22,652 22,484
Retained earnings 10,636 25,992
Unrealized gain on securities 961 336
------- -------
Total stockholders' equity 59,896 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
====== ======= =======
- --------------------------------------------------------------------------------
(Continued)
F-74
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(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 affected 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-75
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
March 31, 1998
(Unaudited)
ASSETS
Cash and due from banks $ 29,115
Federal Funds Sold 5,700
Securities available for sale, at fair value 130,740
Mortgage loans held for sale 19,969
Loans, net 472,919
Premises and equipment, net 21,905
Mortgage servicing rights 6,992
Federal Home Loan Bank Stock, at cost 3,099
Intangible assets 2,196
Accrued interest receivable and other asset 8,797
---------
Total assets $ 701,432
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 101,632
Interest-bearing deposits 465,596
---------
Total deposits 567,228
Securities sold under agreements to repurchase 19,175
Federal funds purchased and other borrowings 15,600
Advances from the Federal Home Loan Bank 27,351
Accrued interest payable and other liabilities 8,609
---------
Total liabilities 637,963
Employee Stock Ownership Plan 1,745
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares
authorized, 9,998,420 shares outstanding 24,560
Noncumulative convertible preferred stock: $5 par
value, 1,000,000 shares authorized, 215,805 shares
outstanding 1,079
Additional paid-in capital 22,494
Retained earnings 12,300
Unrealized gain on securities available for sale 1,291
---------
Total stockholders' equity 61,724
---------
Total liabilities and stockholders' equity $ 701,432
=========
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
F-76
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Three months ended March 31,
(Unaudited)
1998 1997
-------- --------
Interest income
Interest and fees on loans $ 11,822 $ 10,053
Taxable securities 1,440 1,786
Nontaxable securities 454 288
Other 80 118
-------- --------
13,796 12,245
Interest expense
Deposits 5,321 5,152
Short-term borrowings 535 179
Long-term borrowings 144 169
-------- --------
6,000 5,500
-------- --------
Net interest income 7,796 6,745
Provision for loan losses 534 360
-------- --------
Net interest income after provision
for loan losses 7,262 6,385
Noninterest income
Service charges and fees 767 801
Loan servicing income, net of amortization 325 --
Net gain on loan sales 206 52
Trust department income 185 161
Other 476 284
-------- --------
1,959 1,298
Noninterest expenses
Salaries and employee benefits 3,646 2,798
Occupancy expense 541 359
Equipment expense 663 644
Office expense 355 105
Data processing fees 365 298
FDIC assessments 11 29
Merger expense 39 --
Other 1,018 1,107
-------- --------
6,638 5,340
-------- --------
Income before income taxes 2,583 2,343
Provision for income taxes 880 776
-------- --------
Net income $ 1,703 $ 1,567
======== ========
Other comprehensive income (loss), net of tax
Change in unrealized gain (loss) on securities 330 (1,302)
-------- --------
Comprehensive income $ 2,033 $ 265
======== ========
Earnings per share:
Basic $ 0.17 $ 0.16
Diluted $ 0.16 $ 0.14
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
F-77
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months ended March 31, 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 $ 24,554 $ 1,093 $ 22,652 $ 10,636 $ 961 $ 59,896
Sales of Common Stock, 428 shares 1 -- 15 -- -- 16
Stock options exercised, 814 shares 1 -- 26 -- -- 27
Conversion of 2,703 shares of
preferred stock into 1,669 shares
common stock 4 (14) 10 -- -- --
Cash dividend on preferred stock -- -- -- (39) -- (39)
Net income -- -- -- 1,703 -- 1,703
Reclassification of ESOP shares
subject to put options -- -- (209) -- -- (209)
Change in unrealized gains -- -- -- -- 330 330
(losses)
-------- -------- -------- -------- -------- --------
Balance, March 31, 1998 $ 24,560 $ 1,079 $ 22,494 $ 12,300 $ 1,291 $ 61,724
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
F-78
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Three months
ended March 31,
(Unaudited)
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 1,703 $ 1,567
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 534 360
Depreciation 411 384
Amortization and accretion, net (334) (31)
Gain on sale of mortgage loans (206) (52)
Proceeds from sales of mortgage loans 29,806 1,899
Purchases of mortgage loans held for sale (11,944) --
Originations of mortgage loans held for sale (30,963) (2,140)
Changes in assets and liabilities
Accrued interest receivable and other assets (2,324) (759)
Accrued interest payable and other liabilities (958) 954
-------- --------
Net cash provided by (used in) operating
activities (14,275) 2,182
Cash flows from investing activities
Net cash paid for mortgage company (7,449) --
Purchase of securities (4,105) (3,680)
Proceeds from maturities of securities 1,641 7,666
Net increase in loans (14,979) (16,689)
Purchase of FHLB stock (42) (556)
Premises and equipment expenditures, net (675) (1,686)
-------- --------
Net cash used in investing activities (25,609) (14,945)
Cash flows from financing activities
Net change in deposits 17,459 11,771
Net change in securities sold
under agreements to repurchase 2,873 295
Net change in federal funds purchased 14,291 10,450
Advances from the FHLB 15,250 250
Repayment of notes payable (6,468) 384
Preferred stock dividends paid (39) (40)
Stock options exercised 43 --
Repurchase of common stock -- (178)
-------- --------
Net cash provided by financing activities 43,409 22,932
Net change in cash and cash equivalents 3,525 10,169
Cash and cash equivalents, beginning of period 31,290 25,132
Cash and cash equivalents, end of period $ 34,815 $ 35,301
Supplemental disclosures:
Interest paid $ 3,483 $ 3,158
Income taxes paid 298 182
Loans converted to other real estate 178 167
Preferred stock converted to common stock 14 --
Reclassification of ESOP shares 209 --
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
F-79
<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.
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 three month periods
ended March 31, 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 consolidated financial
statements for the year ended December 31, 1997.
Mortgage Banking Activities: Mortgage loans are 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.
Borrowings: Federal funds purchased are overnight borrowings. Advances from the
Federal Home Loan Bank are comprised of $15,000 overnight, $5,000 due April 30,
1998, $5,000 due September 30, 1998, and $2,351 with due dates ranging from
September 2008 to January 2013.
Comprehensive Income: The Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income", effective for the interim
period ended March 31, 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 March 31, 1997 was restated to meet
the current reporting format.
- --------------------------------------------------------------------------------
(Continued)
F-80
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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)
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
Three months ended
March 31,
(Unaudited)
1998 1997
----------- -----------
Earnings Per Share
Net income $ 1,703 $ 1,567
Less: Dividends declared on preferred stock (39) (40)
----------- -----------
Net income available to common
stockholders $ 1,664 $ 1,527
=========== ===========
Weighted average common shares outstanding 9,988,925 9,829,470
=========== ===========
Earnings per share $ 0.17 $ 0.16
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
F-81
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Earnings Per Share (Continued):
Earnings Per Share Assuming Dilution
Net income available to common stockholders $ 1,664 $ 1,527
Add back dividends upon assumed conversion
of preferred stock 39 40
----------- -----------
Net income available to common
stockholders assuming conversion $ 1,703 $ 1,567
=========== ===========
Weighted average common shares outstanding 9,988,925 9,829,470
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock 671,855 699,235
Stock options 294,695 286,065
----------- -----------
Weighted average common and dilutive
potential common shares outstanding 10,955,475 10,814,770
=========== ===========
Earnings per share assuming dilution $ 0.16 $ 0.14
=========== ===========
- --------------------------------------------------------------------------------
F-82
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheets as of
March 31, 1998 and December 31, 1997, and the unaudited pro forma condensed
consolidated statements of income for the three months ended March 31, 1998, and
for the years ended December 31, 1997, 1996, and 1995, have been prepared to
reflect The Company's acquisition of First Franklin.
The acquisition is presented as if it had occurred on March 31, 1998 and
December 31, 1997, with respect to the balance sheets, and as of January 1,
1995, with respect to the statements of income, in each case after providing the
effect to the pro forma adjustments described in the accompanying notes. The pro
forma adjustments are based on estimates made for the purpose of preparing these
pro forma financial statements. The actual adjustments to the accounts of The
Company will be made based on the underlying historical financial data at the
time of the transaction. The Company's management believes that the estimates
used in these pro forma financial statements are reasonable under the
circumstances. The pro forma information gives effect to the merger of The
Company and First Franklin under the pooling-of-interest method of accounting.
No adjustments to these pro forma financial statements were necessary to conform
accounting methods as contemplated by APB Opinion No. 16
These pro forma financial statements should be read in conjunction with the
historical financial statements and related notes presented elsewhere in this
Prospectus and Proxy Statement. The unaudited pro forma condensed consolidated
balance sheets as of March 31, 1998 and December 31, 1997, are not necessarily
indicative of the combined financial position had the transactions been
effective at those dates. The unaudited pro forma condensed consolidated
statements of income are not necessarily indicative of the results of operations
that would have occurred had the acquisition of First Franklin been effective at
the beginning of the periods indicated, or of the future results of operations
of The Company.
The Company is also undertaking an underwritten public offering of its common
stock subsequent to the merger. Management estimates that the public offering
will generate net proceeds of approximately $13.5 million on the issuance of
1,200,000 shares. This pro forma financial information does not present the
effect of this public offering.
F-83
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Balance Sheet
March 31, 1998
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma Pro Forma
BankFirst Franklin Adjustments Consolidated
--------- -------- ----------- ------------
ASSETS
Cash and cash equivalents $ 23,711 $ 11,104 $ -- $ 34,815
Investment in subsidiary -- -- 21,105 A --
(21,105)B
Securities available for sale 75,206 55,534 -- 130,740
Loans held for sale 19,969 -- -- 19,969
Loans, net 361,029 111,890 -- 472,919
Premises and equipment, net 19,202 2,703 -- 21,905
Mortgage servicing rights 6,992 -- -- 6,992
FHLB and FRB Stock 2,422 677 -- 3,099
Intangible assets 2,120 76 -- 2,196
Accrued interest receivable
and other assets 6,176 2,621 -- 8,797
-------- -------- ---------- --------
Total assets $516,827 $184,605 $ -- $701,432
======== ======== ========== ========
LIABILITIES
Deposits $410,125 $157,103 $ -- $567,228
Federal funds purchased 14,500 -- -- 14,500
Repurchase agreements 19,175 1,100 -- 20,275
Federal Home Loan Bank advances 25,000 2,351 -- 27,351
Accrued interest payable and
other liabilities 6,280 2,329 -- 8,609
-------- -------- ---------- --------
Total liabilities 475,080 162,883 -- 637,963
Employee Stock Ownership Plan 1,745 -- -- 1,745
SHAREHOLDERS' EQUITY
Common stock 3,105 821 1,809 A 24,560
(821)B
19,646 C
Noncumulative preferred stock 1,079 -- -- 1,079
Additional paid-in capital 19,938 3,218 2,230 A 22,494
(3,218)B
326 C
Retained earnings 15,206 17,066 17,066 A 12,300
(17,066)B
(19,972)C
Unrealized gain (loss) on
securities available
for sale 674 617 -- 1,291
-------- -------- ---------- --------
Total shareholders' equity 40,002 21,722 -- 61,724
-------- -------- ---------- --------
Total liabilities and
shareholders' equity $516,827 $184,605 $ -- $701,432
======== ======== ========== ========
Proforma merger adjustments
A Issuance of 723,791 shares of BankFirst in exchange for the 164,125 common
shares of First Frankin.
B To eliminate investment in First Franklin.
C To reflect a 5 for 1 common stock split subsequent to the effective date of
the merger.
F-84
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1997
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma Pro Forma
BankFirst Franklin Adjustments Consolidated
--------- -------- ----------- ------------
ASSETS
Cash and cash equivalents $ 24,363 $ 6,927 $ -- $ 31,290
Investment in subsidiary -- -- 20,618 A --
(20,618)B
Securities available for sale 71,912 55,824 -- 127,736
Loans, net 345,564 113,305 -- 458,869
Premises and equipment, net 18,737 2,729 -- 21,466
FHLB and FRB Stock 2,380 666 -- 3,046
Accrued interest receivable
and other assets 5,794 2,516 -- 8,310
-------- -------- ------- --------
Total assets $468,750 $181,967 $ -- $650,717
======== ======== ======= ========
LIABILITIES
Deposits $395,152 $154,617 $ -- $549,769
Borrowed funds 16,511 1,750 -- 18,261
Federal Home Loan Bank advances 10,000 2,121 -- 12,121
Accrued interest payable
and other liabilities 6,672 2,462 -- 9,134
-------- -------- ------- --------
Total liabilities 428,335 160,950 -- 589,285
Employee Stock Ownership Plan 1,536 -- -- 1,536
SHAREHOLDERS' EQUITY
Common stock 3,099 820 1,809 A 24,554
(820)B
19,646 C
Noncumulative preferred stock 1,093 -- -- 1,093
Additional paid-in capital 20,112 3,203 2,214 A 22,652
(3,203)B
326 C
Retained earnings 14,013 16,595 16,595 A 10,636
(16,595)B
(19,972)C
Unrealized gain (loss) on
securities available
for sale 562 399 -- 961
-------- -------- ------- --------
Total shareholders' equity 38,879 21,017 -- 59,896
-------- -------- ------- --------
Total liabilities and
shareholders' equity $468,750 $181,967 $ -- $650,717
======== ======== ======= ========
Proforma merger adjustments
A Issuance of 723,791 shares of BankFirst in exchange for the 164,125 common
shares of First Frankin.
B To eliminate investment in First Franklin.
C To reflect a 5 for 1 common stock split subsequent to the effective date of
the merger.
F-85
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Statement of Income
For the three months ended March 31, 1998
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma
BankFirst Franklin Consolidated
--------- -------- ------------
INTEREST INCOME
Interest and fees on loans $ 9,088 $2,734 $11,822
Taxable securities 1,089 351 1,440
Nontaxable securities 57 397 454
Other 46 34 80
------- ------ -------
Total interest income 10,280 3,516 13,796
INTEREST EXPENSE
Deposits 3,774 1,547 5,321
Short term borrowings 628 15 643
Long-term borrowings -- 36 36
------- ------ -------
Total interest expense 4,402 1,598 6,000
------- ------ -------
NET INTEREST INCOME 5,878 1,918 7,796
PROVISION FOR LOAN LOSSES 225 309 534
------- ------ -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,653 1,609 7,262
OTHER INCOME
Service charges and fees 466 301 767
Loan servicing income, net 325 -- 325
Gain on sale of loans 206 -- 206
Trust department income 24 161 185
Other income 452 24 476
------- ------ -------
Total other income 1,473 486 1,959
OTHER EXPENSE
Salaries and employee benefits 2,820 826 3,646
Occupancy expense 434 107 541
Equipment expense 496 167 663
Other operating expense 1,398 390 1,788
------- ------ -------
Total other expense 5,148 1,490 6,638
------- ------ -------
INCOME BEFORE INCOME TAXES 1,978 605 2,583
INCOME TAXES 746 134 880
------- ------ -------
NET INCOME $ 1,232 $ 471 $ 1,703
======= ====== =======
EARNINGS PER SHARE:
Basic $ 0.19 $ 2.87 $ 0.17
Diluted $ 0.17 $ 2.87 $ 0.16
F-86
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Statement of Income
For the year ended December 31, 1997
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma
BankFirst Franklin Consolidated
--------- -------- ------------
INTEREST INCOME
Interest and fees on loans $32,769 $10,111 $42,880
Taxable securities 4,513 2,361 6,874
Nontaxable securities 122 1,051 1,173
Other 221 139 360
------- ------- -------
Total interest income 37,625 13,662 51,287
INTEREST EXPENSE
Deposits 15,044 6,060 21,104
Short term borrowings 744 118 862
Long-term borrowings 686 -- 686
------- ------- -------
Total interest expense 16,474 6,178 22,652
------- ------- -------
NET INTEREST INCOME 21,151 7,484 28,635
PROVISION FOR LOAN LOSSES 2,250 685 2,935
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,901 6,799 25,700
------- ------- -------
OTHER INCOME
Service charges and fees 2,640 1,171 3,811
Other income 780 1,066 1,846
------- ------- -------
Total other income 3,420 2,237 5,657
OTHER EXPENSE
Salaries and employee benefits 7,986 3,124 11,110
Occupancy expense 1,312 404 1,716
Equipment expense 2,028 509 2,537
Other operating expense 4,458 1,502 5,960
------- ------- -------
Total other expense 15,784 5,539 21,323
------- ------- -------
INCOME BEFORE INCOME TAXES 6,537 3,497 10,034
INCOME TAXES 2,471 935 3,406
------- ------- -------
NET INCOME $ 4,066 $ 2,562 $ 6,628
======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.62 $ 15.62 $ 0.66
Diluted $ 0.56 $ 15.62 $ 0.61
F-87
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Statement of Income
For the year ended December 31, 1996
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma
BankFirst Franklin Consolidated
--------- -------- ------------
INTEREST INCOME
Interest and fees on loans $28,227 $ 9,362 $37,589
Taxable securities 4,815 2,473 7,288
Nontaxable securities 172 1,016 1,188
Other 370 263 633
------- ------- -------
Total interest income 33,584 13,114 46,698
------- ------- -------
INTEREST EXPENSE
Deposits 14,108 5,989 20,097
Short term borrowings 562 50 612
Long-term borrowings 529 -- 529
------- ------- -------
Total interest expense 15,199 6,039 21,238
------- ------- -------
NET INTEREST INCOME 18,385 7,075 25,460
PROVISION FOR LOAN LOSSES 517 150 667
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,868 6,925 24,793
OTHER INCOME
Service charges and fees 2,615 1,181 3,796
Other income 782 665 1,447
------- ------- -------
Total other income 3,397 1,846 5,243
OTHER EXPENSE
Salaries and employee benefits 7,392 3,147 10,539
Occupancy expense 1,724 405 2,129
Equipment expense 1,884 498 2,382
Other operating expense 4,412 1,337 5,749
------- ------- -------
Total other expense 15,412 5,387 20,799
------- ------- -------
INCOME BEFORE INCOME TAXES 5,853 3,384 9,237
INCOME TAXES 2,189 999 3,188
------- ------- -------
NET INCOME $ 3,664 $ 2,385 $ 6,049
======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.61 $ 14.40 $ 0.63
Diluted $ 0.55 $ 14.40 $ 0.59
F-88
<PAGE>
BankFirst Corporation
Pro Forma Condensed Consolidated Statement of Income
For the year ended December 31, 1995
(Dollars in thousands, except per share data)
(Unaudited)
First Pro Forma
BankFirst Franklin Consolidated
--------- -------- ------------
INTEREST INCOME
Interest and fees on loans $24,628 $ 9,171 $33,799
Taxable securities 4,049 2,565 6,614
Nontaxable securities 200 874 1,074
Other 372 260 632
------- ------- -------
Total interest income 29,249 12,870 42,119
INTEREST EXPENSE
Deposits 12,640 5,576 18,216
Short term borrowings 177 90 267
Long-term borrowings 599 -- 599
------- ------- -------
Total interest expense 13,416 5,666 19,082
------- ------- -------
NET INTEREST INCOME 15,833 7,204 23,037
PROVISION FOR LOAN LOSSES 378 175 553
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,455 7,029 22,484
OTHER INCOME
Service charges and fees 2,181 1,124 3,305
Other income 508 556 1,064
------- ------- -------
Total other income 2,689 1,680 4,369
OTHER EXPENSE
Salaries and employee benefits 6,746 3,003 9,749
Occupancy expense 1,142 401 1,543
Equipment expense 1,213 472 1,685
Other operating expense 4,744 1,436 6,180
------- ------- -------
Total other expense 13,845 5,312 19,157
------- ------- -------
INCOME BEFORE INCOME TAXES 4,299 3,397 7,696
INCOME TAXES 1,474 1,043 2,517
------- ------- -------
NET INCOME $ 2,825 $ 2,354 $ 5,179
======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.61 $ 14.15 $ 0.63
Diluted $ 0.55 $ 14.15 $ 0.59
F-89
<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.
----------------------
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.................................................................... 36
Regulation.................................................................. 44
Management.................................................................. 51
Certain Transactions........................................................ 56
Principal and Selling Shareholders.......................................... 57
Description of Capital Stock................................................ 59
Shares Eligible for Future Sale............................................. 60
Underwriting................................................................ 62
Legal Matters............................................................... 63
Experts..................................................................... 63
Additional Information...................................................... 64
Index to Financial Statements............................................... F-1
----------------------
Until _________, 1998 (25 days after the date of this Prospectus), 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.
================================================================================
================================================================================
1,600,000 Shares
Bankfirst Corporation
Common Stock
PROSPECTUS
J.C. Bradford & Co.
Morgan Keegan
& Company, Inc.
__________, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering are as set forth
in the following table. All amounts except the SEC registration fee are
estimated.
SEC Registration Fee............................................ $ 7,328
Printing and Engraving Expenses................................. 60,000
Accounting Fees and Expenses.................................... 160,000
Legal Fees and Expenses......................................... 150,000
Blue Sky Fees and Expenses...................................... 5,000
Transfer Agent's and Registrar's Fees and Expenses.............. 5,000
Miscellaneous................................................... 12,672
--------
Total............................................... $400,000
========
Item 14. Indemnification.
The Charter and Bylaws of the Company provide for the indemnification of
the Company's directors, officers, employees and agents to the full extent
permitted by the Tennessee Business Corporation Act ("TBCA").
The Company's directors, officers, employees and agents who successfully
defend any threatened, pending or completed action, suit or proceeding to which
they were made a party by reason of their status as a director, officer,
employee or agent of the Company are entitled to indemnification against all
expenses actually and reasonable incurred by them in connection with such
action, suit or proceeding.
Indemnification may be provided by the Company in other situations upon
court order or upon a determination by (1) a disinterested majority of the Board
of Directors of the Company; (2) independent legal counsel in a written opinion;
or (3) a majority of the shareholders of the Company that indemnification of the
director, officer, employee or agent is proper because such person met the
applicable standard of conduct specified by the TBCA and the Company's Charter
and Bylaws. Indemnification may be authorized if the individual (1) acted in
good faith; (2) reasonable believed that his conduct was in or not opposed to
the best interest of the corporation; and (3) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgement, order, settlement,
conviction, or plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the above standard of conduct has not been met.
No director of the Company can be held personally liable to the
corporation for monetary damages for any breach of his fiduciary duty to the
corporation; provided that, a director may be liable (1) for breach of the
director's duty of loyalty to the corporation and its shareholders; (2) for acts
or omission not in good faith or involving intentional misconduct or a knowing
violation of law; (3) for any action in which the director did not meet the
applicable standard of conduct; and (4) for any transaction from which the
director derived an improper personal benefit.
The TBCA provides that the Company may not indemnify a director in
connection with any action, suit or proceeding in which a judgement or other
final adjudication established the director's liability (1) to the corporation;
(2) for receipt of an improper personal benefit; (3) for breach of the
director's duty of loyalty to the corporation or its shareholders; (4) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; or (5) for
II-1
<PAGE>
unlawful distributions pursuant to TBCA ss. 48-18-304.
In addition, the TBCA and the Company's Charter and Bylaws authorize the
Company to purchase officer and director liability insurance. The Company has
officer and director liability insurance in the amount of $5 million.
Item 15. Recent Sales of Unregistered Securities.
(1) Since June 1, 1995, the Registrant has issued and sold 146,659 shares
of Common Stock, pre-split, to employees at prices ranging from $18.62 to
$44.00, upon exercise of stock options pursuant to the Company's stock option
plans, the employee stock ownership plan or contracts relating to compensation.
The aggregate offering price of all stock sold since June 1, 1995 pursuant to
these Company plans is $3, 577,508. Additionally, in this time period, options
to purchase an additional 109,200 shares of Common Stock were issued pursuant to
the Company's option plans and stock ownership plan.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities or Rule 701 promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving a public offering or transactions
pursuant to compensatory benefit plans or contracts relating to compensation as
provided under such Rule 701.
(2) From July 31, 1996 through September 24, 1996, the Registrant issued
and sold 40,480 shares of Common Stock, pre-split, in six separate transactions
with Company employees, the son of the majority shareholder and with a family
trust of a Company advisor for $43.50 a share, or an aggregate $1,208,647.50.
The purpose of this transaction was to raise capital levels to support growth
while complying with bank holding company regulatory requirements.
The sales of the above securities were deemed exempt from registration
under the Securities Act in reliance upon Section 4(2) or Section 3(a)(11) of
the Securities Act as transactions by an issuer not involving a public offering
or transactions involving securities offered and sold only to persons resident
within a single state where the issuer is incorporated and doing business in the
same state. Management believes that the recipients of securities acquired such
securities for investment only and not with the view to or for sale in
connection with any distribution thereof. All recipients had adequate access to
information about the Registrant. All recipients of the securities represented
that they were residents of Tennessee which was the state in which the
Registrant is incorporated and does business.
(3) On December 31, 1996, 570,380 shares of Common Stock, 225,559 shares
of Preferred Stock, and options for 87,520 shares of Common Stock of the
Registrant were issued to existing shareholders of BankFirst in exchange for all
their existing shares of Common Stock, shares of Preferred Stock, and options in
a share exchange whereby BankFirst became a wholly-owned subsidiary of the
Registrant.
The exchange was deemed exempt from registration under the Securities Act
under Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering. Management believes that such securities were
acquired for investment only and not with the view to or for sale in connection
with any distribution thereof. All recipients had adequate access to information
about the Registrant.
(4) In July, 1997, 7,051 shares of Common Stock of the Registrant were
issued in two separate transactions involving the conversion of Preferred Stock
issued in connection with the transaction described in paragraph (3).
The sales of the above securities were deemed exempt from registration
under the Securities Act under Section 3(a)(9) of the Securities Act as
exchanges by an issuer with its existing security holders. The securities were
issued by the same issuer as part of an exchange which did not include any
non-security holders.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement.
Exhibit No. Description
----------- -----------
1 Form of Underwriting Agreement by and between the
Company and the Underwriters.
2.1* Agreement and Plan of Merger between Smoky Mountain
Bancorp, Inc. and First Franklin Bancshares, Inc.,
dated March 19, 1998.
3.1* Amended and Restated Charter of BankFirst Corporation,
as amended.
3.2* Bylaws of BankFirst Corporation.
4* Form of Common Stock Certificate.
5 Opinion and Consent of Baker, Donelson, Bearman &
Caldwell, P.C. as to the validity of the Common Stock
registered hereunder.
10.1* BankFirst Corporation Incentive Stock Option Plan.
10.2* Smoky Mountain Bancorp, Inc. Employee Stock Option
Plan, as amended April 1, 1989.
10.3* Agreement to Purchase Stock between BankFirst and
Curtis Mortgage Company; William H. Curtis and Gordon
C. Curtis, dated January 13, 1998.
10.4* Agreement and Plan of Merger of BankFirst and First
National Bank of Gatlinburg, dated January 16, 1997.
10.5* Acquisition Agreement between Smoky Mountain Bancorp,
Inc. and BankFirst, dated August 15, 1996.
10.6* BankFirst v. Electronic Communication Corporation, et.
al., Partial Settlement Agreement, dated March 18,
1998.
10.7* Lease Agreement between BankFirst and Clayton Homes,
Inc., dated July 1, 1997.
10.8* Stock Option Plan of BankFirst dated March 14, 1995.
10.9* BankFirst Incentive Stock Option Plan dated October 11,
1995.
10.10* Form of Letter Agreement between Smoky Mountain
Bancorp, Inc. and the Directors of First Franklin
Bancshares, Inc.
10.12 First National Bank and Trust Company Pension Plan
II-3
<PAGE>
21 List of Subsidiaries.
23.1 Consent of Baker, Donelson, Bearman & Caldwell, P.C.
(included in Exhibit 5).
23.2 Consent of Crowe, Chizek and Company LLP
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of G.R. Rush & Company, P.C.
23.5 Consent of Hazlett, Lewis & Bieter, P.L.L.C.
24 Powers of Attorney (included on the signature page of
this Registration Statement).
27 Financial Data Schedule
99.1 Consent of Director Nominees
* Filed previously with S-4 Registration Statement, File No. 333-52051 dated May
7, 1998.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officer and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Knoxville, State of
Tennessee, on June 18, 1998.
BANKFIRST CORPORATION
By:/s/ Fred R. Lawson
-----------------------------------------
Fred R. Lawson,
President & Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Fred R. Lawson and C. David Allen, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendment to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
that all that said attorney-in-fact and agent, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James L. Clayton Chairman of the Board, June 18, 1998
- ---------------------------- Director
James L. Clayton
/s/ Fred R. Lawson President, Chief Executive June 18, 1998
- ---------------------------- Officer, Director
Fred R. Lawson
/s/ C. David Allen Chief Financial Officer June 18, 1998
- ----------------------------
C. David Allen
/s/ C. Warren Neel Director June 18, 1998
- ----------------------------
C. Warren Neel
____________________________ Director June , 1998
Charles Earl Ogle, Jr.
/s/ Geoffrey A. Wolpert Director June 18, 1998
- ----------------------------
Geoffrey A. Wolpert
II-5
EXHIBIT 1
BANKFIRST CORPORATION
1,600,000 Shares of Common Stock
UNDERWRITING AGREEMENT
August ___, 1998
J.C. BRADFORD & CO., L.L.C.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
BankFirst Corporation, a Tennessee corporation (the "Company"), and
certain shareholders of the Company identified on Schedule II hereto (the
"Selling Shareholders") propose to sell to the several underwriters named in
Schedule I hereto (the "Underwriters"), for whom you are acting as the
representatives (the "Representatives"), _________ and ________shares,
respectively (collectively, the "Firm Shares"), of the Common Stock, $2.50 par
value per share (the "Common Stock"), of the Company. The Company proposes to
grant to the Underwriters an option to purchase up to 240,000 additional shares
of Common Stock as provided for in Section 3 of this Agreement for the purpose
of covering over-allotments (the "Option Shares"). The Underwriters, severally
and not jointly, are willing to purchase the Firm Shares set forth opposite
their respective names on Schedule I hereto and their pro-rata share of the
Option Shares in the event the Representatives elect to exercise the
over-allotment taken in whole or in part. The Firm Shares and the Option Shares
purchased pursuant to this Underwriting Agreement (the "Agreement"), are
collectively referred to herein as the "Shares."
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "Securities Act"), a registration statement on Form S-1
(Registration No. 333-_________), including the related preliminary
prospectus relating to the Shares. Copies of such registration statement
and
<PAGE>
any amendments, including any post-effective amendments, and all forms of
the related prospectuses contained therein and any supplements thereto,
have been delivered to you. Such registration statement, including the
prospectus, Part II, all financial schedules and exhibits thereto, all
information deemed to be a part of such registration statement pursuant to
Rule 430A under the Rules and Regulations (as hereinafter defined) and any
related registration statement filed pursuant to Rule 462(b) under the
Rules and Regulations, at the time when they became effective, are herein
referred to as the "Registration Statement," and the prospectus included
as part of the Registration Statement on file with the Commission that
discloses all the information that was omitted from the prospectus
pursuant to Rule 430A under the Rules and Regulations on the date that the
Registration Statement became effective and in the form filed pursuant to
Rule 424(b) of the Rules and Regulations, is herein referred to as the
"Final Prospectus." The prospectus included as part of the Registration
Statement on the date when the Registration Statement became effective is
referred to herein as the "Effective Prospectus." Any prospectus included
in the Registration Statement and in any amendment thereto prior to the
date on which the Registration Statement became effective is referred to
herein as a "Preliminary Prospectus." For purposes of this Agreement,
"Rules and Regulations" means the rules and regulations promulgated by the
Commission under either the Securities Act or the Securities Exchange of
1934, as amended (the "Exchange Act"), as applicable.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus and no proceeding for that purpose
has been instituted or threatened by the Commission or the securities
authority of any state or other jurisdiction. Each Preliminary Prospectus,
at the time of filing thereof, complied with the requirements of the
Securities Act and the Rules and Regulations, and did not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; except that the foregoing does not apply to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through J.C. Bradford & Co.
("Bradford") specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and in the [third, fourth, fifth and eighth
paragraphs] under the caption "Underwriting" in the Preliminary, Effective
and Final Prospectus). When the Registration Statement becomes effective
and at all times subsequent thereto up to and including the First Closing
Date (as hereinafter defined), (i) the Registration Statement, the
Effective Prospectus and the Final Prospectus and any amendments or
supplements thereto will contain all statements which are required to be
stated therein in accordance with the
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Securities Act and the Rules and Regulations and will comply with the
requirements of the Securities Act and the Rules and Regulations, and (ii)
neither the Registration Statement, the Effective Prospectus nor the Final
Prospectus nor any amendment or supplement thereto will include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
except that the foregoing does not apply to statements or omissions made
in reliance upon and in conformity with written information furnished to
the Company by any Underwriter through Bradford specifically for use
therein (it being understood that the only information so provided is the
information included in the last paragraph on the cover page and in the
[third, fourth, fifth and eighth paragraphs] under the caption
"Underwriting" in the Final Prospectus).
(c) The Company is duly organized and validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization with full power and authority to own its properties and
conduct its business as now conducted and is duly qualified or authorized
to do business and is in good standing in all jurisdictions wherein the
nature of its business or the character of property owned or leased may
require it to be authorized or qualified to do business, except where
failure to obtain such authorization or qualification would not have a
material adverse effect on the Company's condition (financial or
otherwise). The Company holds all licenses, consents and approvals, and
has satisfied all eligibility and other similar requirements imposed by
federal, state and local regulatory bodies, administrative agencies or
other governmental bodies, agencies or officials, in each case as required
for the conduct of the business in which it is engaged and is contemplated
to be engaged as set forth in the Effective Prospectus.
(d) All of the consolidated corporations, partnerships (including,
without limitation, general and limited partnerships) and limited
liability companies in which the Company has a direct or indirect
ownership interest are listed in Schedule III to this Agreement
(collectively, the "Subsidiaries"). Each Subsidiary that is a corporation,
including a banking corporation or association (a "Corporate Subsidiary")
has been duly organized and is validly existing as such a corporation in
good standing under the laws of the jurisdiction of its incorporation,
with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement. Each Corporate Subsidiary is duly qualified and in good
standing as a foreign corporation authorized to do business in each other
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the
Company's condition (financial or otherwise). All of the outstanding
shares of capital
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stock of each Corporate Subsidiary have been duly authorized and validly
issued, are fully paid and non-assessable, were not issued in violation of
or subject to any preemptive or similar rights, and, except as set forth
on Schedule III, are owned by the Company directly, or indirectly through
one of the other Subsidiaries, free and clear of all security interests,
liens, encumbrances and equities and claims; and no options, warrants or
other rights to purchase, agreements or other obligations to issue or
other rights to convert any obligations into shares of capital stock or
ownership interests in any Corporate Subsidiary are outstanding.
(e) Each Subsidiary that is a partnership (a "Partnership") has been
duly organized, is validly existing as a partnership in good standing
under the laws of its jurisdiction of organization and has the partnership
power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement. Each
Partnership is duly qualified and in good standing as a foreign
partnership authorized to do business in each other jurisdiction in which
the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified
would not have a material adverse effect on the Company's condition
(financial or otherwise). The capital contributions with respect to the
outstanding units of each Partnership have been made to the Partnership.
Except as set forth in Schedule III, the general and limited partnership
interests therein held directly or indirectly by the Company are owned
free and clear of all security interests, liens, encumbrances and equities
and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into ownership interests in any Partnership are outstanding.
Each partnership agreement pursuant to which the Company or a Subsidiary
holds an interest in a Partnership is in full force and effect and
constitutes the legal, valid and binding agreement of the parties thereto,
enforceable against such parties in accordance with the terms thereof,
except as enforcement thereof may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights
generally. There has been no material breach of or default under, and no
event which with notice or lapse of time would constitute a material
breach of or default under, such partnership agreements by the Company or
any Subsidiary or, to the Company's knowledge, any other party to such
agreements.
(f) Each Subsidiary that is a limited liability company (an "LLC")
has been duly organized, is validly existing as a limited liability
company in good standing under the laws of its jurisdiction of
organization and has the limited liability company power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement. Each LLC is duly qualified and in
good standing as a foreign limited liability company authorized to do
business in each other jurisdiction
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in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the Company's
condition (financial or otherwise). The capital contributions with respect
to the outstanding membership interests of each LLC have been made to the
LLC. All outstanding membership interests in the LLCs were issued and sold
in compliance with the applicable operating agreements or such LLCs and
all applicable federal and state securities laws, and, except as set forth
in Schedule 1(f), the membership interests therein held directly or
indirectly by the Company are owned free and clear of all security
interests, liens, encumbrances and equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into ownership interests
in any LLC are outstanding. Each operating agreement pursuant to which the
Company or a Subsidiary holds a membership interest in an LLC is in full
force and effect and constitutes the legal, valid and binding agreement of
the parties thereto, enforceable against such parties in accordance with
the terms thereof, except as enforcement thereof may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally. There has been no material breach of or
default under, and no event which with notice or lapse of time would
constitute a material breach of or default under, such operating
agreements by the Company or any Subsidiary or, to the Company's
knowledge, any other party to such agreements.
(g) Except as disclosed in the Prospectus, there are no consensual
encumbrances or restrictions on the ability of any Subsidiary (i) to pay
any dividends or make any distributions on such Corporate Subsidiary's
capital stock, such Partnership's partnership interests or such LLC's
membership interests or to pay any indebtedness owed to the Company or any
other Subsidiary, (ii) to make any loans or advances to, or investments
in, the Company or any other Subsidiary, or (iii) to transfer any of its
property or assets to the Company or any other Subsidiary.
(h) The capitalization of the Company as of _________ ___, 1998 is
as set forth under the caption "Capitalization" in the Effective
Prospectus and the Final Prospectus, and the Company's capital stock
conforms to the description thereof contained under the caption
"Description of Capital Stock" in the Effective Prospectus and the Final
Prospectus. All the issued shares of the Company's Common Stock have been
duly authorized and validly issued, and are fully paid and nonassessable.
None of the issued shares of the Company's Common Stock have been issued
in violation of any preemptive or similar rights. The Shares to be sold by
the Company hereunder have been duly and validly authorized and, upon
issuance and delivery and payment therefor in the manner herein described,
will be validly issued, fully paid and nonassessable. Except as set forth
in the Effective Prospectus and the Final
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Prospectus, (i) the Company does not have outstanding any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or
sell, any shares of capital stock, and (ii) there are no preemptive rights
or other rights to subscribe for or to purchase, or any restriction upon
the transfer of, any shares of capital stock pursuant to the Company's
charter, bylaws or any agreement or other instrument to which the Company
is a party or by which it may be bound. Neither the filing of the
Registration Statement nor the issuance, offer or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration
of any shares of Common Stock or any other securities of the Company. The
Underwriters will receive good and marketable title to the Shares to be
issued and delivered hereunder, free and clear of all liens, encumbrances,
claims, security interests, restrictions, shareholders' agreements, voting
trusts or any other claims of third parties whatsoever.
(i) The form of stock certificate to be used to evidence the Common
Stock will be in due and proper form and will comply with all applicable
legal requirements.
(j) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered or the
subject of an available exemption from the registration requirements of
the Securities Act, and were duly registered or the subject of an
available exemption from the registration requirements of the applicable
state securities or Blue Sky laws, and any private placement memoranda
delivered in connection with offers and sales of the Company's securities
prior to the date hereof did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein not misleading.
(k) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to be sold by it to
the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms. No consent, approval, authorization or order of
any court or governmental agency or body or third party is required for
the performance of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, except such as have
been obtained and such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or under the Securities Act or state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters. The issuance and sale of
the Shares by
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<PAGE>
the Company, the Company's performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in a
breach or violation of, or conflict with, any of the terms and provisions
of, or constitute a default by the Company under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument to
which the Company is a party or to which the Company or any of its
properties is subject, the charter, bylaws or other governing instruments
of the Company or any statute or any judgment, decree, order, rule or
regulation of any court or governmental agency or body applicable to the
Company or any of its properties. The Company is not in violation of its
charter, bylaws or other governing instruments or any law, administrative
rule or regulation or arbitrators' or administrative court decree,
judgment or order or in violation or default (there being no existing
state of facts which with notice or lapse of time or both would constitute
a default) in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
deed of trust, mortgage, loan agreement, note, lease, agreement or other
instrument or permit to which it is a party or by which it or any of its
properties is or may be bound.
(l) The historical financial statements, together with the related
schedules and notes, of the Company, included in the Registration
Statement, the Effective Prospectus and the Final Prospectus, conform to
the requirements of the Securities Act and the Rules and Regulations. Such
financial statements fairly present the financial position of the Company
at the respective dates indicated in accordance with generally accepted
accounting principles applied on a consistent basis for the periods
indicated. The financial and statistical data set forth in the Effective
Prospectus and the Final Prospectus fairly present the information set
forth therein on the basis stated in the Effective Prospectus and the
Final Prospectus. Crowe, Chizek and Company LLP ("Crowe Chizek"), whose
reports are included in the Effective Prospectus and the Final Prospectus,
are independent accountants as required by the Securities Act and the
Rules and Regulations. The other financial statements and schedules
included in or as schedules to the Registration Statement, the Effective
Prospectus and the Final Prospectus conform to the requirements of the Act
and the Regulations and present fairly the information presented therein
for the periods shown. The unaudited pro forma financial statements and
notes thereto are in conformity with generally accepted accounting
principles and are presented on the basis of appropriate and reasonable
pro forma adjustments.
(m) Subsequent to __________ __, 199_, the Company and the
Subsidiaries have not sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, which is not disclosed
in the Effective
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Prospectus and the Final Prospectus; and subsequent to the respective
dates as of which information is given in the Registration Statement, the
Effective Prospectus and the Final Prospectus, (i) the Company and the
Subsidiaries have not incurred any material liabilities or obligations,
direct or contingent, or entered into any transactions not in the ordinary
course of business, and (ii) there has not been any issuance of options,
warrants or rights to purchase interests or the capital stock of the
Company and the Subsidiaries, or any material adverse change, or any
development involving a prospective material adverse change, in the
general affairs, management, business, prospects, financial position, net
worth or results of operations of the Company and the Subsidiaries, except
in each case as described in the Effective Prospectus and the Final
Prospectus.
(n) Except as described in the Effective Prospectus and the Final
Prospectus, there is not pending, or to the knowledge of the Company
threatened, any legal or governmental action, suit, proceeding, inquiry or
investigation, to which the Company, the Subsidiaries or any of the
Company's officers or directors is a party, or to which its property is
subject, before or brought by any court or governmental agency or body,
wherein an unfavorable decision, ruling or finding could prevent or
materially hinder the consummation of this Agreement or result in a
material adverse change in the business condition (financial or other),
prospects, financial position, net worth or results of operations of the
Company.
(o) _______________ shares of Common Stock, including the Shares,
have been approved for listing on the Nasdaq National Market (the "Nasdaq
National Market"), subject to official notice of issuance.
(p) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly, any
action resulting in a violation of Regulation M under the Exchange Act, or
designed to cause or result under the Exchange Act or otherwise in, or
which has constituted or which reasonably might be expected to constitute,
the stabilization or manipulation of the price of any securities of the
Company or facilitation of the sale or resale of the Shares.
(q) There are no contracts or other documents required by the
Securities Act or by the Rules and Regulations to be described in the
Registration Statement, the Effective Prospectus or the Final Prospectus
or to be filed as exhibits to the Registration Statement which have not
been described or filed as required. All such contracts to which the
Company and the Subsidiaries are a party have been duly authorized,
executed and delivered by the Company and the Subsidiaries, constitute
valid and binding agreements of the Company and the Subsidiaries and are
enforceable against the Company and the Subsidiaries in accordance with
the terms thereof. The
8
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Company and the Subsidiaries have performed all obligations required to be
performed by them, and are neither in default nor have they received
notice of any default or dispute under, any such contract or other
material instrument to which they are a party or by which their property
is bound or affected. To the best knowledge of the Company, no other party
under any such contract or other material instrument to which the Company
and the Subsidiaries are a party is in default in any material respect
thereunder.
(r) Except as described in the Effective Prospectus and the Final
Prospectus, the Company and the Subsidiaries have good and marketable
title to all real and material personal property owned by them, free and
clear of all liens, charges, encumbrances or defects, except those
reflected in the financial statements hereinabove described. The real and
personal property and buildings referred to in the Effective Prospectus
and the Final Prospectus which are leased from others by the Company and
the Subsidiaries are held under valid, subsisting enforceable leases. The
Company and the Subsidiaries own or lease all such properties as is
necessary to the Company's operations as now conducted.
(s) The Company's system of internal accounting controls is
sufficient to meet the broad objectives of internal accounting controls
insofar as those objectives pertain to the prevention or detection of
errors or irregularities in amounts that would be material in relation to
the Company's financial statements.
(t) The Company and the Subsidiaries have filed all foreign,
federal, state and local income and franchise tax returns required to be
filed through the date hereof and have paid all taxes shown as due thereon
to the extent such taxes have become due and are not being contested in
good faith; and there is no tax deficiency that has been, nor does the
Company have knowledge of any tax deficiency which is likely to be,
asserted against the Company or any of the Subsidiaries which, if
determined adversely, could materially and adversely affect the earnings,
assets, affairs, business prospects or condition (financial or other) of
the Company.
(u) The Company and the Subsidiaries operate their businesses in
conformity with all applicable statutes, common laws, ordinances, decrees,
orders, rules and regulations of governmental bodies. The Company and the
Subsidiaries have all licenses, approvals or consents to operate their
businesses in all locations in which such business is currently being
operated and is not aware of any existing or imminent matter which may
materially adversely impact their operations or business prospects other
than as specifically disclosed in the Effective Prospectus and the Final
Prospectus.
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(v) Neither the Company nor any of its Subsidiaries is in violation
of any federal, state, local or foreign law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials, and the Company and the
Subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal, state and foreign occupational
safety and health and environmental laws and regulations to conduct their
respective businesses, and the Company and the Subsidiaries are in
compliance with all terms and conditions of any such permit, license or
approval, except for any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals which
would not result in a material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or prospects of the
Company.
(w) Neither the Company nor any of its Subsidiaries has failed to
file with the applicable regulatory authorities any statements, reports,
information or forms required by all applicable laws, regulations or
orders; all such filings or submissions were in compliance with applicable
laws when filed, and no material deficiencies have been asserted by any
regulatory commission, agency or authority with respect to such filings or
submissions. Neither the Company nor any of its Subsidiaries has failed to
maintain in full force and effect any licenses, registrations or permits
necessary or proper for the conduct of their respective businesses, or
received any notification that any revocation or limitation thereof is
threatened or pending, and there is not to the knowledge of the Company
pending any change under any law, regulation, license or permit which
could materially adversely affect the business, operations, property or
business prospects of the Company and the Subsidiaries. Neither the
Company nor any of its Subsidiaries has received any notice of violation
of or been threatened with a charge of violating or is under investigation
with respect to a possible violation of any provision of any law,
regulation or order.
(x) No labor dispute exists or is imminent with any of the employees
of the Company and the Subsidiaries or otherwise which could materially
adversely affect the Company. The Company is not aware of any existing or
imminent labor disturbance by employees of the Company and the
Subsidiaries which could be expected to materially adversely affect the
condition (financial or otherwise), results of operations, properties,
affairs, management, business affairs or business prospects of the
Company. The Company and the Subsidiaries are in compliance with all
federal, state and local employment and labor laws, including but not
limited to, laws relating to non-discrimination in hiring, promotion and
pay of employees.
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(y) The Company and the Subsidiaries own or possess all
licenses, patents, copyrights, trademarks, service marks and trade
names currently employed by it in connection with the businesses
currently operated or proposed to be operated by them, and the Company
has not received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing which,
alone or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company.
(z) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged and in which they propose to engage; and the Company has no
reason to believe that it and the Subsidiaries will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business.
(aa) Neither the Company, the Subsidiaries, nor any director,
officer, agent, employee or other person acting on behalf of the Company
has (i) used, or authorized the use of, any corporate or other funds for
unlawful payments, contributions, gifts or entertainment, (ii) made
unlawful expenditures relating to political activity to government
officials or others, or (iii) established or maintained any unlawful or
unrecorded funds in violation of any federal, state, local or foreign law
or regulation, including Section 30A of the Exchange Act. Neither the
Company nor any director, officer, agent, employee or other person acting
on behalf of the Company has accepted or received any unlawful
contributions, payments, gifts or expenditures.
(bb) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940.
(cc) Except as disclosed in the Registration Statement and the
Effective Prospectus, there are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation
S-K promulgated by the Commission.
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2. Representations and Warranties of the Selling Shareholders. Each of the
Selling Shareholders, severally and not jointly, represents and warrants to and
agrees with, each of the Underwriters that:
(a) Such Selling Shareholder, at the First Closing Date, will have
good and marketable title to the Shares set forth in Schedule II to be
sold by such Selling Shareholder, free and clear of any liens,
encumbrances, equities and claims (other than as imposed by the Securities
Act or this Agreement), and full right, power and authority to effect the
sale and delivery of such Shares; and upon the delivery of and payment for
the Shares to be sold by such Selling Shareholder pursuant to this
Agreement, good and marketable title thereto, free and clear of any liens,
encumbrances, equities and claims, of any kind, will be transferred to the
Underwriters.
(b) Such Selling Shareholder has duly executed and delivered the
Custody Agreement and Power of Attorney in the form previously delivered
to the Representatives, appointing the persons named therein, and each of
them as such Selling Shareholder's attorney-in-fact (the
"Attorney-in-Fact") and as custodian (the "Custodian"). The
Attorney-in-Fact is authorized to execute, deliver and perform this
Agreement on behalf of such Selling Shareholder, to deliver the Shares to
be sold by such Selling Shareholder hereunder, to accept payment therefor,
and otherwise to act on behalf of such Selling Shareholder in connection
with this Agreement, including payment from the Offering proceeds of
expenses incurred on behalf of such Selling Shareholder. Certificates, in
suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank, representing the Shares to
be sold by such Selling Shareholder hereunder have been deposited with the
Custodian pursuant to the Custody Agreement and Power of Attorney for the
purpose of delivery pursuant to this Agreement. Such Selling Shareholder
agrees that the shares of Common Stock represented by the certificates on
deposit with the Custodian are subject to the interest of the Underwriters
hereunder, that the arrangements made for such custody and the appointment
of the Attorney-in-Fact are to that extent irrevocable, and that the
obligations of such Selling Shareholder hereunder shall not be terminated
except as provided in this Agreement and the Custody Agreement and Power
of Attorney. If such Selling Shareholder should die or become
incapacitated, or if any other event should occur, before the delivery of
the Shares of such Selling Shareholder hereunder, the certificates for
such Shares deposited with the Custodian shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such death, incapacity or other event had not occurred, regardless of
whether the Custodian or the Attorney-in-Fact shall have received notice
thereof.
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(c) Such Selling Shareholder, acting through his duly authorized
Attorney-in-Fact, has duly executed and delivered this Agreement and the
Custody Agreement and Power of Attorney; this Agreement constitutes a
legal, valid and binding obligation of such Selling Shareholder, all
authorizations and consents necessary for the execution and delivery of
this Agreement and the Custody Agreement and Power of Attorney on behalf
of such Selling Shareholder and for the sale and delivery of the Shares to
be sold by such Selling Shareholder hereunder have been given, except as
may be required by the Securities Act or state securities laws; and such
Selling Shareholder has the legal capacity and full right, power and
authority to execute this Agreement and the Custody Agreement and Power of
Attorney.
(d) The performance of this Agreement and the Custody Agreement and
Power of Attorney and the consummation of the transactions contemplated
hereby and thereby by such Selling Shareholder will not result in a breach
or violation of, or conflict with, any of the terms or provisions of, or
constitute a default by such Selling Shareholder under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or instrument to which such
Selling Shareholder or any of his or its properties is bound, or any
statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Shareholder or any
of his, her or its properties.
(e) Such Selling Shareholder has not distributed nor, other than as
permitted by the Securities Act and the Rules and Regulations, will
distribute any prospectus or other offering material in connection with
the offer and sale of the Shares other than any Preliminary Prospectus
filed with the Commission or the Final Prospectus or other material
permitted by the Securities Act.
(f) Such Selling Shareholder has reviewed and is familiar with the
Registration Statement and the Preliminary Prospectus. To the knowledge of
such Selling Shareholder, the Preliminary Prospectus does not include an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(h) At the time the Registration Statement becomes effective (i)
such parts of the Registration Statement and any amendments and
supplements thereto as specifically refer to such Selling Shareholder will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) such parts of the Effective
Prospectus and Final Prospectus as specifically refer to such Selling
Shareholder will not include an untrue statement of a material fact or
omit to state a material fact
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necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(i) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement by such Selling Shareholder, and the
consummation by such Selling Shareholder of the transactions herein
contemplated (other than as required by the Securities Act, state
securities laws and the NASD).
(j) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or to counsel for
the Representatives shall be deemed a representation and warranty by such
Selling Shareholder to each Underwriter as to the matters covered thereby.
(k) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, such
Selling Shareholder agrees to deliver to you prior to or at the First
Closing Date (as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
(l) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action resulting in a violation of Regulation
M under the Exchange Act which has constituted or which reasonably might
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company or facilitation of the sale or resale of
the Shares.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Shareholders, severally and not
jointly, in the amount set forth on Schedule II hereto, agree to sell to
the several Underwriters __________ and ___________, Firm Shares,
respectively, and each of the Underwriters, severally and not jointly,
agrees to purchase at a purchase price of $______ per share, the number of
Firm Shares set forth opposite such Underwriter's name in Schedule I
hereto.
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the sale
of Firm Shares, all or any portion of the Option Shares at the purchase
price per share set forth above. The option granted hereby may be
exercised as to all or any part of the Option Shares at any time within 30
days after the date of the Final Prospectus. The Underwriters shall not be
under any obligation
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<PAGE>
to purchase any Option Shares prior to the exercise of such option. The
option granted hereby may be exercised by the Underwriters by Bradford
giving written notice to the Company setting forth the number of Option
Shares to be purchased and the date and time for delivery of and payment
for such Option Shares and stating that the Option Shares referred to
therein are to be used for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares. If such
notice is given prior to the First Closing Date (as hereinafter defined),
the date set forth therein for such delivery and payment shall not be
earlier than two full business days thereafter or the First Closing Date,
whichever occurs later. If such notice is given on or after the First
Closing Date, the date set forth therein for such delivery and payment
shall not be earlier than three full business days thereafter. In either
event, the date so set forth shall not be more than four full business
days after the date of such notice. The date and time set forth in such
notice is herein called the "Option Closing Date." Upon exercise of the
option, the Company shall become obligated to sell to the Underwriters,
and, subject to the terms and conditions herein set forth, the
Underwriters shall become obligated to purchase, for the account of each
Underwriter, from the Company, severally and not jointly, the number of
Option Shares specified in such notice. Option Shares shall be purchased
for the accounts of the Underwriters in proportion to the number of Firm
Shares set forth opposite such Underwriter's name in Schedule I hereto,
except that the respective purchase obligations of each Underwriter shall
be adjusted so that no Underwriter shall be obligated to purchase
fractional Option Shares.
(c) Certificates in definitive form for the Firm Shares which each
Underwriter has agreed to purchase hereunder shall be delivered by or on
behalf of the Company to the Underwriters for the account of such
Underwriter against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer of immediately available funds to
the order of the Company, at the offices of Bradford, 330 Commerce Street,
Nashville, Tennessee 37201, or at such other place as may be agreed upon
by Bradford and the Company, at 10:00 A.M., Nashville time, on the third
full business day after this Agreement becomes effective, or, at the
election of the Underwriters, on the fourth full business day after this
Agreement becomes effective, if it becomes effective after 4:30 P.M.
Eastern time, or at such other time not later than the seventh full
business day thereafter as the Underwriters and the Company may determine,
such time of delivery against payment being herein referred to as the
"First Closing Date." The First Closing Date and the Option Closing Date
are herein individually referred to as the "Closing Date" and collectively
referred to as the "Closing Dates." Certificates in definitive form for
the Option Shares which each Underwriter shall have agreed to purchase
hereunder shall be similarly delivered by or on behalf of the Company on
the Option Closing Date. The certificates in definitive form for the
Shares to be delivered will be in good delivery form
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<PAGE>
and in such denominations and registered in such names as Bradford may
request not less than 48 hours prior to the First Closing Date or the
Option Closing Date, as the case may be. Such certificates will be made
available for checking and packaging at a location in New York, New York
as may be designated by Bradford, at least 24 hours prior to the First
Closing Date or the Option Closing Date, as the case may be. It is
understood that Bradford may (but shall not be obligated to) make payment
on behalf of any Underwriter or Underwriters for the Shares to be
purchased by such Underwriter or Underwriters. No such payment shall
relieve such Underwriter or Underwriters from any of its or their
obligations hereunder.
4. Offering by the Underwriters. After the Registration Statement becomes
effective, the several Underwriters propose to offer for sale to the public the
Firm Shares and any Option Shares which may be sold at the price and upon the
terms set forth in the Final Prospectus.
5. Covenants of the Company and the Selling Shareholders.
(a) The Company covenants and agrees with each of the Underwriters
that:
(i) The Company shall comply with the provisions of and make
all requisite filings with the Commission pursuant to Rules 424 and
430A of the Rules and Regulations and shall notify the
Representatives promptly (in writing, if requested) of all such
filings. The Company shall notify the Representatives promptly of
any request by the Commission for any amendment of or supplement to
the Registration Statement, the Effective Prospectus or the Final
Prospectus or for additional information; the Company shall prepare
and file with the Commission, promptly upon the Underwriters'
request, any amendments of or supplements to the Registration
Statement, the Effective Prospectus or the Final Prospectus which,
in the Underwriters' opinion, may be necessary or advisable in
connection with the distribution of the Shares; and the Company
shall not file any amendment of or supplement to the Registration
Statement, the Effective Prospectus or the Final Prospectus which is
not approved by the Representatives after reasonable notice thereof.
The Company shall advise the Representatives promptly of the
issuance by the Commission or any jurisdiction or other regulatory
body of any stop order or other order suspending the effectiveness
of the Registration Statement, suspending or preventing the use of
any Preliminary Prospectus, the Effective Prospectus or the Final
Prospectus or suspending the qualification of the Shares for
offering or sale in any jurisdiction, or of the institution of any
proceedings for any such purpose; and the Company shall use its best
efforts to prevent the
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<PAGE>
issuance of any stop order or other such order and, should a stop
order or other such order be issued, to obtain as soon as possible
the lifting thereof.
(ii) The Company will take or cause to be taken all necessary
action and furnish to whomever the Representatives direct, such
information as may be reasonably required in qualifying the Shares
for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Underwriters may designate and will continue
such qualifications in effect for as long as may be reasonably
necessary to complete the distribution of the Shares.
(iii) Within the time during which a Final Prospectus relating
to the Shares is required to be delivered under the Securities Act,
the Company shall comply with all requirements imposed upon it by
the Securities Act, as now and hereafter amended, and by the Rules
and Regulations, as from time to time in force, so far as is
necessary to permit the continuance of sales of or dealings in the
Shares as contemplated by the provisions hereof and the Final
Prospectus. If during such period any event occurs as a result of
which the Final Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances then existing, not misleading, or if during
such period it is necessary to amend the Registration Statement or
supplement the Final Prospectus to comply with the Securities Act,
the Company shall promptly notify the Representatives and shall
amend the Registration Statement or supplement the Final Prospectus
(at the expense of the Company) so as to correct such statement or
omission or effect such compliance.
(iv) The Company will furnish without charge to the
Representatives and make available to the Underwriters copies of the
Registration Statement (four of which shall be signed and shall be
accompanied by all exhibits), each Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus, and all amendments
and supplements thereto, including any prospectus or supplement
prepared after the effective date of the Registration Statement, in
each case as soon as available and in such quantities as the
Underwriters may reasonably request.
(v) The Company will (A) deliver to the Representatives at
such office or offices as the Representatives may designate as many
copies of the Preliminary Prospectus and Final Prospectus as the
Representatives may reasonably request, (B) for a period of not more
than nine months after the Registration Statement becomes effective,
17
<PAGE>
send to the Representatives as many additional copies of the Final
Prospectus and any supplement thereto as the Representatives may
reasonably request, and (C) following nine months after the
Registration Statement becomes effective, send to the
Representatives at their expense as many additional copies of the
Final Prospectus and any supplement hereto as the Representative may
reasonably request.
(vi) The Company shall make generally available to its
security holders, in the manner contemplated by Rule 158(b) under
the Rules and Regulations as promptly as practicable and in any
event no later than 45 days after the end of its fiscal quarter in
which the first anniversary of the effective date of the
Registration Statement occurs, an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act covering a period
of at least 12 consecutive months beginning after the effective date
of the Registration Statement.
(vii) The Company will apply the net proceeds from the sale of
the Shares to be sold by it as set forth under the caption "Use of
Proceeds" in the Final Prospectus and will timely report such use of
proceeds in its periodic reports filed pursuant to sections 13(a)
and 15(d) of the Exchange Act in accordance with Rule 463 of the
Securities Act or any successor provision.
(viii) During a period of five years from the effective date
of the Registration Statement or such longer period as the
Representatives may reasonably request, the Company will furnish to
the Representatives copies of all reports and other communications
(financial or other) furnished by the Company to its shareholders
and, as soon as available, copies of any reports or financial
statements furnished or filed by the Company to or with the
Commission or any national securities exchange or over-the-counter
market on which any class of securities of the Company may be listed
for trading.
(ix) The Company will, from time to time, after the effective
date of the Registration Statement file with the Commission such
reports as are required by the Securities Act, the Exchange Act and
the Rules and Regulations, and shall also file with foreign, state
and other governmental securities commissions in jurisdictions where
the Shares have been sold by the Underwriters (as the
Representatives shall have advised the Company in writing) such
reports as are required to be filed by the securities acts and the
regulations of those jurisdictions.
(x) Except pursuant to this Agreement or with the
Representatives' written consent, for a period of 180 days from the
effective date of the Registration Statement, the Company will not,
18
<PAGE>
and the Company has provided agreements (the "Lockup Agreements")
executed by each of its officers, directors and 5% or greater
Shareholders providing that for a period of [150] days from the
effective date of the Registration Statement, such person will not,
offer for sale, sell (other than the issuance by the Company of
shares of Common Stock pursuant to acquisitions or the exercise of
options granted pursuant to existing employee benefit plans and
agreements), grant any options (other than pursuant to existing
employee benefit plans and agreements), rights or warrants with
respect to any shares of Common Stock, securities convertible into
shares of Common Stock or any other capital stock of the Company, or
otherwise dispose of, directly or indirectly, any shares of Common
Stock or such other securities or capital stock.
(xi) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly,
any action resulting in a violation of Regulation M under the
Exchange Act, or designed to cause or result in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of any securities of the
Company or facilitation of the sale or resale of the Shares.
(xii) The Company will either conduct its business and
operations, and that of its Subsidiaries, as described in the Final
Prospectus or, if the Company makes any material change to its or
its Subsidiaries' business or operations as so conducted, promptly
disclose such change generally to the Company's security holders.
(xiii) The Company will use its best efforts to effect the
listing of the Common Stock, subject to notice of issuance, on the
Nasdaq National Market on or before the effective date of the
Registration Statement.
(b) Each of the Selling Shareholders, severally and not jointly,
covenants and agrees with each of the Underwriters that:
(i) Such Selling Shareholder will cooperate to the extent
necessary to cause the Registration Statement or any post-effective
amendment thereto to become effective at the earliest possible time.
(ii) Such Selling Shareholder will pay all federal and other
taxes, if any, on the transfer or sale of the Shares being sold by
such Selling Shareholder to the Underwriters.
(iii) Such Selling Shareholder will do or perform all things
required to be done or performed by such Selling Shareholder prior
19
<PAGE>
to the First Closing Date to satisfy all conditions precedent to the
delivery of the Shares pursuant to this Agreement or the Power of
Attorney and Custody Agreement.
(iv) Such Selling Shareholder has delivered to the Company an
agreement pursuant to which such Selling Shareholder has agreed that
during the period of 180 days from the date the Registration
Statement is declared effective under the Securities Act, such
Selling Shareholder will not, without your prior written consent,
offer, pledge, issue, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of (or announce any offer, pledge,
sale, grant of an option to purchase or other disposition), directly
or indirectly, any shares of Common Stock or securities convertible
into, exercisable or exchangeable for, shares of Common Stock.
(v) Such Selling Shareholder will not (i) take, directly or
indirectly, prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to cause or to
result in, or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Shares, (ii)
sell, bid for, purchase or pay anyone any compensation for the
solicitation of purchases of, the Shares or (iii) pay or agree to
pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(vi) Such Selling Shareholder will deliver to the Custodian on
or prior to the First Closing Date a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department Regulations in lieu
thereof).
(vii) Such Selling Shareholder will furnish any documents,
instruments or other information which you may reasonably request in
connection with the sale and transfer of the Shares.
(viii) Such Selling Shareholder will use such Selling
Shareholder's best efforts to comply or cause to be complied with
the conditions to the obligations of the Underwriters in Section 7
hereof insofar as such conditions relate to such Selling
Shareholder.
6. Expenses. The Company agrees with each of the Selling Shareholders and
the Underwriters that (a) whether or not the transactions contemplated by this
Agreement are consummated or this Agreement becomes effective or is terminated,
the Company will pay all fees and expenses incident to the performance of the
obligations of the Company hereunder, including, but not limited to, (i) the
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<PAGE>
Commission's registration fee, (ii) the expenses of printing (or reproduction)
and distributing the Registration Statement (including the financial statements
therein and all amendments and exhibits thereto), each Preliminary Prospectus,
the Effective Prospectus, the Final Prospectus, any amendments or supplements
thereto, any Marketing Materials (as hereinafter defined) and this Agreement and
other underwriting documents, including Underwriter's Questionnaires,
Underwriter's Powers of Attorney, Blue Sky Memoranda, Agreements Among
Underwriters and Selected Dealer Agreements, (iii) fees and expenses of
accountants and counsel for the Company, (iv) expenses of registration or
qualification of the Shares under state Blue Sky and securities laws, including
the fees and disbursements of counsel to the Underwriters in connection
therewith, (v) filing fees paid or incurred by the Underwriters in connection
with filings with the NASD, (vi) expenses of listing the outstanding Common
Stock on the Nasdaq National Market, (vii) all travel, lodging and reasonable
living expenses incurred by the Company in connection with marketing, dealer and
other meetings attended by the Company and the Underwriters in marketing the
Shares, (viii) the costs and charges of the Company's transfer agent and
registrar and the cost of preparing the certificates for the Shares, and (ix)
all other costs and expenses incident to the performance of its obligations
hereunder not otherwise provided for in this Section; and (b) all out-of-pocket
expenses, including counsel fees, disbursements and expenses, incurred by the
Underwriters in connection with investigating, preparing to market and marketing
the Shares and proposing to purchase and purchasing the Shares under this
Agreement, will be borne and paid by the Company if the sale of the Shares
provided for herein is not consummated (i) by reason of the termination of this
Agreement by the Underwriters pursuant to Section 14(b)(ii) through (v) of this
Agreement or (ii) because of any failure or refusal on the part of the Company
or any Selling Shareholder to comply with the terms or fulfill any of the
conditions of this Agreement.
The provisions of this Section shall not affect any agreement that the
Company and the Selling Shareholders may have for the sharing of such costs and
expenses; provided, however, the Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees, and expenses to be paid
hereunder by the Company and the Selling Shareholders.
7. Conditions of the Underwriters' Obligations. The respective obligations
of the Underwriters to purchase and pay for the Firm Shares shall be subject to
the accuracy of the representations and warranties of the Company herein as of
the date hereof and as of the Closing Date as if made on and as of the Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company and the Selling
Shareholders of all of their respective covenants and agreements hereunder and
to the following additional conditions:
21
<PAGE>
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., Washington,
D.C. time, on the day following the date of this Agreement, or such later
time and date as shall have been consented to by the Representatives and
all filings required by Rule 424 and Rule 430A of the Securities Act Rules
shall have been made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Underwriters, shall be contemplated by the Commission;
any request of the Commission for additional information (to be included
in the Registration Statement or the Final Prospectus or otherwise) shall
have been complied with to the Representatives' satisfaction; and the
NASD, upon review of the terms of the public offering of the Shares, shall
not have objected to such offering, such terms or the Underwriters'
participation in the same.
(b) No Representative shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus
or Final Prospectus, or any amendment or any supplement thereto, contains
an untrue statement of fact which, in the Representatives' reasonable
judgment, is material, or omits to state a fact which, in the
Representatives' reasonable judgment, is material and is required to be
stated therein or necessary to make the statements therein not misleading
and the Company shall not have cured such untrue statement of fact or
omission.
(c) The Representatives shall have received an opinion, dated the
Closing Date, from Baker, Donelson, Bearman & Caldwell, P.A., counsel for
the Company, to the effect that:
(i) Each of the Company and the Corporate Subsidiaries has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation,
with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement,
each of the Company and the Corporate Subsidiaries is duly qualified
to transact business as a foreign corporation and in good standing
in those states where a failure to so qualify would have a material
adverse effect on the Company; and the outstanding shares of capital
stock of each of the Corporate Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable
and are owned by the Company or a Corporate Subsidiary; and, to the
best of such counsel's knowledge, the outstanding shares of capital
stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other
obligations to issue or
22
<PAGE>
other rights to convert any obligations into any shares of capital
stock or of ownership interests in the Corporate Subsidiaries are
outstanding.
(ii) As of the dates specified therein, the Company had
historically authorized and issued capital stock as set forth under
the caption "Capitalization" in the Final Prospectus. All of the
outstanding shares of Common Stock have been duly authorized and are
validly issued, fully paid and nonassessable, and the Shares to be
sold by the Company have been duly authorized, and upon issuance
thereof and payment therefor as provided herein, will be validly
issued, fully paid and nonassessable; none of the issued shares have
been issued in violation of or subject to any preemptive rights
provided for by law, any agreement known to such counsel or the
Company's charter. To such counsel's knowledge, the Company does not
have outstanding any options to purchase, or any rights or warrants
to subscribe for, or any securities or obligations convertible into,
or any contracts or commitments to issue or sell any shares of
capital stock, and there are no preemptive rights or other rights to
subscribe for or purchase any shares of the capital stock of the
Company, or any restriction upon the transfer of, the Shares
pursuant to the Company's charter or bylaws or any agreement or
other instrument known to such counsel to which the Company is a
party or by which it may be bound, except as described in the
Effective Prospectus and Final Prospectus. Neither the filing of the
Registration Statement nor the offer or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the
registration of any Common Stock or any other securities of the
Company. The Underwriters will receive good and marketable title to
the Shares to be issued and delivered by the Company pursuant to
this Agreement, free and clear of all liens, encumbrances, claims,
security interests, restrictions, shareholders agreements, voting
trusts and the rights of any third party whatsoever. The capital
stock of the Company and the Shares conform to the description
thereof contained in the Final Prospectus. All offers and sales of
the Company's interests and securities prior to the date hereof were
made in reliance upon available exemptions from the registration
requirements of the Securities Act and the registration requirements
of applicable state securities or Blue Sky laws or, if not exempt,
properly registered in compliance with such laws.
(iii) The form of stock certificate to be used to evidence the
Common Stock will be in due and proper form and will comply with all
applicable legal requirements under the Tennessee Business
Corporation Act.
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<PAGE>
(iv) No consent, approval, authorization or order of any court
or governmental agency or body or third party is required for the
performance of this Agreement by the Company or the consummation by
the Company of the transactions contemplated hereby, except such as
have been obtained under the Securities Act and such as may be
required by the NASD and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
several Underwriters, as to which such counsel need not express an
opinion. The performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby
will not conflict with or result in a breach or violation by the
Company of any of the terms or provisions of, or constitute a
default by the Company under, any material indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument to
which the Company is a party or to which the Company or its
properties is subject, the charter or bylaws of the Company, any
statute, or any judgment, decree, order, rule or regulation of any
court or governmental agency or body applicable to the Company.
(v) The Company has full legal right and all corporate power
and authority to enter into this Agreement and to issue, sell and
deliver the Shares to be sold by it to the Underwriters as provided
herein, and this Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and legally
binding obligation of the Company enforceable against the Company in
accordance with its terms.
(vi) Except as described in the Final Prospectus, there is not
pending or threatened, any action, suit, proceeding, inquiry or
investigation, to which the Company or any of the Subsidiaries are a
party, or to which the property of the Company or any of the
Subsidiaries are subject, before or brought by any court or
governmental agency or body, which, if determined adversely to the
Company or any of the Subsidiaries, could likely result in any
material adverse change in the business, financial position, net
worth or results of operations, or could materially adversely affect
the properties or assets, of the Company or any of the Subsidiaries.
(vii) No default exists, and no event has occurred which with
notice or after the lapse of time to cure or both, would constitute
a default, in the due performance and observance of any term,
covenant or condition of any material indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to
which either the Company or any of its Subsidiaries is a party or to
which their
24
<PAGE>
respective properties are subject, or of the charter or bylaws of
the Company.
(viii) There are no contracts or documents of the Company
known to such counsel which are required to be filed as exhibits to
the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been so filed.
(ix) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined
in the Investment Company Act of 1940, as amended.
(x) The Registration Statement and all post-effective
amendments thereto have become effective under the Securities Act,
and, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are threatened, pending or contemplated by the
Commission. All filings required by Rule 424 and Rule 430A of the
Rules and Regulations have been made; the Registration Statement,
the Effective Prospectus and Final Prospectus, and any amendments or
supplements thereto, as of their respective effective or issue
dates, complied as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
the descriptions in the Registration Statement, the Effective
Prospectus and the Final Prospectus of statutes, regulations, legal
and governmental proceedings, and contracts and other documents are
accurate in all material respects and present fairly in all material
respects the information purported to be summarized; and counsel
does not know of any pending or threatened legal or governmental
proceedings, statutes or regulations required to be described in the
Final Prospectus which are not described as required nor of any
contracts or documents of a character required to be described in
the Registration Statement or the Final Prospectus or to be filed as
exhibits to the Registration Statement which are not described and
filed as required.
(xi) To such counsel's knowledge in the course of their
representation, none of the Company or any of the Subsidiaries is in
violation of any material laws applicable to the Company or any of
the Subsidiaries or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of the
Subsidiaries.
(xii) The Company and each of the Subsidiaries have all
necessary permits (except where the failure to have such permits,
individually or in the aggregate, would not have a material adverse
effect on the business, operations or financial condition of the
Company
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<PAGE>
and the Subsidiaries taken as a whole), to own their respective
properties and to conduct their respective businesses as now being
conducted, and as described in the Registration Statement and
Prospectus.
(xiii) The descriptions of banking statutes and regulations in
the Prospectus have been reviewed by such counsel and fairly
summarize such statutes and regulations in all material respects.
(xiv) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not (a) breach, or result in a default under, any existing
obligation of the Company under any of the agreements of the Company
or any of its Subsidiaries filed as exhibits to the Registration
Statement or otherwise; (b) violate or conflict with any applicable
statute, rule or regulation or, to such counsel's knowledge any
judgment, decree or order of any court or governmental agency or
body (except that such counsel need not express an opinion as to
compliance with any disclosure requirement or any prohibition
against fraud or misrepresentation or as to whether performance of
the indemnification or contribution provisions of this Agreement
would be permitted); or (c) to such counsel's knowledge, result in
the creation or imposition or any lien, charge, claim or encumbrance
upon any property or asset of the Company or the Subsidiaries,
respectively.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made (except that such counsel need
express no view as to financial statements, schedules and other financial or
statistical information included therein).
(d) The Representatives shall have received an opinion, dated the
Closing Date, of [FIRM] as counsel for the Selling Shareholders,
reasonably acceptable to the Representatives, to the effect that:
(i) This Agreement and the Custody Agreement and Power of
Attorney have been duly authorized (in the case of corporate or
partnership Selling Shareholders), executed and delivered by or on
behalf of each of the Selling Shareholders and constitute valid and
binding agreements of such Selling Shareholders enforceable in
accordance with their terms.
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<PAGE>
(ii) The sale of the Shares to be sold by each Selling
Shareholder hereunder and the compliance by such Selling Shareholder
with all of the provisions of this Agreement, the Custody Agreement
and the Power of Attorney and the consummation of the transactions
herein and therein contemplated will not conflict with or result in
a breach or violation of any terms or provisions of, or constitute a
default under any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which such Selling Shareholder
is a party or by which such Selling Shareholder is bound or to which
any of the property or assets of such Selling Shareholder is
subject, or any statute, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Shareholder
or the property of such Selling Shareholder.
(iii) No consent, approval, authorization or order of any
regulatory, administrative or other governmental body is required
for the consummation of the transactions contemplated by this
Agreement in connection with the Shares to be sold by each Selling
Shareholder hereunder, except which have been duly obtained and in
full force and effect, such as have been obtained under the
Securities Act and such as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of
such Shares by the Underwriters, as to which such counsel need
express no opinion.
(iv) Each of the Selling Shareholders has the full right,
power and authority to sell, transfer and deliver such Shares
pursuant to this Agreement. By delivery of a certificate or
certificates therefor, the Selling Shareholders will transfer to the
Underwriters valid title to such shares, free and clear of any
pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
The opinions to be rendered pursuant to paragraphs (c) and (d) may be
limited to federal law, and as to foreign and state law matters, to the laws of
the states or jurisdictions in which such counsel is admitted to practice. Such
counsel may rely upon opinions of other counsel in rendering such opinions
provided that such counsel shall state that they believe that both the
Representatives and they are justified in relying upon such opinions.
(e) The Underwriters shall have received an opinion or opinions,
dated the Closing Date, of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, counsel for the Underwriters, with respect to
the Registration Statement and the Final Prospectus, and such other
related matters as the Underwriters may require, and the Company shall
have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
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<PAGE>
(f) The Representatives shall have received from Crowe Chizek a
letter dated the date hereof and, at the Closing Date, a second letter
dated the Closing Date, in form and substance satisfactory to the
Representatives, stating that they are independent public accountants with
respect to the Company and its subsidiaries within the meaning of the
Securities Act and the applicable Rules and Regulations, and containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information of the Company contained in the
Registration Statement and the Prospectus.
In the event that the letters to be delivered referred to above set forth
any such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that the Underwriters shall have determined,
after discussions with officers of Company responsible for financial and
accounting matters and with Crowe Chizek that such changes, decreases or
increases as are set forth in such letters do not reflect a material adverse
change in the total assets, shareholders' equity or long-term debt of Company as
compared with the amounts shown in the latest balance sheets of Company included
in the Final Prospectus, or a material adverse change in revenues or net income
of Company, in each case as compared with the corresponding period of the prior
year.
(g) There shall have been furnished to the Representatives a
certificate, dated the Closing Date and addressed to you, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that:
(i) the representations and warranties of the Company in
Section 1 of this Agreement are true and correct, as if made at and
as of the Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been initiated or are pending, or to their knowledge,
threatened under the Securities Act;
(iii) all filings required by Rule 424 and Rule 430A of the
Rules and Regulations have been made;
(iv) they have carefully examined the Registration Statement,
the Effective Prospectus and the Final Prospectus, and any
amendments or supplements thereto, and such documents do not include
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
28
<PAGE>
statements therein not misleading in light of the circumstances
under which they were made; and
(v) since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amendment
or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which has not been so set forth.
(h) The representations and warranties of each Selling Shareholder
in Section 2 of this Agreement shall be true and correct as of the Closing
Date and such Selling Shareholders shall deliver to the Representatives a
certificate to that effect, dated the Closing Date, signed by such Selling
Shareholder or his or its duly appointed Attorney-in-fact.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Final Prospectus, and except
as stated therein, the Company has not sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any court or governmental action, order or decree, or
become a party to or the subject of any litigation which is material to
the Company, nor shall there have been any material adverse change, or any
development involving a prospective material adverse change, in the
business, properties, key personnel, capitalization, prospects, net worth,
results of operations or condition (financial or other) of the Company,
which loss, interference, litigation or change, in the Representatives'
reasonable judgment shall render it inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth
on the cover page of the Prospectus or to proceed with the delivery of the
Shares.
(j) The Shares shall be listed on the Nasdaq National Market.
(k) The Representatives shall have received the Lockup Agreements.
All such opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Representatives and their counsel. The Company
shall furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for the
Option Shares shall be subject, in their discretion, to the conditions of this
Section 7, except that all references to the "Closing Date" shall be deemed to
refer to the Option Closing Date, if it shall be a date other than the Closing
Date.
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<PAGE>
8. Condition of the Company's and the Selling Shareholder's Obligations.
The obligations hereunder of the Company and the Selling Shareholders are
subject to the condition set forth in Section 7(a) hereof.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities to which such Underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based in whole or in part upon: (i) any inaccuracy in the
representations and warranties of the Company or the Selling Shareholders
contained herein; (ii) any failure of the Company or the Selling
Shareholders to perform their obligations hereunder or under law; (iii)
any untrue statement or alleged untrue statement of any material fact
contained in (A) the Registration Statement, any Preliminary Prospectus,
the Effective Prospectus or Final Prospectus, or any amendment or
supplement thereto, (B) any audio or visual materials supplied by the
Company expressly for use in connection with the marketing of the Shares,
including without limitation, slides, videos, films and tape recordings
(the "Marketing Materials") or (C) in any Blue Sky application or other
written information furnished by the Company or the Selling Shareholders
filed in any state or other jurisdiction in order to qualify any or all of
the Shares under the securities laws thereof (a "Blue Sky Application");
(iv) or the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus or Final
Prospectus or any amendment or supplement thereto, any Marketing Materials
or Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating to in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred
to in any loss, claim, damage, liability or action arising out of or based
upon matters covered by clause (i), (ii), (iii) or (iv) above (provided
that the Company shall not be liable under this clause (v) to the extent
that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful
misconduct); and will reimburse each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company will not be
liable in any such case to the extent that any such loss,
30
<PAGE>
claim, damage, or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made
in the Registration Statement, the Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto, or
any Marketing Materials or Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and in the [third, fourth, fifth and eighth
paragraphs] under the caption "Underwriting" in any Preliminary Prospectus
and the Final Prospectus and the Effective Prospectus).
(b) The Selling Shareholders, severally and not jointly, agree to
indemnify and hold harmless each Underwriter, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, against
any losses, claims, damages or liabilities to which such Underwriter or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based in whole or in part
upon: (i) any inaccuracy in the representations and warranties of the
Company or such Selling Shareholder contained herein; (ii) any failure of
the Company or such Selling Shareholder to perform their obligations
hereunder or under law; (iii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus or Final
Prospectus, or any amendment or supplement thereto, (B) any Marketing
Materials or (C) in any Blue Sky Application furnished by the Company or
such Selling Shareholder; or (iv) the omission or alleged omission to
state the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus or any amendment or supplement
thereto, any Marketing Materials or Blue Sky Application a material fact
required to be stated therein or necessary to make the statements therein
not misleading; or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating to in
any manner to, the Shares or the offering contemplated hereby, and which
is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by clause
(i), (ii), (iii) or (iv) above (provided that the Company shall not be
liable under this clause (v) to the extent that it is determined in a
final judgment by a court of competent jurisdiction that such loss, claim,
damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct);and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action as such
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<PAGE>
expenses are incurred; provided, however, that such Selling Shareholder
will not be liable in any such case to the extent that any such loss,
claim, damage, or liability arises out of or is based upon any untrue
statement or alleged statement or omission or alleged omission made in the
Registration Statement, the Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto, or
any Marketing Materials or Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the
only information so provided is the information included in the last
paragraph on the cover page and in the [third, fourth, fifth and eighth
paragraphs] under the caption "Underwriting" in any Preliminary Prospectus
and the Final Prospectus and the Effective Prospectus).
(c) Notwithstanding the foregoing provisions of Section 9(a) and
(b), the parties agree that the indemnification obligations of each
Selling Shareholder under this Section 9, with respect to any matter that
such Selling Shareholder and the Company are both required to indemnify
the Underwriters hereunder, shall be subject to the determination by the
Representatives, on behalf of the Underwriters, that, in the
Representatives' reasonable commercial judgment, the Company is or may be
unable to discharge fully its obligations to the Underwriters hereunder;
provided, however, that such Selling Shareholder's obligations shall (i)
be limited to such Selling Shareholder's proportion of the Firm Shares as
set forth on Schedule II, times the aggregate amount to which the
Underwriters are entitled to indemnification, and (ii) shall be liable in
any such case only to the extent of the total net proceeds (before
deducting expenses) received from the Underwriters by such Selling
Shareholder in connection with the sale of the Shares hereunder. To the
extent the Company is or may be able, in the Representatives' reasonable
commercial judgment, to discharge the Company's obligations to the
Underwriters with respect to any matter that the Company is required to
indemnify the Underwriters hereunder, the Underwriters shall to such
extent, first seek indemnification from the Company.
(d) Each Underwriter, will indemnify and hold harmless each of the
Selling Shareholders, the Company, each of its directors, each of the
Company's officers who signed the Registration Statement and each person,
if any, who controls the Company within the meaning of the Securities Act
against any losses, claims, damages or liabilities to which such Selling
Shareholders, the Company or any such director, officer or controlling
person may become subject, under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary
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<PAGE>
Prospectus, the Effective Prospectus or Final Prospectus, or any amendment
or supplement thereto, any Marketing Materials or any Blue Sky
Application, or arise out of or are based upon the omission or the alleged
omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any amendment
or supplement thereto, any Marketing Materials or any Blue Sky Application
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by any Underwriter
specifically for use therein (it being understood that the only
information so provided is the information included in the last paragraph
on the cover page and in the [third, fourth, fifth and eighth paragraphs]
under the caption "Underwriting" in any Preliminary Prospectus and in the
Effective Prospectus and the Final Prospectus).
(e) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, including
governmental proceedings, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this
Section 9 notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party hereunder unless
the indemnifying party has been materially prejudiced thereby and in any
event shall not relieve it from liability otherwise than under this
Section 9. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein, and to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation except that
the indemnified party shall have the right to employ separate counsel if,
in the indemnified party's reasonable judgment, it is advisable for the
indemnified party to be represented by separate counsel, and in that event
the fees and expenses of separate counsel shall be paid by the
indemnifying party.
(f) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the
preceding part of this Section 9 is for any reason held to be unavailable
to the
33
<PAGE>
Underwriters, the Company or the Selling Shareholders or is insufficient
to hold harmless an indemnified party, then the Company and the Selling
Shareholders shall contribute to the damages paid by the Underwriters, and
the Underwriters shall contribute to the damages paid by the Company and
the Selling Shareholders; provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f)) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The amount of such
contribution shall (i) be in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, be in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Selling Shareholders on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders on the one hand and the
Underwriters on the other with respect to such offering shall be deemed to
be in the same proportion as the total net proceeds from the offering of
the Shares purchased under this Agreement (before deducting expenses)
received by the Company and the Selling Shareholders, in the case of the
Company and the Selling Shareholders, and the total underwriting discounts
and commissions received by the Underwriters with respect to the Shares
purchased under this Agreement, in the case of the Underwriters, bear to
the total gross proceeds from the offering of the Shares under this
Agreement, in each case as set forth in the Prospectus. The relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Shareholders or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Shareholders
and the Underwriters agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation
(even if the Underwriters were treated as one entity for such purpose).
Notwithstanding the foregoing, (i) no Underwriter or person controlling
such Underwriter shall be obligated to make contribution hereunder which
in the aggregate exceeds the underwriting discount applicable to the
Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages which such Underwriter and its controlling
persons have otherwise been required to pay in respect of the same or any
similar claim and (ii) no Selling Shareholder shall be required to
contribute any amount in excess of the aggregate amount for which such
Selling Shareholder is obligated to
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<PAGE>
provide indemnification pursuant to Section 9(c). The Underwriters'
obligations and the Selling Shareholders' obligations to contribute
hereunder are several in proportion to their respective obligations and
not joint. For purposes of this Section, each person, if any, who controls
an Underwriter within the meaning of Section 15 of the Securities Act
shall have the same rights to contribution as such Underwriters, and each
director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company
or a Selling Shareholder within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as the Company
or the Selling Shareholders, as the case may be.
(g) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified
party is a party or is (or would be, if a claim were to be made against
such indemnified party) entitled to indemnity hereunder, unless such
settlement includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such action,
suit or proceeding.
10. Default of Underwriters. If any Underwriter defaults in its obligation
to purchase Shares hereunder and if the total number of Shares which such
defaulting Underwriter agreed but failed to purchase is ten percent or less of
the total number of Shares to be sold hereunder, the non-defaulting Underwriters
shall be obligated severally to purchase (in the respective proportions which
the number of Shares set forth opposite the name of each non-defaulting
Underwriter in Schedule I hereto bears to the total number of Shares set forth
opposite the names of all the non-defaulting Underwriters), the Shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase. If
any Underwriter so defaults and the total number of Shares with respect to which
such default or defaults occur is more than ten percent of the total number of
Shares to be sold hereunder, and arrangements satisfactory to the other
Underwriters, the Company and the Selling Shareholders for the purchase of such
Shares by other persons (who may include the non-defaulting Underwriters) are
not made within 36 hours after such default, this Agreement, insofar as it
relates to the sale of the Shares, will terminate without liability on the part
of the non-defaulting Underwriters or the Company or the Selling Shareholders
except for (i) the provisions of Section 9 hereof, and (ii) the expenses to be
paid or reimbursed by the Company pursuant to Section 6. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 10. Nothing herein shall relieve a defaulting
Underwriter from liability for its default.
11. Default by the Selling Shareholders. If the Selling Shareholders shall
fail to sell and deliver the number of Firm Shares that the Selling Shareholders
are obligated to sell, the Representatives may, at their option, by notice to
the Company,
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<PAGE>
either (a) require the Company to sell and deliver such number of shares of
Common Stock as to which the Selling Shareholders have defaulted, or (b) elect
to purchase the Firm Shares and the Option Shares that the Company and the
non-defaulting Selling Shareholders have agreed to sell pursuant to this
Agreement.
In the event of a default under this Section that does not result in the
termination of this Agreement, the Representatives shall have the right to
postpone the First Closing Date or Option Closing Date for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. No action
taken pursuant to this Section shall relieve the Company or the Selling
Shareholder so defaulting from liability, if any, in respect of such default.
12. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Selling
Shareholders, the Company or their officers and the Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (a) any
investigation made by or on behalf of the Company, any of its officers or its
directors, any Underwriter or any controlling person, (b) any termination of
this Agreement and (c) delivery of and payment for the Shares.
13. Effective Date. This Agreement shall become effective at whichever of
the following times shall first occur: (i) at 11:30 am Washington D.C. time, on
the next full business day following the date in which the Registration
Statement becomes effective or (ii) at such time after the Registration
Statement has become effective as the Representatives shall release the Firm
Shares for sale to the public; provided, however, that the provisions of
Sections 6, 9, 12, and 13 hereof shall at all times be effective. For purposes
of this Section 13, the Firm Shares shall be deemed to have been so released
upon the release by the Representatives for publication, at any time after the
Registration Statement has become effective, of any newspaper advertisement
relating to the Firm Shares or upon the release by the Representatives of
telegrams offering the Firm Shares for sale to securities dealers, whichever may
occur first.
14. Termination.
(a) The Company's obligations under this Agreement may be terminated
by the Company by notice to the Representatives (i) at any time before it
becomes effective in accordance with Section 13 hereof, or (ii) in the
event that the condition set forth in Section 8 shall not have been
satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Representatives by
notice to the Company (i) at any time before it becomes effective in
accordance with Section 13 hereof; (ii) in the event that at or prior to
the
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<PAGE>
First Closing Date the Company or any Selling Shareholder shall have
failed, refused or been unable to perform any agreement on the part of the
Company or such Selling Shareholder to be performed hereunder or any other
condition to the obligations of the Underwriters hereunder is not
fulfilled; (iii) if at or prior to the Closing Date trading in securities
on the NYSE, the Nasdaq National Market, the American Stock Exchange or
the over-the-counter market shall have been suspended or materially
limited or minimum or maximum prices shall have been established on either
of such exchanges or such market, or a banking moratorium shall have been
declared by Federal or state authorities; (iv) if at or prior to the
Closing Date trading in securities of the Company shall have been
suspended; or (v) if there shall have been such a material adverse change
in general economic, political or financial conditions or if the effect of
international conditions on the financial markets in the United States
shall be such as, in your reasonable judgment, makes it inadvisable to
commence or continue the offering of the Shares at the offering price to
the public set forth on the cover page of the Prospectus or to proceed
with the delivery of the Shares.
(c) Termination of this Agreement pursuant to this Section 14 shall
be without liability of any party to any other party other than as
provided in Sections 6 and 9 hereof.
15. Notices. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to the Underwriters in care of J. C. Bradford & Co., J. C.
Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201,
Attention: Michael C. Nunan, or if sent to the Company shall be mailed,
delivered or telegraphed and confirmed in writing to the Company at 625 Market
Street, Knoxville, Tennessee 37902, Attention Fred R. Lawson, or if sent to the
Selling Shareholders shall be mailed, delivered or telegraphed and confirmed in
writing to _______________________________________________________ as
Attorney-in-Fact for the Selling Shareholders.
16. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the Underwriters, the Company and the Selling Shareholders their
respective successors and legal representatives. Nothing expressed or mentioned
in this Agreement is intended or shall be construed to give any other person any
legal or equitable right, remedy or claim under or in respect of this Agreement.
This Agreement and all conditions and provisions hereof are intended to be for
the sole and exclusive benefit of the Company, the Selling Shareholders and the
Underwriters and for the benefit of no other person except that (a) the
representations and warranties and indemnities of the Company and the Selling
Shareholder contained in this Agreement shall also be for the benefit of any
person or persons who control any Underwriter within the meaning of Section 15
of the Securities Act, and (b) the indemnities by the Underwriters shall also be
for the benefit of the directors of the
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<PAGE>
Company, officers of the Company who have signed the Registration Statement and
any person or persons who control the Company within the meaning of Section 15
of the Securities Act. No purchaser of Shares from any Underwriter will be
deemed a successor because of such purchase. The validity and interpretation of
this Agreement shall be governed by the laws of the State of Tennessee. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. The Representatives hereby represent and warrant to the Company that
the Representative have authority to act hereunder on behalf of the
Underwriters, and any action hereunder taken by the Representatives shall be
binding upon all the Underwriters.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please indicate your acceptance thereof in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among the Company, each of the Selling Shareholders and each of the
Underwriters.
Very truly yours,
BANKFIRST CORPORATION
By: __________________________________
Title: __________________________________
SELLING SHAREHOLDERS
By: ____________________________________
Attorney-in-Fact for each of the
Selling Shareholders listed in
Schedule II hereto
Confirmed and accepted as of
the date first above written.
J.C. BRADFORD & CO., L.L.C.
By: _________________________
MORGAN KEEGAN & COMPANY, INC.
By: _________________________
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<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased
- ----------- -------------------------------------
J.C. Bradford & Co.
Morgan Keegan & Company, Inc.
-------------------
Total
===================
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<PAGE>
SCHEDULE II
SELLING SHAREHOLDERS
Selling Shareholder Number of Shares to be Sold
- ------------------- ---------------------------
-------------------
Total
===================
41
<PAGE>
SCHEDULE III
SUBSIDIARIES
42
EXHIBIT 5
[LETTERHEAD OF BAKER, DONELSON, BEARMAN & CALDWELL]
June 18, 1998
BankFirst Corporation
625 Market Street
P.O. Box 10
Knoxville, TN 37901-0010
RE: Registration Statement on Form S-1 Relating to 1,840,000 Shares of
Common Stock, Par Value $2.50 Per Share
Gentlemen:
We have acted as your counsel in the preparation of a Registration
Statement on Form S-1 (the "Registration Statement") filed by you with the
Securities and Exchange Commission on June 18, 1998 covering 1,840,000 shares of
$2.50 par value common stock ("Common Stock") of BankFirst Corporation (the
"Company") to be sold by the Company to J.C. Bradford & Co. and Morgan Keegan &
Company, Inc. (herein collectively referred to as the "Underwriters"), for
public distribution pursuant to the underwriting agreement between the Company
and the Underwriters, filed as exhibit to the Registration Statement.
In so acting, we have examined and relied upon such records, documents and
other instruments as in our judgment are necessary or appropriate in order to
express the opinions hereinafter set forth and have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies.
Based on the foregoing, we are of the opinion that the Common Stock, when
issued and delivered in the manner and on the terms described in the
Registration Statement (after the same is declared effective), will be duly and
validly issued, fully paid and non-assessable.
<PAGE>
BankFirst Corporation
June 18, 1998
Page 2
We hereby consent to the reference to our firm in the Registration
Statement under the caption "Legal Matters" and to the use of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
BAKER, DONELSON, BEARMAN & CALDWELL
A Professional Corporation
/s/ Robert G. McCullough
--------------------------------
Robert G. McCullough
RGM:djr
FIRST NATIONAL BANK
AND TRUST COMPANY
PENSION PLAN
PLAN DOCUMENT
<PAGE>
BANKERS SYSTEMS, INC.
DEFINED BENEFIT PLAN DOCUMENT 03
ARTICLE I Introduction
1 Adoption of Plan
The Employer shall adopt the Plan by executing the Bankers Systems, Inc.
Prototype Defined Benefit Adoption Agreement (#001).
2 Purpose
This pension plan is adopted by the Employer to provide retirement
benefits for eligible Participants, their spouses and other beneficiaries. The
plan is intended to be qualified under Section 401(a) of the Internal Revenue
Code of 1986.
3 Restatement
In the event this Plan is a restatement of another plan, as signified by
the completion of a date specified in the appropriate section of the Adoption
Agreement, Employees who terminate employment with the Employer prior to the
Restated Date shall be subject to the terms of the plan in effect prior to its
restatement, except as otherwise provided herein. All other Employees shall be
subject to the terms of this Plan.
ARTICLE II Interpretation of Plan
1 Gender and Number
Except when otherwise indicated by the context, the masculine gender shall
include the feminine and neuter, and words used in the singular shall include
the plural whenever appropriate.
2 Titles to Sections
Titles to Articles and Sections are for general information only, and the
Plan shall not be construed by reference thereto.
3 Applicable Law
This Plan shall be construed and enforced in a manner that is consistent
with the Employee Retirement Income Security Act of 1974, as amended, and the
Internal Revenue Code of 1986, as amended. To the extent
<PAGE>
state law has not been preempted by federal law, the laws of the state of the
Employer's principal place of business shall control.
2.4 Severability
In case any provision of this Plan shall be held illegal or invalid for
any reason, or would result in the denial of tax exempt status for the Plan and
trust, such provision shall not affect the remaining provisions of the Plan and
the Plan shall be construed and enforced as if such provision had not been
included herein during the time for which such provision is held to be illegal,
invalid or result in the denial of tax exempt status.
2.5 Definitions
Whenever used in the Plan, the terms set out in Article III shall have the
meanings commonly ascribed to them, unless otherwise expressly provided herein,
and when the defined meaning is intended, the term is capitalized.
ARTICLE III Definitions
3.1 Accrued Benefit
A Participant's Accrued Benefit at any time equals the product of the
Normal Retirement Benefit multiplied by a fraction, the numerator of which is
the number of years of Credited Benefit Service at such time, and the
denominator of which is the number of years of Credited Benefit Service years
the Participant would have at Normal Retirement Age, or the current year if
greater. However, if this plan has had a fresh-start, and after the latest
Fresh-Start date, the fresh-start rule used under the Plan is the formula with
wear-away, the amount in the preceding sentence will not be less than the
Participants Frozen Accrued Benefit. When determining the Accrued Benefit, the
Normal Retirement Benefit is the annual benefit to which the Participant would
be entitled if he or she continued to earn annually until such Normal Retirement
Age the same rate of Compensation upon which his or her Normal Retirement
Benefit would be computed. This rate of Compensation is computed on the basis of
Compensation taken to account under the Plan (but not to exceed the ten Years of
Service immediately preceding the determination).
3.2 Actuarial Equivalent or Actuarially Equivalent
"Actuarial Equivalence" shall be determined on the basis of the mortality
rates specified in the adoption agreement, and either the interest rate(s)
specified in the adoption agreement or the Section 417 interest rate(s),
whichever produces the greater benefit.
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In addition, the amount of any distribution under the terms of this plan
will be determined in accordance with the preceding paragraph.
The preceding two paragraphs shall not apply to the extent they would
cause the plan to fail to satisfy the requirements of Article X of the plan.
The Section 417 interest rate(s) are:
(i) The applicable interest rate if the present value of the benefit
[using such rate(s)] is not in excess of $25,000; or,
(ii) 120 percent of the applicable interest rate if the present value of
the benefit exceeds $25,000 [as determined under clause (i) above].
In no event shall the present value determined under this clause
(ii) be less than $25,000.
The applicable interest rate is the interest rate(s) which would be used
(as of the first day of the plan year which contains the annuity starting date)
by the Pension Benefit Guaranty Corporation for a trusteed single-employer plan
to value a benefit upon termination of an insufficient trusteed single-employer
plan. However, an amendment onto this Plan (restatement) which changes the date
for determining the applicable interest rate, will require that the interest
rate used in determining distributions within one year of this Plans adoption be
the rate which results in the larger Accrued Benefit.
The section 417 interest rate limitations shall apply to distributions in
plan years beginning after December 31, 1984. Notwithstanding the foregoing, the
section 417 interest rate limitations shall not apply to any distributions
commencing in plan years beginning before January 1, 1987, if such distributions
were determined in accordance with the interest rate(s) as required by
regulations Section 1.417(e)-1T(e) (including the PBGC immediate interest rate).
The Section 417 interest rate limitations shall not apply to annuity
contracts distributed to or owned by a participant prior to September 17, 1985,
unless additional contributions are made under the plan by the employer with
respect to such contracts. In addition, the Section 417 interest rate
limitations shall not apply to annuity contracts owned by the employer or
distributed to or owned by a participant prior to the first plan year after
December 31,1988, if the annuity contracts satisfied the requirements in
Sections 1.401(a)-11T and 1.417(e)-1T of the regulations. The preceding sentence
shall not apply if additional contributions are made under the plan
3
<PAGE>
by the employer with respect to such contracts on or after the beginning of the
first plan year beginning after December 31, 1988.
Notwithstanding the above, if a benefit is distributed in a form other
than a nondecreasing annuity payable for a period not less than the life of a
participant (or in the case of a qualified preretirement survivor annuity, the
life of the surviving spouse), the interest rate used in determining the
actuarial equivalence of the portion of the excess benefit percentage that
exceeds the base benefit percentage (in an excess plan) or the offset (in an
offset plan), shall be the Section 417 interest rate(s).
3.3 Actuary
"Actuary" means the Actuary or actuarial consulting firm appointed by the
Plan Administrator.
3.4 Adoption Agreement
"Adoption Agreement" shall mean the agreement executed by the Employer and
Trustee for purposes of adopting the Plan and setting forth those provisions of
the Plan which relate to the Employer's participation hereunder.
3.5 Administrative Committee
"Administrative Committee" shall mean the committee appointed by the
Employer as provided in Section 4.3 and specified in the Adoption Agreement.
3.6 Affiliate
"Affiliate" shall mean an Employer which, along with the Employer
hereunder, is a member of
(a) Controlled group of corporations, within the meaning of Code Section
414(b), [as modified by Code Section 415(h) for the purposes of the
limitations of ARTICLE X];
(b) A group of trades or businesses under common control within the
meaning of Code Section 414(c), [as modified by Code Section 415(h)
for purposes of the limitations of ARTICLE X]; or
(c) An affiliated service group, as defined in Code Section 414(m), and
any other entity required to be aggregated under Section 414(o).
4
<PAGE>
3.7 Alternate Payee
"Alternate Payee" means any spouse, former spouse, child or other
dependent of a Participant who is recognized by a Domestic Relations Order as
having a right to receive all, or a portion of, the benefits payable under the
Plan with respect to the Participant.
3.8 Annuity Starting Date
"Annuity Starting Date" means the first or last day of the first month on
which a payment of a pension benefit begins.
3.9 Anticipated Monthly Benefit
The "Anticipated Monthly Benefit" means a Participant's monthly pension at
the Normal Retirement Date assuming that the Participant continued full-time
employment with the Employer at the same salary until the Normal Retirement
Date. The Anticipated Monthly Benefit shall be calculated based upon the facts
applicable on the last day of the Plan Year prior to the Participant's death.
3.10 Average Compensation or Average Annual Compensation
"Average Compensation" means the average annual Compensation paid to an
Employee for the period elected in the Adoption Agreement. In the event an
Employee does not have Compensation for the number of years elected, an average
of the months during which he/she has Compensation shall be annualized and used
instead. In the case of an Employee who has a leave of absence the calculation
of Average Compensation shall assume that the Employee earned during that period
an amount not less than the Employee's Compensation in effect on the date the
leave of absence begins. In the event of a short Plan Year, the Employees
Compensation for the short Plan Year shall be annualized for purposes of
determining Average Compensation.
3.11 Average Monthly Compensation
"Average Monthly Compensation" means Average Annual Compensation divided
by twelve.
3.12 Base Benefit Percentage
The Base Benefit Percentage is the rate, expressed as a percentage of
Compensation, at which Employer derived benefits are accrued with respect to
Compensation of Participants at or below the Integration Level for the Plan
Year.
5
<PAGE>
3.13 Beneficiary
"Beneficiary" or "Beneficiaries" shall mean the person or persons, natural
or legal, entitled to receive any benefits from the Plan which may become
payable by reason of the death of the Participant.
3.14 Benefit Service
"Benefit Service" means an applicable Computation Year during which an
Employee completes 1,000 Hours of Service, or less if so elected in the Adoption
Agreement.
3.15 Break in Service
"Break in Service" shall mean a Computation Year during which an Employee
completes 500 or fewer Hours Service.
3.16 Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
3.17 Compensation
As elected by the Employer in the Adoption Agreement, Compensation will
mean all of each Participant's (a) W-2 earnings (b) Compensation [as that term
is defined in Section 415(c)(3) of the Code] or (c) Section 401(a) wages with
any applicable adjustments as indicated in the Adoption Agreement. For any
self-employed individual covered under the plan, Compensation will mean Earned
Income. Compensation shall include only that Compensation which is actually paid
to the Participant during the applicable period. Except as provided elsewhere in
this Plan, the applicable period shall be the period elected by the Employer in
the Adoption Agreement. If the Employer makes no election, the applicable period
shall be the Plan Year.
Notwithstanding the above, if elected by the Employer in the Adoption
Agreement, Compensation shall include any amount which is contributed by the
Employer pursuant to a salary reduction agreement and which is not includible in
the gross income of the Employee under Sections 125, 402(e)(3), 402(h)(1)(B) or
403(b) of the Code.
For years beginning on or after January 1,1989, and before January 1,
1994, the annual Compensation of such Participant taken into account under the
plan for any Plan Year shall not exceed $200,000. This limitation shall be
adjusted by the Secretary at the same time and in the same manner as under
Section 415(d) of the Code, except that the dollar increase in effect on January
1 of any calendar year is effective for Plan Years
6
<PAGE>
beginning in such calendar year and the first adjustment to the $200,000
limitation is effected on January 1, 1990. For years beginning on or after
January 1,1994, the annual Compensation limit of each Participant taken into
account for determining all benefits provided under the Plan for any
determination period shall not exceed $150,000, as adjusted for the
cost-of-living in accordance with section 401(a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar year applies to any
determination period beginning in such calendar year.
If a plan determines Compensation on a period of time that contains fewer
than 12 calendar months, then the annual Compensation limit is an amount equal
to the annual Compensation limit for the calendar year in which the Compensation
period begins multiplied by the ratio obtained by dividing the number of all
months in the short determination period by 12.
If Compensation for any prior determination period is taken into account
in determining a Participants benefits for the current Plan Year, the
Compensation for such prior determination period is subject to the applicable
annual Compensation limit in-effect for that prior period. For this purpose, in
determining benefits in Plan Years beginning on or after January 1,1989, the
annual Compensation limit in effect for determination periods beginning before
that date is $200,000. In addition, in determining benefits in Plan Years
beginning on or after January 1,1994, The annual Compensation limit in effect
for determination periods beginning before that date is $150,000.
In determining the Compensation of a Participant for purposes of this
limitation, the rules of Section 414(q)(6) of the Code shall apply, except in
applying such rules, the term "family" shall include only the spouse of the
Participant and any lineal descendants of the Participant who have not attained
age 19 before the close of the year. If, as result of the application of such
rules the adjusted annual Compensation limitation is exceeded, then except for
purposes of determining the portion of compensation up to the Integration Level
if this plan provides for permitted disparity), the limitation shall be prorated
among the affected individuals in proportion to each such individual's
Compensation as determined under this section prior to the application of this
limitation.
3.18 Computation Year
"Computation Year" shall mean, for purposes of determining Years of
Service for purposes of eligibility, the initial eligibility computation period
is the 12-consecutive month period beginning on the date the Employee first
performs an Hour of Service for the Employer (employment commencement date).
Depending upon the Adoption Agreement election, one of the following two
paragraphs will apply:
7
<PAGE>
(a) The succeeding 12-consecutive month periods commence with the first
anniversary of the Employees employment commencement date; or
(b) The succeeding 12-consecutive month periods commence with the first
Plan Year which commences prior to the first anniversary of the
Employees employment commencement date regardless of whether the
employee is entitled to be credited with 1,000 Hours of Service
during the initial eligibility computation period. An Employee who
is credited with 1,000 Hours of Service in both the initial
eligibility computation period and the first Plan Year that
commences prior to the first anniversary of the Employees initial
eligibility computation period will be credited with two Years of
Service for purposes of eligibility to participate.
For all other purposes, "Computation Year" shall mean the Plan Year.
3.19 Covered Compensation
A participant's covered compensation for a plan year is the average
(without indexing) of the taxable wage bases in effect for each calendar year
during the 35-year period ending with the last day of the calendar year in which
the participant attains (or will attain) social security retirement age. No
increase in covered compensation shall decrease a participant's accrued benefit
under the plan.
In determining a participant's covered compensation for a plan year, the
taxable wage base for all calendar years beginning after the first day of the
Plan Year is assumed to be the same as the taxable wage base in effect as of the
beginning of the plan year for which the determination is being made. Covered
Compensation will be determined based on the year designated by the Employer in
section L.5 of the Adoption Agreement.
A participant's covered compensation for a plan year before the 35-year
period ending with the last day of the calendar year in which the participant
attains social security retirement age is the taxable wage base in effect as of
the beginning of the plan year. A participant's covered compensation for a plan
year after such 5-year period is the participant's covered compensation for the
plan year during which the participant attained social security retirement age.
3.20 Credited Benefit Service
"Credited Benefit Service" means Years of Participation plus past Benefit
Service as elected in the Adoption Agreement.
8
<PAGE>
3.21 Determination Date
"Determination Date" shall mean the last day of the preceding Plan Year
or, in the case of the first Plan Year of the Plan, the last day of such Plan
Year. In the event the Employer or an Affiliate maintains another plan or plans
in addition to this Plan, "Determination Date" shall mean the Determination
Dates of all such plans which fall within the same calendar year as the
Determination Date for this Plan.
3.22 Disability
"Disability" or "Disabled" shall mean a medically determinable physical or
mental impairment which prevents an Employee from engaging in any substantial
gainful activity and which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than 12
months.
3.23 Domestic Relations Order
"Domestic Relations Order" means any judgment, decree, or order, including
approval of a property settlement agreement which relates to the provision of
child support, alimony payments or marital property rights of a spouse, former
spouse, child or other dependent of a Participant and is made pursuant to a
state domestic relations law, including a community property law.
3.24 Earned Income
"Earned Income" shall mean a Self-Employed individual's net earnings from
self employment in the trade or business for which the Plan is established, but
only if such trade or business is one in which the personal services of the
Self-Employed is a material income producing factor. Net earnings shall be
computed:
(a) By taking into account deductions from gross income due to
contributions to a qualified plan to the extent such contributions
are deductible under Section 404 of the Code;
(b) For Fiscal Years of the Employer beginning after December 31,1989,
by taking into account the deduction described in Section 164(f) of
the Code;
(c) By including gains and net earnings derived from the sale or other
disposition of, the transfer of any interest in, or the licensing of
the use of property (other than goodwill) by an individual whose
personal efforts created such property;
(d) By excluding any gain which is treated as gain from the sale or
exchange of a capital asset for the purpose of determining the
Self-Employed individual's federal income tax; and
9
<PAGE>
(e) By excluding any amounts not included in gross income and the
deductions allocable to such items.
3.25 Effective Date
"Effective Date" shall mean the date the Plan is effective, as provided in
the Adoption Agreement.
3.26 Employee
"Employee" shall mean any employee of the employer maintaining the plan or
of any other employer required to be aggregated with such employer under
Sections 414(b), (c), (m) or (o) of the Code.
The term employee shall also include any leased employee deemed to be an
employee of any employer described in the previous paragraph as provided in
Section 414(n) or (o) of the Code.
3.27 Employer
"Employer" shall mean the corporation, partnership or sole proprietorship
which has adopted this Plan and the Affiliates of such Employer, as described in
the Adoption Agreement.
3.28 Excess Benefit Percentage
The Excess Benefit Percentage is the rate, expressed as a percentage of
Compensation, at which Employer derived benefits are accrued with respect to
Compensation of Participants above the Integration Level for the Plan Year.
3.29 Fiscal Year
"Fiscal Year" shall mean the Employer's Fiscal Year as described in the
Adoption Agreement.
3.30 Fresh Start Date
"Fresh-start Date" generally means the last day of a Plan Year preceding a
Plan Year for which any amendment of the Plan that directly or indirectly
affects the amount of a Participants benefit determined under the current
benefit formula (such as an amendment to the definition of Compensation used in
the current benefit formula or a change in the Normal Retirement Age of the
Plan) is made effective.
However, if under the Adoption Agreement the Fresh-Start Group is limited
to an acquired group of Employees, or a group of Employees with a Frozen Accrued
Benefit attributable to assets and liabilities transferred to the plan, the
Fresh-Start Date will be the date designated in the Adoption Agreement.
10
<PAGE>
If this Plan has had a fresh-start for all Participants, and in a
subsequent Plan Year is aggregated for purposes of section 401(a)(4) with
another plan that did not make the same fresh-start, this Plan will have a
fresh-start on the last day of the Plan Year preceding the Plan Year during
which the plans are first aggregated.
3.31 Frozen Accrued Benefit
A Participants Frozen Accrued Benefit is the amount of the Participants
Accrued Benefit determined in accordance with the provisions of the Plan
applicable in the year containing the latest Fresh-Start Date, determined as if
the Participant terminated employment with the Employer as of the latest
fresh-start date, (or the date the Participant actually terminated employment
with the Employer, if earlier), without regard to any amendment made to the Plan
after that date other than amendments recognized as effective as of or before
the date under section 401(b) of the Code or section 1.401(a)(4)-11(g) of the
regulations. If the Participant has not had a fresh-start, the Participant's
Frozen Accrued Benefit will be zero.
If, as of the Participants latest Fresh-Start Date, the amount of a
Participants Frozen Accrued Benefit was permitted by the application of section
415 of the Code, the Participants Frozen Accrued Benefit will be increased for
years after the latest Fresh-Start Date to the extent permitted under section
415(d)(1) of the Code. In addition, the Frozen Accrued Benefit of a Participant
whose Frozen Accrued Benefit includes the Top-Heavy minimum benefits provided in
section 13.2 of the Plan, will be increased to the extent necessary to comply
with the average compensation requirement of section 416(c)(1)(D)(i).
If: (1) the plans Normal Form of Benefit in effect on the Participants
latest Fresh-Start Date is not the same as the normal form under the Plan after
such-Fresh-Start Date and/or (2) the Normal Retirement Age for any Participant
on that date was greater than the Normal Retirement Age for that Participant
under the Plan after-such-Fresh-Start Date, the Frozen Accrued Benefit will be
expressed as an Actuarial Equivalent benefit of the normal form under the Plan
after the Participants latest Fresh-Start Date, commencing at the Participants
Normal Retirement Age under the Plan in effect after such latest Fresh-Start
Date.
If the Plan provides a new optional from of benefit with respect to a
Participants Frozen Accrued Benefit, such new optional form of benefit will be
provided with respect to each Participants entire Accrued Benefit (i.e., accrued
both before and after the Fresh-Start Date).
3.32 Fund
"Fund" shall mean the aggregate of the assets of the Plan held by the
Trustee.
11
<PAGE>
3.33 Hour of Service
"Hour of Service" shall mean:
(a) Each hour for which an Employee is paid, or entitled to payment, for
the performance of duties for the Employer or an Affiliate. These
hours shall be credited to the Employee for the Computation Year or
years in which the duties are performed;
(b) Each hour for which an Employee is paid, or entitled to payment, by
the Employer or an Affiliate on account of a period of time during
which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including Disability), layoff, jury duty,
military duty or Leave of Absence. No more than 501 Hours of Service
shall be credited under this paragraph for any single continuous
period (whether or not such period occurs in a single Computation
Year). Notwithstanding the foregoing, Hours of Service shall not be
credited on account of payments made under a plan maintained solely
for the purpose of complying with applicable workers' compensation,
unemployment compensation, or Disability insurance laws nor shall
Hours of Service be credited on account of a payment which solely
reimburses an Employee for medical or medically related expenses
incurred by the Employee.
(c) Each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer or an Affiliate. The
same Hours of Services shall not be credited both under paragraph
(a) or paragraph (b) as the case may be, and under this paragraph
(c). These hours shall be credited to the Employee for the
Computation Year or Years to which the award or agreement pertains
rather than the Computation Year in which the award, agreement or
payment is made; and
(d) Hours required to be credited for any period of service with the
armed forces of the United States which the Employee entered from
employment with the Employer or an Affiliate on account of induction
or enlistment under federal law, provided the Employee returns to
employment with the Employer (or Affiliate) within the period
prescribed by federal law during which his reemployment rights are
protected by law or, in the absence of such a law, within 90 days
from the date his release or discharge from military service is
available.
(e) For purposes of paragraphs (a) and (b), a payment shall be deemed to
be made by or due from the Employer or an Affiliate regardless of
whether such payment is made by or due from the Employer or an
Affiliate directly or indirectly through, among others, a trust Fund
or insurer to which the Employer or an
12
<PAGE>
Affiliate contributes or pays premiums, regardless of whether
contributions made or due to the trust Fund, insurer or other entity
are for the benefit of particular Employees or are on behalf of a
group of Employees in the aggregate.
(f) For purposes of paragraphs (b) and (c), in the case of an Employee
without a regular work schedule, Hours of Service shall be credited
based on a daily average of the Employee's Hours of Service
otherwise determined under paragraphs (a), (b) and (c) for the 12
months immediately preceding the date of determination, or during
his entire employment with the Employer or an Affiliate ending
immediately prior to the date of determination if employed by the
Employer or an Affiliate for less than 12 months.
(g) To the extent not otherwise provided herein, Hours under this
section shall be calculated and credited pursuant to Sections
2530.200b-2 of the Department of Labor Regulations which are
incorporated herein by reference.
(h) Hours of Service for a previous Employer shall be included to the
extent designated in the Adoption Agreement; provided, however, that
service with a predecessor Employer shall be taken into account to
the extent service is required to be given pursuant to Code Section
414(a) and the regulations thereunder.
(i) Hours of Service shall be determined by the Employer from the
records determined by it to accurately reflect this information.
(j) Solely for purposes of determining whether a Break in Service, for
participation and Vesting purposes has occurred in a Computation
Year, an individual who is absent from work for maternity or
paternity reasons shall receive credit for the Hours of Service
which would otherwise have been credited to such individual but for
such absence, or in any case in which such hours cannot be
determined, eight Hours of Service per day of such absence. For
purposes of this subsection, an absence from work for maternity or
paternity reasons means an absence
(1) By reason of pregnancy of the individual,
(2) By reason of a birth of a child of the individual,
(3) By reason of the placement of a child with the individual in
connection with the adoption of such child by such individual, or
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<PAGE>
(4) For purposes of caring for such child for a period beginning
immediately following such birth or placement. The Hours of Service
credited under this subsection shall be credited (1) in the
Computation Year in which the absence begins if the crediting is
necessary to prevent a Break in Service in that year, or (2) in all
other cases, in the following Computation Year.
3.34 Integration Level
"Integration Level" is the amount elected in the Adoption Agreement.
3.35 Investment Manager
"Investment Manager" shall mean any fiduciary of the Plan, other than a
Named Fiduciary, who:
(a) Has the power to manage, acquire or dispose of any assets of the
Plan;
(b) Is registered as an investment advisor under the Investment
Advisor's Act of 1940, is a bank defined in that Act, or is an
insurance company qualified to perform services described in (a)
above under the laws of more than one state;
(c) Has been appointed by the Employer as provided herein; and
(d) Has acknowledged in writing that it is a fiduciary with respect to
the Plan.
3.36 Joint and Survivor Annuity
"Joint and Survivor Annuity" means an annuity payable for the life of the
Participant with an annuity payable to the Participant's surviving spouse for
the spouse's life.
3.37 Highly Compensated Employees
"Highly Compensated Employee" shall mean highly compensated active
Employees and highly compensated former Employees.
A highly compensated active Employee includes any Employee who performs
service for the Employer during the determination year and who, during the
look-back year: (i) received Compensation from the Employer in excess of $75,000
(as adjusted pursuant to Section 415(d) of the Code); (ii) received Compensation
from the Employer in excess of $50,000 (as adjusted pursuant to Section 415(d)
of the Code) and was a member of the top-paid group for such year; or (iii) was
an officer of the Employer and received Compensation during
14
<PAGE>
such year that is greater than 50 percent of the dollar limitation in effect
under Section 415(b)(1)(A) of the Code. The term Highly Compensated Employee
also includes: (i) Employees who are both described in the preceding sentence if
the term "determination year" is substituted for the term "look-back year" and
the Employee is one of the 100 Employees who received the most Compensation from
the Employer during the determination year; and (ii) Employees who are 5 percent
owners at any time during the look-back year or determination year.
If no officer has satisfied the Compensation requirement of (iii) above
during either a determination year or look-back year, the highest paid officer
for such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding the
determination year.
A highly compensated former Employee includes any Employee who separated
from service (or was deemed to have separated) prior to the determination year,
performs no service for the Employer during the determination year, and was a
highly compensated active Employee for either the separation year or any
determination year ending on or after the Employee's 55th birthday.
If an Employee is, during a determination year or look-back year, a family
member of either a 5 percent owner who is an active or former Employee or a
Highly Compensated Employee who is one of the 10 most Highly Compensated
Employees ranked on the basis of Compensation paid by the Employer during such
year, then the family member and the 5 percent owner or top-ten Highly
Compensated Employee shall be aggregated. In such case, the family member and 5
percent owner or top-ten Highly Compensated Employee shall be treated as a
single Employee receiving Compensation and Plan contributions or benefits equal
to the sum of such compensation and contributions or benefits of the family
member and 5 percent owner or top-ten Highly Compensated Employee. For purposes
of this section, family member includes the spouse, lineal ascendants and
descendants of the Employee or former Employee and the spouses of such lineal
ascendants and descendants.
The determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of Employees in the top-paid group,
the top 100 Employees, the number of Employees treated as officers and the
Compensation that is considered, will be made in accordance with Section 414(q)
of the Code and the regulations thereunder.
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3.38 Late Retirement
"Late Retirement" means an election made by a Participant to Retire after
the Normal Retirement Date.
3.39 Late Retirement Date
The "Late Retirement Date" is the date specified in the Adoption Agreement
to begin distributions to a Participant which has elected Late Retirement.
3.40 Leased Employee
The term "Leased Employee" shall mean any person (other than an employee
of the recipient) who pursuant to an agreement between the recipient and any
other person ("leasing organization") has performed services or the recipient
(or for the recipient and related persons determined in accordance with Section
414(n)(6) of he Code) on a substantially full-time basis for a period of at
least one year, and such services are of a type historically performed by
employees in the business field of the recipient employer.
Contributions or benefits provided a Leased Employee by the leasing
organization which are attributable to services performed for the recipient
employer shall be treated as provided by the recipient employer.
A Leased Employee shall not be considered an employee of the recipient if:
(i) such employee is covered by a money purchase pension plan providing: (1) a
nonintegrated employer contribution rate of at least 10 percent of compensation,
as defined in Section 415(c)(3) of the Code, but including amounts contributed
pursuant to a salary reduction agreement which are excludable from the
employee's gross income under Section 425, Section 402(e)(3), Section
402(h)(1)(B) or Section 403(b) of the Code, (2) immediate participation, and (3)
full and immediate vesting; and (ii) Leased Employees do not constitute more
than 20 percent of the recipient's nonhighly compensated work force.
3.41 Life Annuity
A "Life Annuity" means a single Life Annuity payable for a Participant's
life.
3.42 Limitation Year
"Limitation Year" shall mean the 12 consecutive month period designated in
the Adoption Agreement. All qualified plans of the Employer and Affiliates shall
utilize the same 12-month period as the Limitation Year. If the Limitation Year
is amended to a different 12 consecutive month period, the new Limitation Year
must begin on a date which is within the Limitation Year in which the amendment
is made.
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3.43 Named Fiduciaries
"Named Fiduciaries" shall mean the Employer, the Trustee and the
Administrative Committee if established.
3.44 Normal Benefit Form
The "Normal Benefit Form" shall be the benefit selected in the Adoption
Agreement.
3.45 Normal Retirement Age
"Normal Retirement Age" shall mean age selected in the Adoption Agreement.
If the employer enforces a mandatory retirement age, the Normal Retirement Age
is the lesser of that mandatory age or the age specified the Adoption Agreement.
If, for plan years beginning before January 1, 1988, Normal Retirement Age
was determined with reference the anniversary of the participation commencement
date (more than five but not to exceed ten years), the anniversary date for
Participants who first commenced participation under the Plan before the first
Plan Year beginning on or after January 1,1988, shall be the earlier of (A) the
tenth anniversary of the date the Participant commenced participation in the
Plan (or such anniversary as had been elected by the Employer, if less than ten)
or (B) the fifth anniversary of the first day of the first Plan Year beginning
on or after January 1, 1988. The participation commencement date is the first
day of the first Plan Year in which the Participant commenced participation in
the Plan.
3.46 Normal Retirement Benefit
"Normal Retirement Benefit" means the monthly benefit payable on the
Participant's Normal Retirement Date in the Normal Benefit Form.
3.47 Normal Retirement Date
"Normal Retirement Date" means the first day or the last day of the
calendar month coincident with or next following the date the Participant
attains Normal Retirement Age, as specified in the Adoption Agreement.
3.48 Owner-Employee
"Owner-Employee" shaft mean a Self-Employed individual owning more than 10
percent of either the capital profit interest of the Employer or an Affiliate,
if the Employer or Affiliate is an unincorporated business.
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3.49 Participant
"Participant" shall mean an Employee who has satisfied the requirements
for eligibility in the Plan and who has commenced participation in the Plan but
has not yet received a distribution of his/her entire benefit under the plan.
3.50 Past Benefit Service
"Past Benefit Service" means Benefit Service in Computation Years ending
prior to the Effective Date of the Plan.
3.51 Plan
"Plan" shall mean the plan of the Employer as incorporated in this plan
document and trust agreement, including any amendments hereto, and including the
provisions of the Adoption Agreement executed by the Employer.
3.52 Plan Administrator
The Employer shall be the "Plan Administrator." The Plan Administrator
shall have the rights and duties set forth in Article XIV and elsewhere under
the Plan.
3.53 Plan Anniversary
"Plan Anniversary" shall mean the first day following the end of the Plan
Year. In the first Plan Year is shall mean the Effective Date.
3.54 Plan Valuation Date
"Plan Valuation Date" shall mean the last day of the Plan Year and the
last day of such additional and more frequent intervals as the Employer may
select for valuing Plan assets. The Employer, in its sole discretion, may elect
to treat any date in the Plan Year as a Plan Valuation Date if the Employer
finds it necessary or desirable in order to fairly reflect the value of the
Fund.
3.55 Plan Year
"Plan Year" shall mean a consecutive twelve month period described in the
Adoption Agreement.
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3.56 Qualified Domestic Relations Order
"Qualified Domestic Relations Order" means a Domestic Relations Order
entered on or after January 1, 1985, which creates or recognizes the existence
of an Alternate Payee's right to, or assigns to an Alternate Payee the right to,
receive all or a portion of the benefits payable with respect to a Participant
under the Plan. A Domestic Relations Order shall be a Qualified Domestic
Relations Order only if it clearly specifies:
(a) The name and the last known mailing address, if available, of the
Participant and the name and mailing address of each Alternate Payee
covered by the Domestic Relations Order unless the Plan
administrator has reason to know such information independently of
such order;
(b) The amount or percentage of the Participant's benefits to be paid by
the Plan to each Alternate Payee, or the manner in which that amount
or percentage is to be determined;
(c) The number of payments or period to which the Domestic Relations
Order applies; and
(d) Each plan to which the Domestic Relations Order applies.
A Domestic Relations Order shall be considered a Qualified Domestic
Relations Order only if the Domestic Relations Order:
(a) Does not require the Plan to provide any type or form of benefit, or
any option, not otherwise provided under the Plan;
(b) Does not require the Plan to provide increased benefits, determined
on the basis of actuarial value; and
(c) Does not require the payment of benefits to an Alternate Payee which
are required to be paid to another Alternate Payee under another
Domestic Relations Order previously determined to be a Qualified
Domestic Relations Order.
In the case of any payment before a Participant's termination of
employment with all participating employers, a Domestic Relations Order shall
not be treated as failing to be a Qualified Domestic Relations Order solely
because the Domestic Relations Order requires the payment of benefits to be made
to an alternate Payee:
(a) On or after the date the Participant would be entitled to early
retirement under Section 7.1, or would have been entitled to early
retirement if the Participant had not died;
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(b) As if the Participant had retired on the date on which the payment
is to begin under the Domestic Relations Order; and
(c) In any form in which benefits may be paid to the Participant under
the Plan, other than the form of any Joint and Survivor Annuity with
respect to the Alternate Payee and his or her subsequent spouse.
The Plan Administrator may treat a Domestic Relations Order entered before
January 1,1985, as a Qualified Domestic Relations Order, pursuant to such
uniform and nondiscriminatory rules as it may establish, even if the Domestic
Relations Order does not satisfy the requirements of this section.
3.57 Qualified Joint and Survivor Annuity
"Qualified Joint and Survivor Annuity" shall mean an immediate annuity
payable for the life of the Participant with a survivor annuity payable to his
surviving spouse which is not less than 50 percent nor greater than 100 percent
of the amount of the annuity payable during the joint lives of the Participant
and such spouse. The joint and survivor annuity will be the actuarial equivalent
of the normal form of benefit or if greater, any optional form of benefit.
Unless the Participant elects otherwise, the survivor annuity shall be 50
percent of the annuity payable during the joint lives of the Participant and his
surviving spouse.
3.58 Qualified Preretirement Survivor Annuity
"Qualified Preretirement Survivor Annuity" shall mean an annuity for the
life of the Participants' surviving spouse commencing on the date the
Participant would have attained his Normal Retirement Age or any Early
Retirement Age elected under the plan, which is provided as described in Article
IX.
3.59 Restated Date
"Restated Date" shall mean the date this Plan document is effective as a
replacement for a prior plan document, as specified in the Adoption Agreement.
3.60 Retire
"Retire" means to terminate employment after the earliest retirement age
under the Plan, with no intention resuming employment with the Employer.
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3.61 Self-Employed
"Self-Employed" shall mean an individual who is the sole proprietor of the
Employer or an Affiliate or an individual who is a partner in the Employer or an
Affiliate and who has Earned Income from the Employer or Affiliate, or would
have Earned Income if the Employer or Affiliate had a profit. The term
"Self-Employed" shall include any individual who has been a Self-Employed
individual during any prior Fiscal Year.
3.62 Shareholder Employee
"Shareholder Employee" shall mean an Employee or officer who owns, or is
considered to own within the meaning of Section 318(a)(1) of the Code, on any
day during the Fiscal Year, more than 5 percent of the outstanding stock of the
Employer for any Fiscal Year in which the Employer is an electing small business
(Subchapter S) corporation.
3.63 Sponsor
"Sponsor" shall mean the entity identified in the Adoption Agreement as
the Sponsor.
3.64 Trustee
"Trustee" shall mean the corporate or individual Trustee or Trustees who
have executed this Plan and any successor Trustees duly appointed as provided
herein.
3.65 Vested Interest, Vesting or Vested
"Vested Interest," "Vesting" or "Vested" shall mean a right to a
Participant's Account which is nonforfeitable.
3.66 Year of Participation
"Year of Participation" shall mean a Plan Year during which a Participant
completes more than 1,000 Hours of Service unless the Plan is top-heavy.
3.67 Year of Service
"Year of Service" shall mean a Computation Year in which an Employee has
1,000 or more Hours of Service.
A Participant's years of Credited Benefit Service shall mean (subject to
any maximum limitation on the number of years of Credited Benefit Service
specified in the Adoption Agreement) the sum of: (1) the Participant's years of
participation pursuant to Article V of the Plan, and (2) other years with the
Employer specified in the Adoption Agreement taken into account under the Plan
benefit formula.
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ARTICLE IV Funding
4.1 Employer Contributions
The Employer intends to make contributions to the Trust Fund in an amount
necessary to provide the benefits accrued under the Plan. The Plan Administrator
shall engage an enrolled Actuary to compute the amounts necessary to provide the
benefits to which participants are entitled under the Plan.
The Employer reserves the right to reduce, suspend or discontinue its
contributions under the Plan for any reason at any time.
4.2 Participant Contributions
Beginning with the Plan Year in which this Plan is adopted by the
Employer, this Plan will no longer accept employee contributions which are
allocated to a separate account.
Employee contributions for Plan Years beginning after December 31,1986,
will be limited so as to meet the nondiscrimination test of section 401(m).
Employee voluntary contributions (as adjusted for investment experience)
shall be nonforfeitable at all times.
A separate account shall be maintained for the nondeductible voluntary
Employee contributions of each Participant. The assets of the Plan will be
valued annually at fair market value as of the last day of the Plan Year. On
such date, the earnings and losses of the Plan attributable to the accumulated
nondeductible voluntary employee contributions will be allocated to each
Participants nondeductible voluntary contributions account in the ratio that
such account balance bears to all such account balances.
The Plan Administrator will not accept deductible Employee contributions
which are made for a taxable year beginning after December 31, 1986.
Contributions made prior to that date will be maintained in a separate account
which will be nonforfeitable at all times. The assets of the Plan will be valued
annually at fair market value as of the last day of the Plan Year. On such date,
the earnings and losses of the Plan attributable to the accumulated deductible
voluntary contribution will be allocated to each Participants deductible
voluntary contributions account in the ratio that such account balance bears to
all such account balances. No part of the deductible voluntary contribution
account will be used to purchase life insurance. Subject to Article VIII Joint
and Survivor Annuity requirements (if applicable), the Participant may withdraw
any part of the deductible voluntary contribution account by making a written
application to the Plan Administrator.
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4.3 Transfers/Rollovers from Qualified Plans
(a) If specified in the Adoption Agreement and with the consent of the
Plan Administrator, amounts may be transferred/rolled from other
qualified plans, including amounts derived from Employee
contributions as defined in Section 4.2, provided that the trust
from which such funds are transferred/rolled permits the transfer to
be made and, in the opinion of legal counsel for the Employer, the
transfer will not jeopardize the tax exempt status of the Plan or
Fund or create adverse tax consequences for the Employer. The
amounts transferred/rolled shall be set up in a separate account
herein referred to as a "Rollover Account". Such account shall be
fully Vested at all times and shall not be subject to forfeiture for
any reason.
(b) Amounts in a Rollover Account shall be held by the Trustee pursuant
to the provisions of this Plan, and such amounts shall not be
subject to forfeiture for any reason and may not be withdrawn by, or
distributed to the Participant, in whole or in part, except as
provided in Paragraph (c) of this Section.
(c) At Normal Retirement Date, or such other date when the Participant
or his Beneficiary shall be entitled to receive benefits, the
Rollover Account shall be used to provide additional benefits to the
Participant pursuant to Article VI.
(d) The Accrued Benefit under this Section shall be the balance of the
Rollover Account as of any applicable date. Unless the Plan
Administrator directs that the Rollover Account be segregated into a
separate account for each Participant in a federally insured savings
account, certificate of deposit in a bank or savings and loan
association, money market certificate, other short-term debt
security acceptable to the Trustee, or in a single premium deferred
annuity, it shall be invested as part of the general Fund and shall
share in any income earned thereon, any investment gains and losses
attributable thereto, less any expenses, pursuant to the terms of
this Agreement.
(e) The Plan Administrator may direct that Employee transfers/rollovers
made after the first month of the Plan Year pursuant to this Section
be segregated into a separate account for each Participant in a
federally insured savings account, certificate of deposit in a bank
or savings and loan association, money market certificate,
annuities, or other short term debt security acceptable to the
Trustee until the first day of the following Plan Year (or the first
day following any interim "valuation" date), at which time they
shall be invested as determined by the Plan Administrator pursuant
to (f) below.
(f) Unless the Plan Administrator directs that the Rollover Account be
segregated into a separate account for each Participant in a
federally insured savings account, certificate of deposit in a bank
or savings and
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loan association, money market certificate, annuities, or other
short term debt security acceptable to the Trustee, it shall be
invested as part of the general Fund and share in earnings and
losses. Except, however, deposits into the general Fund after the
first month of the Plan Year shall not share in earnings or losses
for such year, unless an interim valuation has been performed.
(g) For purposes of this Section the term "amounts transferred/rolled
from another qualified plan" shall mean: (i) amounts transferred to
this Plan directly from another qualified plan; (ii) lump sum
distributions received by an Employee from another qualified plan
which are eligible for tax free rollover to a qualified plan and
which are rolled over by the Employee to this Plan within sixty (60)
days following his receipt thereof; (iii) amounts rolled over to
this Plan from a conduit individual retirement account provided that
the conduit individual retirement account has no assets other than
assets which (a) were previously distributed to the Employee by
another qualified plan as a lump sum distribution (B) were eligible
for tax free rollover to a qualified corporate or noncorporate plan
and (C) were deposited in such conduit individual retirement account
within sixty (60) days of receipt thereof and other than earnings on
said assets; and (iv) amounts distributed to the Employee from a
conduit individual retirement account meeting the requirements of
clause (iii) above, and transferred/rolled by the Employee to this
Plan within sixty (60) days of his receipt thereof from such conduit
individual retirement account. Prior to accepting any
transfers/rollovers to which this Section applies, the Administrator
may require the Employee to establish that the amounts to be
transferred to this Plan meet the requirements of this Section and
may also require the Employee to provide an opinion of counsel
satisfactory to the Employer that the amounts to be
transferred/rolled meet the requirements of this Section.
(h) For purposes of this Section, the term "qualified plan" shall mean
any tax qualified plan under Section 401(a) of the Code.
ARTICLE V Eligibility
5.1 Initial Eligibility
An Employee shall begin participation in the Plan based upon meeting the
eligibility requirements (age and/or Years of Service) elected in the Adoption
Agreement. An Employee who meets the eligibility requirements but terminates
employment prior to entering the plan shall not enter the plan. The Plan shall
have the entry date(s) listed in the Adoption Agreement.
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5.2 Special Participation Rules for Certain Employees
A Participant who terminates employment with the Employer or an Affiliate
and later returns shall participate in the plan immediately on the date he/she
returns.
An Employee who has satisfied the requirements of Section 5.1 and who
terminates employment with the Employer or an Affiliate before becoming a
Participant shall become a Participant:
(a) Immediately if the Employee returns to employment with the Employer
or an Affiliate after the entry date on which he/she would have
become a Participant if he/she had not terminated employment; or
(b) On the entry date on which he/she would have become a Participant if
he/she had not terminated employment if he/she returns to employment
with the Employer or an Affiliate before that date.
An Employee who was not previously a member of an eligible class of
Employees and later becomes a member of an eligible class shall become a
Participant immediately if he/she would already be a Participant ad he/she not
failed to be a member of an eligible class of Employees.
In the event a Participant is no longer a member of an eligible class of
Employees and becomes ineligible to participate such Employee will participate
immediately upon returning to an eligible class of Employees.
5.3 Members of a Collective Bargaining Group
Notwithstanding the other provisions of this Article V, an Employee who is
in a unit of Employees covered under collective bargaining agreement between the
Employer or Affiliate (or its representatives) and Employee representatives
shall not be eligible to participate in the Plan unless such collective
bargaining agreement specifically provides for the Employee's participation in
the Plan. This section shall only apply if retirement benefits were the subject
of good faith bargaining and if 2 percent or less of the Employees of the
Employer who are covered pursuant to that agreement are professionals as defined
in section 1.410(b)-9 of the regulations.
For purposes of this section, the Term "Employee representatives" does not
include any organization if more than half of its members are Employees who are
owners, officers or executives of the Employer or an Affiliate.
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5.4 Nonresident Aliens
Employees who are Nonresident Aliens (within the meaning of IRC section
7701 (b)(1)(B)) with no earned income (within the meaning of IRC 911(d)(2)) from
the Employer which constitutes income from sources within the United States
(within the meaning of IRC 861 (a)(3)) shall not be eligible to participate in
the Plan.
5.5 Special Rule for Owner-Employees
If this Plan provides contributions or benefits for one or more
Owner-Employees who control both the business for which this Plan is established
and one or more other trades or businesses, this Plan and the plan established
for other trades and businesses must, when aggregated as a single plan, satisfy
Sections 401(a) and (d) for the Employees of this and all other trades or
businesses.
If the Plan provides contributions or benefits for one or more
Owner-Employees who control one or more other trades or businesses, the
Employees of the other trades or businesses must be included in a Plan which
satisfies Sections 401(a) and (d) of the Code and which provides contributions
and benefits not less favorable than provided for Owner-Employees under this
Plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which are not controlled and the individual controls a
trade or business, then the contributions or benefits of the Employees under the
plan of the trades or businesses which are controlled must be as favorable as
those provided for him under the most favorable plan of the trade or business
which is not controlled.
For purposes of this section, an Owner-Employee, or two or more
Owner-Employees, will be considered to control a trade or business if the
Owner-Employee, or two or more Owner-Employees together:
(a) Own the entire interest in an unincorporated trade or business, or
(b) In the case of a partnership, own more than 50 percent of either the
capital interest or the profits interest in the partnership.
For purposes of this section, an Owner-Employee, or two or more
Owner-Employees, shall be treated as owning any interest in a partnership which
is owned, directly or indirectly, by a partnership which such Owner-Employee, or
such two or more Owner-Employees, are considered to control within the meaning
of the receding sentence.
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5.6 Computing Years and Months of Service for Eligibility
A "Year of Service" for purposes of determining eligibility shall be defined as
a Computation Year in which 1 Employee has 1,000 or more Hours of Service.
5.7 Administrative Requirements
As a condition of participation in the Plan, the Employer may require an
Employee to furnish such information may be reasonably required by the Employer,
Trustee or Custodian for the maintenance of records and proper Plan
administration.
5.8 Service With a Predecessor Employer
If the Employer maintains the plan of a predecessor Employer, service with
such predecessor Employer shall be treated as service for the Employer, as
required by IRC Section 414(a).
ARTICLE VI Benefits
6.1 Normal Retirement Benefits
The Normal Retirement Benefit payable under the Plan shall be the benefit
described in the Adoption agreement. All Participants who complete 1,000 Hours
of Service, but terminate employment before the end the year must accrue a
benefit under the plan. The Normal Retirement Benefit for a Participant shall be
a monthly pension commencing on his/her Normal Retirement Date and continuing
for the period selected in the Adoption Agreement or the Actuarial Equivalent of
such benefit if the Participant chooses an available alternative benefit as
provided in Article VIII. The Normal Retirement Date is specified in the
Adoption Agreement and is tied to the Normal Retirement Age specified in the
Adoption Agreement.
6.2 Commencement of Benefits
Benefits will be paid only on death, disability, plan termination, at
normal retirement age or upon termination employment.
Unless the Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest of the close of
the Plan Year in which:
(a) The Participant attains age 65 (or Normal Retirement Age, if
earlier);
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(b) Occurs the tenth anniversary of the year in which the Participant
commenced participation in the plan; or
(c) The participant terminates service with the Employer.
Notwithstanding the foregoing, the failure of a participant and spouse to
consent to a distribution while a benefit is immediately distributable, within
the meaning of Section 8.2.1 of the plan, shall be deemed to be an election to
defer-commencement of payment of any benefit sufficient to satisfy this section.
In any event, benefits will commence no later than the first day of April
following the calendar year in which such Participant attains age 70 1/2 as
provided in Article XII.
6.3 Late Retirement Benefit
A Participant may choose to delay retirement and continue employment
beyond his/her Normal Retirement Date. This shall be referred to as Late
Retirement. If a Participant elects Late Retirement, he/she shall be entitled to
receive a monthly pension commencing the first or last day of the calendar month
coincident with or next following his/her last day of employment. The payments
shall continue for the period selected as the Normal Retirement Benefit in the
Adoption Agreement or Actuarial Equivalent of such benefit if the Participant
chooses an available alternative benefit as provided in Article VIII.
The amount of such monthly pension shall equal the Normal Retirement
Benefit determined as of his/her Normal Retirement Date actuarially increased to
reflect actual retirement age or benefits determined by continuing accruals to
the Participant as provided by the Plan, after his/her Normal Retirement Date if
that would create a greater benefit.
6.4 Suspension of Benefits
Pursuant to the election by the Employer on the Adoption Agreement, once
payment of benefits to a participant has begun either (a) or (b) below will
apply.
(a) The payments continue even if the Participant should later become
reemployed with the Employer or any Affiliate; or
(b) Normal or early Retirement Benefits will be suspended for each
calendar month during which the Employee completes at least 40 Hours
of Service with the Employer in section 203 (a)(3)(B) service.
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Consequently, the amount of benefits which are paid later than Normal Retirement
Age will be computed as if the Employee had been receiving benefits since Normal
Retirement Age.
(1) Resumption of payment. If benefit payments have been suspended
payments shall resume no later than the first day of the third
calendar month after the calendar month in which the Employee ceases
to be employed in section 203(a)(3)(B) service. The initial payment
upon resumption shall include the payment scheduled to occur in the
calendar month when payments resume and any amounts withheld during
the period between the cessation of section 203(a)(3)(B) service and
the resumption of payments.
(2) Notification. No payment shall be withheld by the Plan pursuant to
this section unless the Plan notifies the Employee by personal
delivery or first class mail during the first calendar month or
payroll period in which the plan withholds payments that his or her
benefits are suspended. Such notifications shall contain a
description of the specific reasons why benefit payments are being
suspended, a description of the plan provision relating to the
suspension of payments, a copy of such provisions, and a statement
to the effect that applicable Department of Labor regulations may be
found in section 2530.203-3 of the Code of Federal Regulations.
In addition, the notice shall inform the Employee of the Plan's procedures
for affording a review of the suspension of benefits. Requests for such reviews
may be considered in accordance with the claims procedure adopted by the Plan
pursuant to section 503 of ERISA and applicable regulations.
(3) Amount suspended.
a) Life Annuity. In the case of benefits payable periodically on
a monthly basis for as long as a life (or lives) continues,
such as a straight Life Annuity or a Qualified Joint and
Survivor Annuity, an amount equal to the portion of a monthly
benefit payment derived from Employer contributions.
b) Other benefit forms. In the case of a benefit payable in a
form other than the form described in subsection (a) above, an
amount of the Employer-provided portion of benefit payments
for a calendar month in which the Employee is employed in
section 203(a)(3)(B) service, equal to the lesser of
(i) The amount of benefits which would have been payable to
the Employee if he had been receiving monthly benefits
under the Plan since actual retirement based on a
straight Life Annuity commencing at actual retirement
age; or
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(ii) The actual amount paid or scheduled to be paid to the
Employee for such month. Payments which are scheduled to
be paid less frequently than monthly may be converted to
monthly payments for purposes of the above sentence.
c) This section does not apply to the minimum benefit to which
the Participant is entitled under the top-heavy rules of
Article 13.
6.5 Top-Heavy Requirements
In the event this plan becomes Top-Heavy, the minimum benefit provisions
of Section 13.2 shall apply.
6.6 Benefit Limitations (Plan Termination)
In the event of plan termination, the benefit of any Highly Compensated
active or former Employee is limited to a benefit that is nondiscriminatory
under Section 401(a)(4).
(a) For plan years beginning on or after January 1,1994, benefits
distributed to any of the 25 most Highly Compensated active and
former Highly Compensated Employees with the greatest compensation
in the current or any prior year are restricted such that the annual
payments are no greater than an amount equal to the payment that
would be made on behalf of the Employee under a straight Life
Annuity that is the actuarial equivalent of the sum of the
Employee's Accrued Benefit and the Employee's other benefits under
the Plan (other than a social security supplement, within the
meaning of section 1.411(a)-7(c)(4)(ii) of the Income Tax
Regulations), and the amount the Employee is entitled to receive
under a social security supplement. The preceding paragraph shall
not apply if: (a) after payment of the benefit to an Employee
described in the preceding paragraph, the value of plan assets
equals or exceeds 110 percent of the value of current liabilities,
as defined in Section 412(1)(7) of the Code, (b) the value of the
benefits for an Employee described above is less than 1 percent of
the value of current liabilities before distribution, or (c) the
value of benefits payable under the Plan to an Employee described
above does not exceed $3,500. For purposes of this section, benefit
includes loans in excess of the amount set forth in Section
72(p)(2)(A) of the Code, any periodic income, any withdrawal values
payable to a living Employee, and any death benefits not provided
for by insurance on the Employee's life.
(b) For plan years beginning before January 1,1994, employer
contributions on behalf of any of the 25 highest paid Employees at
the time the plan is established and whose anticipated annual
benefit exceeds $1,500 will be restricted as provided in paragraph
(c) upon the occurrence of the following conditions:
30
<PAGE>
(1) The plan is terminated within 10 years after its
establishment,
(2) The benefits plan of such highest paid Employee become payable
within 10 years after the establishment of the plan, or
(3) If Section 412 of the Code (without regard to Section
412(h)(2)) does not apply to this plan, the benefits of such
Employee become payable after the plan has been in effect for
10 years, and the full current costs of the plan for the first
10 years have not been funded.
(c) Employer contributions which may be used for the benefit of an
Employee described in paragraph (b) shall not exceed the greater of
$20,000, or 20 percent of the first $50,000 of the Employee's
Compensation multiplied by the number of years between the date of
the establishment of the plan and:
(1) If (b)(1) applies, the date of the termination of the plan,
(2) If (b)(2) applies, the date of the benefits become payable, or
(3) If (b)(3) applies, the date of the failure to meet the full
current costs.
(d) If the plan is amended so as to increase the benefit actually
payable in the event of the subsequent termination of the plan, or
the subsequent discontinuance of contributions thereunder, then the
provisions of the above paragraphs shall be applied to the plan as
so changed as if it were a new plan established on the date of the
change. The original group of 25 Employees (as described in (b)
above) will continue to have the limitations in (c) apply as if the
plan had not been changed. The restrictions relating to the change
of plan should apply to benefits or funds for each of the 25 highest
paid Employees on the Effective Date of the change except that such
restrictions need not apply with respect to any Employee in this
group for whom the normal annual pension or annuity provided by
Employer contributions prior to that date and during the ensuing ten
years, based on his rate of Compensation on that date, could not
exceed $1,500. The Employer contributions which may be used for the
benefit of the new group of 25 Employees will be limited to the
greater of:
(1) The Employer contributions (or funds attributable thereto)
which would have been applied to provide the benefits for the
Employee if the previous plan had been continued without
change;
(2) $20,000; or
31
<PAGE>
(3) The sum of (i) the Employer contributions (or funds
attributable thereto) which would have been applied to provide
benefits for the Employee under the previous plan if it had
been terminated the day before the Effective Date of change,
and (ii) an amount computed by multiplying the number of years
for which the current costs of the plan after that date are
met by: (A) 20 percent of his annual Compensation, or (B)
$10,000, whichever is smaller.
(e) Notwithstanding the above limitations, the following limitations
will apply if they would result in a greater amount of Employer
contributions to be used for the benefit of the restricted Employee:
(1) In the case of a substantial owner (as defined in Section
4022(b)(5) of ERISA), a dollar amount which equals the present
value of the benefit that would be guaranteed for such
Employee under Section 4022 of ERISA, or if the Plan has not
terminated, the present value of the benefit that would be
guaranteed if the plan terminated on the date the benefit
commences, determined in accordance with the regulations of
the Pension Benefit Guaranty Corporation (PBGC); and
(2) In the case of the other restricted Employees, a dollar amount
which equals the present value of the maximum benefit
described in Section 4022(b)(3)(B) of the ERISA (determined on
the earlier of the date the plan terminates or the date
benefits commence, and determined in accordance with
regulations of PBGC) without regard to any other limitations
in Section 4022 of ERISA.
6.7 Minimum Benefits
The Normal Retirement Benefit of each Participant shall not be less than
the largest periodic benefit that could have been payable to the Participant
upon separation from service at or prior to Normal Retirement Age under the Plan
exclusive of social security supplements, premiums on disability or term
insurance, and the value of disability benefits not in excess of the Normal
Retirement Benefit. For purposes of comparing periodic benefits in the same
form, commencing prior to and at Normal Retirement Age, the greater benefit is
determined by converting the benefit payable prior to Normal Retirement Age into
the same form of annuity benefit payable at Normal Retirement Age and comparing
the amount of such annuity payments.
If so elected in the Adoption Agreement, the Participant shall also have a
right to receive a minimum monthly dollar amount as a Normal or Late Retirement
Benefit if this minimum would exceed the amount of the benefit otherwise payable
under this Plan.
32
<PAGE>
6.8 Pre-ERISA Accruals
For Plan Years beginning before Section 411 of the Internal Revenue Code
is applicable hereto, the participant's Accrued Benefit shall be the greater of
that provided by the plan, or one-half of the benefit which could have accrued
had the provisions of this Article VI been in effect. In the event the Accrued
Benefit as of the Effective Date of Section 411 of the Code is less than that
provided by Article VI such difference shall be accrued in accordance with
Article VI.
6.9 Maximum Rates of Integration
The provisions of Section 6.9 shall apply with respect to plan years and
benefits attributable to plan years beginning after December 31, 1988.
6.9.1 Maximum Excess Allowance
If an integrated Unit Benefit formula has been elected in the Adoption
Agreement, the maximum excess allowance is the lesser of the Base Benefit
Percentage or .75 percent times Years of Credited Benefit Service up to 35
years. If the normal form of benefit is something other than a straight Life
Annuity or the Participant begins receiving benefits before his or her social
security retirement age, the .75 percent must be reduced to the percentage
listed in Table 1, 2, or 3 as applicable. However, the maximum number of years
of Credited Benefit Service taken into account for the purposes of determining
the Excess Benefit Percentage and the Base Benefit Percentage shall be equal to
35.
If a Participant's Accrued Benefit is adjusted in accordance with Section
1.3 of the Adoption Agreement, then, with respect to benefits accruing during
Plan Years beginning after the latest Fresh Start Date, each Participant will
accrue a benefit of not less than .5 percent of the Participant's total Average
Annual Compensation times years of Credited Benefit Service after the latest
Fresh Start Date.
If an integrated Fixed Benefit formula is chosen, the Maximum Excess
Allowance shall not exceed .75 percent times the number of years of Credited
Benefit Service needed to receive the maximum benefit up to a maximum of 35
years. If the Normal Form of Benefit is something other than a straight Life
Annuity or if the participant begins receiving benefits before his or her social
security retirement age, the .75 percent must be reduced to the amounts listed
in Table 1 2, or 3 as applicable.
For Participants who are projected to have earned less than 35 years of
Credited Benefit Service as of the end of the Plan Year in which they attain
Normal Retirement Age, the Base Benefit Percentage and the Excess
33
<PAGE>
Benefit Percentage will be reduced by multiplying them by a fraction, the
numerator of which is the number of years of Credited Benefit Service the
Participant is projected to have earned as of the end of the Plan Year in which
the Participant attains Normal Retirement Age, and the denominator of which is
35.
The Accrued Benefit will be determined under the fractional method in
Section 3.1 of this Plan.
If a Participant's Accrued Benefit is adjusted in accordance with section
1.3 of the Adoption Agreement, then, with respect to benefits accruing during
Plan Years beginning after the latest Fresh Start Date, each participant will
accrue a benefit of not less than 25 percent of the Participant's total Average
Annual Compensation. If an Employee has less than 50 years of Credited Benefit
Service with the Employer, then such minimum percentage will be reduced by
multiplying it by the following factor:
Participant's years of Credited Benefit Service after the latest
Fresh Start Date
----------------------------------------------------------------
50
Overall permitted disparity limit: For any Plan Year this Plan benefits
any Participant who benefits under another qualified plan or simplified employee
pension maintained by the Employer that provides for permitted disparity (or
imputes permitted disparity), the benefit for each Participant under this Plan
will be equal to the Base Benefit Percentage times the Participant's Average
Annual Compensation. For Participants who are projected to have earned less than
35 years of Credited Benefit Service under this Plan as of the end of the Plan
Year in which they attain Normal Retirement Age, (or current age, if later), the
percentage in the preceding sentence will be multiplied by a fraction (not more
than one), the numerator of which is the number of the Participants years of
Credited Benefit Service the Participant is projected to have earned under this
Plan as of the end of the Plan Year in which the Participant attains Normal
Retirement Age (or current age, if later), and the denominator of which is 35.
If this paragraph is applicable, this Plan will have a Fresh-Start Date on the
last day of the Plan Year preceding the Plan Year in which this paragraph is
first applicable. In addition, if in any Subsequent Plan Year this plan no
longer benefits any Participant who also benefits under another qualified an or
simplified employee pension maintained by the Employer that provides for
permitted disparity (or imputes permitted disparity), this Plan will have a
Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in
which this paragraph is no longer applicable. For purposes of determining the
Participants overall permitted disparity limit, all years ending in the same
calendar year are treated as the same year.
6.9.2 Adjustments for Benefits Beginning in Midyear
If benefit payments commence in a month other than the month in which the
Participant attains the age specified in the foregoing tables, the early
retirement factor shall be determined by straight line interpolation in
34
<PAGE>
the applicable tables below. If a benefit is distributed in a form other than a
nondecreasing annuity payable for a period not less than the life of a
Participant (or in the case of a qualified preretirement survivor annuity the of
the surviving spouse), the amount of such benefit will be determined in
accordance with section 8.8 of the plan.
6.9.3 Benefits Beginning Before Age 55
If benefit payments begin before the first day of the month in which the
Participant attains age 55, the early retirement factor shall be the Actuarial
Equivalent of the early retirement factor contained in the applicable table
above for a benefit commencing in the month in which the participant attains age
55.
6.9.4 Adjustment to Disability Benefits
An unreduced disability benefit, other than a qualified disability
benefit, commencing before Normal Retirement Age will be treated as a benefit
subject to the limitations of this section. A disability benefit is a qualified
disability benefit only if the benefit: (i) is payable under the plan solely on
account of a Participant's disability, as determined by the Social Security
Administration, (ii) terminates no later than the Participant's social security
retirement age, (iii) is not in excess of the amount of the benefit that would
be payable if the participant had separated from service at Normal Retirement
Age, and (iv) upon attainment of early or Normal Retirement Age, the Participant
receives a benefit that satisfies the accrual and vesting rules of Section 411
and the regulations thereunder) without taking into account the disability
benefits made up to that age.
6.9.5 Retroactive Limitation on Plans Which Offset A Benefit Against Pia prior
to 1989.
The following limitation applies for Plan Years beginning after May 27,
1986 (or, in the case of a plan in existence on May 27, 1986, for plan years
beginning after December 31, 1986) and before January 1, 1989.
(1) The amount of the offset shall not exceed the maximum offset
otherwise allowable prior to Plan Years beginning in 1989 multiplied
by a fraction (not to exceed 1):
Actual years of service at retirement or severance
--------------------------------------------------------
Total years of service at social security retirement age
(2) The amount of the offset shall not exceed the maximum offset
otherwise allowable prior to Plan Years beginning in 1989
(determined in accordance with paragraph (1), if applicable, reduced
by 1/15 for each of the first five years and 1/30 for each of the
next five years by which the starting date of such benefit precedes
the social security retirement age of the Participant, and reduced
actuarially for each additional year thereafter.
35
<PAGE>
The service adjustment under paragraph (1) is required only if the
plan (before amendment) assumed that the Participant would continue
to receive, after retirement or severance, income which would be
treated as wages for purposes of the Social Security Act.
6.9.6 Definitions
For purposes of this section 6.9, the following definitions apply:
(a) Employer derived Accrued Benefit. For purposes of this section, the
Employer derived accrued retirement benefit as of a Plan Year is the
Participant's accrued retirement benefit under the plan (determined
on an actual basis and not a projected basis) attributable to
Employer contributions under the Plan.
(b) Social security retirement age. Social security retirement age means
age 65 if the Participant attains age 62 before January 1, 2000
(i.e., born before January 1, 1938), age 66 if the Participant
attains age 62 after December 31, 1999, but before January 1, 2017),
(i.e., born after December 31, 1937, but before January 1, 1955 and
age 67 if the Participant attains age 62 after December 31, 2016
(i.e., born after December 31, 1954).
- --------------------------------------------------------------------------------
TABLE 1
- --------------------------------------------------------------------------------
SOCIAL SECURITY RETIREMENT AGE 67
AGE AT WHICH BENEFITS COMMENCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Normal Form of
Benefit Adjustment 67 66 65 64 63 62 61 60 59 58 57
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life Annuity 1.0000 0.750000 0.70000 0.65000 0.60000 0.55000 0.50000 0.47500 0.45000 0.42500 0.40000 0.37500
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
5 Year Certain 0.970 0.72750 0.67900 0.63050 0.58200 0.53350 0.48500 0.46075 0.43650 0.41225 0.38800 0.36375
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
10 Year Certain 0.91 0.6825 0.637 0.5915 0.819 0.5005 0.455 0.43225 0.4095 0.38675 0.364 0.34125
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
15 Year Certain 0.84 0.63 0.588 0.546 0.504 0.462 0.42 0.399 0.378 0.357 0.336 0.315
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
20 Year Certain 0.78 0.585 0.546 0.507 0.468 0.429 0.39 0.3705 0.351 0.3315 0.312 0.2925
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Normal Form of
Benefit 56 55
- --------------------------------------
<S> <C> <C>
Life Annuity 0.34400 0.31600
- --------------------------------------
Life Annuity
5 Year Certain 0.33368 0.30652
- --------------------------------------
Life Annuity
10 Year Certain 0.3130.4 0.28756
- --------------------------------------
Life Annuity
15 Year Certain 0.28896 0.26544
- --------------------------------------
Life Annuity
20 Year Certain 0.26832 0.24648
- --------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TABLE 2
- --------------------------------------------------------------------------------
SOCIAL SECURITY RETIREMENT AGE 66
AGE AT WHICH BENEFITS COMMENCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Normal Form of
Benefit Adjustment 66 65 64 63 62 61 60 59 58 57 56 55
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life Annuity 1.000 0.75000 0.70000 0.65000 0.60000 0.55000 0.50000 0.47500 0.45000 0.42500 0.40000 0.37500 0.34400
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
5 Year Certain 0.970 0.72750 0.67900 0.53350 0.58200 0.48500 0.48500 0.46075 0.43650 0.41225 0.38800 0.36375 0.33368
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
10 Year Certain 0.91 0.6825 0.637 0.5915 0.819 0.5005 0.455 0.43225 0.4095 0.38675 0.364 0.34125 0.31304
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
15 Year Certain 0.84 0.63 0.588 0.546 0.504 0.462 0.42 0.399 0.378 0.357 0.336 0.315 0.28896
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
20 Year Certain 0.78 0.585 0.546 0.507 0.468 0.429 0.39 0.3705 0.351 0.3315 0.312 0.2925 0.26832
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
TABLE 3
- --------------------------------------------------------------------------------
SOCIAL SECURITY RETIREMENT AGE 65
AGE AT WHICH BENEFITS COMMENCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Normal Form of
Benefit Adjustment 65 64 63 62 61 60 59 58 57 56 55
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life Annuity 1.000 0.75000 0.70000 0.65000 0.60000 0.55000 0.50000 0.47500 0.45000 0.42500 0.40000 0.37500
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
5 Year Certain 0.970 0.72750 0.67900 0.63050 0.58200 0.53350 0.48500 0.46075 0.43650 0.41225 0.38800 0.36375
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
l0 Year Certain 0.91 0.6825 0.637 0.5915 0.819 0.5005 0.455 0.43225 0.4095 0.38675 0.364 0.34125
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
15 Year Certain 0.84 0.63 0.588 0.546 0.504 0.462 0.42 0.399 0.378 0.357 0.336 0.315
- ----------------------------------------------------------------------------------------------------------------------------------
Life Annuity
20 Year Certain 0.78 0.585 0.546 0.507 0.468 0.429 0.39 0.3705 0.351 0.3315 0.312 0.2925
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
ARTICLE VII Early Retirement, Termination of Employment and Disability
7.1 Early Retirement Benefits
If the Employer so elects in the Adoption Agreement, the Participant may
elect to retire before his/her Normal Retirement Date after completion of the
requirements set forth in the Adoption Agreement.
If a Participant separated from service before satisfying the age
requirement for early retirement, but has satisfied the service requirement, the
Participant will be entitled to elect an early retirement benefit upon
satisfaction of such age requirement.
The monthly benefit payable at Early Retirement shall be equal to the
Accrued Benefit adjusted as stated in the Adoption Agreement.
If an actuarial reduction has been elected or if the plan is integrated
with social security benefits, the benefits reduced by 1/15 for each of the
first five years and 1/30 for each of the next five years by which the starting
ate of such benefit precedes age 65 and reduced actuarially for each additional
year thereafter.
7.2 Termination of Employment
If a Participant should terminate employment for a reason other than
death, normal retirement or early retirement (if the Employer has selected that
option in the Adoption Agreement), the Participant shall have a right to receive
his/her Vested Accrued Benefit in the following manner:
(a) If the Actuarial Equivalent Lump Sum Value of the Participant's
Vested Accrued Benefit is equal to $3,500 or less, distribution
shall be made to the Participant in the form of a lump sum pursuant
to Section 8.1.
(b) If the provisions of paragraph (a) above do not apply, the
Participant may begin receiving payments on the first or last day
(per the Adoption Agreement) of the month coincident with or
following his/her Normal Retirement Date. The amount of these
payments shall be determined in accordance with Article VI. As an
alternative to receiving payments on or after his/her Normal
Retirement Date, the Participant may elect to receive benefits under
the Early Retirement provisions of the Plan (if this option has been
selected by the Employer in the Adoption Agreement.)
7.3 Disability
Any Participant who terminates employment due to Disability shall receive
the same benefit payable in the same manner as he/she would have received if
he/she had terminated employment prior to the Normal
37
<PAGE>
Retirement Date (unless continued accruals have been elected in the Adoption
Agreement) except that upon termination of employment due to Disability all of a
Participant's Accrued Benefits shall become fully Vested as provided in Section
11.1.
ARTICLE VIII Forms of Benefit Available
8.1 Lump-Sum Payments
Notwithstanding other provisions of this Article, the Vested portion of a
Participant's benefit shall be paid in lump sum and the nonvested portion
forfeited if the present value of the Participant's Vested Accrued Benefit does
not exceed $3,500. However, no distribution shall be made pursuant to the
preceding sentence after the last day of the first period for which an amount is
received as an annuity unless the Employee and his/her spouse consent in writing
to such distribution.
For purposes of this section, if the present value of an Employee's Vested
Accrued Benefit is zero, the employee shall be deemed to have received a
distribution of such Vested Accrued Benefit.
If an Employee terminates service, and the present value of the Employee's
Vested Accrued Benefit derived from Employer and Employee contributions exceed
$3,500, the Employee may elect, if the Employer has so elected in the Adoption
Agreement, to receive a distribution of the present value of the entire Vested
portion of such Accrued Benefit and the nonvested portion will be treated as a
forfeiture.
A Participant's Vested Accrued Benefit shall not include accumulated
deductible employee contributions within the meaning of Section 72(o)(5)(B) of
the Code for plan years beginning prior to January 1, 1989.
For the purpose of the foregoing provisions, present value shall be
calculated using the interest rate specified Section 3.2 of the plan. If an
Employee receives a distribution pursuant to this section and the Employee
resumes covered employment under the Plan, he or she shall have the right to
restore his or her employer-derived Accrued Benefit (including all optional
forms of benefits and subsidies relating to such benefits) to the extent
forfeited upon the repayment to the Plan of the full amount of the distribution
plus interest, compounded annually from the date of distribution at the rate
determined for purposes of Section 411 (c) (2) of the Code. Such repayment must
be made before the earlier of five years after the first date on which the
participant is subsequently reemployed by the Employer, or the date the
Participant incurs 5 consecutive 1-year Breaks In Service following the date of
distribution. If an Employee is deemed to receive a distribution pursuant to
this section, and the Employee resumes employment covered under this Plan before
the date the Participant
38
<PAGE>
occurs 5 consecutive 1-year Breaks In Service, upon the reemployment of such
Employee, the Employer-derived Accrued Benefit will be restored to the amount on
the date of such deemed distribution.
8.2 Restrictions on Immediate Distributions
8.2.1 If the present value of a participant's vested accrued benefit derived
from Employer and Employee contributions exceeds (or at the time of any
prior distribution exceeded) $3,500, and the Accrued Benefit is
immediately distributable, the Participant and the Participant's spouse
(or where either the Participant or the spouse has died, the survivor)
must consent to any distribution of such Accrued Benefit. The consent of
the Participant and the Participant's spouse shall be obtained in writing
within the 90-day period ending on the Annuity Starting Date. The Annuity
Starting Date is the first day of the first period for which an amount is
paid as an annuity or any other form. The Plan Administrator shall notify
the Participant and the Participant's spouse of the right to defer any
distribution until the Participant's Accrued Benefit is no longer
immediately distributable. Such notification shall include a general
description of the material features, and an explanation of the relative
values of, the optional forms of benefit available under the Plan in a
manner that would satisfy the notice requirements of Section 417(a)(3),
and shall be provided no less than 30 days and no more than 90 days prior
to the Annuity Starting Date. However, distribution may commence less than
30 days after the notice described in the preceding sentence is given,
provided the distribution is one to which sections 401(a)(11) and 417 of
the Code do not apply, the Plan Administrator clearly informs the
Participant that the Participant has a right to a period of at least 30
days after receiving the notice to consider the decision of whether or not
to elect a distribution (and, if applicable, a particular distribution
option), and the Participant, after receiving the notice, affirmatively
elects a distribution.
Notwithstanding the foregoing, only the Participant need consent to the
commencement of a distribution in one form of a Qualified Joint and Survivor
Annuity while the Accrued Benefit is immediately distributable. Neither the
consent of the Participant nor the Participant's spouse shall be required to the
extent that a distribution is required to satisfy Section 401(a)(9) or Section
415 of the Code.
Present value shall be determined in accordance with Section 8.4 of the
plan.
An accrued benefit is immediately distributable if any part of the accrued
benefit could be distributed to the participant (or surviving spouse) before the
participant attains (or would have attained if not deceased) the later of normal
retirement age or age 62.
39
<PAGE>
8.2.2 For purposes of determining the applicability of the foregoing consent
requirements to distributions made before the first day of the first plan
year beginning after December31, 1988, the participant's vested accrued
benefit shall not include amounts attributable to accumulated deductible
employee contributions within the meaning of Section 72(o)(5)(B) of the
Code.
8.3 Normal Form of Benefit
The Normal Form of Benefit under the Plan is the benefit elected in the
Adoption Agreement.
8.4 Actuarial Equivalence
The present value of any benefit under the terms of this plan will be the
Actuarial Equivalent of the Normal Form of Benefit.
8.5 Qualified Joint and Survivor Annuity
If a Participant has completed at least one Hour of Service on or after
August 23, 1984 and unless an optional form of benefit is selected pursuant to a
qualified election (as described in Section 8.7 within a 90-day period ending on
the Annuity Starting Date), a married Participant's Vested Accrued Benefit will
be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried
Participant's Vested Accrued Benefit will be paid in the form of an immediate
Life Annuity. The Participant may elect to have such annuity distributed upon
attainment the earliest retirement age under the Plan. The earliest retirement
age shall be the earliest date on which the participant could elect to receive
retirement benefits. This section and sections 8.6 and 8.7 shall also apply to
participants as provided in the Transitional Rules Section 9.2.1.
8.6 Notice Requirements
When the rules of Section 8.5 apply, the Plan Administrator shall provide
each Participant no less than 30 days and no more than 90 days prior to the
Annuity Starting Date a written explanation of: (1) the terms and conditions of
a Qualified Joint and Survivor Annuity; (2) the Participant's right to make and
the effect of an action to waive the Qualified Joint and Survivor Annuity form
of benefit; (3) the rights of a Participant's spouse; the right to make, and the
effect of, a revocation of a previous election to waive the Qualified Joint and
survivor Annuity; and (5) the relative values of the various optional forms of
benefit under the Plan.
If a distribution is one to which sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less than 30
days after the notice required under section 1.411(a)-11(c) of the Income Tax
Regulations is given, provided that:
40
<PAGE>
(a) The Plan Administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving
the notice to consider the decision of whether or not to elect a
distribution (and, if applicable, a particular distribution option), and
(b) The Participant, after receiving the notice, affirmatively elects a
distribution.
8.7 Election Procedures
If Section 8.5 applies, an election to receive a form of benefit other
than the Qualified Joint and Survivor annuity described in Section 8.5 must be
accomplished by a waiver of the Qualified Joint and Survivor form of benefit.
Any waiver of a qualified joint and survivor annuity shall not be effective
unless: (a) the participant's spouse consents in writing to the election; (b)
the election designates a specific alternative beneficiary, including any class
of beneficiaries or any contingent beneficiaries, which may not be changed
without spousal consent or the spouse expressly permits designations by the
participant without any further spousal consent; (c) the spouse's consent
acknowledges the effect of the election; and (d) the spouse's consent is
witnessed by a plan representative or notary public. Additionally, a
participant's waiver of the Qualified Joint and Survivor Annuity will not be
effective unless the election designates a form of benefit payment which may not
be changed without spousal consent (or the spouse expressly permits designations
by the participant without any further spousal consent). If it is established to
the satisfaction of a plan representative that such written consent may not be
obtained because there is no spouse or the spouse cannot be located, a waiver
will be deemed a qualified selection.
Any consent by a spouse obtained under this provision (or establishment
that the consent of a spouse may not be obtained) shall be effective only with
respect to such spouse. A consent that permits designations by the participant
without any requirement of further consent by such spouse must acknowledge that
the spouse has the right to limit consent to a specific beneficiary, and a
specific form of benefit where applicable, and that the spouse voluntarily
elects to relinquish either or both of such rights. A revocation of a prior
waiver may be made by a participant without the consent of the spouse at any
time prior to the commencement of benefits. The number of revocations shall not
be limited. No consent obtained under this provision shall be valid unless the
participant has received notice as provided in Section 8.6 above.
8.8 Optional Modes of Distribution
Instead of having benefits paid in the form of a Qualified Joint and
Survivor Annuity, a Participant may elect, in the manner described in Section
8.7 to have his/her benefit paid as elected in the Adoption Agreement from
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one of the following optional benefit modes and the additional options specified
in the addendum to the Adoption Agreement (if any) which shall be the Actuarial
Equivalent of the Normal Benefit Form:
(a) A single Life Annuity commencing on the Participant's Annuity
Starting Date and terminating on the first day of the month of the
Participant's death.
(b) The Normal Benefit (as elected in the Adoption Agreement)
(c) A Life Annuity with a period certain (5, 10, 15 or 20 years)
(d) A joint and 50 percent survivor annuity
(e) A joint and 100 percent survivor annuity
(f) A joint and 75 percent survivor annuity
(g) A series of payments over a period of years not to extend beyond the
life expectancy of the Participant and a designated Beneficiary.
(h) A lump sum (if this form of benefit was elected as an option in the
Adoption Agreement).
(i) Any additional forms included in the Adoption Agreement.
8.9 Commencement of Benefits
Benefits under any normal or optional mode of payment shall commence as
described in Section 6.2.
8.10 Minimum Amounts to be Distributed
If the Participant's entire interest is to be distributed in other than a
lump sum, then the amount to be distributed each year must be at least an amount
equal to the amount determined under Article XII.
8.11 Direct Rollovers
8.11.1 This Section applies to distributions made on or after January 1, 1993.
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a distributee
may elect at the time and in the manner prescribed by the Plan
Administrator, to have any portion of an eligible rollover distribution
that is equal to at least $500 paid directly to an eligible retirement
plan specified by the distributee in a direct rollover.
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8.11.2 Definitions
(a) Eligible rollover distribution: An eligible rollover distribution is any
distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section 401
(a)(9) of the Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion for
net unrealized appreciation with respect to Employer securities); and any
other distribution(s) that is reasonably expected to total less than $200
during a year.
(b) Eligible retirement plan: An eligible retirement plan is an individual
retirement account described in Section 408(a) of the Code, an individual
retirement annuity described in Section 408(b) of the Code, an annuity
plan described in Section 403(a) of the Code, or a qualified plan
described in Section 401(a) of the Code that accepts the distributee's
eligible rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible retirement plan
is an individual retirement account or individual retirement annuity.
(c) Distributee: A distributee includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest
of the spouse or former spouse.
(d) Direct rollover: A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
ARTICLE IX Death Benefits
9.1 Availability of Qualified Preretirement Survivor Annuity
The provisions of Sections 9.3 and 9.4 shall be applicable to any benefits
payable under this Plan on account of the death of a Participant who has at
least one Hour of Service on or after August 23, 1984. Certain other
participants also have the option to receive benefits under Sections 9.3 and
9.4. These Participants are described in Section 9.2.
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9.2 Transitional Rules
9.2.1 Any living Participant not receiving benefits on August 23, 1984, who
would otherwise not receive the benefits prescribed by the Sections 8.5,
9.3 and 9.4 must be given the opportunity to elect to have those Sections
apply if such Participant is credited with at least one Hour of Service
under this Plan or a predecessor plan in a Plan Year beginning on or after
January 1, 1976, and such Participant had at least ten years of Vesting
service when he or she separated from service.
9.2.2 Any living Participant not receiving benefits on August 23,1984, who was
credited with at least one Hour of Service under this plan or a
predecessor plan on or after September 2,1974, and who is not otherwise
credited with any service in a Plan Year beginning on or after January 1,
1976, must be given the opportunity to have his or her benefits paid in
accordance with Section 9.2.4 of this article.
9.2.3 The respective opportunities to elect (as described in Sections 9.2.1 and
9.2.2 above) must be afforded to the appropriate Participants during the
period commencing on August 23, 1984, and ending on the date benefits
would otherwise commence to said Participants.
9.2.4 Any Participant who has elected pursuant to Section 9.2.2 of this article
and any Participant who does not elect under Section 9.2.1 or who meets
the requirements of Section 9.2.1 except that such Participant does not
have at least ten years of Vesting service when he or she separates from
service, shall have his or her benefits distributed in accordance with all
of the following requirements if benefits would have been payable in the
form of a Life Annuity:
(a) Automatic Joint and Survivor Annuity. If benefits in the form of a
Life Annuity become payable to a married Participant who:
(1) Begins to receive payments under the plan on or after Normal
Retirement Age; or
(2) Dies on or after Normal Retirement Age while still working for
the Employer; or
(3) Begins to receive payments on or after the qualified early
retirement age; or
(4) Separates from service on or after attaining Normal Retirement
Age (or the qualified early retirement age) and after
satisfying the eligibility requirements for the payment of
benefits under the plan and thereafter dies before beginning
to receive such benefits; then such benefits will be received
under this plan in the form of a Qualified Joint and Survivor
Annuity, unless the Participant has elected otherwise
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during the election period. The election period must begin at
least six months before the Participant attains qualified
early retirement age and end not more than 90 days before the
commencement of benefits. Any election hereunder will be in
writing and may be changed by the Participant at any time.
(b) Election of early survivor annuity. A Participant who is employed
after attaining the qualified early retirement age will be given the
opportunity to elect, during the election period, to have a survivor
annuity payable on death. If the Participant elects the survivor
annuity, payments under such annuity must not be less than the
payments which would have been made to the spouse under the
Qualified Joint and Survivor Annuity if the Participant had retired
on the day before his or her death.
Any election under this provision will be in writing and may be
changed by the Participant at any time. The election period begins
on the later of
(1) The 90th day before the Participant attains the qualified
early retirement age, or
(2) The date on which participation begins, and ends on the date
the Participant terminates employment.
(c) For purposes of this Section 9.2.4
(1) Qualified early retirement age is the latest of:
(ii) The earliest date, under the plan, on which the
Participant may elect to receive retirement benefits,
(ii) The first day of the 120th month beginning before the
Participant reaches Normal Retirement Age, or
(iii) The date the Participant begins participation.
(2) Qualified Joint and Survivor Annuity is an annuity for the
life of the Participant with a survivor annuity for the life
of the spouse as described in Section 8.5.
9.3 Qualified Preretirement Survivor Annuity
For Participants described in Section 9.1, benefits payable under this
Plan on account of death of a participant shall be paid to the Participant's
surviving Spouse, unless a Beneficiary other than the Participant's spouse is
named as provided in Section 9.6. If benefits are paid to the Participant's
surviving Spouse, under this section, the benefits shall be paid in the form of
a Qualified Preretirement Survivor Annuity unless another mode of distribution
is elected as provided in Section 9.6.
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Unless an optional form of benefit is chosen (pursuant to Section 9.6), if
a Participant dies after the earliest retirement age, the Participant's
surviving spouse (if any) will receive the same benefit that would be payable if
the Participant had retired with an immediate Qualified Joint and Survivor
Annuity on the day before the Participant's date of death. The surviving spouse
may elect to commence payment under such annuity within reasonable period after
the Participant's death. The actuarial value of benefits which commence later
than the date on which payments would have been made to the surviving spouse
under a Qualified Joint and Survivor Annuity in accordance with this provision
shall be adjusted to reflect the delayed payment.
Unless an optional form of benefit is chosen as provided in Section 9.6,
if a Participant dies on or before the earliest retirement age, the
Participant's surviving spouse (if any) will receive the same benefit that would
have been payable if the Participant had:
(a) Separated from service on the date of death (or date of separation
from service, if earlier),
(b) Survived to the earliest retirement age
(c) Retired with an immediate Qualified Joint and Survivor Annuity at
the earliest retirement age, and
(d) Died on the day after the earliest retirement age.
If a Participant dies on or before the earliest retirement age, a
surviving spouse will begin to receive payments the earliest retirement age.
Benefits commencing after the earliest retirement age will be the Actuarial
Equivalent of the benefit to which the surviving spouse would have been entitled
if benefits had commenced on the earliest retirement age under an immediate
Qualified Joint and Survivor Annuity in accordance with Section 8.5.
For purposes of this section, "earliest retirement age" is the earliest
date on which the participant may receive retirement benefits under the plan.
9.4 For Purposes of This Article
(a) Election period is the period which begins on the first day of the
Plan Year in which the Participant attains age 35 and ends on the
date of the Participant's death. If a Participant separates from
service prior to the first day of the Plan Year in which age 35 is
attained, with respect to benefits accrued prior to separation, the
election period shall begin on the date of separation.
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(b) Spouse (surviving spouse) shall mean the spouse or surviving spouse
of the Participant, provided that a former spouse will be treated as
the spouse or surviving spouse and a current spouse will not be
treated as the spouse or surviving spouse to the extent provided
under a Qualified Domestic Relations Order as described in Section
414(p) of the Code.
(c) Vested Accrued Benefit is the value of the Participant's Vested
Accrued Benefit derived from Employer and Employee contributions
(including rollovers). The provisions of this article shall apply to
a Participant who is Vested in amounts attributable to Employer
contributions, Employee contributions (or both) at the time of death
or distribution.
(d) Annuity Starting Date is the first day of the first period for which
an amount is paid as an annuity or any other form. The Annuity
Starting Date for disability benefits shall be the date such
benefits commence if the disability benefit is not an auxiliary
benefit. An auxiliary benefit is a disability benefit which does not
reduce the benefit payable at Normal Retirement Age.
9.5 Notice Requirements
The Plan Administrator shall provide each Participant within the
applicable period for such Participant, a written explanation of the Qualified
Preretirement Survivor Annuity in such terms and in such manner as would be
comparable to the explanation provided for meeting the requirements of Section
8.6 applicable to a Qualified Joint and Survivor Annuity.
The applicable period for a Participant is whichever of the following
periods ends last:
(a) The period beginning with the first day of the Plan Year in which
the Participant attains age 32 and ending with the close of the Plan
Year preceding the Plan Year in which the Participant attains age
35;
(b) A reasonable period ending after the individual becomes Participant;
(c) A reasonable period ending after this article first applies to the
Participant. Notwithstanding the foregoing, notice must be provided
within a reasonable period ending after separation from service in
case of a Participant who separates from service before attaining
age 35.
For purposes of this section a reasonable period ending after the
enumerated events described in (b) and (c) is the end of the two year period
beginning one year prior to the date the applicable event occurs and ending one
year after that date. In the case of a participant who separates from service
before the plan year in which
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age 35 is attained, notice shall be provided within the two year period
beginning one year prior to separation and ending one year after separation. If
such a participant thereafter returns to employment with the employer, the
applicable period for such participant shall be redetermined.
9.6 Other Death Benefits
The Beneficiary of a Participant who dies before his/her termination of
employment with all Participating Employers shall be entitled to a death benefit
if any such benefit has been elected under the Adoption Agreement.
The benefit elected (if any) shall be payable to the Beneficiary in a
single sum. Alternatively, the Beneficiary shall have the right to elect one of
the optional modes of payment described in Section 8.6 except that the
beneficiary shall not have the option to choose a Joint and Survivor Annuity.
The amount of any optional mode of payment shall be the Actuarial Equivalent of
the single sum payment.
9.7 Waiver of Preretirement Survivor Annuity
A Participant who is entitled to a death benefit shall have the right,
subject to Section 9.3, to waive the Preretirement Survivor Annuity and/or to
name a Beneficiary or Beneficiaries to receive the death benefit payable under
such Sections. The Participant shall name a Beneficiary or Beneficiaries by
filing a Beneficiary designation with the Plan Administrator before his or her
death. The Beneficiary designation shall be in writing, signed by the
Participant, and on such form or forms as the Plan Administrator may prescribe.
The Beneficiary designation may be revoked or modified by filing a new
designation with the Employer any time before the Participant's death.
Notwithstanding the foregoing, in the case of a Participant who has at least one
Hour of service on or after August 23, 1984, if the Participant is married on
the date of his death, the Participant's spouse on the date of his death shall
be the Participant's Beneficiary (both under the Plan and under any life
insurance contracts held under the Plan for the Participant's benefit) and shall
be entitled to a Preretirement Survivor Annuity regardless of the designation or
waiver made by the Participant unless such spouse consents to any designation or
waiver which has the effect of waiving the spouse's right to the Preretirement
Survivor Annuity. The consent:
(a) Shall be in writing;
(b) Shall be signed by the Participant's surviving spouse;
(c) Shall acknowledge the effect of the designation made by the
Participant; and
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(d) Shall be witnessed by a Plan representative named by the Plan
Administrator or a notary public.
Notwithstanding this consent requirement, if the Participant establishes
to the satisfaction of a plan representative that such written consent may not
be obtained because there is no spouse or the spouse cannot be located, a waiver
will be deemed a qualified election. Any consent necessary under this provision
will not be valid with respect to any other spouse. Additionally, a revocation
of prior waiver may be made by a Participant without the consent of the spouse
at any time before the commencement of benefits. The number of revocations shall
not be limited. Any new waiver or change of beneficiary will require a new
spousal consent.
If a Participant designates more than one person to receive a death
benefit and if any of those persons predecease the Participant or die prior to a
complete distribution of the benefit without provision having been made for such
contingency in the designation, the Plan Administrator shall direct the Trustee
to distribute the remaining payments to the surviving designee or designees
proportionately as the portion designated by the Participant for each bears to
the total portion designated for all survivors.
If a Participant files no designation, revokes a designation previously
filed without filing a new designation, fails to file a valid designation or
revocation or if all persons designated shall predecease the Participant or die
prior to complete distribution to them, the Participant shall be deemed to have
named the following as his beneficiary:
(a) The Participant's surviving spouse; or
(b) If none, the Participant's surviving issue per stripes and not per
capita; or
(c) If none, then the Participant's estate. For purposes of this
section, a Participant's "surviving spouse" means the spouse to whom
the Participant is married on the Participant's date of death;
provided, however, that to the extent provided in a Qualified
Domestic Relations Order, a former spouse shall be considered to be
a Participant's surviving spouse and a current spouse shall not be
treated as the spouse or surviving spouse.
Pre-age 35 waiver: A Participant who will not yet attain age 35 as of the
end of any current Plan Year may make a special qualified election to waive the
Qualified Preretirement Survivor Annuity for the period beginning on the date of
such election and ending on the first day of the Plan Year in which the
Participant will attain age 35. Such election shall not be valid unless the
Participant receives a written explanation of the Qualified Preretirement
Survivor Annuity in such terms as are comparable to the explanation required
under section 9.5.
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Qualified Preretirement Survivor Annuity coverage will be automatically
reinstated as of the first day of the Plan Year in which the Participant attains
age 35. Any new waiver on or after such date shall be subject to the full
requirements of this article.
9.8 Restrictions on Distributions Due to Death
Notwithstanding other provisions of the Plan, payments made by the Plan on
account of the death of a Participant are subject to the restrictions of Article
XII.
ARTICLE X Limitation on Benefits
10.1 Application
This Article, except for Section 10.3, applies regardless of whether any
Participant is or has ever been a Participant in another qualified plan
maintained by the adopting Employer. If any Participant is or has ever been a
Participant in another qualified plan maintained by the Employer or a welfare
benefit Fund, as defined in Section 419(e) of the Code, maintained by the
Employer, or an individual medical account, as defined in Section 15(1)(2) of
the Code, or a simplified employee pension, as defined in section 408(k) of the
Code, which provides an annual addition as defined in Section 10.5.11, Section
10.4 is also applicable to that Participant's benefits.
10.2 Limitation
The annual benefit otherwise payable to a Participant at any time will not
exceed the maximum permissible amount. If the benefit the Participant would
otherwise accrue in a Limitation Year would produce an annual benefit in excess
of the maximum permissible amount, the rate of accrual will be reduced so that
the annual benefit will equal the maximum permissible amount.
10.3 Minimal Payments
The limitation in Section 10.2 is deemed satisfied if the annual benefit
payable to a Participant is not more than $1,000 multiplied by the Participant's
number of Years of Service or parts thereof (not to exceed 10) with the
Employer, and the Employer has not at any time maintained a defined contribution
plan a welfare benefit than as defined in Section 419(e) of the Code, or an
individual medical account as defined in Section 415(1)(2) of the Code in which
such Participant participated.
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10.4 Coverage Under Additional Employer Plans
This section applies if any Participant is covered, or has ever been
covered, by another plan maintained by an employer, including a qualified plan
or a welfare benefit Fund, as defined in Section 419(e) of the Code, maintained
by the Employer, an individual medical account as defined in Section 415(1)(2)
of the Code or a amplified employee pension, which provides an annual addition
as described in Section 10.5.11.
10.4.1 If a Participant is, or has ever been, covered under more than one
defined benefit plan maintained by the Employer, the sum of the
Participant's annual benefits from all such plans may not exceed the
maximum permissible amount. The Employer will choose in the Adoption
Agreement the method by which the plans will meet this limitation.
10.4.2 If the Employer maintains, or at any time maintained, one or more
qualified defined contribution plans covering any Participant in this plan
(or if, after December 31, 1985, the Employer maintains a welfare benefit
Fund, as defined in Section 419(e) of the Code), or an individual medical
account as defined in Section 415(1)(2) of the Code, or a simplified
employee pension, the sum of the Participant's defined contribution
fraction and defined benefit fraction will not exceed 1.0 in any
Limitation Year, and the annual benefit otherwise payable to the
Participant under this plan will be limited in accordance with the
Adoption Agreement.
10.4.3 In the case of an individual who was a participant in one or more defined
benefit plans of the employer as of the first day of the first limitation
year beginning after December 31, 1986, the application of the limitations
of this article shall not cause the maximum permissible amount for such
individual under all such defined benefit plans to be less than the
individual's current accrued benefit. The preceding sentence applies only
if such defined benefit plans met the requirements of Section 415 of the
Code, for all limitation years beginning before January 1, 1987.
10.5 Definitions
The following definitions shall apply for purposes of Article X.
10.5.1 Annual Benefit
A retirement benefit under the plan which is payable annually in the form
of a straight Life Annuity. Except as provided below, a benefit payable in a
form other than a straight Life Annuity must be adjusted to an Actuarially
Equivalent straight Life Annuity before applying the limitations of this
article. The interest rate assumption used to determine Actuarial Equivalence
will be the greater of the interest rate specified in the Adoption Agreement
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or five percent. The annual benefit does not include any benefits attributable
to assets transferred from a qualified plan that was not maintained by the
Employer. No actuarial adjustment to the benefit is required for
(a) The value of a Qualified Joint and Survivor Annuity,
(b) The value of benefits that are not directly related to retirement
benefits (such as the qualified disability benefit, preretirement
death benefits, and postretirement medical benefits), and
(c) The value of postretirement cost-of-living increases made in
accordance with Section 415(d) of the code and Section 1.41
5-3(c)(2)(iii) of the Federal Income Tax Regulations.
10.5.2 Compensation
As elected by the Employer in the Adoption Agreement, Compensation shall
mean all of a Participants:
(a) Information required to be reported under sections 6041, and 6051,
and 6052 of the Internal Revenue Code (Wages, Tips, and Other
Compensation as reported on Form W-2). Compensation is defined as
wages, within the meaning of section 3401(a), and all other payments
of compensation to an Employee by the Employer (in the course of the
Employers trade or business) for which the Employer is required to
furnish the Employee a written statement under sections 6041(d), and
6051(a)(3), and 6052. Compensation must be determined without regard
to any rules under section 3401(a) that limit the remuneration
included in wages based on the nature or location of the employment
or the services performed (such as the exception for agricultural
labor in section 3401 (a)(2)).
(b) Section 3401(a) wages. Wages as defined in Section 3401(a) for the
purposes of income tax withholding at the source but determined
without regard to any rules that limit the remuneration included in
wages based on the nature or location of the employment or the
services performed (such as the exception for agricultural labor in
Section 3401(a) (2)).
(c) 415 safe-harbor compensation. Wages, salaries, and fees for
professional services and other amounts received (without regard to
whether or not an amount is paid in cash) for personal services
actually rendered in the course of employment with the Employer
maintaining the Plan to the extent that the amounts are includable
in gross income (including, but not limited to, commissions paid
salesmen, compensation for services on the basis of a percentage of
profits, commissions on insurance premiums,
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tips, bonuses, fringe benefits, reimbursements, and expense
allowances under a nonaccountable plan (as described in 1.62-2(c)),
and excluding the following:
(1) Employer contributions to a plan of deferred compensation
which are not includible in the Employee's gross income for
the taxable year in which contributed, or Employer
contributions under a simplified employee pension plan to the
extent such contributions are deductible by the Employee, or
any distributions from a plan of deferred compensation;
(2) Amounts realized from the exercise of a nonqualified stock
option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
described in Section 403(b) of the Internal Revenue Code
(whether or not the amounts are actually excludable from the
gross income of the Employee).
For any self-employed individual Compensation will mean Earned Income. For
limitation years beginning after December, 1991, for purposes of applying the
limitations of this article, Compensation for a limitation year is the
Compensation actually paid or includible in gross income during such Limitation
Year.
10.5.3 Defined Benefit Fraction
A fraction, the numerator of which is the sum of the Participant's
projected annual benefits under all the defined benefit plans (whether or not
terminated) maintained by the Employer, and the denominator of which is the
lesser of 125 percent of the dollar limitation determined for the Limitation
Year under Section 415(b) and (d) of the Code and in accordance with Section
10.5.12 below or 140 percent of the highest average Compensation including any
adjustment under Section 415(b) of the Code.
Notwithstanding the above, if the participant was a participant as of the
first day of the first limitation year beginning after December 31, 1986, in one
or more defined benefit plans maintained by the employer which were in existence
on May 6,1986, the denominator of this fraction will not be less than 125
percent of the sum
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of the annual benefits under such plans which the participant had accrued as of
the close of the last limitation year beginning before January 1, 1987,
disregarding any changes in the terms and conditions of the plans after May
5,1986. The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Section 415 for
all limitation years beginning before January 1,1987.
10.5.4 Defined Contribution Fraction
A fraction, the numerator of which is the sum of the annual additions to
the Participant's account under all the defined contribution plans (whether or
not terminated) maintained by the Employer for the current and all prior
Limitation Years, (including the annual additions attributable to the
Participant's nondeductible Employee contributions to this and all other defined
benefit plans (whether or not terminated) maintained by the Employer, the annual
additions attributable to all welfare benefit Funds, as defined in Section
419(e) of the Code, or individual medical accounts as defined in Section
415(l)(2) of the Code and simplified employee pensions, maintained by the
Employer), and the denominator of which is the sum of the maximum aggregate
amounts or the current and all prior Limitation Years of Service with the
Employer (regardless of whether a defined contribution plan was maintained by
the Employer).
The maximum aggregate amount in any Limitation Year is the lesser of 125
percent of the dollar limitation determined under Sections 415(b) and (d) of the
Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the
Participant's Compensation for such year. If the employee was a participant as
of the first day of the first limitation year beginning after December 31, 1986,
in one or more defined contribution plans maintained by the employer which were
in existence on May 6,1986, the numerator of this fraction will be adjusted if
the sum of this fraction and the defined benefit fraction would otherwise exceed
1.0 under the terms of this plan. Under the adjustment, an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0 times (2) the
denominator of this fraction, will be permanently subtracted from the numerator
of this fraction. The adjustment is calculated using the fractions as they would
be computed as of the end of the last limitation year beginning before January
1,1987, and disregarding any changes in the terms and conditions of the plans
made after May 5,1986, but using the Section 415 limitation applicable to the
first limitation year beginning on or after January 1,1987.
The annual addition for any limitation year beginning before January 1,
1987, shall not be recomputed to eat all employee contributions as annual
additions.
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10.5.5 Employer
The Employer that adopts this plan, and all members of a controlled group
of corporations (as defined in Section 414(b) of the Internal Revenue Code, as
modified by Section 415(h)), commonly controlled trades or businesses (as
defined in Section 414(c) as modified by Section 415(h)), or affiliated service
groups (as defined in Section 414(m)) of which the adopting Employer is a part,
and any other entity required to be aggregated with the Employer pursuant to the
regulations under Section 414(o) of the Code.
10.5.6 Highest Average Compensation
The Average Compensation for the three consecutive Years of Service with
the Employer that produces the highest average. A Year of Service with the
Employer is the 12-consecutive month period defined in the Adoption Agreement.
10.5.7 Limitation Year
Limitation Year is defined in Section 3.42 of this Plan Document.
10.5.8 Maximum Permissible Amount
(a) The lesser of the defined benefit dollar limitation or 100 percent
of the Participant's highest Average Compensation.
(b) If the Participant has less than 10 years of participation with the
Employer, the defined benefit dollar limitation is reduced by
one-tenth for each year of participation (or part thereof) less than
ten. To the extent provided in regulations or in other guidance
issued by the Internal Revenue Service, the preceding sentence shall
be applied separately with respect to each change in the benefit
structure of the Plan. If the participant has less than ten Years of
Service with the Employer, the compensation limitation is reduced by
one-tenth for each Year of Service (or part thereof) less than ten.
The adjustments of this section (b) shall be applied in the
denominator of the defined benefit fraction based upon Years of
Service. Years of Service shall include future years occurring
before the Participant's Normal Retirement Age. Such future years
shall include the year which contains the date the Participant
reaches Normal Retirement Age, only if it can be reasonably
anticipated that the Participant will receive a Year of Service for
such year.
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(c) If the annual benefit of the Participant commences before the
Participant's social security retirement age, but on or after age
62, the defined benefit dollar limitation as reduced above, if
necessary, shall be determined as follows:
(i) If a Participant's social security retirement age is 65,
the dollar limitation for benefits commencing on or
after age 62 is determined by reducing the defined
benefit dollar limitation by 5/9 of one percent for each
month by which benefits commence before the month in
which the Participant attains age 65.
(ii) If a Participant's social security retirement age is
greater than 65, the dollar limitation for benefits
commencing on or after age 62 is determined by reducing
the defined benefit dollar limitation by 5/9 of one
percent for each of the first 36 months and 5/12 of one
percent for each of the additional months (up to 24
months) by which benefit commence before the month of
the Participant's social security retirement age.
(d) If the annual benefit of a Participant commences prior to age 62,
the defined benefit dollar limitation shall be the Actuarial
Equivalent of an annual benefit beginning at age 62, as determined
above, reduced for each month by which benefits commence before the
month in which the Participant attains age 62. To determine
Actuarial Equivalence, the interest rate assumption is the greater
of the rate specified in the Adoption Agreement or 5 percent. Any
decrease in the defined benefit dollar limitation determined in
accordance with this provision (d) shall not reflect the mortality
decrement to the extent that benefits will not be forfeited upon the
death of the Participant.
(e) If the annual benefits of a Participant commences after the
Participant's social security retirement age, the defined benefit
dollar limitation as reduced in (b) above, if necessary, shall be
adjusted so that it is the Actuarial Equivalent of an annual benefit
of such dollar limitation beginning at the Participant's social
security retirement age. To determine Actuarial Equivalence, the
interest rate assumption used is the lesser of the rate specified in
the Adoption Agreement or 5 percent.
10.5.9 Current Accrued Benefit
A Participant's Accrued Benefit under the Plan, determined as if the Participant
had separated from service as of the close of the last Limitation Year beginning
before January 1, 1987, when expressed as an annual benefit within the meaning
of 415(b)(2) of the Code. In determining the amount of a Participant's current
Accrued benefit, the following shall be disregarded:
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(i) Any change in the terms and conditions of the Plan after
May 5,1986; and
(ii) Any cost of living adjustments occurring after May
5,1986.
10.5.10 Projected Annual Benefit
The annual benefit as defined in Section 10.5.1 of this article, to which
the Participant would be entitled under the terms of the Plan assuming:
(a) The Participant will continue employment until Normal Retirement Age
under the Plan (or current age, if later), and
(b) The Participant's Compensation for the current Limitation Year and
all other relevant factors used to determine benefits under the Plan
will remain constant for all future Limitation Years.
10.5.11 Annual Additions
The sum of the following amounts credited to a Participant's account for
the Limitation Year:
(a) Employer contributions;
(b) Employee contributions;
(c) Forfeitures;
(d) Amounts allocated, after March 31,1984, to an individual medical
account, as defined in Section 415(l)(1) of the Code, which is part
of a pension or annuity plan maintained by the Employer are treated
as annual additions to a defined contribution plan. Also, amounts
derived from contributions paid or accrued after December 31, 1985,
in taxable years ending after such date, which are attributable to
postretirement medical benefits allocated to the separate account of
a Key Employee, as defined in Section 419A(d)(3), under a welfare
benefit Fund, as defined in Section 419(e), maintained by the
Employer, are treated as annual additions to a defined contribution
plan; and
(e) Allocations under a simplified employee pension.
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10.5.12 Defined Benefit Limitation
The defined benefit dollar limitation shall be $90,000. Effective on
January 1,1988, and each January thereafter, the $90,000 limitation above will
be automatically adjusted by multiplying such limit by the cost of living
adjustment factor prescribed by the Secretary of the Treasury under Section
415(d) of the Code in such manner as the Secretary shall prescribe. The new
limitation will apply to Limitation Years ending within the calendar year of the
date of the adjustment.
10.5.13 Social Security Retirement Age
Social security retirement age shall be age 65 in the case of a
participant attaining age 62 before January 1, 2000 (i.e., born before January
1,1938), age 66 for a participant attaining age 62 after December 31, 1999, and
before January 1, 2017 (i.e., born after December 31,1937, but before January
1,1955), and age 67 for a participant attaining age 62 after December 31, 2016
(i.e., born after December 31,1954).
10.5.14 Year of Participation
The Participant shall be credited with a Year of Participation (computed
to fractional parts of a year) for each Accrual computation period for which the
following conditions are met: (1) The Participant is credited with at least the
number of Hours of Service (or period of service if the elapsed time method is
used) for benefit accrual purposes, required under the terms of the Plan in
order to accrue a benefit for the accrual computation period, and (2) The
Participant is included as a Participant under the eligibility provisions of the
Plan for at least one day of the accrual computation period. If these two
conditions are met, the portion of a Year of Participation credited to the
Participant shall equal the amount of benefit accrual service credited to the
Participant for such accrual computation period. A Participant who is
permanently and totally disabled within the meaning of Section 15(c)(3)(C)(i) of
the Code for an accrual computation period shall receive a Year of Participation
with respect to that period. In addition, for a participant to receive a year of
participation (or part thereof) for an accrual computation period, the Plan must
be established no later than the last day of such accrual computation period. In
no event will more than one Year of Participation be credited for any 12-month
period.
ARTICLE XI Vesting and Termination of Employment
11.1 Participant's Vested Interest
A Participant shall always have a 100 percent Vested Interest in his
Accrued Employee Benefit upon death, disability or reaching his/her Normal
Retirement Age. If Early Retirement is elected as an option in the Adoption
Agreement, a Participant shall become fully Vested in his/her Early Retirement
Benefits upon meeting the
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requirements to receive the Early Retirement Benefit. Upon termination of
employment for any reason other than death, Disability or Retirement, a
Participant shall have a Vested Interest in that portion of his Participant's
Benefit in accordance with the Vesting schedule elected in the Adoption
Agreement.
11.2 Computing Years of Service for Vesting
An Employee who completes 1,000 or more Hours of Service during the
applicable Computation Year shall be credited with a Year of Service for
Vesting. All of a Participant's Years of Service for Vesting shall be taken into
account for the purpose of computing his Vested Interest except that Years of
Service prior to age 18 (or age 22 for Plan Years beginning before January 1,
1985) and prior to the Effective Date of the Plan shall not be taken into
account to the extent excluded in the Adoption Agreement.
11.3 Distribution of Vested Interest
Upon termination of employment for any reason other than death, Disability
or retirement, a Participant's Vested Interest shall be computed as provided in
this ARTICLE and distributed as provided in ARTICLE VIII. A Participant's
aggregate number of Years of Service shall be determined as provided in Section
3.62.
11.4 Missing Persons
A Participant's Accrued Benefit or the benefit of a Participant's spouse
or Beneficiary which is otherwise considered as nonforfeitable shall be
forfeited if, at the time such benefit is payable, the Plan Administrator, after
reasonable efforts, is unable to locate such Participant, such Participant's
spouse or Beneficiary. Notwithstanding the foregoing, if at any subsequent date
that person is located, the benefit shall be reinstated, reduced, however, by
the value of any amount paid by the Trustee or a Participating Employer to any
state or political subdivision under any law relating to unclaimed property or
escheat.
11.5 Disposition of Forfeitures
Any forfeiture of a Participant's Accrued Benefit shall not be applied to
increase any Participant's benefit under the Plan, but shall be applied as soon
as possible to reduce the Participating Employer's cost of funding the Plan.
11.6 Forfeiture-Withdrawal of Employee Contributions
If a Participant has a nonforfeitable right to at least 50 percent of his
Employer-provided Accrued Benefit, then no forfeitures will occur solely as a
result of a Participants withdrawal of Employee contributions. Regardless of a
Participants nonforfeitable percentage, a withdrawal of Employee contributions
will not result a forfeiture of the minimum benefit, if any, provided under
section 13.2.
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ARTICLE XII Distribution Requirements
12.1 General Rules
12.1.1 Subject to Article VIII, Joint and Survivor Annuity Requirements, the
requirements of this article shall apply to any distribution of a
Participant's interest and will take precedence over any inconsistent
provisions of this plan. Unless otherwise specified, the provisions of
this article apply to calendar years beginning after December 31, 1984.
12.1.2 All distributions required under this article shall be determined and
made in accordance with the proposed regulations under Section 401(a)(9),
including the minimum distribution incidental benefit requirement of
Section 18.401(a)(9)-2 of the proposed regulations.
12.2 Required Beginning Date.
The entire interest of a Participant must be distributed or begin to be
distributed no later than the Participant's required beginning date.
12.3 Limits on Distribution Periods.
As of the first distribution calendar year, distributions, if not made in
a single-sum, may only be made over one of the following periods (or a
combination thereof):
(a) The life of the Participant,
(b) The life of the Participant and a designated Beneficiary,
(c) A period certain not extending beyond the life expectancy of the
Participant, or
(d) A period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated Beneficiary.
12.4 Determination of Amount to be Distributed Each Year
(a) If the Participant's interest is to be paid in the form of annuity
distributions under the Plan, payments under the annuity shall
satisfy the following requirements:
(1) The annuity distributions must be paid in periodic payments
made at intervals not longer than one year;
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(2) The distribution period must be over a life (or lives) or over
a period certain not longer than a life expectancy (or joint
life and last survivor expectancy) described in Section
401(a)(9)(A)(ii) or Section 401(a)(9)(B)(iii) of the Code,
whichever is applicable;
(3) The life expectancy (or joint life and last survivor
expectancy) for purposes of determining the period certain
shall be determined without recalculation of life expectancy;
(4) Once payments have begun over a period certain, the period
certain may not be lengthened even if the period certain is
shorter than the maximum permitted;
(5) Payments must either be nonincreasing or increase only as
follows;
(i) With any percentage increase in a specified and
generally recognized cost-of-living index;
(ii) To the extent of the reduction to the amount of the
Participant's payments to provide for a survivor benefit
upon death, but only if the Beneficiary whose life was
being used to determined the distribution period
described in Section 3 above dies and the payments
continue otherwise in accordance with that Section over
the life of the Participant;
(iii) To provide cash refunds of Employee contributions upon
the Participant's death; or
(iv) Because of an increase in benefits under the Plan.
(6) If the annuity is a Life Annuity (or a Life Annuity with a period
certain not exceeding 20 years), the amount which must be
distributed on or before the Participant's required beginning date
(or, in the case of distributions after the death of the
Participant, the date distributions are required to begin pursuant
to Section 12.5 below) shall be the payment which is required for
one payment interval. The second payment need not be made until the
end of the next payment interval even if that payment interval ends
in the next calendar year. Payment intervals are the periods for
which payments are received, e.g., bimonthly, monthly, semiannually,
or annually.
If the annuity is a period certain annuity without a life contingency (or is a
life annuity with a period certain exceeding 20 years), periodic payments for
each distribution calendar year shall be combined and treated as an annual
amount. The amount which must be distributed by the Participant's required
beginning date (or, in the case of distributions after the death of the
Participant, the date distributions are required to begin pursuant
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to Section 12.5 below) is the annual amount for the first distribution calendar
year. The annual amount for other distribution calendar years, including the
annual amount for the calendar year in which the Participant's required
beginning date (or the date distributions are required to begin pursuant to
Section 12.5 below) occurs, must be distributed on or before December 31 of the
calendar year for which the distribution is required.
(b) Annuities purchased after December 31,1988, are subject to the
following additional conditions:
(1) Unless the Participant's spouse is the designated Beneficiary,
if the Participant's interest is being distributed in the form
of a period certain annuity without a life contingency, the
period certain as of the beginning of the first distribution
calendar year may not exceed the applicable period determined
using the table set forth in Q&A A-5 of Section 1.401(a)(9)-2
of the proposed regulations.
(2) If the Participant's interest is being distributed in the form
of a joint and survivor annuity for the joint lives of the
Participant and a nonspouse Beneficiary, annuity payments to
be made on or after the Participant's required beginning date
to the designated Beneficiary after the Participant's death
must not at any time exceed the applicable percentage of the
annuity payment for such period that would have been payable
to the Participant using the table set forth in Q&A A-6 of
Section 1.401 (a)(9)-2 of the proposed regulations.
(c) Transitional rule. If payments under an annuity which complies with
section (a) above begin prior to January 1, 1989, the minimum
distribution requirements in effect as of July 27, 1987, shall apply
to distributions from this Plan, regardless of whether the annuity
form of payment is irrevocable. This transitional rule also applies
to deferred annuity contracts distributed to or owned by the
Employee prior to January 1, 1989, unless additional contributions
are made under the Plan by the Employer with respect to such
contract.
(d) If the form of distribution is an annuity made in accordance with
this section 12.4, any additional benefits accruing to the
Participant after his required beginning date shall be distributed
as a separate and identifiable component of the annuity beginning
with the first payment interval ending in the calendar year
immediately following the calendar year in which such amount
accrues.
(e) Any pad of the Participant's interest which is in the form of an
individual account shall be distributed in a manner satisfying the
requirements of Section 401(a)(9) of the Code and the proposed
regulations thereunder.
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12.5 Death Distribution Provisions
12.5.1 Distribution beginning before death. If the Participant dies after
distribution of his or her interest has begun, the remaining portion of
such interest will continue to be distributed at least as rapidly as under
the method of distribution being used prior to the Participant's death.
12.5.2 Distribution beginning after death. If the Participant dies before
distribution of his or her interest begins, distribution of the
Participant's entire interest shall be completed by December 31 of the
calendar year containing the fifth anniversary of the Participant's death
except to the extent that an election is made to receive distributions in
accordance with (a) or (b) below:
(a) if any portion of the Participant's interest is payable to a
designated Beneficiary, distributions may be made over the life or
over a period certain not greater than the life expectancy of the
designated Beneficiary commencing on or before December 31 of the
calendar year immediately following the calendar year in which the
Participant died;
(b) if the designated Beneficiary is the participant's surviving spouse,
the date distributions are required to begin in accordance with (a)
above shall not be earlier than the later of (1) December 31 of the
calendar year immediately following the calendar year in which the
Participant died and (2) December 31 of the calendar year in which
the participant would have attained age 70 1/2.
If the Participant has not made an election pursuant to this section
12.5.2 by the time of his death, the Participant's designated Beneficiary must
elect the method of distribution no later than the earlier of (1) December 31 of
the calendar year in which distributions would be required to begin under this
section, or (2) December 31 of the calendar year which contains the fifth
anniversary of the date of death of the Participant. If the Participant has no
designated Beneficiary, or if the designated Beneficiary does not elect a method
of distribution, distribution of the participant's entire interest must be
completed by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
12.5.3 For purposes of Section 12.5.2 above, if the surviving spouse dies after
the participant, but before payments to such spouse begin, the provisions
of Section 12.5.2, with the exception of paragraph (b) therein, shall be
applied as if the surviving spouse were the Participant.
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12.5.4 For purposes of this Section 12.5, any amount paid to a child of the
Participant will be treated as if it had been paid to the surviving spouse
if the amount becomes payable to the surviving spouse when the child
reaches the age of majority
12.5.5 For the purposes of this Section 12.5, distribution of a Participant's
interest is considered to begin on the Participant's required beginning
date (or, if Section 12.5.3 above is applicable, the date distribution is
required to begin to the surviving spouse pursuant to Section 12.5.2
above). If distribution in the form of an annuity described in Section
12.4 above irrevocably commences to the Participant before the required
beginning date, the date distribution is considered to begin is the date
distribution actually commences.
12.5.6 Minor Beneficiary
Distributions on behalf of a minor can only be made to a person who has
the legal right to receive the distributions or who is appointed by the
appropriate court to receive funds on behalf of the minor. Such a payment shall
fully discharge the Trustee, Employer, and Plan from further liability on
account thereof.
12.6 Definitions
12.6.1 Life Expectancy
The life expectancy (or joint and last survivor expectancy) calculated
using the attained age of the Participant (or designated Beneficiary) as of the
Participant's (or designated Beneficiary's) birthday in the applicable calendar
year. The applicable calendar year shall be the first distribution calendar
year. If annuity payments commence before the required beginning date, the
applicable calendar year is the year such payments commence. Life expectancy and
joint and last survivor expectancy are computed by use of the expected return
multiples in Tables V and VI of Section 1.72-9 of the Income Tax Regulations.
12.6.2 Designated Beneficiary
The individual who is designated as the Beneficiary under the Plan in
accordance with Section 401 (a)(9) and the regulations thereunder.
2.6.3 Distribution Calendar Year
A calendar year for which a minimum distribution is required. For
distributions beginning before the Participant's death, the first distribution
calendar year is the calendar year immediately preceding the calendar year which
contains the Participant's required beginning date. For distributions beginning
after the
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Participant's death, the first distribution calendar year is the calendar year
in which distributions are required to begin pursuant to Section 12.5 above.
12.6.4 Life Expectancy
Life expectancy and joint and last survivor expectancy are computed by use
of the expected return multiples in Tables V and VI of Section 1.72-9 of the
Income Tax Regulations.
Unless otherwise elected by the Participant (or spouse, in the case of
distributions described in Section 12.5.2(b) above) by the time distributions
are required to begin, life expectancies shall be recalculated annually. Such
election shall be irrevocable as to the Participant (or spouse) and shall apply
to all subsequent years. The life expectancy of a nonspouse Beneficiary may not
be recalculated.
12.6.5 Required Beginning Date
(a) General rule. The required beginning date of a Participant is the
first day of April of the calendar year following the calendar year
in which the Participant attains age 70 1/2.
(b) Transitional rules. The required beginning date of a Participant who
attains age 70 1/2 before January 1, 1988, shall be determined in
accordance with (1) or (2) below:
(1) Non-5-percent owners. The required beginning date of a
Participant who is not a 5-percent owner is the first day of
April of the calendar year following the calendar year in
which the later of retirement or attainment of age 70 1/2
occurs.
(2) 5-percent owners. The required beginning date of a Participant
who is a 5-percent owner during any year beginning after
December 31,1979, is the first day of April following the
later of:
(i) the calendar year in which the Participant attains age
70 1/2, or
(ii) The earlier of the calendar year with or within which
ends the plan year in which the Participant becomes a
5-percent owner, or the calendar year in which the
Participant retires.
The required beginning date of a participant who is not a 5-percent
owner who attains age 70 1/2 during 1988 and who has not retired as of
January 1,1989, is April 1, 1990.
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(c) 5-percent owner. A Participant is treated as a 5-percent owner for
purposes of this section if such Participant is a 5-percent owner as
defined in Section 416(i) of the Code (determined in accordance with
Section 416 but without regard to whether the plan is top-heavy) at
any time during the Plan Year ending with or within the calendar
year in which such owner attains age 66 1/2 or any subsequent Plan
Year.
(d) Once distributions have begun to a 5-percent owner under this
section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent year.
12.7 Transitional Rule
12.7.1 Notwithstanding the other requirements of this article and subject to the
requirements of Article VIII, Joint and Survivor Annuity Requirements,
distribution on behalf of any Employee, including a 5-percent owner, may
be made in accordance with all of the following requirements (regardless
of when such distribution commences):
(a) The distribution by the Plan is one which would not have
disqualified such Plan under Section 401(a)(9) of the Internal
Revenue Code as in effect prior to amendment by the Deficit
Reduction Act of 1984.
(b) The distribution is in accordance with a method of distribution
designated by the Employee whose interest in the Plan is being
distributed or, if the Employee is deceased, by a Beneficiary of
such Employee.
(c) Such designation was in writing, was signed by the Employee or the
Beneficiary, and was made before January 1,1984.
(d) The Employee had accrued a benefit under the Plan as of December
31,1983.
(e) The method of distribution designated by the Employee or the
Beneficiary specifies the time at which distribution will commence,
the period over which distributions will be made, and in the case of
any distribution upon the Employee's death, the Beneficiaries of the
Employee listed in order of priority.
12.7.2 A distribution upon death will not be covered by this transitional rule
unless the information in the designation contains the required
information described above with respect to the distributions to be made
upon the death of the Employee.
12.7.3 For any distribution which commences before January 1, 1984, but
continues after December 31, 1983, the Employee, or the Beneficiary, to
whom such distribution is being made, will be presumed to have
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designated the method of distribution under which the distribution is being made
if the method of distribution was specified in writing and the distribution
satisfies the requirements in subsections 12.7.1(a) and (e).
12.7.4 If a designation is revoked any subsequent distribution must satisfy the
requirements of Section 401(a)(9) of the Code and the regulations
thereunder. If a designation is revoked subsequent to the date
distributions are required to begin, the Plan must distribute by the end
of the calendar year following the calendar year in which the revocation
occurs the total amount not yet distributed which would have been required
to have been distributed to satisfy Section 401(a)(9) of the Code and the
proposed regulations thereunder, but for the Section 242(b)(2) election.
For calendar years beginning after December 31, 1988, such distributions
must meet the minimum distribution incidental benefit requirements in
Section 1.401(a)(9)-2 of the proposed regulations. Any changes in the
designation will be considered to be a revocation of the designation.
However, the mere substitution or addition of another Beneficiary (one not
named in the designation) under the designation will not be considered to
be a revocation of the designation, so long as such substitution or
addition does not alter the period over which distributions are to be made
under the designation, directly or indirectly (for example, by altering
the relevant measuring life). In the case in which an amount is
transferred or rolled over from one plan to another plan, the rules in Q&A
J-2 and Q&A J-3 of Section 1.401(a)(9)-1 of the Proposed Income Tax
Regulations shall apply.
ARTICLE XIII Top-Heavy Provisions
13.1 Application of This Article
If the Plan is or becomes Top-Heavy in any Plan Year beginning after
December 31, 1983, the provisions of this Article XIII will supersede any
conflicting provisions in the Plan or Adoption Agreement.
13.2 Minimum Accrued Benefit
(a) Notwithstanding any other provision of this Plan except (c), (d) and
(e) below, for any Plan Year in which this plan is Top-Heavy, each
Participant who is not a Key Employee and has completed 1,000 Hours
of Service (will accrue a benefit to be provided solely by Employer
contributions and expressed as a Life Annuity commencing at Normal
Retirement Age) of no less than two percent of his or her highest
Average Compensation for the five consecutive years for which the
Participant had the highest Compensation. The aggregate Compensation
for the years during such five-year period in which the Participant
was credited with a Year of Service will be divided by the number of
such years in order to determine Average Annual Compensation. The
minimum accrual is determined without regard to any Social Security
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contribution. The minimum accrual applies even though under other
plan provisions the Participant would not otherwise be entitled to
receive an accrual, or would have received a lesser accrual for the
year because (a) the Non-Key Employee fails to make mandatory
contributions to the Plan, (b) the Non-Key Employee's Compensation
is less than a stated amount, (c) the Non-Key Employee is not
employed on the last day of the accrual computation period, or (d)
the plan is integrated with Social Security.
(b) For purposes of computing the minimum accrued benefit, Compensation
shall be defined as elected in the Adoption Agreement as limited by
Section 401(a)(17) of the Code.
(c) No additional benefit accruals shall be provided pursuant to (a)
above to the extent that the total accruals on behalf of the
Participant attributable to Employer contributions will provide a
benefit expressed as a Life Annuity commencing at Normal Retirement
Age that equals or exceeds 20 percent of the Participant's highest
Average Compensation for the five consecutive years for which the
Participant had the highest Compensation.
(d) The provisions in (a) above shall not apply to any Participant to
the extent that the Participant is covered under any other Plan or
Plans of the Employer and the Employer has provided in the Adoption
Agreement that the minimum allocation or benefit requirement
applicable to this Top-Heavy Plan will be met in the other Plan or
Plans.
(e) All accruals of Employer derived benefit, whether or not
attributable to years for which the Plan is Top-Heavy, may be used
in computing whether the minimum accrual requirements of paragraph
(c) above are satisfied.
13.3 Adjustment for Benefit Form Other Than Life Annuity at Normal Retirement
Age, IRC Section 416
If the form of benefit is other than a single Life Annuity, the Employee
must receive an amount that is the actuarial Equivalent of the minimum single
Life Annuity benefit. If the benefit commences at a date other than Normal
Retirement Age, the Employee must receive at least an amount that is the
Actuarial Equivalent of the minimum single Life Annuity benefit commencing at
Normal Retirement Age.
13.4 Nonforfeitability
The minimum Accrued Benefit required (to the extent required to be
nonforfeitable under Section 416(b) of the code) may not be suspended or
forfeited under Sections 411(a)(3)(B) or 4ll(a)(3)D) of the Code.
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13.5 Minimum Vesting Schedules
For any Plan Year in which this plan is Top-Heavy, one of the minimum
Vesting schedules as elected by the Employer in the Adoption Agreement will
automatically apply to the Plan. The minimum Vesting Schedule applies to all
benefits within the meaning of Section 411(a)(7) of the Code except those
attributable to employee contributions including benefits accrued before the
Effective Date of Section 416 and benefits accrued before the Plan became
Top-Heavy. Further, no decrease in a Participants nonforfeitable percentage may
occur in the event the Plan's status as Top-Heavy changes for any year. However
this section does not apply to the Accrued benefits of any Employee who does not
have an Hour of Service after the plan has initially become Top-Heavy and such
Employee's Accrued Benefits attributable to Employer contributions will be
determined without regard to this section.
13.6 Definitions
For purposes of this Article XIII, the following definitions shall apply:
13.6.1 Key Employee
Any Employee or former Employee (and the Beneficiaries of such Employee)
who at any time during the determination period was an officer of the Employer
if such individual's annual Compensation exceeds 50 percent of the dollar
limitations under Section 415(b)(1)(A) of the Code, an owner (or considered an
owner under Section 318 of the Code) of one of the ten largest interests in the
Employer if such individual's Compensation exceeds 100 percent of the dollar
limitation under Section 415(c)(1)(A) of the Code, a five-percent owner of the
Employer, or a one-percent owner of the Employer who has an annual Compensation
of more than $150,000. Annual Compensation means Compensation as defined in
Section 415(c)(3) of the Code, but including amounts contributed by the Employer
pursuant to a salary reduction agreement which are excludable from the
Employee's gross income under Section 125, Section 402(e)(3), Section
402(h)(1)(B) or Section 403(b) of the Code. The determination period is the Plan
Year containing the Determination Date and the four preceding Plan Years. The
determination of who is a Key Employee will be made in accordance with Section
416(i)(1) of the Code and the regulations thereunder.
13.6.2 Top-Heavy Plan
For any Plan Year beginning after December 31,1983, this plan is Top-Heavy
if any of the following conditions exists:
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(a) If the Top-Heavy ratio for this Plan exceeds 60 percent and this
plan is not part of any required aggregation group or permissive
aggregation group of plans;
(b) If this Plan is part of a required aggregation group of plans but
which is not part of a permissive aggregation group and the
Top-Heavy ratio for the group of plans exceeds 60 percent; or
(c) If this plan is a part of a required aggregation group of plans and
part of a permissive aggregation group and the Top-Heavy ratio for
the permissive aggregation group exceeds 60 percent.
13.6.3 Top-Heavy Ratio
(a) If the Employer maintains one or more defined benefit plans and the
Employer has not maintained any defined contribution plans
(including any simplified employee pension plan as defined in
section 408(k) of the Code) which during the five-year period ending
on the Determination Date(s) has or has had account balances, the
Top-Heavy ratio for this plan alone or for the required or
permissive aggregation group as appropriate is a fraction, the
numerator of which is the sum of the present values of the Accrued
Benefits of all Key Employees as of the Determination Date(s)
(including any part of any Accrued Benefit distributed in the
five-year period ending on the Determination Date(s)), and the
denominator of which is the sum of the present value of all Accrued
Benefits (including any part of any Accrued Benefit distributed in
the five-year period ending on the Determination Date(s), determined
in accordance with Section 416 of the Code and the regulations
thereunder. Both the numerator and the denominator of the Top-Heavy
Ratio are increased to reflect any contribution not actually made as
of the Determination Date, but which is required to be taken into
account on that date under Section 416 of the Code and the
regulations thereunder.
(b) If the Employer maintains one or more defined benefit plans and the
Employer maintains or has maintained one or more defined
contribution plans (including any simplified employee pension plan)
which during the 5-year period ending on the Determination Date(s)
has or has had any account balances, the Top-Heavy Ratio for any
Required or Permissive Aggregation Group as appropriate is a
fraction, the numerator of which is the sum of the present values of
Accrued Benefits under the aggregated defined benefit Plan or Plans
for all Key Employees, determined in accordance with (a) above, and
the sum of account balances under the aggregated defined
contribution Plan or Plans for all Key Employees as of the
Determination Date(s), and the denominator of which is the sum of
the present value of Accrued Benefits under the aggregated defined
benefit Plan or Plans for all Participants, determined in accordance
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with (a) above for all Participants and the sum of the account
balances under the aggregated defined contribution plan or plans for
all Participants as of the Determination Date(s), all determined in
accordance with Section 416 of the Code and the regulations
thereunder. The account balances under a defined contribution plan
in both the numerator and denominator of the Top-Heavy Ratio are
increased for any distribution of an account balance made in the
five-year period ending on the Determination Date.
(c) For purposes of (a) and (b) above, the value of account balances and
the present value of Accrued Benefits will be determined as of the
most recent Valuation Date that falls within or ends with the
12-month period ending on the Determination Date, except as provided
in Section 416 of the Code and the regulations thereunder for the
first and second Plan Year of a defined benefit plan. The account
balances and Accrued Benefits of a Participant
(1) Who is not a Key Employee but who was a Key Employee in a
prior year, or
(2) Who has not been credited with at least one Hour of Service
with any Employer maintaining the Plan at any time during the
five-year period ending on the Determination Date will be
disregarded. The calculation of the Top-Heavy ratio, the
extent to which distributions and transfers are taken into
account will be made in accordance with Section 416 of the
Code and the regulations thereunder. When aggregating plans,
the value of account balances and accrued benefits will be
calculated with reference to the Determination Dates that fall
within the same calendar year.
The accrued benefit of a Participant other than a Key Employee shall be
determined under (a) the method, any, that uniformly applies for accrual
purposes under all defined benefit plans maintained by the Employer, (b) if
there is no such method, as if such benefit accrued not more rapidly than the
slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C)
of the Code.
13.6.4 Permissive Aggregation Group
The Required Aggregation Group of plans plus any other plan or plans of
the Employer which, when considered as a group with the Required Aggregation
Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410
of the Code.
13.6.5 Required Aggregation Group
(1) Each qualified plan of the Employer in which at least one Key
Employee participates or participated at any time during the
determination period (regardless of whether the plan
terminated), and
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(2) Any other qualified plan of the Employer which enables a plan
described in (1) to meet the requirements of Sections 401(a)(4) or 410 of the
Code.
13.6.6 Determination Date
For any Plan Year subsequent to the first Plan Year, the last day of the
preceding Plan Year. For the first Plan Year of the Plan, the last day of that
year.
13.6.7 Valuation Date
The date elected by the Employer in the Adoption Agreement as of which
account balances or Accrued Benefits are valued for purposes of calculating the
Top-Heavy ratio.
13.6.8 Present Value
Present value shall be based only on the interest and mortality rates
specified in the Adoption Agreement.
ARTICLE XIV Administration
14.1 Plan Administrator
The Employer shall be the Plan administrator and shall be a Named
Fiduciary of the Plan, and as administrator shall administer the Plan in
accordance with its terms and shall have all powers necessary to carry out its
terms. The Plan Administrator shall, in its sole discretion, interpret the
provisions of the Plan.
14.2 Delegation
The Employer shall have the power to delegate specific fiduciary duties
and responsibilities, other than those of the Trustee or with respect to the
custody and control of the assets of the Fund. Such delegations may be officers,
partners or other Employees of the Employer or to other individuals or entities.
Any delegation by the Employer, may if specifically stated, allow further
delegations by the individual or entity to whom the delegation has been made.
Any delegation may be rescinded by the Employer at any time.
14.3 Administrative Committee
The Employer, in the exercise of its power to delegate fiduciary duties,
may establish an Administrative Committee (Committee) and appoint its members to
assist in the administration of the Plan. If so established, the Committee shall
be a Named Fiduciary and, unless otherwise provided in a written resolution of
the Employer, shall have the power and responsibility to:
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(a) Adopt rules and regulations not inconsistent with the declared
purposes and specific provisions of the Plan for its administration;
(b) Interpret and construe the provisions of the Plan;
(c) Determine from time to time and certify in writing to the Trustee
the names of retired, terminated or deceased Participants, the
payment option selected with respect to any benefits payable to such
persons, the amount of any benefits so payable and the date such
payments shall commence and terminate, all in accordance with the
Plan. Any such notice from the Committee shall be deemed adequate by
the Trustee if signed by any member of the Committee or the
Committees duly authorized agent;
(d) Prescribe procedures to be followed and forms to be used in electing
any options available under the Plan and to apply for benefits under
the Plan;
(e) Review claims for benefits in accordance with the Plans claims
procedures;
(f) Instruct the Trustee as to the disbursement of the assets of the
Fund;
(g) Prepare and distribute, in such manner as the Committee determines
appropriate, information explaining the Plan;
(h) By unanimous vote, members of the Committee may allocate specific
responsibilities among themselves. Also by unanimous vote, the
Committee may delegate to persons other than members of the
Committee some or all of its discretionary authority to control and
manage the operation and administration of the Plan. However, the
Committee may not delegate its power to review claims under the
Plans claims procedures;
(i) Appoint such advisors, agents and representatives as it shall deem
advisable and may also employ such clerical, legal, and medical
counsel as it deems necessary. Any action taken by a properly
authorized agent of the Committee shall be deemed taken by the
Committee;
(j) Receive from the Employer and Affiliates and from Participants such
information as shall be necessary for the proper administration of
the Plan. The Committee shall be entitled to rely on any such
information so received;
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(k) A majority of the members of the Committee shall constitute a quorum for
the transaction of business. No action shall be taken except upon a
majority vote of the Committee members. An individual shall not vote or
decide upon any matter relating solely to himself or vote in any case in
which his individual right or claim to any benefit under the Plan is
particularly involved. If, in any case in which a Committee member is so
disqualified to act, and the remaining members cannot agree, the Board of
Directors of the company will appoint a temporary substitute member to
exercise all the powers of the disqualified member concerning the matter
in which he is disqualified;
(l) Employ an actuary who shall be responsible for the preparation of the
annual actuarial statement required to be filed under ERISA;
(m) Employ an independent qualified public accountant to examine the books,
records, and any financial statements and schedules prepared by the
actuary which are required to be included in the annual report;
(n) File with the appropriate government agency (or agencies) the annual
report, plan description, summary plan description, and other pertinent
documents which may be duly requested or required by law and not filed by
the Trustee;
(o) File such terminal and supplementary reports as may be necessary in the
event of the termination of the Plan;
(p) File notice of termination with the Pension Benefit Guaranty Corporation
within the time prescribed by ERISA;
(q) Furnish each Employee and each beneficiary receiving benefits hereunder a
summary plan description explaining the Plan;
(r) Furnish any Employee or Beneficiary, who requests in writing, statements
indicating such Employees or Beneficiary's total Accrued Benefits and
nonforfeitable benefits, if any;
(s) Maintain all records necessary for verification of information required to
be filed with the appropriate government agency (or agencies);
(t) Pay premiums when due to the Pension Benefit Guaranty Corporation with
respect to insurance coverage;
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(u) Report to the Pension Benefit Guaranty Corporation any reportable event,
as such is defined in ERISA, which becomes known to him;
(v) Report to the Trustee all available information regarding the amount of
benefits payable to each Employee, the amount of benefits guaranteed, the
computations with respect to the allocation of assets, and any other
information which the Trustee may require in order to terminate the Plan;
and
(w) Receive and review the annual valuation of the Plan made by the actuary.
Any member of the Administrative Committee may resign by delivering a
written copy of his resignation to the Employer and may be removed by written
resolution of the Employer. Vacancies shall be filled by the employer. If an
Administrative Committee is appointed as provided herein, all references to the
Employer in the plan shall be deemed to refer to the Administrative Committee to
the extent of the duties delegated.
14.4 Reports and Records
The Employer and those to whom the Employer has delegated fiduciary duties
shall keep records of all their proceedings and actions, and shall maintain all
such books of account, records and other data as shall be necessary for the
proper administration of the Plan and to comply with applicable law.
14.5 Establishment of Funding Policy
The Employer shall
(a) Establish a funding policy for the Plan consistent with the needs of
the Plan and in accordance with applicable law and
(b) Communicate this policy to the Trustee and direct and supervise the
Trustee's actions to see that this policy is carried out. However,
the Employer may delegate this function in accordance with Section
12.2 to any person or entity, including the Administrative
Committee, if established, or an Investment Manager. An Investment
Manager shall be charged with the power to direct the Trustee as to
the management, acquisition or disposal of any or all assets of the
Trust Fund, as designated in the delegation.
14.6 Payment of Expenses
The Employer may pay all expenses of administering the Plan, including but
not limited to the Trustee's fees, attorney fees and expenses incurred by
persons or entities to whom fiduciary duties have been delegated.
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If said expenses are not paid by the Employer, they shall be a lien against and
paid from the Fund, except for the items the payment of which would constitute a
prohibited transaction.
14.7 Indemnification
Every Named Fiduciary, except a bank or an insurance company, unless
exempted by the ERISA and regulations thereunder, shall be bonded in an amount
not less than 10 percent of the amount of the funds such Named Fiduciary
handles; provided, however, that the minimum bond shall be $1,000 and the
maximum bond, $500,O00. The amount of funds handled shall be determined at the
beginning of each Plan Year by the amount of funds handled by such person,
group, or class to be covered and their predecessors, if any, during the
preceding Plan Year, or if there is no preceding Plan Year, then by the amount
of the funds to be handled during the then current year. The bond shall provide
protection to the Plan against any loss by reason of acts of fraud or dishonesty
by the Named Fiduciary alone or in connivance with others. The surety shall be a
corporate surety company (as such term is used in Section 412(a)(2) of the
ERISA), and the bond shall be in a form approved by the Secretary of Labor.
Notwithstanding anything in this Plan to the contrary, the cost of such bonds
shall be an expense of and may, at the election of the Plan Administrator, be
paid from the Fund or by the Employer.
ARTICLE XV Fund and Trustee
15.1 Trust Fund
All contributions received by the Trustee pursuant to the Plan, together
with all investments made therewith, the proceeds thereof, and all earnings and
accumulations thereon, and the part thereof from time to time remaining, shall
be held and administered by the Trustee, in a Fund referred to herein as the
"Fund," in accordance with the terms and provisions hereof.
15.2 Responsibility of the Trustee
The general responsibilities of the Trustee shall be as follows:
(a) Except as expressly otherwise provided herein, the Trustee shall
have exclusive authority and discretion to manage and control the
assets of the Plan held in the Fund.
(b) The Trustee shall hold, administer, invest and reinvest, and
disburse the Fund in accordance with the powers stated herein.
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(c) The Trustee shall disburse moneys and other properties from the Fund
on direction of the Employer, pursuant to the provision of the Plan
at the time or times, to the payee or payees specified by the
Employer in directions to the Trustee in such form as the Trustee
may reasonably require. The Trustee shall be under no liability for
any distribution made by it pursuant to such directions and shall be
under no duty to make inquiry as to whether any distribution made by
it pursuant to any such direction is made pursuant to the provisions
of the Plan. The receipt of a distribution by the Payee shall
constitute a full acquittance to the Trustee.
(d) The Trustee shall have the responsibilities, if any, expressly
allocated to it by the Plan. Except as responsibilities may be
expressly so allocated, the Trustee in its capacity as such shall
have no responsibility or authority with respect to the operation
and administration of the Plan. However, if the Trustee is notified
that any action on its part is necessary or desirable and the
Employer has failed or is unable to furnish the Trustee with the
necessary instructions or information, the Trustee may take such
action as it deems necessary or desirable, consistent with the Plan,
including, without limitation action respecting interpretation of
the Plan and payment of benefits.
(e) At any time when there is more than one Trustee, the Trustees shall
act by majority vote.
15.3 Compensation And Expenses
The Trustee shall be entitled to receive such reasonable Compensation for
its services hereunder as may be agreed upon with the Employer; provided,
however, that no Employee who is a Trustee shall receive compensation for
services rendered as a Trustee. The Trustee shall be entitled to reimbursement
for all reasonable and necessary costs, expenses, and disbursements incurred by
it in the performance of such services. Such Compensation and reimbursements
shall be paid from the Fund if not paid directly by the employer and shall
constituted a lien upon the Fund until paid.
15.4 Records and Accounting
The Trustee shall maintain such records as may be reasonably necessary for
the proper administration of the Fund. As soon as reasonably practicable
following a Plan Valuation Date of the Fund, and as soon as reasonably
practicable after the resignation or removal of a Trustee has become effective,
the Trustee shall file with the Employer a written account setting forth all
receipts, disbursements, and other transactions effected by it during the Plan
Year, or during the part of the Plan Year to the date the resignation or removal
is effective, as the case may be, and shall certify the fair market value of the
assets of the Fund. The accounting shall also
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furnish the Employer such other information as the Trustee may possess and as
may be necessary for the Employer to comply with the reporting requirements of
the Employee Retirement Income Security Act of 1974. The Trustee shall have no
duty to furnish information about the Fund to any person except that expressly
provided herein or as required by law. Any accounting when approved by the
Employer will be binding and conclusive as to the Employer, Plan Participants
and Beneficiaries, and the Trustee will thereby be released and discharged from
any liability or accountability to the Employer, Plan Participants or
Beneficiaries with respect to matters set forth therein.
Omission by the Employer of any written objection to any specific item in
any such accounting within one hundred eighty days after its delivery will
constitute approval of the Account by the Employer. If there is a disagreement
between the Trustee and anyone as to any act or transaction reported in an
accounting, the Trustee shall have the right to have its account settled by a
court of competent jurisdiction.
15.5 Record Retention
The Trustee shall retain its records relating to the Fund as long as
necessary for the proper administration thereof and at least for any period
required by the Employee Retirement Income Security Act of 1974 or other
applicable law.
15.6 Resignation and Removal of Trustee
(a) The Trustee may resign by giving the Employer thirty (30) days' (or
such shorter period as the Employer may approve in writing) written
notice of its resignation, such notice period to commence upon the
mailing thereof. The Employer shall thereupon appoint a successor
Trustee to assume the rights, powers and duties of the Trustee and
shall promptly give the Trustee written notice of the appointment of
such successor Trustee. The Trustee shall forthwith deliver to the
successor Trustee and as soon as possible thereafter account to the
successor Trustee for each and every Fund asset and any and all
records of the Fund that are in its possession or control.
(b) The Employer may remove the Trustee by giving the Trustee thirty
(30) days' (or such shorter period as the Trustee may approve in
writing) written notice of its removal, such notice period to
commence upon the receipt thereof by the Trustee, and which written
notice shall identify the successor Trustee appointed by the
Employer to assume the rights, powers and duties of the Trustee. The
Trustee shall forthwith deliver to the successor Trustee and as soon
as possible thereafter account to the successor Trustee for each and
every Fund asset and all records of the Fund that are in its
possession or control.
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15.7 Dealings of Others With Trustee
No person (corporate or individual) dealing with the Trustee shall be
required to see the application of any money paid or property delivered to the
Trustee or to determine whether the Trustee is acting pursuant to any authority
granted to it under the Plan.
15.8 Trustee's Power to Protect Itself on Account of Taxes
The Trustee, as a condition to making a distribution of a Participant's
Benefit, may require the person or persons entitled to receive a distribution in
such event to furnish the Trustee with proof of payment of all income,
inheritance, estate, transfer, legacy and/or succession taxes, and all other
taxes of any different type or kind at may be imposed under or by virtue of any
state or federal statute or law upon the payment, transfer, descent, or
distribution of such Benefit and for the payment of which the Trustee may, in
its judgment, be directly or indirectly liable. In lieu of the foregoing, the
Trustee unless prevented by law, may deduct, withhold and transmit to the proper
taxing authorities any such tax which it may be permitted or required to deduct
and withhold and [illegible] Account to be distributed in such case shall be
correspondingly reduced. In the event any distribution is subject to Federal or
State withholding requirements the Trustee may require evidence that such
withholding requirements have been met or that a waiver thereof is available and
the condition's of the waiver have been satisfied.
15.9 Other Powers of Trustee
In extension, but not in limitation of the rights, powers and discretions
conferred upon the Trustee herein, the Trustee shall have and may exercise from
time to time in the management and custody of the assets of the fund and, for
the purpose of distribution after the termination thereof, and, for the purpose
of distribution of Participant's Accounts, without order or license of any
court, any one or more or all of the following rights, powers and discretions:
(a) To invest and reinvest the assets of the Fund with the care, skill,
prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such
matters would use in the conduct of an enterprise of like character
and the like aims (and to the extent possible consistently with the
most recent funding policy method adopted by the Employer and
communicated to the Trustee) without limitation by any statute, rule
or law, or regulation of any governmental body prescribing or
limiting the investment of trust assets by corporate or individual
Trustees, in or to certain kinds, types, or classes of investments
or prescribing the portion of the Fund which may be invested in
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any one property or kind, type, or class or investment. Specifically
and without limiting the generality of the foregoing, the Trustee
may invest and reinvest principal and accumulated income of the Fund
in preferred and common stocks of any kind or class of any
corporation, including but not limited to investment and small
business investment companies of all types; voting trust
certificates; interest in investment trusts; shares of mutual funds;
interest in a common trust, variable demand note or other type of
pooled or collective fund operated by the Trustee; bonds, notes and
debentures, secured or unsecured; mortgages on real or personal
property; covered call options; deposits in a commercial or savings
bank or a savings and loan association including savings accounts or
time deposits in the Trustee if the Trustee (or a Co-Trustee) is a
bank or other Financial Institution; conditional sales contracts;
real estate and leases. The Plan may not acquire or hold any
securities issued by an Employer or real estate leased to an
Employer. Investment of the entire Fund in common stocks shall be
deemed appropriate at any phase of the economic business cycle, but
is not, however, the purpose hereof to direct that the Fund shall be
invested either entirely or to any extent whatsoever in such common
stocks.
(b) To sell, exchange or to otherwise dispose of any asset in whatever
character at any time held by the Trustee in trust hereunder.
(c) To procure from an Insurer selected by the Plan Administrator
annuity or other contracts on the life of a Participant. Any life
insurance policies issued under the Plan to insure death benefits or
otherwise shall be owned by the Trustee. The Trustee may exercise
any and all rights under such policies within the limits set forth
in the Plan. Any payments by the insurer on account of credits such
as dividends, experience rating credits, or surrender or
cancellation credits shall be applied, within the taxable year of
the employer in which received or within the next succeeding taxable
year, toward the next premiums due before any further employer
contributions are so applied.
Upon commencement of benefits, the Trustee may, at the direction of
the Plan Administrator distribute such contract(s) to the former
Participant or convert the contracts to cash. Any annuity contracts
distributed shall be nontransferable. If the value of any insurance
contracts exceeds the lump sum value of the benefit, the Trustee may allow
the former Participant to contribute the amount of the excess to the Plan
in cash.
All policies covering the life of a Participant shall be distributed
or converted so that no life insurance on the Participant extends beyond
retirement.
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If any conflict exists between the terms of the Plan and any annuity
or insurance contact issued hereunder, the terms of the Plan shall
control.
(d) To segregate any part or portion of the Fund for the purpose of
administration or distribution thereof and, in its sole discretion,
to hold the Fund uninvested whenever and for so long as, in the
Trustee's discretion the same is likely to be required for payment
in cash of Participants' Benefits normally expected to be
distributed in the near future, or whenever, and for as long as
market conditions are uncertain, or for any other reason which, in
the Trustee's discretion, requires such action or makes such action
advisable.
(e) To retain and employ such attorneys, agents and servants as may be
necessary or desirable, in the opinion of the Trustee, in the
administration of the Fund, and to pay him/her such reasonable
Compensation for their services as may be agreed upon as an expense
of administration of the Fund, including power to employ and retain
counsel upon any matter of doubt as to the meaning of or
interpretation to be placed upon this Plan or any provisions thereof
with reference to any question arising in the administration of the
Fund or pertaining to the distribution thereof or pertaining to the
rights and liabilities of the Trustee hereunder or to the rights and
claims of Participants and Beneficiaries, and the Trustee, in any
such event, may act in reliance upon the advice, opinions, records,
statements, and computations of any attorneys and agents and on the
records, statements and computations of any servants so selected by
it in good faith and shall be released and exonerated of and from
all liability to anyone in so doing (except to the extent liability
is imposed under the Employee Retirement Income Security Act of
1974).
(f) To institute, prosecute, and maintain, or to defend, any proceeding
at law or in equity concerning the Plan or Fund or the assets
thereof or any claims thereof or any claims thereto, or the
interests of Participants and Beneficiaries hereunder at the sole
cost and expense of the Fund as, in the Trustee's option, shall be
fair and equitable in each case, and to compromise, settle and
adjust all claims and liabilities asserted by or against the
Trustee, on such terms as the Trustee, in each such case, shall deem
reasonable and proper, but the Trustee shall be under no duty or
obligation to institute, prosecute, maintain or defend any suit,
action or other legal proceeding unless it shall be indemnified to
its satisfaction against all expenses and liabilities which it may
sustain or anticipate by reason thereof.
(g) To institute, participate, and join in any plan of reorganization,
readjustment, merger, or consolidation with respect to the issuer of
any securities held by the Trustee hereunder and to use any other
means of protecting and dealing with any of the assets of the Fund
which it believes reasonably necessary or proper
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and, in general, to exercise each and every other power or right
with respect to each asset or investment held by it hereunder as
individuals generally have and enjoy with respect to their own
assets and investments, including power to vote upon any securities
or other assets having voting power which it may hold from time to
time, and to give proxies with respect thereto, with or without
power of substitution or revocation, and to deposit assets or
investments with any protective committee, or with Trustees or
depositories designated by any such committee or by any such
Trustees or any court.
(h) In any matter of doubt affecting the meaning, purpose or intent of
any provision of this Plan, to determine such meaning, purpose or
intent; and to determination of the Trustee in any such respect
shall be binding and conclusive upon all persons interested who may
become interested in the Plan or the Fund.
(i) To require, as a condition to distribution of any Participant's
Benefit, proof of identity or of authority of the person entitled to
receive the same, including power to require reasonable
indemnification on that account as a condition precedent to its
obligation to make distributions hereunder.
(j) To collect, receive, receipt and give quittance for all payments
that may be or become due and payable on account of any asset in
trust hereunder which has not, by act of the Trustee taken pursuant
thereto, been made payable others, and payment thereof by the
company issuing the same, or by the party obligated thereon, as the
case may be, when made to the Trustee hereunder or to any person or
persons designated by the Trustee, shall acquit, release and
discharge such company or obligated party from any and all liability
on account thereof.
(k) To determine from time to time, as required for the purpose of
determining necessary contributions or for any other purposes of the
Plan, the then value of the Fund, the Trustee, in each such case,
using and employing for that purpose the fair market value of each
of the assets constituting the Fund. Each such determination so made
by the Trustee in good faith shall be binding and conclusive upon
all persons interested or becoming interested in the Plan or the
Fund.
(l) To carry all investments of the Fund or any part thereof in its own
name or in the name of any nominee selected by it, without
designation of the trust capacity in which the same is held, but
with the same liability for any act or default of any such nominee
as for its own act or default; and to commingle and deposit cash of
the Fund in its own commercial department or savings department, or
both.
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(m) To grant an option or options for the sale or other disposition of a
trust asset, including the issuance of options for the purchase of
common stock held by the trust in return for the receipt of a
premium from the optionee (it being expressly intended that said
options may be in a form and in terms to permit their being freely
traded on an option exchange) and including the repurchase of any
such option granted, or in lieu thereof, the repurchase of an option
identical in terms to be the one issued.
(n) To have and to exercise such other and additional powers as may be
advisable or proper in its opinion for the effective, economical and
equitable administration of the Fund.
(o) The Trustee may cause all or any part of the Fund, without
limitation as to amount, to be commingled with the money of trusts
created by the Trustee or by others by causing such money to be
invested as a part of any or all of the Funds created by said
declarations of trust and the Fund so added to any of said Funds
shall be subject to all of the provisions of said declarations of
trust as the same may be amended from time to time so long as the
terms of said trust are not inconsistent with the terms and
provisions of this Plan.
In the event the Employer has appointed an Investment Manager to
manage, acquire or dispose of any assets of the trust Fund, then,
notwithstanding the rights, powers and discretions conferred upon the
Trustee in this section, the Trustee shall be subject to the direction of
the Investment Manager with respect to the assets under management by the
Investment Manager and shall have no responsibility to determine whether
any such directions are proper, in accordance with the terms of the Plan
or are permitted under applicable law.
15.10 Prohibited Transactions
Except as may be expressly permitted by law, unless the Department of
Labor has issued a specific or blanket prohibited transaction exemption, no
Trustee or other fiduciary hereunder shall permit the Plan to engage, directly
and indirectly, in any of the following transactions with a disqualified person
(as defined in Section 4975 of the Code):
(a) A sale or exchange, or leasing, of any property between the Plan and
a disqualified person;
(b) The lending of money or other extension of credit between the Plan
and a disqualified person;
(c) The furnishing of goods, services or facilities between the Plan and
a disqualified person;
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(d) A transfer to, or use by or for the benefit of, a disqualified
person of the income or assets of the Plan;
(e) An act by a disqualified person who is a fiduciary whereby the deals
with the income or assets of the Plan in his own interest or for his
own account; or
(f) The receipt of any consideration for his own personal account by any
disqualified person who is a fiduciary from any party dealing with
the Plan in connection with a transaction involving the income or
assets of the Plan.
15.11 Indemnity of Trustee
The Trustee shall be indemnified and held harmless by the Employer from
any and all liabilities, costs and expenses (including legal expenses) arising
out of any action taken by it pursuant to their duties hereunder as fiduciary or
in any other capacity with respect to his Plan, whether imposed under the
Employee Retirement Income Security Act of 1974, or otherwise, unless such
liability may arise from the proven gross negligence, bad faith or criminal
misconduct of the Trustee.
ARTICLE XVI Amendment, Termination and Merger
16.1 Amendment by Employer
The Employer may (1) change the choice of options in the Adoption
Agreement, (2) add overriding language to the Adoption Agreement when such
language is necessary to satisfy Section 415 or Section 416 of the Code because
of the required aggregation of multiple plans, and (3) add certain model
amendments published by the Internal Revenue Service which specifically provide
that their adoption will not cause the plan to be treated as individually
designed. An Employer that amends the Plan for any other reason will no longer
participate in this master or prototype Plan and will be considered to have an
individually designed Plan.
16.2 Amendment by Sponsor
The sponsoring organization may amend any part of the Plan. For purposes
of sponsoring organization amendments, the mass submitter shall be recognized as
the agent of the sponsoring organization. If the sponsoring organization does
not adopt the amendments made by the mass submitter, it will no longer be
identical to or a minor modifier of the mass submitter plan.
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<PAGE>
16.3 Limitation on Amendments
No amendment to the Plan (including a change in the actuarial basis for
determining optional or early retirement benefits) shall be effective to the
extent that it has the effect of decreasing a Participant's Accrued Benefit.
Notwithstanding the preceding sentence, a Participant's Accrued Benefit may be
reduced to the extent permitted under Section 412(c)(8) of the Code. For
purposes of this paragraph, a Plan amendment which has the effect of
(1) Eliminating or reducing an early retirement benefit or a
retirement-type subsidy, or
(2) Eliminating an optional form of benefit, with respect to benefits
attributable to service before the amendment shall be treated as
reducing accrued benefits.
In the case of a retirement-type subsidy, the preceding sentence shall
apply only with respect to a Participant who satisfies (either before or after
the amendment) the preamendment conditions for the subsidy. In general, a
retirement-type subsidy is a subsidy that continues after retirement, but does
not include a qualified disability benefit, a medical benefit, a social security
supplement, a death benefit (including life insurance), or a plant shutdown
benefit (that does not continue after retirement age).
Furthermore, if the Vesting schedule of a plan is amended, in the case of
an Employee who is a Participant as of the later of the date such amendment is
adopted or the date it becomes effective, the nonforfeitable percentage
(determined as of such date) of such Employee's employer-derived Accrued Benefit
will not be less than the percentage computed under the Plan without regard to
such amendment.
16.4 Amendments to the Plans Vesting Schedule
If the Plan's Vesting schedule is amended or the Plan is amended in any
way that directly or indirectly affects the computation of a Participant's
nonforfeitable percentage, or if the Plan is deemed amended by an automatic
change to or from a top-heavy Vesting schedule, each Participant with at least 3
years of service with the Employer may elect within a reasonable period after
the adoption of the amendment or change, to have his nonforfeitable percentage
computed under the plan without regard to such amendment or change. For
Participants who do not have at least one Hour of Service in any Plan Year
beginning after December 31, 1988, the preceding sentence shall be applied by
substituting "5 Years of Service" for "3 Years of Service where such language
appears.
85
<PAGE>
The period during which the election may be made shall commence with the
date the amendment is adopted or deemed to be made and shall end on the latest
of:
(1) 60 days after the amendment is adopted;
(2) 60 days after the amendment becomes effective; or
(3) 60 days after the Participant is issued written notice of the
amendment by the Employer or Plan Administrator.
16.5 Termination of Plan
The Employer has established the Plan with a bona fide intention and
expectation that it will be able to make its contributions indefinitely, but the
Employer is not and shall not be under any obligation or liability whatsoever to
continue its contributions or to maintain the Plan for any given length of time
and may, in its sole and absolute discretion, discontinue such contributions or
terminate the Plan at any time without any liability. In the event of the
termination or partial termination of this Plan, the rights of all affected
Employees to benefits accrued to the date of such termination or partial
termination (to the extent funded as of such date) shall be nonforfeitable.
16.6 Employer Reversion
If a balance remains in the Plan after assets have been allocated to
provide all benefits accrued by participants under the Plan and after all
liabilities and expenses of the Plan have been paid, and if upon Plan
termination all Plan liabilities are satisfied and there are any excess assets
arising from erroneous actuarial computation, such balance shall be paid to the
Employer or reallocated to Participants pursuant to ERISA Section 4044, as
elected on the Adoption Agreement.
If plan benefits are provided through the distribution of annuity or
insurance contracts, any refunds or credits in excess of Plan benefits (on
account of dividends, earnings, or other experience rating credits, or surrender
[illegible] cancellation credits) will be paid to the trust.
16.7 Merger
The Plan shall not be merged or consolidated with any other plan, and no
assets or liabilities of the Plan shall be transferred to any other plan, unless
each person having an interest in the Fund would (if the Plan were then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or
86
<PAGE>
greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (if the Plan had then terminated).
16.8 Exclusive Benefit
In no event shall any part of the Fund corpus or income be paid to or
become Vested in the Employer, or be used for any purpose whatsoever other than
for the exclusive benefit of Participants and their Beneficiaries, except as may
be provided in Section 16.6 and except that contributions of the Employer may be
returned if:
(a) In the event that the Commissioner of Internal Revenue determines
that the Plan is not initially qualified under the Code, any
contribution made incident to that initial qualification by the
Employer must be returned to the Employer within one year after the
date the initial qualification is denied, but only if the
application for the qualification is made by the time prescribed by
law for filing the Employer's return for the taxable year in which
the Plan is adopted, or such later date as the Secretary of the
Treasury may prescribe.
(b) The contributions was made due to a mistake of fact, the
contribution is returned within one year of the mistaken payment of
the contribution and the return satisfies the requirements of
paragraph (d) of this section; or
(c) The contribution was conditioned on its deductibility under Section
404 of the Code, the deduction was disallowed under such Section,
the contribution is returned within one year of the disallowance of
the deduction and the return satisfies paragraph (d) of this
section.
(d) The return of a contribution (or a portion of a contribution) to the
Employer satisfies the requirements of this paragraph if the amount
so returned
(1) Does not exceed the excess of the contribution over the amount
which would have been contributed if the Plan had not been
disqualified or the requalification denied or if there had
been no mistake of fact or error in determining the deduction,
as the case may be,
(2) Does not include the net earnings attributable to such excess
contributions,
(3) is reduced by any net losses attributable to the excess
contribution, and
87
<PAGE>
(4) Does not reduce the Benefit of any Participant to less than
the Benefit would have been had the returned contribution
never been made.
16.9 Loans to Participants
No loans shall be available to Participants under the terms of this Plan.
16.10 Withdrawal by Sponsor/Failure to Maintain Qualified Status
The withdrawal of this Plan by the sponsor shall cause the establishment
of an individually designed Plan as provided in Section 16.1 or the Employer may
elect to adopt another master or prototype plan. If the employer's Plan fails to
attain or retain qualification, such Plan shall no longer participate in this
prototype plan and will be considered an individually designed plan.
ARTICLE XVII Miscellaneous
17.1 No Guaranty of Employment
The adoption and maintenance of the Plan shall not be deemed to be a
contract between the Employer and any Employee. Nothing herein contained shall
be deemed to give any Employee the right to be retained in the employ of the
Employer or to interfere with the right of the Employer to discharge any
Employee at any time, nor shall it be deemed to give the Employer the right to
require any Employee to remain in its employ, nor shall interfere with the
Employee's right to terminate his employment at any time.
17.2 Spendthrift Provisions
Except as otherwise provide by law, benefits available hereunder and any
interest of a Participant or beneficiary in the Fund shall not be subject to
assignment, transfer or anticipation or otherwise alienable either [ILLEGIBLE]
voluntary or involuntary act or by operation of law, nor subject to attachment,
execution, garnishment, levy, sequestration or other seizure under any legal or
equitable process. The foregoing shall also apply to the [illegible], assignment
or recognition of a right to any benefit payable with respect to a Participant
pursuant to a Domestic Relations Order unless such order is determined by the
Employer to be a Qualified Domestic Relations Order, as defined in Section
414(p) of the Code, or any Domestic Relations Order entered before January 1,
1985.
88
<PAGE>
17.3 Conflict of Interest
If the Employer or any other person to whom fiduciary or administrative
authority has been delegated or redelegated hereunder shall also be a
Participant in this Plan, he shall have no authority being reserved exclusively
to others empowered to act, to the exclusion of such Participant, and such
Participant shall act only his individual capacity in connection with any such
matter, except to the extent no other person or entity is empowered to act.
17.4 Disclaimers
Neither the Employer nor its owners, officers or directors in any way
guarantee the Fund against loss or depreciation, nor do they guarantee the
payment of any benefit or amount which may become due and payable hereunder to
any Participant or to any Beneficiary or to any creditor of a Participant or a
Beneficiary except to the extent required by law. Each Participant, Beneficiary,
or other person entitled at any time to payments hereunder shall look solely to
the assets of the Fund for such payments or to the Participant's Account
distributed to any Participant or Beneficiary, as the case may be, for such
payments hereunder shall look solely to the assets of the Fund for such
payments. In each case where a Participant's Benefit shall have been distributed
to a Participant or a Beneficiary or to the persons entitled jointly to the
receipt thereof and [illegible] purpose to cover in full the benefit hereunder,
such Participant, or Beneficiary, or such person or persons, as the case may be,
shall have no further right or interest in the other assets of the Fund.
17.5 Role of Sponsor and Financial Institution
The Sponsor which makes this Plan available to the Employer shall not be
considered a party to the Plan except to the extent that Sponsor is a financial
institution with trust powers under the laws of its domicile or under federal
law serves in the capacity of a Trustee and then only to the extent of its
duties and responsibilities [illegible] Trustee, as specifically set forth in
this Plan. The Sponsor shall not be responsible for the validity of this Plan
under any law, the availability of any tax benefits of adopting this Plan or any
other responsibilities not expressly presumed or allocated to it herein.
17.6 Annuities
Any annuity contract distributed by the plan under the provisions of this
article or any other articles shall be nontransferable. The terms of any annuity
contract purchased and distributed by the plan to a participant or spouse shall
comply with the requirements of this plan.
89
EXHIBIT 21
List of Subsidiaries
BankFirst Corporation (Tennessee)
BankFirst (Tennessee Banking Corporation)
Curtis Mortgage Co., Inc. (Tennessee)
Eastern Life Insurance Company (Tennessee)
The First National Bank and Trust Company (National Banking Association)
Friendly Finance, Inc. (Tennessee)
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-1 of
BankFirst Corporation, of our report dated February 6, 1998 on the 1997
consolidated financial statements of BankFirst Corporation (formerly Smoky
Mountain Bancorp, Inc.). We also consent to the reference to us under the
heading "Experts" in the prospectus.
/s/ Crowe, Chizek and Company LLP
-------------------------------
Crowe, Chizek and Company LLP
Louisville, Kentucky
June 17, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 dated
June 18, 1998 of our report, which includes an explanatory paragraph referring
to the restatement of the financial statements as of and for the year ended
December 31, 1995 for the 1996 combination accounted for in a manner similar to
a pooling of interest and referring to the work of other auditors on the
separate consolidated financial statements of Smoky Mountain Bancorp, Inc.,
dated February 6, 1997, on our audit(s) of the financial statements and the
financial statements schedules of BankFirst Corporation (formerly known as Smoky
Mountain Bancorp, Inc.). We also consent to the reference to our firm under the
caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Knoxville, Tennessee
June 17, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-1 of
BankFirst Corporation, of our report dated January 22, 1998 on the 1997, 1996
and 1995 consolidated financial statements of First Franklin Bancshares, Inc. We
also consent to the reference to us under the heading "Experts" in the
prospectus.
/s/ G.R. Rush & Company, P.C.
-----------------------------
G.R. Rush & Company, P.C.
Chattanooga, Tennessee
June 17, 1998
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-1 of
BankFirst Corporation, of our report dated January 24, 1996, on the 1995
financial statements of BankFirst Corporation (formerly Smoky Mountain Bankcorp,
Inc.), prior to the restatement for the 1996 combination with BankFirst
accounted for in a manner similar to a pooling of interest. We also consent to
the reference to us under the heading "Experts" in the prospectus.
/s/ Hazlett, Lewis & Bieter
- ---------------------------
Chattanooga, Tennessee
June 17, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 824719
<NAME> BankFirst Corporation
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-mos 3-mos
<FISCAL-YEAR-END> DEC-31-1997 MAR-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 17,363 23,711
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 7,000 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 71,912 75,206
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 350,566 366,206
<ALLOWANCE> 5,002 5,177
<TOTAL-ASSETS> 468,750 516,827
<DEPOSITS> 395,152 410,125
<SHORT-TERM> 16,511 48,675
<LIABILITIES-OTHER> 8,208 8,025
<LONG-TERM> 10,000 10,000
0 0
1,093 1,079
<COMMON> 3,099 3,105
<OTHER-SE> 34,687 35,818
<TOTAL-LIABILITIES-AND-EQUITY> 468,750 516,827
<INTEREST-LOAN> 32,769 9,088
<INTEREST-INVEST> 4,635 1,146
<INTEREST-OTHER> 221 46
<INTEREST-TOTAL> 37,625 10,280
<INTEREST-DEPOSIT> 15,044 3,774
<INTEREST-EXPENSE> 16,474 4,402
<INTEREST-INCOME-NET> 21,151 5,878
<LOAN-LOSSES> 2,250 225
<SECURITIES-GAINS> 175 0
<EXPENSE-OTHER> 15,784 5,148
<INCOME-PRETAX> 6,537 1,978
<INCOME-PRE-EXTRAORDINARY> 6,537 1,978
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,066 1,232
<EPS-PRIMARY> 3.12 .94
<EPS-DILUTED> 2.80 .84
<YIELD-ACTUAL> 9.14 9.55
<LOANS-NON> 642 592
<LOANS-PAST> 1,533 1,861
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 113 71
<ALLOWANCE-OPEN> 3,570 5,002
<CHARGE-OFFS> 878 62
<RECOVERIES> 60 11
<ALLOWANCE-CLOSE> 5,002 5,177
<ALLOWANCE-DOMESTIC> 4,096 4,135
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 906 1,042
</TABLE>
EXHIBIT 99.1
Date
Re: Form S-1, Securities and Exchange Commission
BankFirst Corporation
To Whom It May Concern:
We, the undersigned have been nominated to serve as directors of BankFirst
Corporation and hereby consent to the use of our names in the filing of Form S-1
Registration Statement under the Securities Act of 1933 with the Securities and
Exchange Commission.
This statement may be signed in counterpart.
/s/ L. A. Walker, Jr.
----------------------------------
L. A. Walker, Jr.
/s/ W. D. Sullins, Jr.
----------------------------------
W. D. Sullins, Jr.
/s/ C. Scott Mayfield, Jr.
----------------------------------
C. Scott Mayfield, Jr.
