As filed with the Securities and Exchange Commission June 12, 1998
Registration No. 333-52051
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BANKFIRST CORPORATION
(exact name of registrant as specified in its charter)
Tennessee 6712 58-1790903
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
Fred R. Lawson, President and
Chief Executive Officer
625 Market Street BankFirst Corporation
Knoxville, TN 37902 625 Market Street
(423) 595-1100 Knoxville, TN 37902
(Address, including zip code, (423) 595-1100
and telephone number,including area (Name,address,including zip code,and
code, of registrant's principal telephone number,including area
executive office) code,of agent for service)
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Copies To:
Kathryn Reed Edge L.A. Walker, Jr., Robert G. McCullough
Miller & Martin LLP Chairman and Chief Baker, Donelson,
Suite 2325, Executive Officer Bearman & Caldwell, P.C.
SunTrust Center First Franklin Bancshares, Inc. 511 Union Street
424 Church Street 204 Washington Avenue Suite 1700
Nashville, TN 37219 Athens, TN 37371 Nashville, TN 37219
(615) 244-3119 (423) 745-2452 (615) 726-5600
Approximate date of commencement of proposed sale of securities to public:
As soon as practicable after the effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
BANKFIRST CORPORATION
625 Market Street, Knoxville, TN 37902
June __, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
BankFirst Corporation ("BFC"), to be held on Friday, June 26, 1998, on the 15th
floor of the main office of BankFirst at 625 Market Street, Knoxville, Tennessee
37902 at 8:00 a.m., Eastern Daylight Savings Time (the "BFC Meeting").
At this meeting, you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger, dated as of March 19, 1998 (the "Merger
Agreement"), between First Franklin Bancshares, Inc. ("FFBS") and BFC, which
provides for the merger of FFBS with and into BFC (the "Merger"), with BFC to be
the surviving corporation. The proposed Merger is more fully described in the
accompanying Joint Proxy Statement/Prospectus.
If the Merger is approved and consummated, the Merger Agreement provides
that (i) each issued and outstanding share of common stock of FFBS, $5.00 par
value per share ("FFBS Common"), other than shares of FFBS Common held as
treasury stock, will be converted into the right to receive 4.410 shares of
common stock of BFC, $2.50 par value per share (the "BFC Common") and cash in
lieu of fractional shares, and (ii) each issued and outstanding share of BFC
Common Stock will remain issued and outstanding, unaffected by the Merger.
As a result of the Merger, the separate existence of FFBS will cease and
First National Bank and Trust Company of Athens, a wholly-owned subsidiary of
FFBS, will become a wholly-owned subsidiary of BFC and will continue in
operation serving its current markets as a national banking association.
At the BFC Meeting, shareholders will also consider and vote on (i) the
election of L. A. Walker, Jr., W. D. Sullins, Jr., and C. Scott Mayfield, Jr. to
fill three additional positions on the Board of Directors of BFC which will be
created upon the effectiveness of the Merger; such nominees were chosen from the
current Board of Directors of FFBS and (ii) an amendment to the BFC Charter
authorizing a five for one stock split of BFC Common, to be effective on June
30, 1998 or immediately after the Merger, whichever is later.
The enclosed Notice of Special Meeting of Shareholders and Joint Proxy
Statement/Prospectus explain the Merger and provide specific information
relative to the BFC Meeting. Please carefully read these materials and
thoughtfully consider the information contained in them. A representative of
BFC's accounting firm will be available during the BFC Meeting to respond to
questions.
The Board of Directors of BFC believes that the Merger and the Merger
Agreement are fair to, and in the best interests of, BFC and its shareholders.
The Boards of Directors of both FFBS and BFC have approved the Merger Agreement.
The Board of Directors of BFC recommends that you vote FOR approval of the
Merger Agreement, election of the director nominees and approval of the Charter
amendment.
Your vote is important since approval of the Merger requires the
affirmative vote of a majority of the outstanding shares of BFC Common. Whether
or not you plan to attend the BFC Meeting, you are urged to promptly complete,
sign, date and return the accompanying Proxy in the enclosed envelope, so that
your shares may be represented at the BFC Meeting. All shareholders are invited
to attend the BFC Meeting in person, and you may, if you wish, vote personally
on all matters brought before the BFC Meeting, even if you have previously
returned your Proxy.
Sincerely,
Fred R. Lawson
President and Chief Executive Officer
<PAGE>
FIRST FRANKLIN BANCSHARES, INC.
204 Washington Avenue, Athens, TN 37371
June __, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
First Franklin Bancshares, Inc. ("FFBS"), to be held on Friday, June 26, 1998,
at the operations center of The First National Bank and Trust Company ("Athens")
at 3 South Hill Street, Madison Park Center, Athens, Tennessee 37371 at 10:00
a.m., Eastern Daylight Savings Time (the "FFBS Meeting").
At this meeting, you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger, dated as of March 19, 1998 (the "Merger
Agreement"), between FFBS and BankFirst Corporation ("BFC"), which provides for
the merger of FFBS with and into BFC (the "Merger"), with BFC to be the
surviving corporation. The proposed Merger is more fully described in the
accompanying Joint Proxy Statement/Prospectus.
If the Merger is approved and consummated, the Merger Agreement provides
that (i) each issued and outstanding share of common stock of FFBS, $5.00 par
value per share ("FFBS Common"), other than shares of FFBS Common held as
treasury stock, will be converted into the right to receive 4.410 shares of
common stock of BFC, $2.50 par value per share ("BFC Common"), and cash in lieu
of fractional shares and (ii) each issued and outstanding share of BFC Common
will remain issued and outstanding, unaffected by the Merger. With respect to
BFC Common received in the transaction by FFBS shareholders, the Merger
Agreement provides for a tax-free exchange.
BFC anticipates that a five for one stock split of BFC Common will occur
on June 30, 1998 or immediately after the Merger, whichever is later. As a
result of that stock split, each share of BFC Common received by FFBS
shareholders in the Merger will become five shares of BFC Common.
As a result of the Merger, the separate existence of FFBS will cease and
Athens, a wholly-owned subsidiary of FFBS, will become a wholly-owned subsidiary
of BFC and will continue in operation serving its current markets as a national
banking association.
The enclosed Notice of Special Meeting of Shareholders and Joint Proxy
Statement/Prospectus explain the Merger and provide specific information
relative to the FFBS Meeting. Please carefully read these materials and
thoughtfully consider the information contained in them. A representative of
FFBS's accounting firm will be present at the FFBS Meeting and available to
respond to questions.
The Board of Directors of FFBS believes that the transactions contemplated
by the Merger Agreement are fair to and in the best interests of FFBS and its
shareholders. The Boards of Directors of both FFBS and BFC have approved the
Merger Agreement. The Board of Directors of FFBS recommends that you vote FOR
approval of the Merger Agreement.
Your vote is of great importance since approval of the Merger requires the
affirmative vote of a majority of the outstanding shares of FFBS Common. Whether
or not you plan to attend the FFBS Meeting, you are urged to promptly complete,
sign, date and return the accompanying Proxy in the enclosed envelope, so that
your shares may be represented at the FFBS Meeting. All shareholders are invited
to attend the FFBS Meeting in person, and you may, if you wish, vote personally
on all matters brought before the FFBS Meeting, even if you have previously
returned your Proxy.
Sincerely,
L.A. Walker, Jr.,
Chairman and Chief Executive Officer
<PAGE>
BANKFIRST CORPORATION
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 26, 1998
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NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of BankFirst
Corporation ("BFC") will be held on Friday, June 26, 1998 on the 15th floor of
the main office of BankFirst at 625 Market Street, Knoxville, Tennessee 37902 at
8:00 a.m., Eastern Daylight Savings Time, for the following purposes:
1. To consider and vote upon the approval and adoption of an Agreement
and Plan of Merger dated as of March 19, 1998 (the "Merger
Agreement") between First Franklin Bancshares, Inc. ("FFBS") and
BFC, a copy of which is set forth as Appendix A to the attached
Joint Proxy Statement/Prospectus. The Merger Agreement provides for,
among other things, the proposed merger of FFBS with and into BFC
(the "Merger"), with BFC to be the surviving corporation of the
Merger;
2. To consider and vote upon the election of L. A. Walker, Jr., W. D.
Sullins, Jr., and C. Scott Mayfield, Jr. to fill three additional
positions on the Board of Directors of BFC which will be created
upon the effectiveness of the Merger; such nominees will serve as
members of the board until the next annual meeting or until their
successors are duly elected and qualified;
3. To consider and vote upon an amendment to the BFC Charter which
authorizes a five for one stock split of BFC Common to be effective
June 30, 1998 or immediately after the Merger, whichever is later.
4. To transact such other business as may properly come before the
meeting. The Board of Directors of BFC is not aware of any other
business to come before the meeting.
The foregoing items of business are more fully described in the Joint
Proxy Statement/Prospectus accompanying this Notice.
Only shareholders of record at the close of business on May 15, 1998 are
entitled to notice of, and to vote at, the meeting and any adjournments thereof.
Approval of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of BFC common stock. Approval of the director
nominees and Charter amendment require the affirmative vote of a majority of the
common stock of BFC which is represented at the meeting. The Board of Directors
of BFC recommends that shareholders vote FOR approval of the Merger Agreement,
the director nominees and the Charter amendment.
BY ORDER OF THE BOARD OF DIRECTORS
Secretary
Knoxville, Tennessee
June __, 1998
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YOUR VOTE IS IMPORTANT
To ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. To revoke a proxy, you must submit to the
Secretary of BFC, prior to voting, either a signed instrument of revocation or a
duly executed proxy bearing a date or time later than the proxy being revoked.
If you attend the meeting, you may vote in person even if you previously
returned a proxy.
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FIRST FRANKLIN BANCSHARES, INC.
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on June 26, 1998
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NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of First
Franklin Bancshares, Inc. ("FFBS") will be held on Friday, June 26, 1998 at the
operations center of The First National Bank and Trust Company ("Athens") at 3
South Hill Street, Madison Park Center, Athens, Tennessee 37371 at 10:00 a.m.,
Eastern Daylight Savings Time, for the following purposes:
1. To consider and vote upon the approval and adoption of an Agreement
and Plan of Merger dated as of March 19, 1998 (the "Merger
Agreement") between FFBS and BankFirst Corporation ("BFC"), a copy
of which is set forth as Appendix A to the attached Joint Proxy
Statement/Prospectus. The Merger Agreement provides for, among other
things, the merger of FFBS with and into BFC (the "Merger"), with
BFC to be the surviving corporation of the Merger;
2. To transact such other business as may properly come before the
meeting. The Board of Directors of FFBS is not aware of any other
business to come before the meeting.
The foregoing items of business are more fully described in the Joint
Proxy Statement/Prospectus accompanying this Notice.
Only shareholders of record at the close of business on May 15, 1998 are
entitled to notice of, and to vote at, the meeting and any adjournments thereof.
Approval of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of FFBS common stock. The Board
of Directors of FFBS recommends that shareholders vote FOR approval of the
Merger Agreement.
BY ORDER OF THE BOARD OF DIRECTORS
Secretary
Athens, Tennessee
June __, 1998
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YOUR VOTE IS IMPORTANT
To ensure your representation at the meeting, you are urged to mark, sign, date
and return the enclosed proxy as promptly as possible in the postage-prepaid
envelope enclosed for that purpose. To revoke a proxy, you must submit to the
Secretary of FFBS, prior to voting, either a signed instrument of revocation or
a duly executed proxy bearing a date or time later than the proxy being revoked.
If you attend the meeting, you may vote in person even if you previously
returned a proxy.
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<PAGE>
JOINT PROXY STATEMENT
BANKFIRST CORPORATION FIRST FRANKLIN BANCSHARES, INC.
Proxy Statement for Proxy Statement for
Special Meeting of Shareholders Special Meeting of Shareholders
To Be Held on June 26, 1998 To Be Held on June 26, 1998
PROSPECTUS
BANKFIRST CORPORATION
Common Stock
This Joint Proxy Statement/Prospectus relates to the proposed merger of
First Franklin Bancshares, Inc. ("FFBS") with and into BankFirst Corporation
("BFC") upon the terms and subject to the conditions set forth in the Agreement
and Plan of Merger, dated as of March 19, 1998, by and between FFBS and BFC (the
"Merger Agreement").
This Joint Proxy Statement/Prospectus is being furnished in connection
with the solicitation of proxies by the Board of Directors of BFC (the "BFC
Board") to be used at the Special Meeting of Shareholders of BFC to be held on
June 26, 1998 (the "BFC Meeting") and by the Board of Directors of FFBS (the
"FFBS Board") to be used at the Special Meeting of Shareholders of FFBS to be
held on June 26, 1998 (the "FFBS Meeting," and together with the BFC Meeting,
the "Meetings").
At the Meetings, shareholders of BFC and FFBS will consider and vote upon
the approval and adoption of the Merger Agreement. In addition, at the BFC
Meeting, the BFC shareholders will consider and vote on (i) nominees to fill
three additional BFC Board positions which will be created upon the
effectiveness of the Merger; such nominees will be chosen from the current FFBS
Board and (ii) a Charter amendment authorizing a five for one stock split of
BFC's outstanding common stock to be effective June 30, 1998 or immediately
after the Merger, whichever is later.
The Merger Agreement provides that (i) each issued and outstanding share
of common stock of FFBS, $5.00 par value per share ("FFBS Common"), other than
shares of FFBS Common held as treasury stock, will be converted into the right
to receive 4.410 shares of common stock of BFC, $2.50 par value per share ("BFC
Common"), and cash in lieu of fractional shares, and (ii) each issued and
outstanding share of BFC Common will remain issued and outstanding, unaffected
by the Merger. As a result of the Merger, the separate existence of FFBS will
cease, and The First National Bank and Trust Company ("Athens"), a wholly-owned
subsidiary of FFBS, will become a wholly-owned subsidiary of BFC and will
continue in operation under its existing federal charter as a national banking
association serving its local market.
This Joint Proxy Statement/Prospectus also serves as a Prospectus under
the Securities Act of 1933, as amended (the "Securities Act"), relating to a
maximum of 723,791 shares of BFC Common issuable to holders of FFBS Common
pursuant to the Merger. This Joint Proxy Statement/Prospectus and the
accompanying forms of proxy are first being mailed to the shareholders of BFC
and FFBS on or about June __, 1998.
There is no established trading market for either BFC Common or FFBS
Common. The exchange ratio was arrived at by arms-length negotiation between the
BFC Board and the FFBS Board. See "The Merger." To management of BFC's knowledge
and management of FFBS' knowledge, the most recent transactions with respect to
the BFC Common and the FFBS Common were at $50.00 per share and $167.00 per
share, respectively.
See "Risk Factors" on page 9 for a summary of certain material risks and
considerations relating to an investment in BFC Common.
THE SHARES OF BFC COMMON OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THE SECURITIES TO BE ISSUED IN THE MERGER 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 JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Joint Proxy Statement/Prospectus is June _____, 1998.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT
LAWFULLY BE MADE. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS.
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AVAILABLE INFORMATION
All information concerning BFC included in this Joint Proxy
Statement/Prospectus and the attached Appendices has been furnished by BFC and
all information concerning FFBS included in this Joint Proxy
Statement/Prospectus and the attached Appendices has been furnished by FFBS.
BFC has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") covering the
securities described herein. This Joint Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. Statements contained herein or incorporated herein by reference concerning
the provisions of documents are summaries of such documents, and each statement
is qualified in its entirety by reference to the applicable document if filed
with the SEC or attached as an appendix hereto. For further information,
reference is hereby made to the Registration Statement and the exhibits filed
therewith. The Registration Statement and any amendments thereto, including
exhibits filed as a part thereof, are available for inspection and copying as
set forth below.
BFC will become subject to the information filing requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports and other information with the SEC. Such
reports and other information will be available for copying and inspection at
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates, as well as at the following Regional Offices of
the SEC: Seven World Trade Center, New York, New York 10048; and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such
material will also be accessible electronically by means of the SEC's home page
on the Internet at http://www.sec.gov through the SEC's Electronic Data
Gathering Analysis and Retrieval ("EDGAR") System.
In addition, BFC intends to furnish its shareholders with annual reports
containing financial statements audited by BFC's independent accountants and to
make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited financial statements.
2
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
in this Joint Proxy Statement/Prospectus and in the attached Appendices.
Shareholders of BFC and FFBS are urged to carefully read this Joint Proxy
Statement/Prospectus and the attached Appendices in their entirety.
The Companies
BFC, incorporated in Tennessee in 1988, is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").
BFC's principal asset is the capital stock of BankFirst, a Tennessee banking
corporation. At March 31, 1998, BFC had consolidated total assets of $517
million and shareholders' equity of $40 million. BFC's principal offices are
located at 625 Market Street, Knoxville, Tennessee 37902 and its telephone
number is (423) 595-1100. See "BUSINESS OF BFC."
FFBS, incorporated in Tennessee in 1982, is a bank holding company
registered under the BHCA. FFBS' principal asset is the capital stock of Athens,
a national banking association. At March 31, 1998 FFBS had consolidated total
assets of $185 million and stockholders' equity of $22 million. FFBS' principal
offices are located at 204 Washington Avenue, Athens, Tennessee 37371-0100 and
its telephone number is (423) 745-2452. See "BUSINESS OF FFBS."
Special Meetings of Shareholders
The BFC Meeting will be held on Friday, June 26, 1998, on the 15th floor
of the main office of BankFirst at 625 Market Street, Knoxville, Tennessee 37902
at 8:00 a.m., Eastern Daylight Savings Time. Only holders of record of BFC
Common at the close of business on May 15, 1998 (the "BFC Record Date") will be
entitled to vote at the BFC Meeting. On the BFC Record Date, there were issued
and outstanding 1,275,893 shares of BFC Common held by approximately 250 holders
of record. Each such share is entitled to one vote on each matter which comes up
at the BFC Meeting. See "THE SPECIAL MEETINGS."
At the BFC Meeting, shareholders of BFC will be asked to consider and vote
upon a proposal to approve and adopt the Merger Agreement, which provides for
the merger of FFBS with and into BFC, with BFC to be the surviving corporation.
In addition, if the Merger is approved, shareholders will consider and vote upon
election of nominees to fill three additional positions on the BFC Board which
will be created upon the effectiveness of the Merger; such nominees will serve
as members of the BFC Board until the next annual meeting or until their
successors are duly elected and qualified and will be chosen from the current
members of the FFBS Board. The BFC shareholders will also be asked to consider
and vote upon a charter amendment to authorize a five for one stock split of BFC
Common. Approval of the Merger requires the affirmative vote of a majority of
the outstanding shares of BFC Common. Election of each of the nominees and
approval of the Charter amendment require the affirmative vote of a majority of
the shares of BFC Common which are represented at the BFC Meeting. See "THE
SPECIAL MEETINGS."
The FFBS Meeting will be held on Friday, June 26, 1998, at the operations
center for Athens at 3 South Hill Street, Madison Park Center, Athens, Tennessee
37371 at 10:00 a.m., Eastern Daylight Savings Time. Only holders of record of
FFBS Common at the close of business on May 15, 1998 (the "FFBS Record Date")
will be entitled to vote at the FFBS Meeting. On the FFBS Record Date, there
were issued and outstanding 164,125 shares of FFBS Common held by approximately
300 holders of record. Each share is entitled to one vote on each matter to come
up at the FFBS Meeting. See "THE SPECIAL MEETINGS."
At the FFBS Meeting, shareholders of FFBS will be asked to consider and
vote upon a proposal to approve and adopt the Merger Agreement, which provides
for the merger of FFBS with and into BFC, with BFC to be the surviving
corporation. Approval of the Merger Agreement requires the affirmative vote of a
majority of the outstanding shares of FFBS. See "THE SPECIAL MEETINGS."
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3
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Terms of the Merger
Upon the effectiveness of the Merger (the "Effective Time"), each share of
FFBS Common outstanding prior to the Effective Time will be converted into a
right to receive 4.410 fully paid and non-assessable shares of BFC Common.
Shareholders of FFBS, who do not exercise dissenters' rights, will receive BFC
Common in exchange for their shares of FFBS Common. No fractional shares of BFC
Common will be issued in connection with the Merger. In lieu of fractional
shares, BFC will make a cash payment for the fractional interest based on a
value of $60 per share. See "THE MERGER--Terms of the Merger." As promptly as
practicable after the Effective Time, BFC will provide letters of transmittal to
shareholders of FFBS for the purpose of exchanging their certificates of FFBS
Common for certificates of BFC Common. See "THE MERGER--Surrender of
Certificates."
As a result of the Merger, the separate existence of FFBS will cease and
Athens, a wholly owned subsidiary of FFBS, will become a wholly-owned subsidiary
of BFC and will continue in operation serving its current markets as a national
banking association. After the Merger, BFC will continue to be managed by its
existing board of directors and officers. However, three new directors, chosen
from the existing FFBS Board, will be added to the BFC Board. See "THE
MERGER--Management After the Merger."
Subsequent Events
Subsequent to the signing of the Merger Agreement and with the approval of
FFBS, the BFC Board proposed to amend the BFC Charter to (i) increase the number
of authorized shares of BFC Common from 3,000,000 to 15,000,000; (ii) remove the
provision authorizing 1,000,000 shares of non-voting common stock, par value
$2.50 per share (there were no shares of such non-voting common stock issued and
outstanding); and (iii) change the name of BFC from "Smoky Mountain Bancorp,
Inc." to "BankFirst Corporation." All three charter amendments were approved and
adopted by the BFC shareholders on April 27, 1998.
Conditions; Regulatory Approvals
Consummation of the Merger is subject to various conditions, including
receipt of the shareholder approval solicited hereby, receipt of the necessary
regulatory approvals, FFBS' receipt of a fairness opinion, receipt of an opinion
of counsel regarding certain tax aspects of the Merger, receipt of an
accountant's letter stating that the Merger can be accounted for as a pooling of
interests, and satisfaction of customary closing conditions.
The regulatory approvals and consents necessary to consummate the
transactions contemplated by the Merger Agreement include the approval of the
Federal Deposit Insurance Corporation (the "FDIC"), the Tennessee Department of
Financial Institutions (the "TDFI"), and the Board of Governors of the Federal
Reserve (the "FRB"). Applications have been submitted for such approvals. There
can be no assurances as to when, if, or with what conditions such approvals will
be granted. See "THE MERGER--Conditions to Consummation of the Merger," and
"--Regulatory Approvals."
Certain Differences in Shareholders' Rights
As a result of the Merger, shareholders of FFBS will become shareholders
of BFC. Both FFBS and BFC are Tennessee corporations registered as bank holding
companies pursuant to the BHCA. Therefore, the statutory provisions governing
the rights of FFBS shareholders will not change as a result of the Merger.
However, at the Effective Time, FFBS shareholders will become subject to the
provisions of BFC's charter and bylaws. The rights of shareholders of FFBS
currently differ from rights of shareholders of BFC with respect to certain
important matters, including authorized capital stock, number and qualification
of directors, indemnification of officers and directors, and dividend policy.
For a summary of these differences, see "EFFECT OF THE MERGER ON RIGHTS OF
SHAREHOLDERS."
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4
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Dissenters' Rights
Under the Tennessee Business Corporation Act ("TBCA"), holders of BFC
Common and holders of FFBS Common who vote against the Merger and who deliver to
BFC or FFBS, respectively, the required written demand and who otherwise comply
with the requirements of the TBCA will be entitled to receive the value of their
shares in cash as determined under the provisions of the TBCA. Such right will
be lost, however, if the procedural requirements of the TBCA are not fully and
precisely satisfied. See "THE MERGER--Dissenters' Rights."
Certain Federal Income Tax Consequences
FFBS will receive an opinion of counsel that for federal income tax
purposes the Merger will be treated as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, and,
accordingly, for federal income tax purposes, shareholders of FFBS Common will
not recognize gain or loss upon the receipt of BFC Common, except to the extent
of any cash received in lieu of fractional shares. See "THE MERGER--Certain
Federal Income Tax Consequences."
FFBS shareholders are urged to consult their own tax advisers as to the
specific tax consequences to them of the Merger, including the applicability and
effect of federal, state, local and other tax laws.
Market Prices of Common Stock
Neither BFC Common nor FFBS Common is listed, traded or quoted on any
securities exchange or in the over-the-counter market, and no dealer makes a
market in either stock, although isolated transactions between individuals occur
from time to time. To BFC management's knowledge, the most recent transaction
with respect to BFC Common was at $50 per share; and to FFBS management's
knowledge, the most recent transaction with respect to FFBS Common was at $167
per share. The shares of BFC Common to be issued hereunder are registered under
the Securities Act.
Initial Public Equity Offering; Stock Split
BFC presently intends to effect an initial public offering of BFC Common
after the Merger, if market conditions are favorable. Neither such offering nor
the Merger is conditioned on the closing of the other. In preparation for the
offering, BFC anticipates that a five for one stock split of BFC Common will
occur soon after the Merger. If the stock split is consummated, the number of
issued and outstanding shares of BFC Common will increase from approximately two
million (including the shares to be issued in the Merger) to approximately ten
million.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except share and per share data)
The following tables set forth (a) summary pro forma financial information
for BFC and FFBS combined as of and for the three months ended March 31, 1998,
and as of and for each of the five years in the period ended December 31, 1997,
and (b) historical, pro forma and equivalent pro forma net income and cash
dividends of BFC and FFBS on a per share basis as of such dates and for such
periods, and the historical and the pro forma book value of BFC and the
historical and the equivalent pro forma book value of FFBS on a per share basis
as of March 31, 1998 (as adjusted). This information is derived from and should
be read in conjunction with the historical financial statements of BFC and FFBS
that appear elsewhere in this Joint Proxy Statement/Prospectus and with the pro
forma consolidated condensed financial statements of BankFirst, which give
effect to the Merger and which appear in this Joint Proxy Statement/Prospectus
under the caption "Pro Forma Financial Information." The pro forma consolidated
condensed financial information has been prepared based on the pooling of
interest method of accounting on the assumptions that 723,791 shares of BFC
common stock will be issued and that no FFBS shareholder will dissent. This
information will vary if any FFBS shareholders dissent to the proposed merger.
The equivalent pro forma per share information for FFBS has been determined by
multiplying BFC pro forma per share information by 4.41 (the Exchange Ratio).
<TABLE>
<CAPTION>
Three Months
Ended Years Ended
-------------- -----------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Summary of operations
Interest income - tax equivalent $ 14,484 $ 51,893 $ 47,311 $ 42,677 $ 34,317 $ 29,301
Interest expense 6,000 22,652 21,238 19,082 13,357 11,963
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 8,484 29,241 26,073 23,595 20,780 17,338
Tax equivalent adjustment (1) (688) (606) (613) (558) (600) (623)
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 7,796 28,635 25,460 23,037 20,180 16,715
Provision for loan losses (534) (2,935) (667) (553) (703) (924)
Noninterest income 1,959 5,657 5,243 4,369 4,382 3,916
Noninterest expenses (2) (6,638) (21,323) (20,799) (19,157) (17,201) (14,013)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 2,583 10,034 9,237 7,696 6,657 5,694
Income tax expense 880 3,406 3,188 2,517 1,727 1,828
----------- ----------- ----------- ----------- ----------- -----------
Net earnings $ 1,703 $ 6,628 $ 6,049 $ 5,179 $ 4,929 $ 3,866
----------- ----------- ----------- ----------- ----------- -----------
Basic earnings per share $ 0.83 $ 3.27 $ 3.15 $ 3.15 $ 3.31 $ 2.65
Diluted earnings per share 0.78 3.05 2.95 2.97 3.04 2.60
Dividends per common share -- 0.61 0.47 0.71 0.77 0.71
Cash dividends declared - common $ -- $ 1,214 $ 876 $ 1,152 $ 1,133 $ 1,039
Cash dividends declared - preferred 39 161 162 74 73 --
Book value per common share 30.87 30.00 31.35 27.79 23.03 20.54
Average common shares
outstanding 1,997,357 1,974,919 1,869,117 1,619,206 1,468,873 1,458,380
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months
Ended Years Ended
-------------- -----------------------------------------------------------------------
March 31, 1998 1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Selected year-end balances
Total assets $ 701,432 $ 650,717 $ 595,284 $ 545,718 $ 480,687 $ 418,337
Earning assets 638,838 604,031 559,927 504,430 444,866 388,644
Total securities 130,740 127,736 134,781 135,127 121,390 116,851
Loans - net of unearned income 479,330 464,967 412,793 350,652 306,905 253,692
Allowance for loan losses 6,411 6,098 4,723 4,690 4,526 4,054
Total deposits 567,228 549,769 516,339 480,346 430,407 376,838
Repurchase agreements and
federal funds 34,775 16,302 5,966 7,632 1,363 --
Long-term debt 27,351 12,121 12,154 8,407 8,416 3,657
Stockholders' equity 61,724 59,894 53,826 42,512 34,074 29,958
Selected average balances
Total assets $ 662,988 $ 621,719 $ 566,616 $ 527,495 $ 467,616 $ 399,080
Earning assets 600,526 577,178 528,179 488,834 419,005 367,538
Total securities 131,604 128,796 136,600 135,509 121,352 106,584
Loans - net of unearned income 472,844 442,296 379,930 339,989 282,812 243,431
Allowance for loan losses 6,348 4,796 4,802 4,541 4,384 3,747
Total deposits 547,480 529,820 492,435 468,068 416,426 343,359
Stockholders' equity 60,554 56,430 47,787 38,282 31,195 28,686
Selected ratios
Loans to deposits 86.37% 83.48% 77.15% 72.64% 67.91% 70.90%
Allowance to year end loans 1.34% 1.31% 1.14% 1.34% 1.47% 1.60%
Allowance to nonperforming assets 163.30% 163.75% 173.19% 258.83% 311.71% 406.21%
Equity to assets 9.13% 9.08% 8.43% 7.26% 6.67% 7.19%
Leverage capital ratio 8.78% 9.73% 9.60% 8.35% 7.50% 8.60%
Return on assets 1.04% 1.07% 1.07% 0.98% 1.05% 0.97%
Return on equity 11.24% 11.75% 12.66% 13.53% 15.80% 13.48%
Dividends payout ratio (3) 18.77% 14.88% 22.56% 23.33% 26.88%
</TABLE>
- ----------
(1) Tax equivalent basis was calculated using a 38% tax rate for all periods
presented.
(2) Noninterest expenses for three months ended March 31, 1998 include
nonrecurring merger expenses of $54, which had the effect of reducing net
income by $34.
(3) Dividends declared on common shares divided by net income available to
common shareholders.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Historical Pro Forma Per Share Data
<TABLE>
<CAPTION>
Three Months Year ended December 31,
Ended ---------------------------------------
March 31, 1998 1997 1996 1995
-------------- --------- --------- ---------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Historical
BankFirst $ 0.94 $ 3.12 $ 3.06 $ 3.07
First Franklin 2.87 15.62 14.40 14.15
Pro forma combined 0.83 3.27 3.15 3.15
Equivalent amount of First Franklin 3.66 14.42 13.89 13.89
DILUTED EARNINGS PER SHARE
Historical
BankFirst $ 0.84 $ 2.80 $ 2.77 $ 2.76
First Franklin 2.87 15.62 14.40 14.15
Pro forma combined 0.78 3.05 2.95 2.96
Equivalent amount of First Franklin 3.44 13.45 13.01 13.05
DIVIDENDS PER COMMON SHARE
Historical
BankFirst $ -- $ -- $ -- $ 0.34
First Franklin -- 7.40 5.30 5.10
Pro forma combined -- 0.61 0.47 0.71
Equivalent amount of First Franklin -- -- -- 3.13
BOOK VALUE PER COMMON SHARE
Historical
BankFirst $ 31.36
First Franklin 30.03
Pro forma combined 30.87
Equivalent amount of First Franklin 136.15
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
FORWARD LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. All statements other than statements of historical
facts included in this Joint Proxy Statement/Prospectus, including, without
limitation, statements under "SUMMARY," "RISK FACTORS," "BFC MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "FFBS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS OF BFC" and "BUSINESS OF FFBS," regarding planned capital
expenditures, financial position, business strategies and other plans and
objectives for future operations, are forward looking statements. BFC and FFBS
wish to caution 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 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 BFC and FFBS believe
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 Joint Proxy
Statement/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
Shareholders of BFC and FFBS are urged to consider carefully the following
Risk Factors, as well as the other information contained in this Joint Proxy
Statement/Prospectus.
Absence of Existing Public Market for BFC Common; Uncertain Market Price
There is no existing market for BFC Common. BFC currently contemplates
effecting an initial public offering of BFC Common after the Merger, subject to
registration with the SEC and favorable market conditions. In connection with
the proposed initial public offering, management expects to apply to list BFC
Common on the NASDAQ National Market and certain underwriters have indicated an
intention to make a market in BFC Common. There can be no assurance that the
public offering will be consummated. In addition, even if the public offering is
consummated, there can be no assurance that an active and liquid trading market
for BFC Common will develop. Further, market prices of BFC Common will depend on
many factors including, among other things, the operating results and financial
condition of BFC and the market for similar securities. There can be no
assurance as to the market price for BFC Common.
No Current Plan to Pay Cash Dividends on BFC Common
BFC has not paid a cash dividend on BFC Common since 1995 and has no
current plan to do so in the 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, BFC's ability to pay dividends depends on
the ability of its subsidiaries to pay dividends to it. The ability of Athens
and BankFirst (the "Banks") to pay dividends is also restricted by applicable
regulations of the TDFI, the Office of the Comptroller of Currency ("OCC") and
the FDIC. As a result, BFC may not be able to declare and pay a dividend to
holders of BFC Common even if BFC's current dividend policy were to change.
Difficulty of BFC in Integrating Operations
The future financial performance of BFC will depend, in part, on its
ability to successfully integrate the operations and management of the Banks.
There can be no assurance that BFC will be able to effectively and profitably
integrate the operations and management of the Banks.
9
<PAGE>
Government Regulations and Monetary Policy Impact on Operations
The banking industry is subject to extensive federal and state supervision
and regulation. Such regulation limits the manner in which BFC, BankFirst and
Athens conduct their respective businesses, undertake new investments and
activities, and obtain financing. This regulation is intended primarily for the
protection of the deposit insurance fund and consumers, and not to benefit the
holders of BFC's securities. Financial institution regulation has been the
subject of significant legislation in recent years, and may be the subject of
further significant legislation in the future, none of which is in the control
of BFC. Significant new laws or changes in, or repeal of, existing laws may
cause BFC's results to differ materially. Further, federal monetary policy,
particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for BFC, primarily through open market operations in
United States government securities, the discount rates for bank borrowings, and
bank reserve requirements. A material change in these conditions would be likely
to have a material impact on BFC's results of operations.
Dependence on Local Economic Conditions and Geographic Concentration
The Banks' operations are located and concentrated primarily in Knox,
Sevier, Blount, Loudon, Jefferson, and McMinn Counties in East Tennessee. As a
result of this geographic concentration, the Banks' results depend largely upon
economic conditions in these areas. A deterioration in economic conditions in
these market areas could have a materially adverse impact on the quality of loan
portfolios and demand for products and services, and, accordingly, the results
of operations. In addition, a significant amount of the business of BankFirst,
totaling 115% of its capital and loan loss reserves and 16% of its loan
portfolio, is derived from the lodging industry, particularly in Sevier County,
Tennessee which is adjacent to the Great Smoky Mountains National Park. A
deterioration in the market for lodging generally, or for lodging in Sevier
County specifically, could have a materially adverse impact on BFC's results of
operations.
Competition
The banking and financial services business in the East Tennessee area
generally, and in the Banks' market areas specifically, is highly competitive.
The increasingly competitive environment is a result, primarily, 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, customers and delivery of 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 terms of total assets and
capitalization, have greater access to capital markets and offer a broader array
of financial services than either BankFirst or Athens. There can be no assurance
that the Banks will be able to compete effectively and the results of operations
of each could be adversely affected if circumstances affecting the nature or
level of competition change.
Dependence on Key Personnel
After the Merger, BFC's success will depend substantially on certain
members of senior management of BankFirst, in particular Fred R. Lawson, R.
Stephen Hagood and David Allen and the senior management of Athens, including L.
A. Walker, Jr., John W. Perdue and Michael L. Bevins. BFC's business and
financial condition could be materially, adversely affected by the loss of the
services of any of such individuals. BFC does not carry key person insurance.
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
may fail to perform in accordance with the terms of their loans. Both BankFirst
and Athens 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 company's credit portfolio.
10
<PAGE>
Such policies and procedures, however, may not prevent unexpected losses which
could materially adversely affect the Banks' results of operations.
Sufficiency of Reserve for Loan Losses
Management of the Banks maintains an allowance for loan losses based upon,
among other things, historical experience, and evaluation of economic conditions
and regular reviews of delinquencies and loan portfolio quality. Based upon such
factors, management makes various assumptions and judgments about the ultimate
collectibility of the respective loan portfolios and provides an allowance for
potential loan losses based upon a percentage of the outstanding balances and
for specific loans when their ultimate collectibility is considered
questionable. Although management of BFC and FFBS believe that allowances for
loan losses at each of their respective Banks are adequate, there can be no
assurance that such allowances will prove sufficient to cover future losses.
Future adjustments may be necessary if economic conditions differ or adverse
developments arise with respect to non-performing or performing loans of the
Banks. Material additions to the allowance for loan losses of the Banks would
result in a material decrease in BFC's net income, and possibly its capital, and
could result in a material decrease in BFC's net income, and possibly its
capital, and could result in its inability to pay dividends, among other adverse
consequences.
Concentration of Voting Control
Following the Merger, James L. Clayton, Chairman of the BFC Board, and his
wife will have the power to vote 44.8% of the outstanding shares of BFC Common.
In addition, Mr. Clayton's relatives and affiliates will have the power to vote
an additional 4.2% of the outstanding shares of BFC Common. Accordingly, Mr.
Clayton will have the ability to exercise significant influence over the
management and policies of BFC, as well as the outcome of all matters requiring
shareholder vote, including the election of directors, adoption or amendment of
BFC's Charter, and approval of mergers or similar transactions, such as the sale
of substantially all of the BFC's assets.
Potentially Adverse Impact of Interest Rates and Economic and Industry
Conditions
The results of operations of banking institutions are materially affected
by general economic conditions, the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities and other
factors that affect market rates of interest. The results of operations 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. A significant portion of the
assets of most banking institutions consists of long-term residential mortgages
and loans with shorter terms to maturity. The repricing periods of these assets
are generally longer than those of the banking institution's interest-bearing
liabilities. As a result, the yield on interest-earning assets of most banking
institutions adjusts to changes in interest rates at a slower rate than the cost
of their interest-bearing liabilities. Banking institutions in recent years have
experienced fluctuations in net interest income due to changing interest rates
and to differences in the repricing characteristics of their interest-earning
assets and interest-bearing liabilities. Because most banking institutions
continue to hold assets which reprice more slowly than their liabilities, any
significant increase in interest rates would be expected to have an adverse
impact on net interest income.
Risks Associated with any Future Acquisitions by BFC
BFC 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 acquisition of Curtis Mortgage Company, Inc. BFC may engage in
selected acquisitions or strategic mergers in the future. Acquisitions involve a
number of special risks, including the time associated with identifying and
evaluating potential acquisitions; BFC'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 BFC's business; possible adverse
short-term effects on BFC's results of operations; possible amortization of
goodwill associated with an acquisition; and the risk of loss of key employees
of the acquired businesses. BFC may issue equity securities and other forms of
common stock-based
11
<PAGE>
consideration in connection with future acquisitions, which could cause dilution
to existing shareholders of BFC. BFC has no present agreements, arrangements or
commitments with respect to any acquisition. See "BUSINESS OF BFC."
Conflicts of Interests of Certain Persons in the Transaction
Directors and officers of BFC and FFBS (and certain of their family
members and related interests) have personal interests in the Merger that may
present them with conflicts of interest in connection with the Merger. The BFC
Board and the FFBS Board are aware of this and have considered the personal
interests disclosed in this Joint Proxy Statement/Prospectus in their evaluation
of the Merger. See "THE MERGER Background of and Reasons for the Merger" and
"THE MERGER Interests of Certain Persons in the Merger."
12
<PAGE>
THE SPECIAL MEETINGS
Meetings of Shareholders
This Joint Proxy Statement/Prospectus is being furnished to the holders of
BFC Common in connection with the solicitation of proxies by and on behalf of
the BFC Board for use at the BFC Meeting to be held at 8:00 a.m., Eastern
Daylight Savings Time, on Friday, June 26, 1998, on the fifteenth floor of the
main office of BankFirst at 625 Market Street, Knoxville, Tennessee, and at any
adjournments thereof. The BFC Board has fixed the close of business on May 15,
1998 as the BFC Record Date for determining the shareholders of BFC entitled to
vote at the BFC Meeting. This Joint Proxy Statement/Prospectus and the enclosed
proxy are first being sent to holders of BFC Common on or about June __, 1998.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of FFBS Common in connection with the solicitation of proxies by and on
behalf of the FFBS Board for use at the FFBS Meeting to be held at 10:00 a.m.,
Eastern Daylight Savings Time, on Friday, June 26, 1998, at the operations
center of Athens at 3 South Hill Street, Madison Park Center, Athens, Tennessee
and at any adjournments thereof. The FFBS Board has fixed the close of business
on May 15, 1998 as the FFBS Record Date for determining the shareholders of FFBS
entitled to vote at the FFBS Meeting. This Joint Proxy Statement/Prospectus and
the enclosed proxy are first being sent to holders of FFBS Common on or about
June __, 1998.
Purpose of Meetings
At the BFC Meeting, BFC shareholders will consider and vote upon (i)
approval and adoption of the Merger Agreement; (ii) election of L. A. Walker,
Jr., W. D. Sullins, Jr., and C. Scott Mayfield, Jr. to fill three additional
positions on the BFC Board which will be created upon the effectiveness of the
Merger; such nominees were chosen from the current member of the FFBS Board and
will serve as members of the BFC Board until the next annual meeting or until
their successors are duly elected and qualified; (iii) approval and adoption of
an amendment to the BFC Charter authorizing a five for one stock split of BFC
Common to be effective on June 30, 1998 or immediately after the Merger,
whichever is later; and (iv) such other business as may properly come before the
BFC Meeting or any adjournments thereof.
At the FFBS Meeting, FFBS shareholders will consider and vote upon (i)
approval and adoption of the Merger Agreement and (ii) such other business as
may properly come before the FFBS Meeting or any adjournments thereof.
Voting Requirements at Meetings
At the BFC Meeting, approval and adoption of the Merger Agreement will
require the affirmative vote of the holders of a majority of the outstanding
shares of BFC Common. The election of each of the three nominees to serve on the
BFC Board and the approval and adoption of the Charter amendment will require
the affirmative vote of a majority of the outstanding shares of BFC Common
represented at the BFC Meeting. The presence at the BFC Meeting, in person or by
proxy, of the holders of a majority of the total number of outstanding shares of
BFC Common on the BFC Record Date will constitute a quorum for the transaction
of business by such holders at the BFC Meeting. On the BFC Record Date, there
were 1,275,893 outstanding shares of BFC Common, each holder of which is
entitled to one vote per share with respect to each matter to be voted on at the
BFC Meeting. BFC has no class or series of stock outstanding, other than BFC
Common, which is entitled to vote at the BFC Meeting.
As of the BFC Record Date, directors and executive officers of BFC
beneficially owned an aggregate of 1,017,205 shares of BFC Common or
approximately 80% of the shares of BFC Common outstanding on such date.
At the FFBS Meeting, approval and adoption of the Merger Agreement will
require the affirmative vote of the holders of a majority of the outstanding
shares of FFBS Common. The presence at the FFBS Meeting, in person or by proxy,
of the holders of a majority of the total number of outstanding shares of FFBS
Common on the FFBS Record Date
13
<PAGE>
will constitute a quorum for the transaction of business by such holders at the
FFBS Meeting. On the FFBS Record Date, there were 164,125 outstanding shares of
FFBS Common, each holder of which is entitled to one vote per share with respect
to each matter to be voted on at the FFBS Meeting. FFBS has no class or series
of stock outstanding other than FFBS Common which is entitled to vote at the
*FFBS Meeting.
As of the FFBS Record Date, directors and executive officers of FFBS
beneficially owned an aggregate of 7,962 shares of FFBS Common, or approximately
4.89% of the shares of FFBS Common outstanding on such date.
At the Meetings, abstentions will be counted as present for quorum
purposes, but will have the same effect as a vote "against" the proposal to
approve the Merger Agreement. Broker "non-votes" will not be considered present
for quorum purposes and will have the same effect as a vote "against" the
proposal to approve the Merger Agreement. A "broker nonvote" refers to shares
represented at the Meetings in person or by proxy by a broker or nominee where
such broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote and (ii) the
broker or nominee does not have the discretionary voting power on such matter.
Proxies
All proxies that are properly executed by holders of BFC Common and
received by BFC prior to the BFC Meeting will be voted in accordance with the
instructions noted thereon. Any proxy that does not specify to the contrary will
be voted in favor of the approval and adoption of the Merger Agreement. Any
holder of BFC Common who submits a proxy will have the right to revoke it, at
any time before it is voted, by filing with the Secretary of BFC written notice
of revocation or a duly executed later-dated proxy, or by attending the BFC
Meeting and voting such BFC Common in person.
All proxies that are properly executed by holders of FFBS Common and
received by FFBS prior to the FFBS Meeting will be voted in accordance with
instructions noted thereon. Any proxy that does not specify to the contrary will
be voted in favor of approval and adoption of the Merger Agreement. Any holder
of FFBS Common who submits a proxy will have the right to revoke it, at any time
before it is voted, by filing with the Secretary of FFBS written notice of
revocation or a duly executed later-dated proxy, or by attending the FFBS
Meeting and voting such FFBS Common in person.
All costs relating to the solicitation of proxies of holders of BFC Common
and FFBS Common will be borne by BFC and FFBS, respectively. Proxies may be
solicited by officers, directors and regular employees of BFC and BankFirst and
FFBS and Athens personally, by mail, by telephone or otherwise. Although there
is no formal agreement to do so, BFC and FFBS may reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries holding shares of stock in
their names or those of their nominees for their reasonable expenses in sending
solicitation material to their principals.
It is important that proxies be returned promptly. Shareholders who do not
expect to attend the respective Meetings of BFC and FFBS in person are urged to
mark, sign and date the respective accompanying proxy and mail it in the
enclosed postage pre-paid envelope so that their votes can be recorded.
14
<PAGE>
THE MERGER
The following information concerning the Merger sets forth the material
terms of the Merger Agreement and is qualified in its entirety by reference to
the Merger Agreement which is incorporated herein by reference and attached
hereto as Appendix A. BFC and FFBS shareholders are urged to carefully read the
Merger Agreement.
Background of and Reasons for the Merger
Background. In order to provide liquidity for shareholders of FFBS Common,
the FFBS Board determined that it would be advantageous for FFBS to be acquired
by a larger financial institution whose securities are or will be expected to be
more freely traded. To this end, in February 1997, FFBS began discussions with a
bank holding company headquartered in southeastern Tennessee. These discussions
continued intermittently, but without success, until September 1997 when they
terminated.
BFC pursues a strategy of enhancing long-term shareholder value through
both internal and external growth, while still maintaining a community banking
philosophy. To implement this strategy, BFC has opened new branches, provided
additional services to customers, and pursued acquisition opportunities
involving compatible community banks. In June 1997, Fred R. Lawson, President
and Chief Executive Officer of BFC and BankFirst, learned that FFBS might be
seeking a strategic alliance or other transaction. Mr. Lawson then contacted
L.A. Walker, Jr., Chairman and Chief Executive Officer of FFBS, about a possible
merger between BFC and FFBS.
During its discussions with the bank holding company headquartered in
southeastern Tennessee, FFBS was approached by three other Tennessee financial
institutions concerning proposed business combinations. The first potential
acquiror was rejected because it was deemed to be too small, and its securities
were not sufficiently liquid. The second potential acquiror was deemed to be
undesirable because of perceived regulatory problems in that there was
significant overlap between the geographic markets of FFBS and the financial
institution. The third potential acquiror was BFC whose philosophy of community
banking was attractive to the FFBS Board. BFC offered more autonomy to Athens
after the proposed merger and BFC offered three seats on its board of directors
to former FFBS directors.
After FFBS negotiations with the bank holding company headquartered in
southeastern Tennessee were terminated in September 1997, Mr. Walker contacted
Mr. Lawson to see if BFC was still interested in expansion opportunities. There
followed an exchange of information and discussions between representatives of
BFC and FFBS relative to the possibility of a business combination.
The first discussions concerning merger pricing occurred on January 14,
1998 when Mr. Lawson proposed an initial exchange ratio of 4.33 shares of BFC
Common for each share of FFBS Common. At this point, the FFBS Board requested
that Professional Bank Services, Inc. ("PBS"), which had earlier been retained
to advise FFBS with respect to the intended merger discussion, analyze the
proposed business combination and assist it in negotiations.
On Thursday, February 5, 1998, Messrs. Perdue and Bevins met with the BFC
Board and representatives of two investment banking firms which were advising
the BFC Board, and discussed the Merger in the context of a potential public
offering of shares of BFC Common.
On Monday, February 9, 1998, Mr. Lawson met with Messrs. Walker, Perdue
and Bevins in Athens, Tennessee and further discussion was had concerning the
appropriate exchange ratio for FFBS Common. Negotiations concerning the
appropriate exchange ratio continued until February 23, 1998 when the parties
agreed to an exchange ratio of 4.41 and a $60 per share price for BFC Common.
The BFC share price was based primarily upon book value but was ultimately
agreed upon by arm length negotiations between the parties. The value of this
consideration was higher than that offered by any of the other parties with
which FFBS had conducted discussions. This exchange ratio was then approved by
the executive committee of BFC and was subsequently approved by the board of
directors of FFBS on February 25, 1998.
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In early March 1998, negotiating teams from FFBS and BFC met to discuss
the details of the transaction. During the following weeks, attorneys
representing both sides worked to document the proposed agreement and plan of
merger.
On March 17, 1998, the FFBS Board, after presentations by its legal
counsel and PBS, unanimously approved the Merger Agreement and recommended its
approval to FFBS' shareholders. The BFC Board unanimously approved the Merger
Agreement and recommended its approval to BFC's shareholders on March 17, 1998.
The Merger Agreement was signed by FFBS and BFC on March 19, 1998.
Reasons for the Merger -- BFC. In reaching its determination that the
Merger and Merger Agreement are fair to, and in the best interest of, BFC and
its shareholders, the BFC Board consulted with its legal and financial advisers,
as well as with BFC management, and considered a number of factors. Without
assigning any relative or specific weights to the factors, the BFC Board
considered without limitation, the following:
-- the BFC Board's belief that the merger is consistent with BFC's
strategy for enhancing long-term shareholder value through both internal and
external growth, while still maintaining a community banking philosophy;
-- the BFC Board's review, based in part on the presentation by BFC
management regarding its due diligence of FFBS, of (i) the business, operations,
earnings and financial condition of FFBS on both a historical and prospective
basis; (ii) the enhanced opportunities for operating efficiencies (particularly
in terms of integration of operations, data processing and support functions,
although the BFC Board did not quantify such anticipated operating efficiencies)
that could result from the Merger; (iii) the enhanced opportunities for growth
that the Merger would make possible; and (iv) the respective contributions the
parties would bring to a combined institution;
-- the BFC Board's belief, based upon an analysis of the anticipated
financial effects of the Merger, that upon consummation of the Merger, BFC and
its banking subsidiaries would be well capitalized institutions, the financial
positions of which would be in excess of all applicable regulatory capital
requirements;
-- the current and prospective economic and regulatory environment and
competitive constraints facing the banking and financial institutions in BFC's
market area;
-- the recent business combinations involving financial institutions,
either announced or completed, during the past year in the United States, the
State of Tennessee and contiguous states and the effect of such combinations on
competitive conditions in BFC's market area; and
-- the BFC Board's belief that the Merger provides an opportunity to
expand in BFC's East Tennessee market and to provide a broader array of
financial services to the community while still maintaining a community bank.
Recommendation of the BFC Board. For the reasons described above, the BFC
Board unanimously approved the Merger Agreement and believes that the Merger is
fair to, and is in the best interest of, its shareholders. ACCORDINGLY, THE BFC
BOARD UNANIMOUSLY RECOMMENDS THAT THE BFC SHAREHOLDERS VOTE FOR ADOPTION OF THE
MERGER AGREEMENT.
Reasons for the Merger -- FFBS. In reaching its determination that the
Merger and Merger Agreement are fair to, and in the best interest of, FFBS and
its shareholders, the FFBS Board consulted with its legal and financial
advisers, as well as with FFBS management, and considered a number of factors.
Without assigning any relative or specific weights to the factors, the FFBS
Board considered, without limitation, the following:
-- the review by the FFBS Board with its legal and financial advisors of
the terms and conditions of the Merger Agreement;
-- the determination by PBS that the Merger is fair from a financial
perspective to the FFBS shareholders;
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-- the FFBS Board's belief that the consideration to be received by the
FFBS shareholders in the Merger offers a much higher value than the current
trading value of FFBS Common and will be more liquid than FFBS Common,
particularly in the event that a public offering of BFC Common is consummated;
-- the expectation that the Merger will generally be a tax-free
transaction to FFBS and its shareholders and will qualify for
pooling-of-interests accounting treatment;
-- the Merger will allow FFBS and Athens to remain part of a community
bank institution dedicated to the service of its traditional market and will
allow Athens to maintain its autonomy;
-- the FFBS Board's belief that the Athens trust department can be
marketed successfully in BankFirst's market areas;
-- the recent business combinations involving financial institutions,
either announced or completed, during the past year in the United States, the
State of Tennessee and contiguous states and the effect of such combinations on
competitive conditions in BFC's market area; and
-- the geographic compatibility and lack of substantial overlap in FFBS'
and BFC's markets and BFC's strong commitment to the communities it serves.
Recommendation of the FFBS Board. For the reasons described above, the
FFBS Board unanimously approved the Merger Agreement and believes that the
Merger is fair to, and is in the best interest of, its shareholders.
ACCORDINGLY, THE FFBS BOARD UNANIMOUSLY RECOMMENDS THAT THE FFBS SHAREHOLDERS
VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
Each member of the FFBS Board has entered into a letter agreement with BFC
which provides that the director will vote all shares of FFBS Common which he
owns in favor of the Merger and will recommend approval of the Merger to other
FFBS shareholders.
Opinion of PBS
PBS was engaged by FFBS to advise the FFBS Board as to the fairness from a
financial perspective of the consideration to be paid by BFC to FFBS
shareholders as set forth in the Merger Agreement.
PBS is a bank consulting firm with offices in Louisville, Atlanta,
Chicago, Nashville and Washington, D.C. As part of its investment banking
business, PBS is regularly engaged in reviewing the fairness of financial
institution acquisition transactions from a financial perspective and in the
valuation of financial institutions and other businesses and their securities in
connection with mergers, acquisitions, estate settlements, and other
transactions. Neither PBS nor any of its affiliates has a material financial
interest in FFBS or BFC. PBS was selected to advise the FFBS Board based upon
its familiarity with Tennessee financial institutions and knowledge of the
banking industry as a whole.
PBS performed certain analyses described herein and presented the range of
values for FFBS resulting from such analyses to the Board of Directors of FFBS
in connection with its advice as to the fairness of the consideration to be paid
by BFC.
A fairness opinion of PBS was delivered to the Board of Directors of FFBS
on March 17, 1997, at a meeting of the FFBS Board and has been updated as of the
date of this Joint Proxy Statement/Prospectus. A copy of the fairness opinion,
which includes a summary of the assumptions made and information analyzed in
deriving the fairness opinion, is attached as Appendix B to this Joint Proxy
Statement/Prospectus and should be read in its entirety.
In arriving at its fairness opinion, PBS reviewed certain publicly
available business and financial information relating to FFBS and BFC. PBS
considered certain financial and market data of FFBS and BFC, compared that data
with
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similar data for certain publicly-held bank holding companies and considered the
financial terms of certain other comparable bank transactions in the states of
Tennessee, Alabama and Georgia that had recently been effected. PBS also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant. In connection with its review, PBS did not independently verify the
foregoing information and relied on such information as being complete and
accurate in all material respects. Financial forecasts prepared by PBS were
based on assumptions believed by PBS to be reasonable and to reflect currently
available information. PBS did not make an independent evaluation or appraisal
of the assets of FFBS or BFC.
As part of preparing the fairness opinion, PBS performed a due diligence
review of BFC. As part of the due diligence, PBS reviewed the following items:
minutes of the Board of Directors meetings of the subsidiary bank, BankFirst,
from January 1997 through January 1998; reports of independent auditors and
management letters and responses thereto, for the years ending December 31, 1996
and 1997; the most recent analysis and calculation of allowance for loan and
lease losses for the subsidiary bank; internal loan review reports; investment
portfolio activity reports; asset/liability management reports; asset quality
reports; Uniform Holding Company Report for BFC as of December 31, 1996 and
September 30, 1997; December 31, 1997 report of Condition and Income and
September 30, 1997 Uniform Bank Performance Report for the subsidiary bank; and
discussions of pending litigation and other issues with senior management of
BFC.
PBS reviewed and analyzed the historical performance of FFBS and FFBS'
wholly-owned subsidiary, Athens, contained in: audited Annual Reports and
financial statements dated December 1996 and 1997 of FFBS; June 30, 1997 and
December 31, 1997, FR Y-9C Consolidated Financial Statements filed by FFBS with
the Federal Reserve; September 30, 1997 Uniform Bank and Holding Company
Performance Reports; historical common stock trading activity of FFBS; and the
premises and other fixed assets. PBS reviewed and tabulated statistical data
regarding the loan portfolio, securities portfolio and other performance ratios
and statistics. Financial projections were prepared and analyzed as well as
other financial studies, analyses and investigations as deemed relevant for the
purposes of this opinion. In its review of the afore mentioned information, PBS
took into account its assessment of general market and financial conditions, its
experience in other similar transactions, and its knowledge of the banking
industry generally.
In connection with rendering the fairness opinion and preparing its
written and oral presentation to the FFBS Board, PBS performed a variety of
financial analyses, including those summarized herein. The summary does not
purport to be a complete description of the analyses performed by PBS in this
regard. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and therefore, such
an opinion is not readily susceptible to summary description. Accordingly,
notwithstanding the separate factors summarized below, PBS believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying its opinion. In performing its analyses, PBS made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond FFBS' or BFC's control.
The analyses performed by PBS are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. In addition, analyses relating to the values of businesses do
not purport to be appraisals or to reflect the process by which businesses
actually may be sold.
Acquisition Comparison Analysis. In performing this analysis, PBS reviewed
all bank acquisition transactions in the states of Tennessee, Alabama and
Georgia (the "Regional Area") since 1990. There were 193 bank acquisition
transactions in the Regional Area announced since 1990 for which detailed
financial information was available. The purpose of the analysis was to obtain
an evaluation range based on these Regional Area bank acquisition transactions.
Median multiples of earnings and book value implied by the comparable
transactions were utilized in obtaining a range for the acquisition value of
FFBS. In addition to reviewing recent Regional Area bank transactions, PBS
performed separate comparable analyses for acquisitions of banks which, like
FFBS, had an equity-to-asset ratio between 10.00% and 12.00%, had total assets
between $100.0 - $250.0 million, had a return on average equity ("ROAE") between
11.0% and 13.0%, and bank transactions effected in the state of Tennessee. In
addition, median values for the 193 Regional Area acquisitions expressed as
multiples of both book value and earnings were 1.75 and 16.20, respectively. The
median
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multiples of book value and earnings for acquisitions of Regional Area banks
which, like FFBS, had an equity-to-asset ratio between 10.00% and 12.00% were
1.84 and 18.38, respectively. For acquisitions of Regional Area banks with
assets between $100.0 - $250.0 million the median multiples were 1.99 and 15.62,
respectively. Regional Area acquisitions of banks with a ROAE between 11.0% and
13.0%, the median multiples were 1.78 and 16.58, respectively. The median
multiples of book value and earnings for acquisitions of banks located in the
state of Tennessee were 1.63 and 14.83, respectively.
In the proposed transaction, FFBS shareholders will receive 723,791 shares
of BFC Common for all 164,125 FFBS Common outstanding, as further defined in the
Merger Agreement. The most recent sales of BFC Common took place on February 27,
1998, when 1,785 shares were sold at $50.00 per share. At the negotiated price
of $60.00 per share of BFC Common, the consideration to be received by FFBS
shareholders represents an aggregate value of $43,427,460 or $264.60 per share
of FFBS Common. The $43,427,460 aggregate value represents a multiple of FFBS'
December 31, 1997 book value and a multiple of FFBS' year end December 31, 1997
adjusted earnings of 2.07 and 17.54, respectively.
Utilizing the negotiated price of $60.00 per share of BFC Common, the
market value of the proposed transaction's percentile ranking was prepared and
analyzed with respect to the above Regional Area comparable group. Compared to
all Regional Area bank transactions, the acquisition value ranked in the 73rd
percentile as a multiple of book value and in the 57th percentile as a multiple
of earnings. Compared to Regional Area bank transactions where the acquired
institution had an equity-to-asset ratio between 10.00% and 12.00%, the
acquisition value ranked in the 73rd percentile as a multiple of book value and
the 46th percentile as a multiple of earnings. For Regional Area bank
acquisitions where the acquired institution had between $100.0 - $250.0 million
in assets, the acquisition value ranked in the 58th percentile as both a
multiple of book value and a multiple of earnings. For Regional Area bank
transactions where the acquired institution had a ROAE between 11.0% and 13.0%,
the acquisition value ranked in the 76th percentile as a multiple of book value
and the 54th percentile as a multiple of earnings. For bank transactions in the
state of Tennessee, the acquisition value ranked in the 77th percentile as a
multiple of book value and in the 65th percentile as a multiple of earnings.
Adjusted Net Asset Value Analysis. PBS reviewed FFBS' balance sheet data
to determine the amount of material adjustments required to the stockholders'
equity of FFBS based on differences between the market value of FFBS' assets and
their value reflected on FFBS' financial statements. PBS determined that two
adjustments were warranted. Equity was reduced by $85,000 to reflect goodwill on
FFBS' balance sheet. Secondly, PBS also reflected a value of the non-interest
bearing demand deposits of approximately $6,903,000. The aggregate adjusted net
asset value of FFBS was determined to be $27,835,000 or $169.60 per share of
FFBS Common.
Discounted Earnings Analysis. A dividend discount cashflow analysis was
performed by PBS pursuant to which a range of values of FFBS was determined by
adding (i) the present value of estimated future dividend streams that FFBS
could generate over a five-year period and (ii) the present value of the
"terminal value" of FFBS' earnings at the end of the fifth year. The "terminal
value" of FFBS' earnings at the end of the five-year period was determined by
applying a multiple of 16.20 times the projected terminal year's earnings. The
16.20 multiple represents the median price paid as a multiple of earnings for
all bank transactions in the Regional Area since 1990.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of FFBS' common stock. The
aggregate value of FFBS, determined by adding the present value of the total
cash flows, was $38,184,000 or $232.65 per share. In addition, using the
five-year projection as a base, a twenty-year projection was prepared assuming
that an annual growth rate of 6.0% and a consistent return on assets of 1.50%
would remain in effect for the entire period, beginning in year two. Dividends
were assumed to increase from 40.0% of income in years one through five to 60%
of income for years six through twenty. This long-term projection resulted in an
aggregate value of $31,659,000 or $192.90 per share of FFBS Common.
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Specific Acquisition Analysis. PBS valued FFBS based on an acquisition
analysis assuming a "break-even" earnings scenario to an acquiror as to price,
current interest rates and amortization of the premium paid. Based on this
analysis, an acquiring institution would pay in aggregate $34,548,000, or
$210.50 per share, assuming they were willing to accept no impact to their net
income in the initial year. This analysis was based on a funding cost of 7.0%,
adjusted for taxes and amortization of the acquisition premium over 15 years.
This analysis was repeated assuming a potential acquiror would attain
non-interest expense reductions of 10% in the transaction. Based on this
analysis, an acquiring institution would pay in aggregate $37,753,000 or $230.03
per share of FFBS Common.
Pro Forma Merger Analysis. PBS compared the historical performance of FFBS
to that of BFC and other regional holding companies. This included, among other
things, a comparison of profitability, asset quality and capital measures. In
addition, the contribution of FFBS and BFC to the income statement and balance
sheet of the pro forma combined company was analyzed.
The effect of the affiliation on the historical and pro forma financial
data of FFBS was prepared and analyzed. FFBS' historical financial data was
compared to the pro forma combined historical and projected earnings, book value
and dividends per share.
PBS prepared analyses examining the pro forma impact, on BFC, of the
proposed public stock offering. PBS also took into consideration in its various
analyses the dilutive effects of BFC's common stock options outstanding.
The fairness opinion is directed only to the question of whether the
consideration to be received by FFBS' shareholders under the Merger Agreement is
fair and equitable from a financial perspective and does not constitute a
recommendation to any FFBS shareholder to vote in favor of the affiliation. No
limitations were imposed on PBS regarding the scope of its investigation or
otherwise by FFBS.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by FFBS' shareholders under the
Merger Agreement is fair and equitable from a financial perspective to the
shareholders of FFBS.
PBS will receive fees in the amount of approximately $59,285 for all
services performed in connection with the sale of FFBS and the rendering of the
Fairness Opinion, regardless of whether or not the Merger is consummated. In
addition, FFBS has agreed to indemnify PBS and its directors, officers and
employees, from liability in connection with the transaction, and to hold PBS
harmless from any losses, actions, claims, damages, expenses or liabilities
related to any of PBS' acts or decisions made in good faith and in the best
interest of FFBS.
Terms of the Merger
At the Effective Time, FFBS will merge with and into BFC with BFC to be
the surviving corporation. All FFBS Common held by FFBS as treasury stock will
be canceled and retired and shall cease to exist. Each share of FFBS Common,
other than treasury stock and shares with respect to which dissenters' rights
have been perfected, will be converted into and exchanged for the right to
receive 4.410 fully paid and non-assessable shares of BFC Common. No fractional
shares of BFC Common will be issued in connection with the Merger. In lieu of
fractional shares, BFC will make a cash payment equal to the fractional interest
which a FFBS shareholder would otherwise receive based on a per share price of
$60, before adjustments for any BFC stock splits. The fractional interest will
be determined by combining all shares owned by such FFBS shareholder.
Effective Time
The Effective Time of the Merger will be the later to occur of the
acceptance for filing by the Secretary of State of Tennessee of Articles of
Merger filed in accordance with the TBCA, or on such later date as the Articles
of Merger may specify. Unless otherwise mutually agreed upon in writing by FFBS
and BFC, the Merger will close at 10:00 a.m. on June 30, 1998 at the offices of
BankFirst, 625 Market Street, Knoxville, Tennessee. If the required regulatory
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approvals have not been received, the Merger will close on the last business day
of the month after the regulatory approvals are obtained.
Surrender of Certificates
As promptly as practicable after the Effective Time of the Merger,
BankFirst, acting in the capacity of exchange agent, will mail to each former
holder of record of FFBS Common a form of letter of transmittal, together with
instructions for the exchange of such holder's certificates representing shares
of FFBS Common for certificates representing shares of BFC Common.
HOLDERS OF FFBS COMMON SHOULD HOLD THEIR CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
Upon surrender to BankFirst, as exchange agent, of one or more
certificates for FFBS Common together with a properly completed letter of
transmittal, there will be issued and mailed to the holder of FFBS Common
surrendering such items a certificate or certificates representing the number of
shares of BFC Common to which such holder is entitled.
No dividend or other distribution payable after the Merger with respect to
BFC Common will be paid to the holder of any unsurrendered certificate until the
holder surrenders such certificate(s), at which time the holder will be entitled
to receive all previously withheld dividends and distributions, without
interest.
After the Merger, there will be no transfers on FFBS' or BFC's stock
transfer books of shares of FFBS Common issued and outstanding at the Effective
Time. If certificates representing shares of FFBS Common are presented for
transfer after the Merger, they will be canceled and exchanged for the shares of
BFC Common deliverable in respect thereof as determined in accordance with the
provisions of the Merger Agreement.
Conditions to Consummation of the Merger
The respective obligations of BFC and FFBS to effect the Merger are
subject to the satisfaction prior to the Merger of the following conditions: (a)
all regulatory approvals shall have been received, and no such approval shall be
conditioned or restricted in a manner which, in the opinion of the FFBS or BFC
Boards, has a material adverse impact on the Merger so as to render it
inadvisable; (b) the Merger Agreement has been duly adopted and approved by the
shareholders of FFBS and BFC; (c) FFBS and BFC shall have received a letter from
Crowe, Chizek & Company LLP, stating that, in their opinion, no conditions exist
with respect to either company which would preclude accounting for the Merger as
a pooling of interests; and (d) the Registration Statement shall have become
effective under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been commenced.
The obligation of FFBS to effect the Merger shall be subject to the
satisfaction, prior to the Merger, of the following additional conditions: (a)
the representations and warranties of BFC in the Merger Agreement shall have
been true when made and at the Effective Time; (b) the obligations and
agreements and covenants of BFC in the Merger Agreement shall have been
performed and complied with by the effective Time; (c) there shall not have been
any material, adverse change in BFC between the date of the Merger Agreement and
the Effective Time; (d) FFBS shall have obtained from PBS a fairness opinion
indicating that the Merger is fair to the shareholders of FFBS from a financial
point of view; (e) to the extent that any lease, contract, or agreement to which
FFBS or Athens is a party or by which any of them is bound or to which any of
their properties is subject shall require the consent of any other person or
entity to the merger transactions, such consent shall have been obtained by the
Effective Time; (f) BFC shall have delivered to FFBS an opinion of its counsel
as provided in the Merger Agreement; (g) BFC shall have delivered to FFBS such
supplements as may be necessary or appropriate to ensure the accuracy and
completeness of the information disclosed by BFC; (h) FFBS shall have obtained
an opinion of counsel that the Merger shall be treated for federal income tax
purposes as a tax-free reorganization with respect to FFBS shareholders; (i) no
more than 1,275,079 shares of BFC Common and 218,508 shares of preferred stock
of BFC shall be outstanding immediately prior to the Effective Time unless
options are exercised or
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preferred shares are converted; and (j) FFBS shall have received a letter,
commonly referred to as a "comfort letter," from Crowe, Chizek & Company LLP
with respect to certain financial information as of the mailing of the Joint
Proxy Statement/Prospectus and as of the Effective Time.
The obligation of BFC to effect the Merger is subject to the satisfaction
at or prior to the Merger of the following additional conditions: (a) the
representations and warranties of FFBS in the Merger Agreement shall have been
true when made and at the Effective Time; (b) the agreements and covenants of
FFBS in the Merger Agreement shall have been performed and complied with by the
effective Time; (c) to the extent that any lease, contract, or agreement to
which FFBS or Athens is a party or by which any of them is bound or to which any
of their properties is subject shall require the consent of any other person or
entity to the merger transactions, such consent shall have been obtained by the
Effective Time; (d) there shall not have been any material, adverse change in
FFBS between the date of the Merger Agreement and the Effective Time; (e) FFBS
shall have delivered to BFC an opinion of its counsel as provided in the Merger
Agreement; (f) BFC shall have delivered to FFBS such supplements as may be
necessary or appropriate to ensure the accuracy and completeness of the
information disclosed by BFC; (g) no more than 164,125 shares of FFBS Common
shall be outstanding immediately prior to the Effective Time; (h) the directors
of FFBS shall have submitted their resignations, effective as of the Effective
Time; (i) FFBS shall have delivered to BFC such other documents or instruments,
and shall have taken such other actions as may reasonably have been requested by
BFC or its counsel with respect to the Merger; and (j) BFC shall have received a
letter, commonly referred to as a "comfort letter," from G.R. Rush & Company,
P.C. with respect to certain financial information as of the mailing of the
Joint Proxy Statement/Prospectus and as of the Effective Time.
Conduct of Business Pending Merger
The Merger Agreement contains certain restrictions on the conduct of FFBS'
and BFC's businesses pending consummation of the Merger. In general, the
business of FFBS and its subsidiaries and of BFC and its subsidiaries shall be
conducted only in the usual, regular and ordinary course and in substantially
the same manner as prior to the signing of the Merger Agreement. FFBS and BFC
must each preserve its business organization, goodwill, and relationships with
depositors, customers and employees.
In particular, the Merger Agreement provides that neither party may,
without the prior written consent of the other, among other things, (a) issue
any shares of capital stock; declare, set aside, or pay any dividend or other
distribution with respect to its outstanding capital stock; make any change in
its capital stock by split, reverse split, reclassification, reorganization,
subdivision or otherwise; acquire any shares of its capital stock; amend its
charter or bylaws; or merge or consolidate with or into any other association,
corporation, trust or entity; (b) grant any stock options, warrants, rights or
other securities convertible into capital stock; (c) incur any obligations in
excess of its legal lending limit or having a maturity of more than one year,
other than in the course of business; (d) enter into any supply contracts,
leases or other agreements that cannot be terminated without substantial penalty
and/or notice of not more than 30 days; (e) change any loan, investment, or
management policies or make any material alteration in the manner of keeping its
books, accounts, and records; (f) grant any salary increase or bonus or enter
into any new employment or employee benefit contract or arrangement except in
the ordinary course of business; (g) sell or otherwise dispose of any assets
other than in the ordinary course of business; (h) take any action that would
adversely affect the ability of any party to obtain the required approvals of
any governmental authorities; (i) authorize or permit anyone to initiate contact
with any person or entity in an effort to solicit, initiate, or encourage a
takeover proposal; (j) not take or fail to take any action that would cause any
of the representations or warranties made in this Merger Agreement to be or
become untrue; and (k) extend credit or accept any deposit other than on
substantially the same terms as those prevailing at the time for comparable
transactions by other banks in the same geographic area.
Subsequent Events
Subsequent to the signing of the Merger Agreement and with the approval of
FFBS, the Charter was amended to (i) increase the number of authorized shares of
BFC Common from 3,000,000 to 15,000,000; (ii) remove the provision authorizing
1,000,000 shares of non-voting common stock, par value $2.50 per share (no
shares of such non-voting
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common stock were issued and outstanding); and (iii) change the name of BFC from
"Smoky Mountain Bancorp, Inc." to "BankFirst Corporation."
Regulatory Approvals
The Merger is subject to the prior approval of the Board of Governors of
the Federal Reserve System ("FRB") under Section 3 of the BHCA. Application for
approval of the Merger was filed with the FRB on April 27, 1998. The FRB has
notified the FDIC and TDFI have the right to comment on the Merger. In
evaluating the Merger, the FRB must consider, among other factors, the financial
and managerial resources and future prospects of the institutions and the
conveniences and needs of the communities to be served. The relevant statutes
prohibit the FRB from approving the Merger if (i) it would result in a monopoly
or would be in furtherance of any combination or conspiracy to monopolize or
attempt to monopolize the business of banking in any part of the United States
or (ii) its effect in any section of the country may be to substantially lessen
competition or to tend to create a monopoly, or if it would be a restraint of
trade in any other manner, unless the FRB finds that any anti-competitive
effects are outweighed clearly by the public interest and the probable effect of
the transaction in meeting the convenience and needs of the communities to be
served. The Merger may not be consummated until the 30th day (which the United
States Department of Justice may reduce to 15 days) following the date of the
FRB approval, during which time the Department of Justice may challenge the
transaction on antitrust grounds. The commencement of any antitrust action would
stay the effectiveness of the approval of the FRB, unless a court of competent
jurisdiction specifically orders otherwise.
There can be no assurance that the regulatory authorities described above
will approve the Merger, and if the Merger is approved, there can be no
assurance as to the date of such approval. There can also be no assurance that
any such approvals will not contain a condition or requirement which causes such
approvals to fail to satisfy the conditions to consummation of the Merger set
forth in the Merger Agreement.
No Solicitation
BFC and FFBS are prohibited by the Merger Agreement from soliciting or
knowingly encouraging inquiries or proposals with respect to, or furnishing any
information relating to or participating in any negotiations or discussions
concerning, any acquisition or purchase of all or a material portion of its
assets (whether owned by it directly or owned by any of its subsidiaries), or of
a substantial equity interest in it or any business combination with it or any
of its subsidiaries, other than as contemplated by the Merger Agreement. BFC and
FFBS have agreed to notify each other immediately if any inquiries or proposals
as described above are received by, any such information is requested from, or
any such negotiations or discussions are sought to be initiated with, BFC or
FFBS.
Waiver; Amendment; Termination
Any amendment, modification or waiver of any provision of the Merger
Agreement must be set forth in writing and duly executed by the party against
whom enforcement of the amendment, modification or waiver is sought.
The Merger Agreement may be terminated at any time prior to the Merger,
either before or after its approval by the shareholders of FFBS and/or BFC, as
follows: (a) by the mutual consent of the FFBS and BFC Boards; (b) by either
FFBS or BFC upon delivery of written notice of termination, if any event occurs
which renders satisfaction of any of the conditions precedent to the Merger
impossible, unless the condition is waived; (c) by either the FFBS Board or the
BFC Board if the Effective Time has not occurred by September 30, 1998 and no
further approvals are necessary; and (d) by either the FFBS Board or the BFC
Board, if any court of competent jurisdiction or other governmental body shall
have taken any action prohibiting the Merger and such action has become final
and non-appealable.
In the event of termination of the Merger Agreement, the Merger Agreement
shall become void and have no effect except that: (a) the confidentiality
requirements shall survive, and (b) if the Merger Agreement is terminated by
either board because some act, condition or omission of the non-terminating
party has rendered impossible the satisfaction of one or more the conditions to
the obligation of the terminating party to effect the Merger, the terminating
party shall
23
<PAGE>
be entitled to reimbursement from the non-terminating party for the costs and
expenses actually and reasonable incurred by it in connection with the Merger.
If the Merger Agreement is terminated without cause after approval by the
shareholders of BFC and FFBS, the terminating party shall pay $4,000,000 to the
non-terminating party as liquidated damages.
Management After the Merger
After the Merger, BFC and BankFirst will continue to be managed by its
current officers and directors, except that three additional positions will be
added to the BFC Board. BFC will use its best efforts to have the three
additional positions filled by L. A. Walker, Jr., W. D. Sullins, Jr., and C.
Scott Mayfield, Jr., who are three of the current directors of FFBS. Athens will
continue to be managed by its current officers and directors. The Athens board
will be expanded to include Fred R. Lawson, who is President, Chief Executive
Officer and a director of BFC.
Interests of Certain Persons in the Merger
All of the current directors of BFC and three current directors of FFBS
will serve as directors of BFC after the Effective Time. The current officers
and directors of BankFirst and Athens will continue to serve after the Effective
Time. For a description of the compensation received by certain executive
officers of BFC, BankFirst and Athens, see "MANAGEMENT OF BFC" and "BUSINESS OF
FFBS."
In the normal course of business, BankFirst and Athens make loans to
directors and officers of BFC and FFBS, including loans to certain related
persons and entities. Such loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers, and in the opinion of management
of both FFBS and BFC, do not involve more than the normal risk of
collectibility. As of March 31, 1998, the amount of these loans (including
amounts available under lines of credit) by BankFirst to BFC directors and
officers was 1.22% of BankFirst's total loans and the amount of these loans
(including amounts available under lines of credit) by Athens to FFBS directors
and officers was 1.28% of Athens' total loans.
Dissenters' Rights
If the Merger is consummated, holders of record of FFBS Common or BFC
Common who follow the procedures specified by Chapter 23 of the Tennessee
Business Corporation Act ("TBCA") will be entitled to determination and payment
in cash of the "fair value" of their stock immediately before the Effective
Time, excluding value resulting from the anticipation of the Merger but
including interest thereon. FFBS and BFC shareholders who elect to follow such
procedures are referred to as "Dissenting Shareholders" and, for purposes of the
discussion in this section only, BFC and FFBS are jointly referred to as the
"Corporation."
A VOTE IN FAVOR OF THE MERGER AGREEMENT BY A HOLDER OF FFBS COMMON OR BFC
COMMON WILL RESULT IN THE WAIVER OF THE SHAREHOLDER'S RIGHT TO DISSENT.
The following is a summary of the provisions of the TBCA which govern the
rights of shareholders to dissent. It is not intended to be a complete statement
of such provisions and is qualified in its entirety by reference to Appendix C.
Shareholders electing to exercise dissenters' rights must not vote in
favor of the Merger Agreement and must file a written notice of their intent to
demand payment for their shares (the "Objection Notice") with the Secretary of
the Corporation before the vote is taken at the meeting. The Objection Notice
must state that the shareholder intends to demand payment for his or her shares
of common stock if the Merger is effected. A vote against approval of the Merger
Agreement will not, in and of itself, constitute an Objection Notice. A failure
to vote will not constitute a waiver of dissenters' rights as long as the
requirements of Chapter 23 of the TBCA are complied with. However, any
shareholder who executes a proxy card and who desires to effect his or her
appraisal rights must mark the proxy card "Against"
24
<PAGE>
the proposal relating to the Merger because if the proxy card is left blank, it
will be voted "For" the proposal relating to the Merger.
If the Merger Agreement is approved, each shareholder who has filed an
Objection Notice will be notified by the Corporation of such approval within 10
days of the Special Meeting (the "Dissenters' Notice"). Within the time
prescribed in the Dissenters' Notice, shareholders electing to dissent must make
a demand for payment (the "Payment Demand"), certify whether they acquired
beneficial ownership of the shares before March 20, 1998 (the date of the first
public announcement of the principal terms of the Merger Agreement), and deposit
their certificates in accordance with the terms of the Dissenters' Notice. Upon
filing the Payment Demand and depositing the certificates, the shareholder will
retain all other rights of a shareholder until these rights are canceled or
modified by consummation of the Merger. A Payment Demand may not be withdrawn
unless the Corporation consents. Failure to comply with these procedures will
cause the shareholder to lose the right to payment for the shares. Consequently,
any shareholder who desires to exercise dissenters' rights is urged to consult
his or her legal adviser before attempting to exercise such rights.
As soon as the Merger is consummated, or upon receipt of a Payment Demand,
the Corporation shall pay to each Dissenting Shareholder who has complied with
the requirements of TBCA the amount that the Corporation estimates to be the
fair value of the shares of common stock, plus accrued interest.
If the Merger is not consummated within two months after the date set for
demanding payment and depositing certificates, the Corporation shall return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares. If, after returning deposited certificates and releasing
transfer restrictions, the Merger is consummated, the Corporation must send a
new Dissenters' Notice and repeat the payment demand procedure.
If a Dissenting Shareholder believes that the amount paid or offered by
the Corporation is less than the fair value of his or her shares or that the
interest due is calculated incorrectly, or if the Corporation fails to make
payment, the Dissenting Shareholder may, within one month after (i) the
Corporation made or offered payment for the shares or failed to pay for the
shares or (ii) the Corporation failed to return deposited certificates or
release restrictions on uncertificated shares timely, notify the Corporation in
writing of his or her own estimate of the fair value of such shares (including
interest due) and demand payment of such estimate (less any payment previously
received). Failure to notify the Corporation in writing of a demand for payment
within one month after the Corporation made or offered payment for such shares
will constitute a waiver of the right to demand payment.
If the Corporation and the Dissenting Shareholder cannot agree on a fair
price two months after the Corporation receives such a demand for payment, the
statute provides that the Corporation will institute judicial proceedings in a
court of record with equity jurisdiction, (the "Court") to fix (i) the fair
value of the shares immediately before consummation of the Merger, excluding any
appreciation or depreciation in anticipation of the Merger, and (ii) the accrued
interest. The Court is required to issue a judgment for the amount, if any, by
which the fair value of the shares, as determined by the Court, plus interest,
exceeds the amount paid by the Corporation, or for the fair value, plus accrued
interest, of the Dissenting Shareholder's after-acquired shares for which the
Corporation elected to withhold payment. If the Corporation does not institute
such proceeding within such two-month period, the Corporation shall pay each
Dissenting Shareholder whose demand remains unsettled the respective amount
demanded by each shareholder.
The Court will, generally, assess the court costs and expenses of such
proceedings against the Corporation, unless the Court finds that any or all of
the Dissenting Shareholders' demand for additional payment was arbitrary,
vexatious or otherwise not in good faith. The Court may assess fees and expenses
of counsel and experts in amounts the Court finds equitable: (i) against the
Corporation if the Court finds that the Corporation did not comply with the TBCA
or (ii) against either the Corporation or any Dissenting Shareholder, if the
Court finds that they acted arbitrarily, vexatiously or not in good faith. If
the Court finds that the services of counsel for any Dissenting Shareholder were
of substantial benefit to other Dissenting Shareholders, the Court may award
reasonable fees to such counsel be paid out of amounts awarded to benefitted
Dissenting Shareholders.
25
<PAGE>
Certain Federal Income Tax Consequences
The following discussion summarizes certain material federal income tax
considerations of the Merger that are generally applicable to holders of FFBS
Common. This discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations promulgated thereunder and current administrative rulings
and court decisions, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to BFC, FFBS or
the FFBS shareholders as described herein.
As a condition to the obligation of FFBS to consummate the Merger, FFBS
will receive an opinion (the "Tax Opinion") from Miller & Martin LLP, tax
counsel for FFBS, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code. The Tax Opinion will be based upon facts existing at the Effective
Time, and, in rendering the opinion referred to in this section, such counsel
will rely upon representations, made as of the Effective Time, by BFC, FFBS and
certain management shareholders of FFBS, which counsel will assume to be true,
correct and complete, including representations as to the intent of the historic
shareholders of FFBS to retain ownership of the BFC Common that they receive in
the Merger. If such representations are untrue, incorrect or incomplete, the Tax
Opinion could be adversely affected. No ruling has been or will be sought from
the Internal Revenue Service (the "IRS") as to the United States federal income
tax consequences of the Merger, and the opinion of counsel set forth herein is
not binding upon the IRS or any court.
Subject to the assumptions and qualifications referred to herein and in
the Tax Opinion, the following U.S. federal income tax consequences should
result:
a. FFBS and BFC will each be "a party to a reorganization" as that term
is defined in Section 368(b) of the Code.
b. No gain or loss will be recognized by an FFBS shareholder upon the
exchange in the Merger of his or her FFBS Common solely for BFC
Common (except with respect to cash received in lieu of a fractional
share interest in BFC Common).
c. The tax basis in the BFC Common received in the Merger by an FFBS
shareholder (including the basis of a fractional share interest in
BFC Common) will be the same as such shareholder's tax basis in the
FFBS Common surrendered in exchange therefor.
d. The holding period of the BFC Common received by an FFBS shareholder
in the Merger will include the period during which the FFBS Common
surrendered in exchange therefor was held (provided that such FFBS
Common was held by such FFBS shareholder as a capital asset at the
Effective Time).
e. An FFBS shareholder who receives cash proceeds in lieu of a
fractional share interest in BFC Common will recognize gain or loss
equal to the difference between such proceeds and the tax basis
allocated to the fractional share interest. Such gain or loss will
constitute capital gain or loss if such shareholder's FFBS Common is
held as a capital asset at the Effective Time and will be long-term
capital gain or loss if shares of FFBS Common have been held for
more than one year at the Effective Time. Capital gain on assets
held for more than one year that is recognized by certain
non-corporate shareholders is subject to federal income tax at
preferential tax rates. If such gain is recognized with respect to
assets held for more than 18 months, it is generally subject to
income tax at further reduced tax rates.
f. An FFBS shareholder who exercises dissenters' rights under any
applicable law with respect to a share of FFBS Common and receives
payments for such stock in cash should recognize capital gain or
loss (if such stock was held as a capital asset at the Effective
Time of the Merger) measured by the difference between the amount of
cash received and the shareholder's basis in such shares, provided
such payment is neither essentially equivalent to a dividend within
the meaning of Section 302 of the
26
<PAGE>
Code nor has the effect of a distribution of a dividend within the
meaning of Section 356(a)(2) of the Code (collectively, a "Dividend
Equivalent Transaction"). A sale of FFBS Common incident to an
exercise of dissenters' rights will generally not be a Dividend
Equivalent Transaction if, as a result of such exercise, the
dissenting stockholder owns no shares of FFBS Common (either
actually or constructively within the meaning of Section 318 of the
Code) immediately after the Merger.
g. No gain or loss will be recognized by FFBS as a result of the
Merger.
A successful challenge by the IRS to the status of the Merger as a
reorganization under Section 368(a) of the Code would result in significant
adverse tax consequences to the FFBS shareholders. An FFBS shareholder would
recognize gain or loss with respect to each share of FFBS Common surrendered
equal to the difference between the shareholder's basis in such share and the
fair market value, as of the Effective Time, of BFC Common received in exchange
therefor. In such event, a shareholder's aggregate basis in the BFC Common so
received would equal its fair market value, and the stockholder's holding period
for such stock would begin the day after the Closing Date.
Certain noncorporate FFBS shareholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in BFC Common. Backup withholding will not apply, however, to a
stockholder who furnishes a correct taxpayer identification number ("TIN") and
certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the Transmittal Letter, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct TIN on Form
W-9 may be subject to a $50 penalty imposed by the IRS.
Each FFBS shareholder also will be required to retain records and file
with such holder's U.S. federal income tax return a statement setting forth
certain facts relating to the Merger.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN MATERIAL
UNITED STATES FEDERAL INCOME CONSEQUENCES OF THE MERGER AND OF HOLDING BFC
COMMON AND DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL
POTENTIAL TAX EFFECTS RELEVANT TO A DECISION WHETHER TO VOTE IN FAVOR OF
APPROVAL OF THE MERGER AND APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE
DISCUSSION DOES NOT ADDRESS THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
THAT MAY BE RELEVANT TO A PARTICULAR FFBS SHAREHOLDER SUBJECT TO SPECIAL
TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS: (i) PERSONS SUBJECT TO
THE ALTERNATIVE MINIMUM TAX, (ii) PERSONS WHO ACQUIRED THEIR FFBS COMMON AS PART
OF A "STRADDLE," "CONVERSION TRANSACTION," "HEDGING TRANSACTION" OR OTHER RISK
REDUCTION TRANSACTION, (iii) PERSONS WHO ARE DEALERS IN SECURITIES, FINANCIAL
INSTITUTIONS, INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS, OR FOREIGN PERSONS
AND (iv) PERSONS WHO ACQUIRED FFBS COMMON PURSUANT TO THE EXERCISE OF STOCK
OPTIONS OR RIGHTS OR OTHERWISE AS COMPENSATION. THIS DISCUSSION ALSO DOES NOT
ADDRESS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY OR
FOREIGN JURISDICTION. THE DISCUSSION OF UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS BASED UPON THE CODE, TREASURY REGULATIONS PROMULGATED THEREUNDER
AND ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE
FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING
VALIDITY OF THIS DISCUSSION. FFBS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES
OF THE MERGER TO THEM.
Accounting Treatment
BFC will account for the Merger as a pooling-of-interests transaction in
accordance with generally accepted accounting principles, which, among other
things, require that the number of shares of FFBS Common acquired for cash
pursuant to the exercise of dissenters' rights or in lieu of fractional shares
not exceed 10% of the outstanding shares of
27
<PAGE>
FFBS Common. Under this accounting treatment, assets and liabilities of FFBS
will be added to those of BFC at their recorded book values, and the
shareholders' equity of the two companies will be combined in BFC's consolidated
balance sheet. Financial statements of BFC issued after the Effective Time of
the Merger will be restated to reflect the consolidated operations of BFC and
FFBS as if the Merger had taken place prior to the periods covered by the
financial statements. A condition to the consummation of the Merger is BFC's and
FFBS' receipt of a letter from Crowe, Chizek & Company, LLP, stating that, in
their opinion, no conditions exist with respect to either company which would
preclude accounting for the Merger as a pooling of interests.
Resales of BFC Common
The shares of BFC Common issued to FFBS shareholders pursuant to the
Merger Agreement will be freely transferrable under the Securities Act, except
for shares issued to any shareholder who may be deemed to be an "affiliate"
(generally including, without limitation, directors, certain executive officers
and beneficial owners of 10% or more of a class of capital stock ) of FFBS for
purposes of Rule 145 under the Securities Act ("Rule 145") as of the date of the
FFBS Meeting. Affiliates may not sell their shares of BFC Common acquired in the
Merger except pursuant to an effective registration statement under the
Securities Act covering such shares or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act
and until such time as financial results covering at least 30 days of combined
operations of FFBS and BFC after the Merger have been published. BFC may place
restrictive legends on certificates representing BFC Stock issued to persons who
are deemed "affiliates" of FFBS under Rule 145. This Joint Proxy
Statement/Prospectus does not cover resales of BFC Common received by any person
who may be deemed to be an affiliate of FFBS.
Stock Split
In order to facilitate an initial public offering of BFC Common, BFC
shareholders are voting to approve a five for one stock split of BFC Common to
be effective on June 30, 1998 or immediately after the Effective Time of the
Merger, whichever is later. As a result of such a stock split, each share of BFC
Common which a FFBS shareholder is entitled to receive in the Merger will become
four shares of BFC Common. If both the Merger and the five for one stock split
are consummated the number of issued and outstanding shares of BFC Common will
increase to approximately ten million.
Initial Public Equity Offering
BFC presently intends to effect an initial public offering of BFC Common
after the Merger, if market conditions are favorable. Neither such offering nor
the Merger is conditioned on the closing of the other. In preparation for the
offering, BFC anticipates that a five for one stock split of BFC Common will
occur soon after the Merger. If the stock split is consummated, the number of
issued and outstanding shares of BFC Common will increase from approximately two
million (including the shares to be issued in the Merger) to approximately eight
million.
Expenses
The Merger Agreement provides, in general, that BFC and FFBS will each pay
its own expenses in connection with the Merger Agreement and the transactions
contemplated thereby. But see, "THE MERGER Waiver; Amendment; Termination.
28
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma 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 proposed acquisition of FFBS. BFC's proposed acquisition of First
Franklin is presented as if the acquisition had occurred on December 31, 1997,
with respect to the balance sheet and as of January 1, 1995, with respect to the
statements of income for the three months ended March 31, 1998, and for the
years ended December 31, 1997, 1996 and 1995 in each case after providing the
effect to the pro forma adjustments described in the accompanying notes. BFC is
also undertaking a public offering of its common stock, which is contemplated to
occur subsequent to the merger with FFBS. These pro formas do not reflect the
effect of the proposed public offering, from which the proposed net proceeds to
BFC are expected to be $13 million. Both transactions are contemplated, but
neither is a condition nor dependent upon the other. The pro forma adjustments
are based on estimates made for the purposes of preparing these pro forma
financial statements. The actual adjustments to the accounts of BFC will be made
based on the underlying historical financial data at the time of the
transaction. BFC'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 proposed merger of BFC and FFBS under the
pooling-of-interest method of accounting, which as discussed previously, is a
condition of the merger. 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 Joint Proxy Statement/Prospectus. The unaudited pro forma condensed
consolidated balance sheet as of December 31, 1997 and March 31, 1998 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 FFBS been effective at the
beginning of the periods indicated, or of the future results of operations of
BFC.
29
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousand, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
As of March 31, 1998
-------------------------------------------------
First Pro Forma Pro Forma
BankFirst Franklin Adjustments Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 23,711 $ 11,104 $ -- $ 34,815
Investment in subsidiary -- -- 21,105(1) --
(21,105)(2)
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 $ -- $ 567,815
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(1) 4,914
(821)(2)
Noncumulative preferred stock 1,079 -- -- 1,079
Additional paid-in capital 19,938 3,218 2,230(1) 22,168
(3,218)(2)
Retained earnings 15,206 17,066 17,066(1) 32,272
(17,706)(2)
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
========= ========= ========= =========
</TABLE>
(1) Issuance of 723,791 shares of BankFirst in exchange for the 164,125 common
shares of First Franklin.
(2) To eliminate investment in First Franklin.
30
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousand, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------
First Pro Forma Pro Forma
BankFirst Franklin Adjustments Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 24,363 $ 6,927 $ -- $ 31,290
Investment in subsidiary -- -- 20,618(1) --
(20,618)(2)
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(1) 4,908
(820)(2)
Noncumulative preferred stock 1,093 -- -- 1,093
Additional paid-in capital 20,112 3,203 2,214(1) 22,326
(3,203)(2)
Retained earnings 14,013 16,595 16,595 30,608
(16,595)(2)
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
========= ========= ========= =========
</TABLE>
(1) Issuance of 723,791 shares of BankFirst in exchange for the 164,125 common
shares of First Franklin.
(2) To eliminate investment in First Franklin.
31
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended March 31, 1998
--------------------------------------
Pro Forma
BankFirst First 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 $ 0.94 $ 2.87 $ 0.83
Diluted $ 0.84 $ 2.87 $ 0.78
32
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Year-Ended December 31, 1997
----------------------------------------
Pro Forma
BankFirst First 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 $ 3.12 $ 15.62 $ 3.27
Diluted $ 2.80 $ 15.62 $ 3.05
33
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Year-Ended December 31, 1996
-----------------------------------------
Pro Forma
BankFirst First 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 $ 3.06 $ 14.40 $ 3.15
Diluted $ 2.77 $ 14.40 $ 2.95
34
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Year-Ended December 31, 1995
------------------------------------------
Pro Forma
BankFirst First 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 $ 3.07 $ 14.15 $ 3.15
Diluted $ 2.76 $ 14.15 $ 2.96
35
<PAGE>
BFC 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 BFC. The consolidated financial information discussed herein primarily
reflects the activities of BFC's wholly-owned subsidiary, BankFirst. The
discussion identifies trends and material changes that occurred during the
reported periods and should be read in conjunction with the consolidated
financial statements of BFC and the accompanying notes. The periods included
within this discussion are the years 1997 and 1996 with respect to financial
position, and 1997, 1996 and 1995 with respect to results of operations.
General
BFC is a community banking organization, headquartered in Knoxville,
Tennessee, which generates loans and deposits through its 23 offices in Knox,
Blount, Sevier, Loudon and Jefferson Counties. BFC provides each of the
communities it serves with a variety of financial services, including commercial
and retail banking products, focusing primarily on funding commercial loan
growth through deposits and borrowings.
At year-end 1997, BFC had $468.8 million in assets, was well capitalized
with an 8.6% leverage ratio, and had 1997 net income of $4.1 million. BFC
reached this financial position over a five-year period through internal growth
combined with selected mergers. Acquisitions have been a component of the BFC's
growth since 1996 and may be utilized in the future if suitable opportunities
arise, such as acquisition candidates that complement geographic position and
the mix of products and services, and that provide expertise in new lines of
business. The following information about BFC is important to understanding this
discussion and analysis.
In the fall of 1992, James Clayton and a group of investors acquired a
majority interest in BankFirst, formerly known as First Heritage, and installed
a local bank management team the following year. Drawing upon 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. These customers, while new to
BankFirst, were mature relationships representing lower than normal lending risk
because of their seasoned performance history. During 1996, 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 BankFirst in a share exchange accounted for in a manner
similar to a pooling of interests. Following the combination, BFC had total
assets of $423 million. The combined entity continued to grow in 1997, primarily
through commercial and 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 enhance mortgage origination,
which had not been a significant line of business, and as an opportunity to
diversify revenues through loan servicing. Curtis Mortgage is a 53 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 1997 historical financial statements of BFC.
BFC changed its name from "Smoky Mountain Bancorp, Inc." to "BankFirst
Corporation" at the April 27, 1998 shareholder meeting. Management expects to
continue growing through expansion of retail locations, through expansion of
products and services, such as mortgage servicing opportunities though Curtis
Mortgage, and possible future mergers or acquisitions. At the current time, BFC
has no present agreements, arrangements or commitments with respect to any
acquisition, other than the Merger Agreement.
The major components of BFC's financial position and operating results for
the past five years are summarized in the following table.
36
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income - tax equivalent $ 37,688 $ 33,673 $ 29,352 $ 22,549 $ 17,928
Interest expense 16,474 15,199 13,416 9,242 7,877
----------- ----------- ----------- ----------- -----------
Net interest income 21,214 18,474 15,936 13,307 10,051
Tax equivalent adjustment (1) (63) (89) (103) (72) (55)
----------- ----------- ----------- ----------- -----------
Net interest income 21,151 18,385 15,833 13,235 9,996
Provision for loan losses (2,250) (517) (378) (503) (624)
Noninterest income 3,420 3,397 2,689 2,475 2,026
Noninterest expenses (15,784) (15,412) (13,845) (12,146) (9,230)
----------- ----------- ----------- ----------- -----------
Income before income taxes 6,537 5,853 4,299 3,060 2,168
Income tax expense 2,471 2,189 1,474 663 826
----------- ----------- ----------- ----------- -----------
Net earnings $ 4,066 $ 3,664 $ 2,825 $ 2,397 $ 1,342
=========== =========== =========== =========== ===========
Basic earnings per share $ 3.12 $ 3.06 $ 3.07 $ 3.12 $ 1.83
Diluted earnings per share 2.80 2.77 2.76 2.68 1.75
Dividends per common share -- -- 0.34 0.40 0.33
Cash dividends declared - common -- -- 305 298 241
Cash dividends declared - preferred 161 162 74 73 --
Book value per common share 30.53 34.37 30.23 24.91 20.31
Average common shares outstanding 1,251,556 1,145,754 895,843 745,510 735,017
Selected year-end balances
Total assets $ 468,750 $ 422,993 $ 374,789 $ 317,784 $ 271,264
Earning assets 431,858 397,449 346,283 290,886 250,522
Total securities 71,912 76,474 79,874 58,817 55,316
Loans - net of unearned income 350,566 315,249 253,471 222,504 182,001
Allowance for loan losses 5,002 3,570 3,407 3,282 2,949
Total deposits 395,152 366,351 329,913 285,050 247,346
Repurchase agreements 16,302 5,966 7,632 1,363 --
Long-term debt 10,000 12,000 8,244 8,244 3,477
Stockholders' equity 38,879 34,154 24,076 18,834 14,931
Selected average balances
Total assets $ 446,524 $ 397,678 $ 363,948 $ 314,132 $ 257,187
Earning assets 412,508 369,529 335,558 275,214 235,320
Total securities 71,650 78,842 79,865 58,946 47,867
Loans- net of unearned income 337,390 284,163 246,805 205,253 174,211
Allowance for loan losses 3,683 3,500 3,245 3,210 2,698
Total deposits 378,678 344,372 324,286 281,188 217,874
Stockholders' equity 35,443 29,276 21,263 16,061 14,504
Ratios based on average balances
Loans to deposits 89.10% 82.52% 76.11% 72.99% 79.96%
Allowance to year end loans 1.43% 1.13% 1.34% 1.48% 1.62%
Equity to assets 8.14% 7.36% 5.84% 5.11% 5.64%
Leverage capital ratio 8.60% 8.25% 6.85% 6.74% 6.04%
Return on assets 0.91% 0.92% 0.78% 0.76% 0.52%
Return on equity 11.19% 12.52% 13.28% 14.93% 9.25%
Dividends payout ratio (2) -- -- 11.09% 12.82% 17.96%
</TABLE>
- ----------------
(1) Tax equivalent basis was calculated using a 38% tax rate for all periods
presented.
(2) Dividends declared on common shares divided by net income available to
common shareholders.
37
<PAGE>
Financial Position
The most significant change in the makeup of BFC's financial position from
1995 to 1997 has been loan growth, funded primarily with deposits and
supplemented with borrowings and/or increases in equity through common and
preferred stock sales. Earning assets were 92% of 1997 total assets and were
approximately at this level during 1996.
Lending
The Loans Outstanding Table reflects the primary earning asset, the loan
portfolio. Total loans were $350.6 million at year-end 1997 and $315.2 million
at year-end 1996. Loan growth was $35.3 million, or 11%, during 1997, and $61.8
million, or 24%, during 1996. Loan growth from 1993 through 1996 was accelerated
from loan customers following management from their previous banking
relationships. All loan categories continued growth during 1997, primarily from
commercial lending, as BFC expanded the loan portfolio in Eastern Tennessee.
Even though loan growth has been experienced in each of the last five years, the
rate of growth slowed during 1997 as management completed refinancing their
previous customer relationships. Management expects loan growth to continue.
Commercial lending will continue to be the primary focus, although management
will work to diversify loan products to consumers, such as increased 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 BFC's loans are commercial, which is
typically the highest risk loan type, management believes that BFC's credit risk
exposure is lower than other similar commercial loan portfolios. Two factors
mitigate credit risk in this portfolio: first 69.5% of total loans are secured
by real estate, and second the early growth was generated through seasoned loan
relationships. BFC's low levels of charge-offs and non-performing loans further
illustrate the lower credit risk.
Lending activities are under the direct supervision of BankFirst's Board
of Directors and Senior Management. BankFirst operates a loan policy which
states among other things, guidelines for underwriting, credit criteria, loan
composition, concentrations, and administration. Commercial loans are generally
underwritten with a life of 15 years; mortgage loans retained are generally
variable rate and have an average term of five years; and installment loans are
underwritten for a maximum of five years. Loan to value guidelines are generally
80% for commercial real estate, 50% for equipment, and 80% for residential real
estate.
LOANS OUTSTANDING
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 65,681 $ 50,286 $ 39,171 $ 31,202 $ 22,751
Commercial real estate 144,876 140,048 102,233 91,983 79,563
Real estate-construction 18,082 20,894 18,184 16,822 9,984
Residential real estate 81,235 72,471 64,915 56,789 53,875
Installment 39,092 30,782 28,614 25,544 15,757
Other 2,355 1,640 1,447 1,585 666
--------- --------- --------- --------- ---------
Total loans 351,321 316,121 254,564 223,925 182,596
Unearned income (755) (872) (1,093) (1,421) (595)
--------- --------- --------- --------- ---------
Total loans, net $ 350,566 $ 315,249 $ 253,471 $ 222,504 $ 182,001
========= ========= ========= ========= =========
</TABLE>
38
<PAGE>
Securities
BankFirst uses its securities portfolio primarily as a source of liquidity
and a base from which to pledge assets for repurchase agreements. Securities are
not a primary focus of BFC, and represent only 15.3% of total assets. Total
securities were $71.9 million at year-end 1997, which is slightly lower than the
$76.5 million balance in 1996. BankFirst's investment strategy is to maintain a
portfolio of acceptable risk at sufficient levels to provide pledging for
deposits and borrowings. BankFirst's policy guidelines are designed to minimize
credit, market, or liquidity risk, and securities generally must have a rating
of Aa or better to be purchased. All securities are classified as available for
sale to provide the most flexibility for asset liability management. U.S.
Government and Agency securities represented 88.8% of the 1997 total portfolio.
Mortgage-backed securities were only $1.8 million, or 2.5%, of total securities
at 1997. Approximately 87% of 1997 securities were pledged for public deposits
and repurchase agreements.
SECURITIES
(Dollar amounts in thousands)
at December 31,
-------------------------------
1997 1996 1995
------- ------- -------
Available for sale
U.S. Government & Agencies $63,853 $73,303 $76,251
States and political subdivisions 6,236 2,712 3,325
Mortgage-backed and asset-backed 1,823 459 298
------- ------- -------
Total available for sale $71,912 $76,474 $79,874
======= ======= =======
Securities Maturity Schedule
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
-------------------- ------------------- -------------------- ---------------- -----------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
-------------------- ------------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Government &
Agencies $ 7,990 6.103% $ 31,424 6.48% $ 24,439 6.58% $ -- $ 63,853 6.47%
State and municipal 211 6.570% 2,732 8.72% 2,401 5.77% 892 7.93% 6,236 7.40%
Mortgage-backed and
asset-backed 1,823 6.92%
------- -------- -------- ----- --------
Total available for sale $ 8,201 $ 34,156 $ 26,840 $ 892 $ 71,912
======= ======== ======== ===== ========
</TABLE>
Deposits and Borrowings
Deposits have been BFC's primary source of funding for loans. The Deposit
Information Table reflects BFC's deposit information for 1995, 1996, and 1997.
Total deposits have continued to grow during this period to a level of $395.2
million at year-end 1997. The growth rate of deposits was 8% during 1997 and 11%
during 1996. BFC's deposit strategy has been to remain competitive in its
markets, although not to pay the highest yield. The Company has demonstrated a
consistent ability to raise deposits quickly within its market areas by slightly
raising interest rates. Banking companies experience competition for deposits
with other banks and brokerage houses. As a result of this competition, BFC's
1997 deposit mix was only 17% noninterest bearing, 37% lower yielding demand and
savings, and 46% time deposits. Deposit growth is expected to continue to be
facilitated through marketing efforts and new retail locations. The cost of
these fundraising activities is expected to be relative to costs historically
incurred.
39
<PAGE>
The loan to deposit ratio increased to 89.1% at 1997, from 82.5% at 1996.
Loan growth out paced the growth of deposit sources. To supply the needed
funding, BFC increased its repurchase agreements from $5.9 million in 1996 to
$16.3 million in 1997. BFC actively solicits customer repurchase agreement
accounts. These accounts are considered volatile under regulatory requirements,
although BFC has found them to be a steady source of funding. BFC has also
utilized the Federal Home Loan Bank of Cincinnati ("FHLB") as a borrowing
source. FHLB borrowings declined from $12 million in 1996 to $10 million in
1997, all of which mature during 1998. The FHLB will continue to be a source for
funding loan growth in the future, as management intends to draw additional
borrowings to fund the Curtis Mortgage warehouse line of credit and for other
loan growth.
While more costly than deposit funding, repurchase agreements and FHLB
advances 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 as
secondary funding sources, core deposits will continue to be BFC's primary
funding source. See further discussion of deposits and borrowings in the
liquidity and interest rate sensitivity sections.
DEPOSIT INFORMATION
(Dollar amounts in thousands)
Deposits at December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Noninterest bearing $ 66,426 $ 47,301 $ 48,938
Interest bearing demand 131,210 120,713 107,482
Savings deposits 15,669 15,468 18,235
Time 181,847 182,869 155,258
-------- -------- --------
Total deposits $395,152 $366,351 $329,913
======== ======== ========
Maturity Ranges of Time Deposits
with Balances of $100 or More at December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
3 months or less $21,780 $25,681 $19,626
3 through 6 months 11,679 9,058 11,790
6 through 12 months 18,189 15,048 8,928
over 12 months 10,289 5,985 6,937
------- ------- --------
$61,937 $55,772 $47,281
======= ======= =======
Equity and Capital Resources
BFC was classified as "well capitalized" during 1997 and 1996. The
leverage capital ratio increased during both periods, from 8.25% in 1996 to 8.6%
in 1997, with total stockholders' equity of $38.9 million. BFC has issued stock
as a result of the exercise of stock options, conversion of preferred stock to
BFC Common, and a five-for-four common stock split in 1997. During 1996, $4.5
million was raised from sales of BFC Common and $1.8 million was raised from
sales of preferred stock. These stock sales were primarily motivated by the
desire to increase operating capital and to maintain well capitalized levels
while supporting asset growth. To further support equity growth, no cash
dividends were paid on BFC Common.
BFC had three million shares of BFC Common authorized. Authorized shares
were increased to 15 million to accommodate the Merger and the proposed public
offering.
40
<PAGE>
Items that represent common stock equivalents include 218,508 shares of 5%
preferred stock, $5.00 par value per share ("BFC Preferred"), and 172,886 common
stock options outstanding at year-end 1997. BFC Preferred is convertible into
.6175 shares of common stock, adjustable for any subsequent stock splits. There
are one million shares of BFC Preferred authorized; management currently has no
plans to issue additional shares. There are 423,961 additional shares of BFC
Common available for grant under the stock option plan. BFC plans to continue
granting stock options to selected officers, directors and other key employees.
Capital adequacy in the banking industry is evaluated primarily by the use
of three required capital ratios: leverage capital (Tier I capital divided by
average assets less intangible assets and unrealized security gains/losses);
Tier I risk-based capital (Tier I capital divided by risk-weighted assets); and
total risk-based capital (Tier I capital plus Tier II capital divided by
risk-weighted assets). Tier I capital is shareholders' equity less intangible
assets plus/less unrealized losses/gains. Tier II capital consists of the
allowance for loan losses limited to 1.25% of risk-weighted assets. Risk weights
are assigned to on-and off-balance sheet items in arriving at risk-adjusted
total assets. Because BFC's consolidated assets exceed $150 million, BFC is
required to meet the capital regulations on a consolidated basis, and BankFirst
is required to meet the regulations on a bank-only basis.
The regulatory capital ratios for BFC and BankFirst are present in Note 12
to the accompanying consolidated financial statements. BFC meets the
requirements to be considered "well capitalized" under regulatory guidelines.
The Merger with FFBS, if approved, is not expected to affect the capital
category of BFC.
Asset growth is the primary factor which creates a need for capital.
Management's current policy is to retain all earnings in order to increase
capital levels to support growth; therefore, cash dividends on BFC Common have
not been paid. Current common shareholders also have the ability to increase
their investment levels, and have historically demonstrated a willingness to do
so when business conditions warranted such additional investments. Management
also believes that public capital markets could be successfully accessed to meet
BFC's capital needs.
Results of Operations
Net income for 1997 was $4.1 million, representing an 11% increase over
1996. Net income for 1996 was $3.7 million, or 30% higher than 1995, and the
1995 net income was $2.8 million, or 18% higher than 1994. The return on average
assets for 1997 was .91%, slightly lower than .92% in 1996, and up from .78% in
1995. Net income has grown in each of these periods; however, the 1997 growth
rate was lower primary because of the $2.2 million provision for loan losses,
which was $1.7 million higher than the previous year. This variance is further
explained with the discussion about the provision for loan losses.
BFC's basic and dilutive earnings per share remained even from 1995 to
1996, and increased to 1997. Earnings per share were flat during 1996 primarily
due to issuance of additional BFC Common during the year and the 1996 merger.
The difference between basic and dilutive earnings per share was approximately
$.30 for each of the years 1997, 1996 and 1995. The dilution results from the
common stock equivalents from the preferred stock and the stock option plan.
Further dilution is anticipated to occur during 1998 from the additional shares
issued in the public offering.
BFC has paid 5% dividends on its preferred stock in the past, but has
generally not paid cash dividends on BFC Common. Dividends on BFC Common were
paid by Smoky Mountain Bancorp, Inc. before Clayton acquired a controlling
interest. BFC currently does not have plans to pay cash dividends on BFC Common.
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 a financial institution. 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
41
<PAGE>
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 38%.
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.
The following table details the key determinants of net interest income:
the average daily balance sheet for each year (including the components of
earning assets and supporting liabilities), the related interest income on an
FTE basis, interest expense, and the average rates earned and paid on these
assets and liabilities.
42
<PAGE>
AVERAGE BALANCE SHEETS AND INTEREST RATES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------- --------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Securities
Taxable $ 69,014 $4,513 6.54% $ 74,769 $ 4,815 6.44% $ 75,103 $4,049 5.39%
Tax-exempt (1) 2,552 196 7.68% 3,883 277 7.13% 4,388 323 7.36%
Unrealized gain on A.F.S. 84 190 374
--------------------------------- -------------------------------- ------------------------------
Total securities 71,650 4,709 6.57% 78,842 5,092 6.46% 79,865 4,372 5.47%
Loans (2) 337,390 32,769 9.71% 284,163 28,227 9.93% 246,805 24,628 9.98%
Federal funds sold and other 3,468 221 6.37% 6,524 370 5.67% 8,888 372 4.19%
--------------------------------- -------------------------------- ------------------------------
Total earning assets 412,508 37,699 9.14% 369,529 33,689 9.12% 335,558 $ 29,372 8.75%
------- ------- -------
Noninterest earning assets
Allowance for loan losses (3,683) (3,500) (3,245)
Premises and equipment 17,019 14,051 14,484
Cash and due from banks 15,088 11,810 11,686
Accrued interest and other
assets 5,592 5,788 5,465
------------ ----------- -----------
Total assets $ 446,524 $ 397,678 $ 363,948
------------ ----------- -----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand
deposits 122,730 $4,500 3.67% $ 109,431 $ 4,689 4.28% $ 106,689 $4,345 4.07%
Savings deposits 14,989 387 2.58% 16,173 461 2.85% 18,091 488 2.70%
Time deposits 185,310 10,157 5.48% 169,851 8,958 5.27% 155,498 7,807 5.02%
--------------------------------- --------------------------------- -----------------------------
Total interest-bearing deposits 323,029 15,044 4.66% 295,455 14,108 4.78% 280,278 12,640 4.51%
Borrowed funds
Repurchase agreements 9,110 438 4.81% 7,346 347 4.72% 4,839 276 5.70%
Other borrowings 6,034 350 5.80% 3,823 213 5.57% 3,744 149 3.98%
Long-term borrowings 11,243 642 5.71% 8,385 531 6.33% 5,000 351 7.02%
--------------------------------- --------------------------------- -----------------------------
Total borrowed funds 26,387 1,430 5.42% 19,554 1,091 5.58% 13,583 776 5.71%
--------------------------------- --------------------------------- -----------------------------
Total interest-bearing
liabilities 349,416 16,474 4.71% 315,009 15,199 4.82% 293,861 13,416 4.57%
------------------- ------------------ ---------------
Noninterest-bearing liabilities
Employee stock ownership plan 1,536 1,389 1,710
Noninterest-bearing demand 55,649 48,917 44,008
deposits
Other liabilities 4,480 3,087 3,106
Shareholders' equity 35,443 29,276 21,263
------------ ----------- -----------
Total liabilities and
shareholders' equity $ 446,524 $ 397,678 $ 363,948
------------ ----------- -----------
Interest margin recap
Net interest income and
interest rate spread $21,225 4.43% $ 18,490 4.30% $ 15,956 4.18%
=========== ------- ========= ------- ========= -----
Net interest income margin 5.15% 5.00% 4.76%
======= ======= =====
</TABLE>
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 38% 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 $693 for 1995.
43
<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
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 change from 1996 due to 1996 change from 1995 due to
---------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 5,392 $ (850) $ 4,542 $ 3,744 $ (145) $ 3,599
Securities
Taxable (363) 61 (302) (18) 784 766
Tax-exempt (86) 5 (81) (36) (10) (46)
Total securities interest (449) 66 (383) (54) 774 720
Federal funds sold (144) (5) (149) (204) 202 (2)
------- ------- ------- ------- ------- -------
Total interest income 4,799 (789) 4,010 3,486 831 4,317
Interest expense
Interest-bearing demand deposits 607 (796) (189) 114 230 344
Savings deposits (45) (29) (74) (45) 18 (27)
Time deposits 838 361 1,199 744 407 1,151
Repurchase agreements 85 6 91 161 (90) 71
Other borrowings 128 9 137 3 61 64
Long-term borrowings 195 (84) 111 258 (78) 180
------- ------- ------- ------- ------- -------
Total interest expense 1,808 (533) 1,275 1,235 548 1,783
------- ------- ------- ------- ------- -------
Net interest income $ 2,991 $ (256) $ 2,735 $ 2,251 $ 283 $ 2,534
======= ======= ======= ======= ======= =======
</TABLE>
Net interest income (FTE) increased $2.7 million from 1996 to 1997, and
$2.5 million from 1995 to 1996, or approximately 15% each year. Net interest
margin also improved each period, moving from 4.76% in 1995, to 5.00% in 1996
and 5.15% in 1997. The strong increase in net interest income and steady
improvement in net interest margin are primarily attributable to an increase in
the level of earning assets and a change in the makeup of those assets.
Average earning assets increased 11.6% from 1996 to 1997, and 10.1% from
1995 to 1996. This strong growth is a result of management's focus on lending
activities. The pace of growth in loans, 18.7% in 1997 and 15.1% in 1996, drove
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, an aggressive calling program,
and opportunities for relationship development arising from the acquisitions of
other community based institutions by banking companies not headquartered in
BankFirst's primary market area. Management expects loan growth to continue,
although the rate of growth recently experienced may not be sustained.
The strong 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 73.6% of earning assets. During 1996 this ratio increased to
76.9%, and in 1997 it increased further to 81.8%. So, even though the average
rate earned on loans has decreased in each of the last two years, 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. While the increase in yield from 1995 to 1996 was consistent with
general market rate increases, in 1997 management engaged an outside advisor,
Martin & Company, with the intent of improving investment yields. Average yields
on investments increased in 1997, while general market rates declined to some
extent.
44
<PAGE>
Net interest income and net interest margin have also been helped by
several factors related to funding. Most importantly, most of BFC's asset growth
has continued to be funded with deposits, the least costly source of funding.
Average interest-bearing deposits grew 9.3% from 1996 to 1997, almost keeping
pace with the growth in earning assets. Even with this strong deposit growth,
the average rate paid on deposits fell from 4.78% in 1996 to 4.66% in 1997. BFC
is generally asset driven, managing funding to support assets gathered.
The portion of earning assets funded by non-interest bearing deposits,
other liabilities, and equity has increased from 20.4% in 1995, to 22.0% in
1996, to 23.2% in 1997. These sources of funding do not carry an interest cost,
and thus the amount of interest earning assets supported by noninterest-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
not quite kept pace with the growth in earning assets. As a result, borrowed
funds have increased from 4.0% of average earning assets in 1995 to 5.3% in 1996
and 6.4% 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 120 basis points ("bp"). In 1996 this fell to 80 bp, and in 1997 it
decreased further to 76 bp. The merger with FFBS may permit BFC to moderate its
use of other borrowed funds.
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. BFC 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.
Activity in the allowance for loan losses is reflected in the Analysis of
Allowance for Loan Losses Table. 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.
BankFirst'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. BFC's level of net charge-offs to average loans, was .24% in 1997,
.12% in 1996, and .10% in 1995. Charge-offs have been relatively immaterial
through 1996 and increased to $878 in 1997 substantially due to two commercial
credits.
45
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,570 $ 3,407 $ 3,282 $ 2,949 $ 2,447
Loans charged off
Commercial, financial, and
agricultural (501) (129) (179) (215) (160)
Commercial real estate (128) -- -- -- --
Real estate-construction -- -- -- -- --
Residential real estate (22) (10) (44) -- --
Installment (213) (300) (177) (73) (69)
Lease financing (14) -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs (878) (439) (400) (288) (229)
--------- --------- --------- --------- ---------
Charge-offs recovered
Commercial, financial, and
agricultural 30 41 130 102 87
Commercial real estate 2 -- -- -- --
Real estate-construction -- -- -- -- --
Real estate-residential 17 -- -- -- --
Installment 11 44 17 15 20
Lease financing -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries 60 85 147 117 107
--------- --------- --------- --------- ---------
Net loans charged off (818) (354) (253) (171) (122)
Current year provision 2,250 517 378 504 624
--------- --------- --------- --------- ---------
Balance at end of year $ 5,002 $ 3,570 $ 3,407 $ 3,282 $ 2,949
========= ========= ========= ========= =========
Loans, net at year end $ 350,566 $ 315,249 $ 253,471 $ 222,504 $ 182,001
Ratio of allowance to loans
at year end 1.43% 1.13% 1.34% 1.48% 1.62%
Average loans $ 337,390 $ 284,163 $ 246,805 $ 205,253 $ 174,211
Ratio of net loans charged off
to average loans 0.24% 0.12% 0.10% 0.08% 0.07%
</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 for which principal is considered
collectible. Another element associated with asset quality is other real estate
owned (OREO), which represents properties acquired through loan defaults by
customers. The Nonperforming Assets Table presents the amount and type of
non-performing assets from 1993 through 1997. Non-performing loans were higher
in 1997 and 1996 than in previous years; however, were still only .62% of loans
in 1997 and .65% of loans in 1996, which is low compared to the banking industry
in general. The dollar increase during 1997 is due to the maturing portfolio,
and is less attributable to conditions in the marketplace. The allowance for
loan losses is more than double the amount of non-performing loans at year-end
1997. BFC considers commercial loans on nonaccrual or classified as doubtful
under the internal grading system to be impaired. For these loans, a specific
reserve, if any, is computed using discounted expected cash flows or conversion
of collateral. There were no material impaired loans at year-end 1997.
46
<PAGE>
Even though BFC has low levels of non-performing loans and has experienced
low charge-offs, management maintains 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 $2.3 million,
which was substantially higher than the two preceding years. Factors which gave
rise to the 1997 increased provision and the resultant 40.1% increase in the
allowance included a 30.6% increase in commercial business loans during the year
and a 131.1% increase in net charge-offs during the year, which increased the
historical loss factors applied to the portfolio.
NONPERFORMING ASSETS
(Dollar amounts in thousands)
as of December 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Principal balance
Nonaccrual $ 642 $ 625 $ 298 $ 568 $ 96
90 days or more past due
and still accruing 1,533 1,423 272 228 125
------ ------ ------ ------ ------
Total nonperforming
loans $2,175 $2,048 $ 570 $ 796 $ 221
====== ====== ====== ====== ======
Nonperforming as a percent
of loans 0.62% 0.65% 0.22% 0.36% 0.12%
Other real estate owned $ 500 $ 216 $ 770 $ 317 $ 396
OREO as a percent of loans 0.14% 0.07% 0.30% 0.14% 0.22%
Allowance as a percent of
nonperforming loans 229.98% 174.32% 597.72% 412.31% 1334.39%
The 1997 loan portfolio was 60% commercial and commercial real estate
loans, which represent higher risk than residential mortgage and consumer loans
based on their size and more dependency on cash flow. BankFirst also has a
concentration of commercial real estate loans to the hospitality industry,
substantially in Sevier County, Tennessee. Management has determined that an
allowance level of 1.43% at 1997 is adequate for this risk. Future provisions
for loan losses will be dependent on loan growth, loan mix, portfolio credit
risk and actual losses incurred. Provisions during 1998 are not expected to be
at 1997 levels.
LOAN COMPOSITION AND ALLOWANCE
(Dollar amounts in thousands)
Composition of loan portfolio
by type at December 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial, financial,
and agricultural 18.70% 15.91% 15.39% 13.93% 12.46%
Commercial real estate 41.24% 44.30% 40.16% 41.08% 43.57%
Real estate-construction 5.15% 6.61% 7.14% 7.51% 5.47%
Residential real estate 23.12% 22.93% 25.50% 25.36% 29.51%
Installment 11.13% 9.74% 11.24% 11.41% 8.63%
Other 0.67% 0.52% 0.57% 0.71% 0.36%
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
47
<PAGE>
Allocation of allowance for loan
losses at December 31,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial, financial,
and agricultural $1,078 $ 741 $ 659 $ 589 $ 605
Commercial real estate 1,715 1,304 1,244 1,153 1,048
Real estate-construction 214 260 217 208 132
Residential real estate 666 602 552 481 412
Installment 423 361 332 317 211
Unallocated 906 302 403 534 541
------ ------ ------ ------ ------
Total $5,002 $3,570 $3,407 $3,282 $2,949
====== ====== ====== ====== ======
Noninterest Income and Expense
The following tables reflect the significant components and percent
changes of noninterest income and expense from 1995 through 1997.
NONINTEREST INCOME
(Dollar amounts in thousands)
% change % change
1997 from '96 1996 from '95 1995
---- -------- ---- -------- ----
Noninterest Income
Deposit service charges
and fees $2,640 0.96% $2,615 19.90% $2,181
Other 379 (34.99)% 583 129.53% 254
------ -------- ------ -------- ------
3,019 (5.60)% 3,198 31.33% 2,435
Realized gain on sale
of loans 226 13.57% 199 9.94% 181
Security gains/(losses) 175 100.00% -- (100.00)% 73
------ -------- ------ -------- ------
Total noninterest income $3,420 0.68% $3,397 26.33% $2,689
====== ======== ====== ======== ======
NONINTEREST EXPENSE
(Dollar amounts in thousands)
% change % change
1997 from '96 1996 from '95 1995
---- -------- ---- -------- ----
Noninterest Expense
Salaries and employee
benefits $ 7,986 8.04% $ 7,392 9.58% $ 6,746
Occupancy expenses 1,312 (23.90)% 1,724 50.96% 1,142
Equipment expenses 2,028 7.64% 1,884 55.32% 1,213
Office expenses 625 68.46% 371 (35.59)% 576
Data processing expenses 981 33.47% 735 37.38% 535
FDIC assessments 48 (64.18)% 134 (73.47)% 505
Other 2,804 (11.60)% 3,172 1.41% 3,128
------- ------- ------- -------- -------
Total noninterest
expense $15,784 2.41% $15,412 11.32% $13,845
======= ======= ======= ======== =======
48
<PAGE>
While net interest income is the primary source of income for BFC,
noninterest income is also an important source of income. The primary recurring
source of noninterest income is service charges on deposit accounts. Service
charges on deposit accounts increased .95% from 1996 to 1997, and increased
19.9% from 1995 to 1996.
Another component of noninterest income is gains on sales of securities
and loans. BFC classifies all of its securities as "available for sale," to
maximize its ability to sell securities for interest rate risk management,
income enhancement, etc. Security sales were $13.9 million in 1997, generating
$175,000 in gains. There were no security sales in 1996, and the $73,000
security gains in 1995 were on $8.2 million sales of trading securities.
Management discontinued trading securities during 1995, and current policies do
not permit trading. Gains from loan sales of $226,000 in 1997, $199,000 in 1996,
and $181,000 in 1995 were solely gains realized from sales of mortgage loans
servicing released to private investors. Proceeds from sales of these mortgage
loans were $15.5 million during 1997. BFC generally has not retained mortgage
loans in the portfolio. With the acquisition of Curtis Mortgage, BFC 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 enhance
earnings from loan servicing income.
Noninterest expense increased only 2.4% in 1997 from 1996. Increases in
office administration and data processing costs were offset by declines in
occupancy and FDIC assessments. BankFirst's FDIC insurance rate is at the lowest
level charged by the FDIC, which is currently close to zero. Noninterest
expenses increased 11.3% from 1995 to 1996, primarily from occupancy and
equipment expenses, also offset by a decline in FDIC assessments. Future
occupancy expenses are expected in increase as a result from 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's data processing service bureau. Other
identified contributors to 1998 noninterest expense will be the costs associated
with the proposed merger with FFBS, which are estimated to be $350,000.
Income Taxes
BFC's effective income tax rate was approximately 37% in 1997 and 1996,
and 34% in 1995. The increase from 1995 is primarily due to lower tax exempt
income. BFC had deferred tax liabilities of $295,000 at year-end 1997 and
$227,000 at year-end 1996. Note 9 to the consolidated financial statements
contains additional analysis of income taxes.
Liquidity and Interest Rate Sensitivity
Liquidity. Liquidity management is both a daily and long-term
responsibility of management. BFC adjusts its investments in liquid assets and
long and short term borrowing based upon management's expectations of expected
loan demand, expected deposit flows, and securities sold under agreements to
repurchase (which are generally deposit equivalents arising from a corporate
cash management program offered by BankFirst). Management maintains a liquidity
ratio which, on average, is lower than its peer institutions, because of its
ready access to significant funding sources. Management looks to deposits and
other borrowings as its primary sources of liquidity. The Asset/Liability
Committee evaluates funding sources on a quarterly basis, sets funding policy
and evaluates repricing and maturity of BFC's assets and liabilities in order to
diminish the potential adverse impact that changes in interest rates could have
on BFC's net interest income.
49
<PAGE>
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 BFC. In general, community bank customer preferences tend to push the
average repricing period for interest-bearing 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. Because most of
BFC's commercial real estate loans are based on the prime rate and can reprice
daily, BFC's asset repricing structure is shorter than most community based
institutions. A summary of BFC's repricing GAP at December 31, 1997 follows:
LIQUIDITY AND INTEREST RATE SENSITIVITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at December 31, 1997
----------------------------------------------------------------------------
1 - 90 91 - 365 1 - 5 Over 5
Days Days Years Years Total
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 164,234 $ 37,013 $ 119,806 $ 29,513 $ 350,566
Securities available for sale
Taxable 999 7,077 32,903 26,261 67,240
Tax-exempt -- 125 1,254 3,293 4,672
--------- --------- --------- --------- ---------
Total securities 999 7,202 34,157 29,554 71,912
Federal funds sold 7,000 -- -- -- 7,000
--------- --------- --------- --------- ---------
Total interest earning assets $ 172,233 $ 44,215 $ 153,963 $ 59,067 $ 429,478
========= ========= ========= ========= =========
Interest bearing liabilities
Interest-bearing demand deposits $ 131,211 $ -- $ -- $ -- $ 131,211
Savings deposits 15,668 -- -- -- 15,668
Time Deposits 50,967 98,280 32,275 325 181,847
Repurchase agreements and other
borrowed funds 15,553 458 500 -- 16,511
Long-term borrowings -- 10,000 -- -- 10,000
--------- --------- --------- --------- ---------
Total interest bearing liabilities $ 213,399 $ 108,738 $ 32,775 $ 325 $ 355,237
========= ========= ========= ========= =========
Rate sensitive gap (41,166) (64,523) 121,188 58,742 74,241
Rate sensitive cumulative gap (41,166) (105,689) 15,499 74,241
Cumulative gap as a percentage of
earning assets (9.59)% (24.61)% 3.61% 17.29%
</TABLE>
As demonstrated in the table, BFC has a cumulative negative GAP of
approximately 10% and 25% 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 contractual asset repricing in a
rising rate environment. Conversely, those liabilities can often be repriced
downward more rapidly than contractually required asset 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
50
<PAGE>
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 BFC's earnings
simulation model.
BFC uses an earnings simulation model to analyze 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 basis points.
Assumptions based on the historical behavior of BFC'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.
The following table illustrates BFC's estimated annualized earnings
sensitivity profile as of December 31, 1997.
INTEREST RATE SENSITIVITY
(Dollar amounts in thousands)
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
------ ------ ----- ------ ------
Projected Interest Income
Loans 31,931 34,077 36,223 38,369 40,515
Investments 5,126 5,212 5,297 5,382 5,468
Federal funds sold 16 16 16 16 16
------- ------- ------- ------- -------
Total interest income 37,073 39,305 41,536 43,767 45,999
Projected Interest Expense
Deposits 13,587 14,853 15,989 17,240 18,491
FHLB term advances 554 611 668 725 782
Federal funds purchased 611 818 1,025 1,232 1,439
------- ------- ------- ------- -------
Total interest expense 14,752 16,282 17,682 19,197 20,712
------- ------- ------- ------- -------
Net interest income 22,321 23,023 23,854 24,570 25,287
Change from level rates (1,533) (831) 716 1,433
% change from level rates (6.43)% (3.48)% 3.00% 6.01%
In the event of an immediate 100 bp upward shift in the yield curve, it is
estimated that net interest income would increase by approximately $700,000
compared to an increase of $1.4 million in the event of a similar 200 bp rate
movement. These changes represent 3% and 6% of net interest income,
respectively. Downward rate movements result in estimated decreases in net
interest income of similar amounts and percentages.
Even though BFC'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.
51
<PAGE>
FUNDING USES AND SOURCES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ----------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
-------- --------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Funding Uses
Loans, net of unearned
income $337,390 $ 53,227 18.73% $284,163 $ 37,358 15.14%
Taxable securities 69,014 (5,755) (7.70)% 74,769 (334) (0.44)%
Tax exempt securities 2,552 (1,331) (34.28)% 3,883 (505) (11.51)%
Federal funds sold 3,468 (3,056) (46.84)% 6,524 (2,364) (26.60)%
-------- -------- ----- -------- -------- -----
Total Uses $412,424 $ 43,085 11.67% $369,339 $ 34,155 10.19%
======== ======== ===== ======== ======== =====
Funding Sources
Noninterest bearing deposits $ 55,649 $ 6,732 13.76%$ 48,917 $ 4,909 11.15%
Interest bearing demand 122,730 13,299 12.15% 109,431 2,742 2.57%
Savings deposits 14,989 (1,184) (7.32)% 16,173 (1,918) (10.60)%
Time deposits 185,310 15,459 9.10% 169,851 14,353 9.23%
Repurchase agreements 9,110 1,764 24.01% 7,346 2,507 51.81%
Other borrowings 6,034 2,211 57.83% 3,823 79 2.11%
Long-term borrowings 11,243 2,858 34.08% 8,385 3,385 67.70%
-------- -------- ----- -------- -------- -----
Total Sources $405,065 $ 41,139 11.30% $363,926 $ 26,057 7.71%
======== ======== ===== ======== ======== =====
</TABLE>
BFC has demonstrated a consistent ability to raise deposits quickly within
its market area by slightly raising interest rates, and has been able to achieve
deposit growth without paying above market interest rates. The current strategy
calls for BFC to be no higher than second highest in its pricing as compared to
its 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. BFC does not solicit brokered deposits, but does have more
certificates greater than $100,000 than its peer institutions. Because of the
other sources of liquidity discussed below, management does not consider this to
be a significant liquidity or interest rate risk. BFC does not actively seek out
these deposits, and the average interest rate paid on these deposits is less
than peer. 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 at the pace of $1 million per month,
replacing this financing with other sources of funds.
BFC actively solicits customer cash management and repurchase agreement
accounts. These accounts are considered volatile under regulatory requirements,
although BFC has found them to be a steady source of funding. BFC has been able
to increase customer relationships in this areas because of its strong business
lending program. While more costly than deposit funding, these deposit
equivalents are typically the lowest cost borrowed funds available in the
marketplace.
Although it had no borrowings of this type outstanding at year-end 1997,
BFC maintains significant federal funds lines of credit with other financial
institutions. At that date total borrowing capacity under those lines amounted
to $31.2 million under agreements with five commercial banks and the FHLB.
Federal funds borrowing are available on demand and reprice on a daily basis.
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BFC also has substantial additional borrowing capacity available from the
FHLB. Under the terms of its advances agreement with the FHLB, BFC can borrow
approximately $40 million without purchasing additional FHLB stock. BFC had $10
million in borrowings at year-end 1997.
Another source of liquidity is the sale of equity securities. The primary
shareholders of BFC have historically had an ability and willingness to supply
capital, in the form of both preferred and common stock, when necessary.
Although the primary basis for providing capital is to meet regulatory capital
requirements discussed below (see "Capital Adequacy"), sales of such securities
by the holding company provide additional funds which can be used to finance
activities of either the holding company or the bank. Proceeds from such sales
have exceeded $7.5 million since January 1, 1995.
Sales and maturities of assets are another source of liquidity. Proceeds
from maturities of securities were $24.2 million, $73.4 million, and $36.6
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. BFC also had $72.0 million in securities classified as available for
sale at December 31, 1997. The ability to sell such securities, which are
essentially quite liquid, is another potential source of liquidity, although
management 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. An additional source of
liquidity for BFC is cash generated by operations, which amounted to $10.9
million, $5.5 million, and $4.2 million in 1997, 1996, and 1995, respectively.
LOAN LIQUIDITY
(Dollar amounts in thousands)
Loan Maturities at December 31, 1997
--------------------------------------------
1 year 1 - 5 Over 5
and less years years Total
------------ --------- -------- ---------
Commercial, financial,
and agricultural $34,973 $ 22,968 $ 7,740 $ 65,681
Commercial real estate 20,452 27,034 97,390 144,876
Real estate - construction
and residential 25,088 36,577 37,652 99,317
Installment and other 10,252 26,104 5,091 41,447
------- -------- -------- --------
Total selected loans $90,765 $112,683 $147,873 $351,321
======= ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates $120,703
Floating interest rates 139,853
--------
$260,556
========
The liquidity discussion above has described BFC'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 bank and
the holding company, although there are certain regulatory restrictions on such
flows, particularly from the bank to the holding company, as described in note
12 to the financial statements. At year-end 1997, the bank had the ability to
transfer approximately $6.2 million to the holding company without special
regulatory approval. The holding company currently has no borrowings, and
management's current policy is not to pay dividends on BFC Common; rather,
earnings are retained to provide capital to support BFC's growth. As a result,
the holding company's independent liquidity needs are only related to holding
company only expenses, which are quite small in relationship to its sources of
liquidity.
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As of and for the Three Months Ended March 31, 1998
The following section provides additional selected discussion of the
financial condition and results of operations of BFC as of and for the three
months ended March 31, 1998. This discussion should be read in conjunction with
the unaudited consolidated financial statements of BFC.
General. On January 16, 1998, BankFirst acquired a mortgage loan
origination and servicing company, Curtis Mortgage, for $7.5 million in a
purchase transaction. The primary asset acquired included a $451.0 million loan
servicing portfolio with a mortgage servicing right asset valued at $7.0
million. Since Curtis Mortgage does not retain mortgage loans for its portfolio,
the amount of loans in process and loans held for sale at purchase were $6.2
million. The mortgage servicing right assets are being amortized on a
level-yield basis over the life of the underlying mortgage loans, an average
life estimated to be approximately eight years. The excess of the purchase price
over the fair value of net assets acquired resulted in $1.9 million of goodwill,
which is being amortized on a straight-line basis over 15 years.
Financial Position. Total assets grew from $468.8 million at year-end 1997
to $516.8 million at March 31, 1998, a $48.0 million increase. The primary
changes in assets were attributed to a $19.6 million increase in loans held for
sale, a $15.5 million increase in net loans, a $6.9 million of mortgage
servicing assets, and intangible assets recorded from the purchase. 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 Curtis Mortgage purchase and approximately $200,000 of
intangibles from previous transactions.
Total liabilities grew from $428.3 million at year-end to $475.1 million
at March 31, 1998, an increase of $46.8 million. Of this growth, deposits
accounted for $15 million, federal funds purchased were $14.5 million,
repurchase agreements accounted for $2.9 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.
Equity grew $1.1 million primarily from retained net income. The leverage
capital ratio fell from 8.6% at year-end 1997 to 7.8% at March 1998 resulting
from asset growth and goodwill recorded in the purchase transaction. This ratio
still maintains BFC in the well capitalized category.
Results of Operations. Net income from the three months ended March 31,
1998 was $1.2 million versus $1.1 million for the comparable period in 1997.
Interest and fees on loans was $1.3 million higher than the prior year period,
primarily from $30.0 million growth in the loan portfolio. Interest expense on
deposits increased $80,000 from the prior year period also due to an increase in
outstanding deposits. Interest expense on borrowings increased $291,000 from the
prior year period resulting from increases in short-term borrowings associated
with funding mortgage loans in process and held for sale as discussed above.
The largest changes in noninterest expense from the three months ended
March 1998 versus March 1997 is $325,000 of mortgage loan servicing income, net
of amortization, and $154,000 increase in gains on sale of loans associated with
Curtis Mortgage. Noninterest expenses increased $1.2 million from the same
periods, primarily from an $832,000 increase in salaries from additional staff
employed by BFC during its growth and salaries associated with Curtis Mortgage.
The March 1998 period reflects $39,000 of nonrecurring expenses associated with
the merger with FFBS. Other increases in noninterest expense categories were
attributed to growth of BFC.
Year 2000
BFC has implemented plans to address Year 2000 compliance. The issue
arises from the fact that many 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.
BankFirst must not only evaluate and test its own Year 2000 readiness, it must
also
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coordinate with other entities with which it routinely interacts such as
suppliers, creditors, borrowers, customers, and other financial service
organizations, which have the same Year 2000 risk.
BFC has initiated an implementation plan providing for Year 2000 readiness
by the end of 1998. Management believes BFC's plan is on target with the goals
established by its regulators. BFC has completed the awareness and assessment
phases and has substantially completed the remediation phase of the plan. BFC's
data processing service bureau implemented new software which has been Year 2000
certified, and BFC completed its conversion to this new software in April, 1998.
Conversion to the new host system necessitated an upgrade of BFC's chief pc's
and their operating systems, which have been tested for Year 2000 compliance.
BFC 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.
BFC has determined that the Year 2000 issue may be critical to its
operations, however customer readiness is not deemed by management to be
material to BFC's 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 $190,000.
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 BFC's operations. Nearly all of the assets and liabilities of
BFC are financial, unlike most industrial companies. As a result, BFC's
performance is directly impacted by changes in interest rates, which are
indirectly influenced by inflationary expectations. BFC'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 BFC'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 BFC is changes in unrealized gains on
securities, which was $493,000 in 1997 and $(518,000) in 1996.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 is effective for public companies interim and
year-end financial statements for reporting periods following the first required
full fiscal year disclosure. This Statement establishes new guidance for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable operating segments in interim financial reports
issued to shareholders. SFAS No. 131 supersedes the industry approach to segment
disclosures previously required by SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", replacing it with a method of segment
reporting which is based on the structure of an enterprise's internal
organization reporting. The Statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
BankFirst plans to include segment reporting in the year-end 1998 financial
statements.
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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 BankFirst;
however, there are certain filing requirements which are only applicable to
banks with assets over $500,000. This threshold is measured on an individual
bank basis, not on consolidated assets. BankFirst had total year-end 1997 assets
of $468.8 million and is expected to exceed $500 million during 1998. As a
result, BankFirst will be required to comply with the FDICIA reporting
requirements during 1999.
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BUSINESS OF BFC
General
BFC is a bank holding company which was incorporated in Tennessee in 1988.
Its principal asset is the capital stock of BankFirst. At March 31, 1998 BFC had
total assets of $517 million and stockholders' equity of $40 million. BankFirst,
BFC's wholly-owned subsidiary, is a community bank which provides a variety of
banking and financial services to businesses and individuals. BankFirst's
headquarters is located at 625 Market Street, Knoxville, Tennessee 37902.
BankFirst has 22 additional branch offices and 38 ATMs located in Blount, Knox,
Loudon, Sevier and Jefferson Counties.
BankFirst has two wholly-owned subsidiaries: Eastern Life Insurance
Company ("Eastern") and Curtis Mortgage Company ("Curtis Mortgage"). Eastern is
a credit life, accident and disability reinsurance company, formed in 1993.
BankFirst acquired Curtis for $7.5 million in a cash purchase in early 1998.
Curtis Mortgage is a Tennessee corporation regulated by the TDFI, which both
originates and services mortgages.
Employees
BFC does not have any employees who are not also employees of BankFirst.
As of March 31, 1998, BFC had approximately 258 full-time equivalent employees.
The employees are not represented by a collective bargaining unit. BFC believes
its relationship with its employees to be good.
Customers
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
materially adverse affect on the business of BFC.
Properties
BFC's principal and executive offices are located at 625 Market Street,
Knoxville, Tennessee 37902. BankFirst currently conducts business at 23 offices.
BFC owns the land and building on which its executive offices are located and
also owns 17 of its branch locations. BFC leases either the land, the building
or both in connection with the operation of its other 5 branch offices.
BankFirst operates eight offices in Knox County:
Market Street Office Farragut Office Knoxville Center Office
625 Market Street 11140 Kingston Pike 3031-A Mall Road North
Knoxville, TN 37902 Knoxville, TN 37922 Knoxville, TN 37924
Bearden Office Halls Office Cedar Bluff Office
4611 Kingston Pike 7108 Maynardville Hwy 330 Cedar Bluff Rd. North
Knoxville, TN 37919 Knoxville, TN 37918 Knoxville, TN 37923
Rocky Hill Office Weisgarber Office
7710 Northshore 1235 Weisgarber Rd.
Knoxville, TN 37902 Knoxville, TN 37909
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Four branches in Loudon County:
Loudon Office Philadelphia Office Tellico Village Office
406 Grove Street 22730 West Lee Hwy 302 Village Square
Loudon, TN 37774 Philadelphia, TN 37846 Loudon, TN 37774
Lenoir City Office
391 Highway 321
Lenoir City, TN 37771
Two branches in Jefferson County:
Jefferson City Office Dandridge Office
263 E. Broadway Blvd. 858 S. Hwy 92
Jefferson City, TN 37760 Dandridge, TN 37725
Six branches in Sevier County:
Gatlinburg Office Dudley Creek Office Pigeon Forge Office
811 Parkway 912 E. Parkway 3416 South River Road
Gatlinburg, TN 37738 Gatlinburg, TN 37738 Pigeon Forge, TN 37863
Sevierville Office Dolly Parton Parkway Kodak Office
430 Forks of the River Pkwy Office 2950 Winfield Dunn Pkwy
Sevierville, TN 37862 710 Dolly Parton Pkwy Kodak, TN 37764
Sevierville, TN 37862
Three branches in Blount County:
Maryville Office Alcoa Office Seymour Office
710 South Foothills 1109 Associates Blvd. 10232 Chapman Hwy
Plaza Dr. Alcoa, TN 37801 Seymour, TN 37865
Maryville, TN 37801
Legal Proceedings
The nature of its business generates a certain amount of litigation
against BFC and BankFirst involving matters arising in the ordinary course of
business. None of the legal proceedings currently pending or threatened to which
BFC or BankFirst is a party or to which any of their properties are subject will
have, in the opinion of management of BFC, a material effect on the business or
financial condition of BFC or BankFirst.
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 (the "Lawsuit"), 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 $3,967,908. 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 $3,423,515 to Paymentech which had been retained by
BankFirst. With respect to the matters not settled, BFC Management expects to
proceed to trial in 1998. BFC Management has established certain reserves
against possible losses in amounts it deems adequate and believes that the
possibility of any additional exposure is remote.
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Banking
BankFirst conducts its business as a commercial bank, with special
emphasis on retail banking, including the acceptance of checking and savings
deposits and the making of commercial, real estate, personal, home improvement,
automobile and other installment and term loans. It also offers trusts, notary
public services, safe deposit box rentals, and other customary bank services to
its customers.
Competition
BankFirst has 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 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 real estate loans normally
comes from other savings and financial institutions, mortgage companies,
commercial banks, credit unions and insurance companies.
Supervision and Regulation
The following summary of statutes and regulations affecting banks and bank
holding companies does not purport to be complete and is qualified in its
entirety by reference to the statutes and regulations described.
Bank Holding Company Act of 1956. BFC is a bank holding company registered
under the provisions of the BHCA, and consequently, will be subject to
examination by the Board of Governors of the Federal Reserve ("FRB").
A bank holding company is required to file with the FRB annual reports and
other information regarding its business operations and those of its
subsidiaries. It is also subject to examination by the FRB and is required to
obtain FRB approval prior to acquiring, directly or indirectly, ownership or
control of any voting shares of any bank, if, after such acquisition, it would
own or control, directly or indirectly, more than 5% of the voting stock of such
bank unless it already owns a majority of the voting stock of such bank.
Furthermore, a bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of any voting stock of any
company which is not a bank or a bank holding company, and must engage only in
the business of banking or managing or controlling banks or furnishing services
to or performing services for its subsidiary banks. One of the exceptions to
this prohibition is the ownership of shares of a company the activities of which
the FRB has determined to be so closely related to banking or management or
controlling banks as to be proper incident thereto.
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 the
customer (i) must obtain or provide some additional credit, property, or
services from or to its bank holding company or subsidiaries thereof or (ii)
must 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.
In approving acquisitions by bank holding companies of banks and companies
engaged in the banking-related activities, the FRB 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 FRB is also empowered to differentiate between new activities and
activities commenced through the acquisition of a going concern.
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The Attorney General of the United States may, within 15 days after
approval of an acquisition by the FRB, 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.
Tennessee Banking Act; Federal Deposit Insurance Act. BankFirst is
incorporated under the banking laws of the State of Tennessee and, as such, is
subject to the supervision of the TDFI and to regular examination by that
department. BankFirst's deposits are insured by the FDIC through the Bank
Insurance Fund ("BIF"), and, therefore, it is subject to the provisions of the
Federal Deposit Insurance Act ("FDIA") and to examination by the FDIC.
Tennessee statutes and the FDIA regulate a variety of the banking
activities of BankFirst, including required reserves, investments, loans,
mergers and consolidations, issuance of securities, payment of dividends, and
establishment of branches. 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.
In addition to the foregoing restrictions, the FRB has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices. The FRB has issued a policy statement on the payment of
cash dividends by bank holding companies which expresses the FRB'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.
BankFirst is also subject to regulation respecting the maintenance of
certain minimum capital levels, and it will be required to file annual reports
and such additional information as the Tennessee Banking Act and FDIC
regulations require. BankFirst is also subject to certain restrictions on loan
amounts, interest rates, "insider" loans to officers, directors and principal
shareholders, tie-in arrangements, and transactions with affiliates, as well as
many other matters. Strict compliance at all times with state and federal
banking laws will be required.
Tennessee law contains limitations on the interest rates that may be
charged on various types of loans. The operations of banks are also affected by
various consumer laws and regulations, including those relating to equal credit
opportunity and regulation of consumer lending practices. All Tennessee banks
must become and remain insured banks under the FDIA. (See 12 U.S.C. ss. 1811, et
seq.)
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There are various legal restrictions on the extent to which BFC and its
nonbank subsidiaries can borrow or otherwise obtain credit from BankFirst. There
are also legal restrictions on BankFirst's (i) purchase of or investment in BFC
securities; (ii) purchase of assets from BFC and its nonbank subsidiaries; (iii)
loans or extensions of credit to third parties collateralized by the securities
or obligations of BFC and its nonbank subsidiaries; (iv) issuance of guaranties,
acceptances and letters of credit on behalf of BFC and its nonbank subsidiaries;
(v) transactions with BFC and its nonbank subsidiaries; and (vi) transactions
with respect to which BFC and its nonbank subsidiaries act as agent, participate
or have a financial interest. Subject to certain limited exceptions, BankFirst
(including for purposes of this paragraph all subsidiaries of such bank) may not
extend credit to BFC or to any other affiliate (other than another bank and
certain exempted affiliates) in an amount which exceeds 10% of BankFirst's
capital stock and surplus and may not extend credit in the aggregate to all such
affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirements as to the type, amount and quality of
collateral which must secure such extensions of credit by BankFirst to BFC or to
such other affiliates. Also, extensions of credit and other transactions between
BankFirst and BFC or such other affiliates must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to such bank as those prevailing at the time for comparable
transactions with nonaffiliated companies. Also, BFC and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides that a depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC after August 9, 1989 in connection with (i) the default of a commonly
controlled FDIC insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC insured depository institution in
danger of default. FIRREA provides that certain types of persons affiliated with
financial institutions can be fined, by the federal regulatory agency having
jurisdiction over a depository institution with federal deposit insurance (such
as BankFirst), up to $1 million per day for each violation of certain
regulations related to transactions with executive officers, directors, and
principal shareholders. Other violations may result in civil money penalties of
$5,000 to $25,000 per day or in criminal fines and penalties. In addition, the
FDIC has been granted enhanced authority to withdraw or to suspend deposit
insurance in certain cases.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") which substantially revised the depository institution regulatory and
funding provisions of the FDIA requires the federal banking regulators to take
"prompt corrective action" with respect to FDIC-insured depository institutions
that do not meet minimum capital requirements. FDICIA establishes five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized"and "critically undercapitalized." Under
applicable regulations, a FDIC-insured depository institution is defined to be
well capitalized if it maintains a Leverage Ratio of at least 5%, a risk
adjusted Tier I Capital Ratio of at least 6% and a Total Capital Ratio of at
least 10% and is not subject to a directive, order or written agreement to meet
and maintain specific capital levels. An insured depository institution is
defined to be adequately capitalized if it meets all of its minimum capital
requirements as described above. An insured depository institution will be
considered undercapitalized if it fails to meet any minimum required measure,
significantly undercapitalized if it is significantly below such measure and
critically undercapitalized if it fails to maintain a level of tangible equity
equal to not less than 2% of total assets. An insured depository institution may
be deemed to be in a capitalization category that is lower than is indicated by
its actual capital position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
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Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
FDICIA contains numerous other provisions, including new accounting, audit
and reporting requirements, termination of the "too big to fail" doctrine except
in special cases, limitations on the FDIC's payment of deposits at foreign
branches, new regulatory standards in such areas as asset quality, earnings and
compensation, and revised regulatory standards for, among other things, powers
of state banks, real estate lending and capital adequacy. FDICIA also requires
that a depository institution provide 90 days prior notice of the closing of any
branches.
Various other legislation, including proposals to revise the bank
regulatory system and to limit or expand the investments that a depository
institution may make with insured funds, is from time to time introduced in
Congress. The TDFI and the FDIC examine the Bank periodically for compliance
with various regulatory requirements. Such examinations, however, are for the
protection of the BIF and for depositors and not for the protection of investors
and shareholders.
Interstate Act. The Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Act") permits (i) bank holding company
acquisitions of banks of a minimum age of up to five years as established by
state law, (ii) mergers of national and state banks across state lines unless
the home state of either bank has opted out of the interstate bank merger
provision, (iii) branching de novo by national and state banks into other states
if the state has opted-in to this provision of the Interstate Act, and (iv)
certain interstate bank agency activities. Regulations have not yet been issued
under the Interstate Act. A bill has been enacted by the Tennessee legislature
which repeals the Tennessee Reciprocal Banking Act, amends the Tennessee Bank
Structure Act of 1974, and amends Tennessee's bank branching laws by opting in
to the Interstate Act. Management cannot predict the extent to which the
business of BankFirst may be affected.
FDIC Insurance Premiums. BankFirst is required to pay semiannual FDIC
deposit insurance assessments to the BIF. As required by FDICIA, the FDIC
adopted a risk-based premium schedule which increased the assessment rates for
most FDIC-insured depository institutions. Under the schedule, the premiums
initially ranged from $.23 to $.31 for every $100 of deposits.
Based upon certain requirements of FDICIA, an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. Any change in these
rates and the category of risk into which BankFirst falls could have an adverse
effect on BankFirst's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
The thrift industry is paying a one-time assessment of $4.5 billion to
capitalize the Savings Association Insurance Fund ("SAIF"), and banks bear part
of the cost of the Financing Corporation ("FICO") bonds sold from 1987-89 in an
effort to shore up the former Federal Savings and Loan Insurance Corporation.
BIF-member institutions, such as the BankFirst, will pay one-fifth the rate paid
by SAIF members until January 1, 2000. After such date, BIF and SAIF members
will share the FICO payments on a pro-rata basis.
Capital Requirements. The state and federal regulatory agencies use
capital adequacy guidelines in their examination and regulation of banks. If
capital falls below the minimum levels established by these guidelines, a bank
may be denied approval to acquire or establish additional banks or non-bank
businesses, to open facilities, or may be subject to other regulatory
restrictions or actions.
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<PAGE>
Banking organizations historically were required to maintain a minimum
ratio of primary capital to total assets of 5.5%, and a minimum ratio of total
capital to total assets of 6.0%. The primary and total capital ratio
requirements have been replaced by the adoption of risk-based and leverage
capital requirements.
Risk-Based Capital Requirements. 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 I
capital (see the description of Tier I capital and Tier II 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 sheet assets and
certain off-balance sheet items, such as standby letters of credit, are assigned
to one of four risk weight categories (0%, 20%, 50%, or 100%) according to the
nature of the asset and its collateral or the identity of any obligor or
guarantor. For example, cash is assigned to the 0% risk category, while loans
secured by one-to-four family residences are assigned to the 50% risk category.
The aggregate amount of such asset and off-balance sheet items in each risk
category is adjusted by the risk weight assigned to that category to determine
weighted values, which are added together to determine the total risk-weighted
assets for the banking organization. Accordingly, an asset, such as a commercial
loan, which is assigned to a 100% risk category is included in risk-weighted
assets at its nominal face value, whereas a loan secured by a single-family home
mortgage is included at only 50% of its nominal face value. The application
ratios are equal to capital, as determined, divided by risk-weighted assets, as
determined.
Leverage Capital Requirements. The banking regulators have issued a final
regulation requiring certain banking organizations to maintain additional
capital of 1% to 2% above a 3% minimum Tier 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
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<PAGE>
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.
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 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.
On May 5, 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued a directive to all federally-insured financial institutions
which outlined comprehensive guidance for banks in effecting a Year 2000
complaint system. The FFIEC directive established the following target time
frames to accomplish critical actions concerning Year 2000 compliance:
* By September 30, 1997, all existing 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 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, banks should be
testing and implementing their Year 2000 conversion programs.
Effect of Governmental Policies
BankFirst's earnings will be affected by the difference between the
interest earned on its loans and investments and the interest paid on its
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 BankFirst will be influenced by general
economic conditions, fiscal policies of the federal government, and the policies
of regulatory agencies, particularly the FRB, 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 FRB. An important function of the FRB is to regulate
the national supply of bank credit. Among the instruments of monetary policy
used by the FRB 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 FRB 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.
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<PAGE>
The monetary and fiscal policies of regulatory authorities, including the
FRB, 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 FRB
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 BankFirst.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. For example, the Depository Institutions Deregulation
and Monetary Control Act of 1980 (the "Deregulation Act") provided for the
phasing out of restrictions on deposit interest rate ceilings, the authorization
of new accounts and related services, and the expansion of the lending authority
of savings and loan associations. The Deregulation Act has altered, to a certain
extent, the competitive relationship that previously existed among financial
institutions, and it may result in a substantial reduction in the historical
distinction between the services offered by banks, savings and loan
associations, and other financial institutions.
65
<PAGE>
MANAGEMENT OF BFC
Directors and Executive Officers
The following table provides certain information regarding directors of
BFC.
Principal
Director Occupation for
Name Age Positions Since previous 5 years
- ---------------- ----- --------------- --------- --------------------
James L. Clayton 64 Chairman of the 1996 Chairman - Clayton
Board Director Homes, Inc.
Fred R. Lawson 62 President, 1996 Bank President
Director
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
No director is related to any other director. No current director of BFC
is a director or executive officer of another bank holding company, bank,
savings and loan association, or credit union; however, 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 BFC are elected annually and each director holds office until
his or her successor is elected and qualified. The following provides certain
information regarding the nominees for election of the BFC Board.
L.A. Walker, Jr., age 62, has been Chairman, Chief Executive Officer and a
director of FFBS since its formation in 1983. Mr. Walker has also served as
Chairman of the Athens board of directors and as Chief Executive Officer of
Athens since 1980.
W.D. Sullins, Jr., age 55, has been a director of FFBS since 1987 and has
been an optometrist in Athens and Madisonville, Tennessee since 1965.
C. Scott Mayfield, Jr., age 47, has been a director of FFBS since 1988 and
has been President of Mayfield's Dairy since 1995, and an executive officer of
Mayfield's Dairy prior to that time.
The following is a brief description of the business experience of the
executive officers of BFC.
Fred R. Lawson. Mr. Lawson is the President of BFC 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, 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.
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<PAGE>
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.
Jerry L. French. Mr. French joined BankFirst in 1993 as Senior Vice
President of Operations. Prior to joining BankFirst, Mr. French served as
Regional President of Bank of East Tennessee in Hamblen County and Regional Vice
President of the Murfreesboro District of First American Bank.
Leigh G. Sterling. Ms. Sterling joined BankFirst in 1997 as Senior Vice
President of Information Systems. Prior to joining BankFirst, Ms. Sterling
worked as an information systems consultant for three years after serving as
Senior Vice President of Operations and Information Systems at Bank of East
Tennessee in Knoxville.
Sharon O. Woods. Ms. Woods joined BankFirst in 1996 as Senior Vice
President of Marketing, assuming responsibility for Retail Banking in 1997.
Prior to joining BankFirst, Ms. Woods was Vice President and Director of
Marketing for First National Bank of Gatlinburg beginning in 1991.
Directors' Compensation
During 1997, each non-employee director of BFC received $500 per board
meeting attended.
Executive Compensation
The following table sets forth the cash compensation paid by BankFirst for
services rendered in all capacities during the fiscal year ended December 31,
1997 to the President and Chief Executive Officer of BankFirst and each other
executive officer of BankFirst 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 the officers of BFC for their services to BFC. Neither
BFC nor BankFirst have any employment agreements with their executive officers.
1997 ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Fiscal 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) 6,875 $ 4,912 (2)
Officer
R. Stephen Hagood Executive Vice President 110,619 11,000 105,251 (1) 1,250 1,217 (2)
Jerry L. French Senior Vice President of 90,480 10,000 -- 625 2,068 (2)
Operations
</TABLE>
- ----------------
(1) Earnings on sale of stock from options exercised in 1997.
(2) Contributions by BankFirst to 401(k) Plan.
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<PAGE>
The following table sets forth certain information with respect to the
grant of stock options under BFC's Option Plans to the named executive officers
for the year ended December 31, 1997.
INDIVIDUAL OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Underlying Options Granted Exercise
Options Granted to Employees of Base Expiration Grant Date
Name ---------------------- in Fiscal Year Price ($/Sh) Date Present Value (1)
- ---- ---------------- ------------ -------------- -------------------
<S> <C> <C> <C> <C> <C>
Fred R. Lawson 6,250 19.01% $38.40 1/25/2007 $40,555
625 1.90% 38.40 3/21/2007 11,102
R. Stephen Hagood 1,250 3.80% 38.40 3/21/2007 22,204
Jerry L. French 625 1.90% 38.40 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.
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 BFC.
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 17,535 $498,213 41,365/27,250 $1,144,196/396,450 (1)
R. Stephen Hagood 3,501 105,021 9,667/2,100 290,411/21,100 (1)
Jerry L. French -- -- 644/1,600 8,265/19,383 (1)
</TABLE>
- --------------
(1) Value based on $50 per share, which is the last known transaction price.
BankFirst's compensation decisions are made by the Executive Committee of
the BankFirst Board of Directors. The Executive Committee is composed of James
L. Clayton, Fred R. Lawson, C. Warren Neel, Charles Earl Ogle, Jr. and Geoffrey
A. Wolpert. The Executive Committee does not use any formal compensation
policies or standards in making its compensation decisions.
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
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<PAGE>
vested and employer contributions are fully vested after five years. Expenses
were $135,000 and $75,000 for 1997 and 1996, respectively.
Employee Stock Ownership Plan. BFC has an Employee Stock Ownership Plan
(ESOP) which enables employees who have met minimum service and age requirements
to acquire shares of BFC's common stock. The cost of the Plan is borne by BFC
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. BFC made no
contribution to the ESOP in 1997. BFC contributed $30,000 to the ESOP in 1996.
No contribution was made to the ESOP in 1995.
Stock Option Plans. As of December 31, 1997, BFC 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 BFC shareholders on April 27, 1998. A total of
500,000 shares of BFC Common 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 BFC Board on the date of grant. Options granted under the ISO
are exercisable at the option of the holder upon vesting. 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, 1988, BFC granted
28,400 shares under the ISO Plan.
BFC 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 BFC's common stock on the date of the grant as
determined by the BFC Board. The maximum term of the options under both plans is
10 years from the date of the grant. The options are exercised at the election
of the holder after vesting. 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, BFC had a total of 201,286 outstanding options,
97,628 of which are currently exercisable.
Transactions with Management
BFC 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 BFC 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 BFC. As of
March 31, 1998, the amount of these loans (including amounts available under
lines of credit) by BankFirst to BFC affiliates was 1.22% of BankFirst's total
loans.
BFC 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, Chairman of the BFC Board and BFC's majority shareholder, is the
controlling 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. The
market value of the building was established by an independent appraisal. The
partnership dissolved upon BankFirst purchase of CMH Services' interest. Clayton
Homes, Inc. will continue to lease eight floors of the building and have
discretionary access to an additional floor through May 31, 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 is more favorable than
market rates.
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<PAGE>
Securities Law Limitations
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of BFC, BFC
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.
Ownership of BFC Common Stock
As of March 31, 1998, BFC's records indicated the following number of
shares were beneficially owned by (i) all persons who own beneficially 5% or
more of BFC Common; (ii) each person who is a director, a Named Executive
Officer or a director nominee of BFC; and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Ownership Percent
Name of Beneficial Owner Address of Beneficial Owner (Number of Shares)(1) of Class(2)
- ------------------------ --------------------------- --------------------- ----------
<S> <C> <C> <C>
James L. Clayton c/o Clayton Homes, Inc. 1,012,261(3) 67.0%
P.O. Box 15169
Knoxville, TN 37901
Fred R. Lawson BankFirst 79,855(4) 5.3%
P. O. Box 10
Knoxville, TN 37901
Charles Earl Ogle, Jr. c/o HMO, Inc./ILM 14,107(5) *
644 Parkway, Suite 1
Gatlinburg, TN 37738
Geoffrey A. Wolpert 1110 Parkway 36,899(6) 3.5%
Gatlinburg, TN 37738
C. Warren Neel University of Tennessee 59,173(7) 3.9%
College of Business Administration
716 Stokely Management Center
Knoxville, TN 37996
R. Stephen Hagood BankFirst 21,510(8) 1.4%
P. O. Box 10
Knoxville, TN 37901
Jerry L. French BankFirst 5,407(9) *
P. O. Box 10
Knoxville, TN 37901
L.A. Walker, Jr. First National Bank & Trust Co. -- --
204 Washington Avenue
Athens, TN 37371
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
W.D. Sullins, Jr. P.O. Box 666 -- --
Athens, TN 37371-0666
C. Scott Mayfield, Jr. P.O. Box 310 -- --
Athens, TN 37371-0310
Directors and Executive
Officers as a Group (10 1,229,212(10) 81.6%
persons)
</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 1,506,781 shares, including
1,275,893 issued and outstanding shares of BFC Common, 215,805 shares of
convertible preferred stock, which is presently convertible into 133,260
shares of BFC Common, and 97,628 shares of BFC Common for which there are
vested options presently exercisable at the option of the holders.
(3) Includes 12,443 shares owned by Mr. Clayton's sons, daughter-in-law and
grandson, as to which Mr. Clayton disclaims any beneficial interest, and
includes 77,110 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 23,366 shares that Mr. Clayton has the right to acquire upon
the conversion of the 37,839 shares of BFC Preferred owned by him, and
includes 5,370 shares that Mr. Clayton's wife and son have the right to
acquire upon conversion of the 8,696 shares of BFC Preferred owned by
them, the latter as to which Mr. Clayton disclaims any beneficial
interest. Also includes 3,866 shares that Mr. Clayton has the right to
purchase upon the exercise of stock options owned by him.
(4) Includes 100 shares owned by Mr. Lawson's wife. Also includes 41,365
shares that Mr. Lawson has the right to purchase upon the exercise of
stock options and 33,524 shares that Mr. Lawson has the right to acquire
upon the conversion of the 54,289 shares of BFC Preferred owned by him.
(5) Includes 10,062 shares owned by Mr. Ogle's father, mother and daughter, as
to which Mr. Ogle disclaims any beneficial interest. Also includes 322
shares owned by ILM Rentals, L.P., in which Mr. Ogle has an ownership
interest, and 1,375 shares that Mr. Ogle has the right to purchase upon
exercise of stock options owned by him.
(6) Includes 34,915 shares in BFC's ESOP, of which Mr. Wolpert serves as one
of three trustees. Also includes 257 shares owned by Steaks, Inc., which
is owned by Mr. Wolpert and 750 shares that he has the right to purchase
upon the exercise of stock options.
(7) Includes 4,160 shares beneficially owned, directly or indirectly, by Mr.
Neel's brothers, as to which Mr. Neel disclaims any beneficial interest.
Also includes 26,811 shares that Mr. Neel has the right to purchase upon
the exercise of stock options owned by hm and 16,762 shares that Mr. Neel
has the right to acquire upon the conversion of the 27,144 shares of BFC
Preferred owned by him.
(8) Includes 9,667 shares that Mr. Hagood has the right to purchase upon the
exercise of stock options owned by him and 6,712 shares that Mr. Hagood
has the right to acquire upon the conversion of the 10,870 shares of BFC
Preferred owned by him.
(9) Includes 644 shares that Mr. French has the right to purchase upon the
exercise of stock options owned by him and 3,338 shares that Mr. French
has the right to acquire upon the conversion of the 5,405 shares of BFC
Preferred owned by him.
(10) Includes beneficial ownership for all directors and officers listed above
and incorporates Notes 3 through 9.
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<PAGE>
DESCRIPTION OF BFC CAPITAL STOCK
General. The total amount of authorized capital stock of BFC consists of
15,000,000 shares of common stock $2.50 par value per share ("BFC Common") of
which 1,275,893 shares were outstanding as of the BFC Record Date; and 1,000,000
shares of preferred stock, $5.00 par value per share ("BFC Preferred") of which
219,059 shares were outstanding as of the BFC Record Date. The following summary
describes certain material provisions of BFC's stock, but does not purport to be
complete and is subject to and qualified in its entirety by, the Charter and the
Bylaws of BFC that are included as exhibits to the Registration Statement of
which this Joint Proxy Statement/Prospectus forms a part and by the provisions
of applicable law.
Common Stock. The issued and outstanding shares of BFC Common are validly
issued, fully paid and nonassessable. Subject to the prior rights of any BFC
Preferred, the holders of outstanding shares of BFC Common are entitled to
receive ratably dividends out of assets legally available therefor at such times
and in such amounts whether in cash or stock as the BFC Board may from time to
time determine. The declaration and payment of dividends by the BFC Board 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 are
paid, and the methods, if any, by which capital stock and surplus may be retired
and reduced.
The shares of BFC Common are not redeemable or convertible, and the holders
thereof have no preemptive or subscription rights to purchase any securities of
BFC. Upon liquidation, dissolution or winding up of BFC, the holders of BFC
Common are entitled to receive pro rata the assets of BFC which are legally
available for distribution after payment of all debts and other liabilities and
subject to the prior rights of any holders of BFC Preferred then outstanding.
Each outstanding share of BFC Common is entitled to one vote on all matters
submitted to a vote of shareholders. BFC has applied for quotation of its BFC
Common on the NASDAQ National Market under the symbol "BKFR."
Convertible Preferred Stock. Holders of BFC Preferred may receive
noncumulative dividends at an annual rate of 5% of the initial sale price at the
option of the BFC Board and subject to the rules and regulations of the FRB
regarding dividends. BFC Preferred is convertible at any time at the option of
the holder into BFC Common at a conversion rate of 0.6175 shares of BFC Common
for each share of BFC Preferred. Holders of BFC Preferred have no voting,
redemption, or preemptive rights.
72
<PAGE>
FFBS 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 financial position and results of operations of FFBS. It
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.
Overview of Operations
FFBS is a community banking organization located in Athens, Tennessee. The
Company is well capitalized, with an equity to assets ratio of 11.55% at year
end 1997. FFBS reported earnings of $2.6 million, or $15.62 per share, in 1997,
an increase of $177,000, or $1.22 per share, reported in 1996. The net increase
in earnings was attributed to an increase in both interest income and
noninterest income which were reduced by the increase in the provision for loan
losses. These components are further discussed below.
The Five-Year Financial Summary Table reflects FFBS' performance in terms of
key industry ratios. The 1997 ratios reflect FFBS' increased earnings and
capital position. The 1997 return on average assets was 1.46%, an increase from
1.41% in 1996. Return on average equity was 12.74%, a decrease from 12.88% in
1996. Average equity to average assets was 11.47%, slightly above the prior
year. The dividend payout ratio was 47.36% in 1997, an increase from 36.81% in
1996. The Board of Directors has elected to retain at least half of the annual
profits to strengthen the capital position.
Assets increased $9.7 million during 1997 primarily as a result of an
increase in the loan portfolio. The loan portfolio grew as a result of better
cash flow management and increased deposits and other borrowings.
FFBS manages its credit risk and interest rate risk, the two most
significant risks in commercial banking. FFBS' credit risk is its most
significant risk because, in recent years, it has experienced higher than
historical average levels of problem loans and loan losses. The current level of
nonperforming loans is higher than previous levels; however, management devotes
significant attention to managing problem loans and minimizing loan losses.
FFBS' interest rate risk exposure is not unlike its community bank peers. FFBS'
asset-liability strategy is based on management's expectations concerning
interest rate movement and a balancing of liquidity flexibility with yield.
73
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income - tax equivalent $ 14,205 $ 13,638 $ 13,325 $ 11,768 $ 11,373
Interest expense 6,178 6,039 5,666 4,295 4,086
--------- --------- --------- --------- ---------
Net interest income 8,027 7,599 7,659 7,473 7,287
Tax equivalent adjustment (1) (543) (524) (455) (528) (568)
--------- --------- --------- --------- ---------
Net interest income 7,484 7,075 7,204 6,945 6,719
Provision for loan losses (685) (150) (175) (200) (300)
Noninterest income 2,237 1,846 1,680 1,907 1,890
Noninterest expenses 5,539 5,387 5,312 5,056 4,783
--------- --------- --------- --------- ---------
Income before income taxes 3,497 3,384 3,397 3,596 3,526
Income tax expense 935 999 1,043 1,064 1,002
--------- --------- --------- --------- ---------
Net income $ 2,562 $ 2,385 $ 2,354 $ 2,532 $ 2,524
========= ========= ========= ========= =========
Per share data
Basic earnings $ 15.62 $ 14.40 $ 14.15 $ 15.12 $ 15.03
Cash dividends declared $ 7.40 $ 5.30 $ 5.10 $ 5.00 $ 4.75
Average common shares outstanding 163,982 165,660 166,325 167,461 167,949
Selected year-end balances
Total assets $ 181,967 $ 172,291 $ 170,929 $ 162,903 $ 147,073
Earning assets 172,173 162,478 158,147 153,980 138,122
Total securities 56,490 58,933 56,342 63,162 62,124
Loans - net of unearned income 114,401 97,544 97,181 84,401 71,691
Allowance for loan losses 1,096 1,153 1,283 1,244 1,105
Total deposits 154,617 149,988 150,433 145,357 129,492
Long-term borrowings 2,121 154 163 172 180
Shareholders' equity 21,017 19,672 18,436 15,240 15,027
Selected average balances
Total assets $ 175,195 $ 168,938 $ 163,547 $ 153,484 $ 141,893
Earning assets 165,839 159,622 154,061 143,791 132,218
Securities 58,315 58,730 56,429 62,406 58,717
Loans- net of unearned income 104,906 95,767 93,184 77,559 69,220
Allowance for loan losses 1,113 1,302 1,296 1,174 1,049
Total deposits 151,142 148,063 143,782 135,238 125,485
Long-term borrowings 971 159 553 175 78
Shareholders' equity 20,103 18,511 17,019 15,134 14,182
Ratios based on average balances
Loans to deposits 69.41% 64.68% 64.81% 57.35% 55.16%
Equity to assets 11.47% 10.96% 10.41% 9.86% 9.99%
Return on average assets 1.46% 1.41% 1.44% 1.65% 1.78%
Return on average equity 12.74% 12.88% 13.83% 16.73% 17.80%
Dividends as a percent of net income 47.36% 36.81% 36.03% 33.07% 31.61%
</TABLE>
(1) Tax equivalent basis was calculated using a 34% tax rate for all periods
presented.
74
<PAGE>
Net Interest Income
Net interest income is the most significant component of FFBS' earnings. Net
interest income is the excess of interest income earned on assets, such as loans
and securities, over the interest paid for funds to support those assets, such
as deposits and borrowings. Net interest income is affected by volume and rate
of average interest earning assets and interest-bearing liabilities. The change
in net interest income is typically measured by net interest spread and net
interest margin. The interest spread is the difference between the average yield
on interest earning assets and the average cost of interest-bearing liabilities.
The net interest margin is determined by dividing net interest income by average
interest earning assets.
The following table represents the major components of interest earning
assets and interest-bearing liabilities. For analytical purposes, interest
income presented in the table has been adjusted to a tax equivalent basis
assuming a 34% tax rate for all years. The tax equivalent adjustment recognizes
the income tax savings when comparing taxable and tax-exempt assets.
75
<PAGE>
AVERAGE BALANCE SHEETS AND INTEREST RATES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Securities
Taxable $ 36,166 $ 2,270 6.28% $ 38,651 $ 2,398 6.20% $ 40,739 $ 2,513 6.17%
Tax-exempt (1) 20,776 1,610 7.75% 19,453 1,552 7.98% 15,317 1,338 8.74%
Other 1,169 74 6.33% 972 63 6.48% 785 51 6.50%
Unrealized gain on A.F.S 204 -- (346) -- (412) --
------------------------------- ----------------------------- -----------------------------
Total securities 58,315 3,954 6.78% 58,730 4,013 6.83% 56,429 3,902 6.91%
Loans (2) 104,906 10,112 9.64% 95,767 9,362 9.78% 93,184 9,163 9.83%
Interest-bearing deposits with
other banks 236 15 6.36% 1,180 61 5.17% 1,154 75 6.50%
Federal funds sold and securities
purchased under
agreements to resell 2,382 124 5.21% 3,945 202 5.12% 3,294 185 5.62%
------------------------------- ----------------------------- -----------------------------
Total earning assets 165,839 $ 14,205 8.57% 159,622 $13,638 8.54% 154,061 $ 13,325 8.65%
=================== ================ =================
Noninterest earning assets
Allowance for loan losses (1,113) (1,302) (1,296)
Premises and equipment 2,750 2,910 2,911
Cash and due from banks 5,788 6,132 6,305
Accrued interest and other assets 1,931 1,576 1,566
--------- --------- --------
Total assets $ 175,195 $ 168,938 $163,547
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand deposits $ 19,211 $ 507 2.64% $ 18,617 $ 496 2.66% $ 18,777 $ 521 2.77%
Savings deposits 21,814 647 2.97% 21,682 646 2.98% 23,576 748 3.17%
Time deposits 85,472 4,906 5.74% 84,597 4,847 5.73% 77,142 4,308 5.58%
Total interest-bearing deposits 126,497 6,060 4.79% 124,896 5,989 4.80% 119,495 5,577 4.67%
Borrowed funds
Securities sold under agreement
to repurchase -- -- -- -- --
Other borrowings 1,139 64 5.62% 887 41 4.62% 930 56 6.02%
Long-term borrowings 971 54 5.56% 159 9 5.66% 553 33 5.97%
------------------------------- ----------------------------- -----------------------------
Total borrowed funds 2,110 118 5.59% 1,046 50 4.78% 1,483 89 6.00%
------------------------------- ----------------------------- -----------------------------
Total interest-bearing liabilities 128,607 $ 6,178 4.80% 125,942 $ 6,039 4.80% 120,978 $ 5,666 4.68%
=================== ================ =================
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 24,645 23,167 24,287
Other liabilities 1,840 1,318 1,263
Shareholders' equity 20,103 18,511 17,019
--------- --------- --------
Total liabilities and shareholders'
equity $ 175,195 $ 168,938 $163,547
========= ========= ========
Interest margin recap
Net interest income and interest
rate spread $ 8,027 3.76% $ 7,599 3.75% $ 7,659 3.97%
=================== ================ =================
Net interest income margin 4.84% 4.76% 4.97%
===== ===== =====
</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 $543 for 1997, $524 for 1996, and
$455 for 1995.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $409 for 1997, $340 for 1996,
and $381 for 1995.
76
<PAGE>
The following table depicts the dollar effect of volume of interest
sensitive assets and liabilities and interest rate changes on FFBS' interest
income and interest expense. Information is provided in each category with
respect to changes attributable to changes in volume (changes in volume
multiplied by prior rate), changes attributable to changes in rate (changes in
rate multiplied by old volume), and the net change. Variances which were not
specifically attributable to volume or rate were allocated proportionately
between rate and volume using the absolute values of each for a basis for the
allocation. Nonaccruing loans were included in the average loan balances used in
determining the yields. Interest foregone on nonaccruing loans is disclosed in
Note 3 to the consolidated financial statements, and is not considered to have a
material effect on the reasonableness of these presentations.
VOLUME/RATE ANALYSIS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 change from 1996 due to 1996 change from 1995 due to
---------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 904 $(154) $ 750 $ 255 $ (56) $ 199
Securities
Taxable (152) 24 (128) (128) 13 (115)
Tax-exempt 108 (50) 58 385 (171) 214
Other 13 (2) 11 12 -- 12
Total securities interest (31) (28) (59) 269 (158) 111
Interest-bearing deposits with
other banks (33) (13) (46) 2 (16) (14)
Federal funds sold (79) 1 (78) 39 (22) 17
----- ----- ----- ----- ----- -----
Total interest income 761 (194) 567 565 (252) 313
----- ----- ----- ----- ----- -----
Interest expense
Interest-bearing demand deposits 16 (5) 11 (4) (21) (25)
Savings deposits 4 (3) 1 (45) (57) (102)
Time deposits 50 9 59 425 114 539
Other borrowings 13 10 23 (3) (12) (15)
Long-term borrowings 47 (2) 45 (22) (2) (24)
----- ----- ----- ----- ----- -----
Total interest expense 130 9 139 350 23 373
----- ----- ----- ----- ----- -----
Net interest income $ 631 $(203) $ 428 $ 214 $(274) $ (60)
===== ===== ===== ===== ===== =====
</TABLE>
FFBS' 1997 net interest income margin (tax equivalent) was $8 million, an
increase of $428,000 (5.63%) from 1996. This increase was substantially related
to interest income, which contributed $567,000 to the increase in net interest
income during 1997. The average balance of loans grew $9.1 million at an average
rate decrease of 14 basis points, while the average balance of the securities
portfolio decreased $415,000 and losing 5 basis points on the average rate. The
increase in loans resulted from FFBS' attempts to expand its loan base by using
cash inflows generated by increased deposits, other borrowings and sales or
maturities of securities. Management's goal was to maximize net interest income.
The effect solely of loan volume growth was $904,000, which was partially
reduced by the loan interest rate of ($154,000). Securities, both rate and
volume, contributed ($59,000) to partially offset the loan interest increase.
Interest expense reduced net interest income by ($139,000). The effect of
interest-bearing liability volume was ($130,000). There was no significant
change in the interest rate paid on deposits. The largest change was an increase
in time deposits.
77
<PAGE>
Noninterest Income and Expense
Noninterest income and expense for 1997 and 1996 and percentage change
between such years is included in the following table.
NONINTEREST INCOME & EXPENSE
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
% change % change
1997 from '96 1996 from '95 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Trust Department income $ 622 8.74% $ 572 3.81% $ 551
Service charges and fees 1,171 (0.85)% 1,181 5.07% 1,124
Prepaid pension cost adjustment 222 -- -- -- --
Other 88 12.82% 78 6.85% 73
-------- -------- -------- -------- --------
2,103 14.86% 1,831 4.75% 1,748
Realized gain on sale of loans -- (100.00)% 35 -- --
Security gains/(losses) 134 (770.00)% (20) (70.59)% (68)
-------- -------- -------- -------- --------
Total noninterest income $ 2,237 21.18% $ 1,846 9.88% $ 1,680
======== ======== ======== ======== ========
Noninterest Expense
Salaries and employee benefits $ 3,124 (0.73)% $ 3,147 4.80% $ 3,003
Occupancy expense 404 (0.25)% 405 1.00% 401
Equipment expense 509 2.21% 498 5.51% 472
Office expense 150 (7.41)% 162 16.55% 139
Data processing fees 272 -- 272 16.24% 234
FDIC assessments -- -- -- (100.00)% 160
Other 1,080 19.60% 903 -- 903
-------- -------- -------- -------- --------
Total noninterest expense $ 5,539 2.82% $ 5,387 1.41% $ 5,312
======== ======== ======== ======== ========
</TABLE>
There were no significant variances between 1997 and 1996 in either
noninterest income or expense. The largest changes in 1997 were a pension plan
adjustment of $222,000 for previously unrecorded prepaid pension plan costs and
an increase of $154,000 on the net gain on securities sales. For 1996, the
largest changes were an increase of $83,000 on securities sales gains, an
increase in salaries and employee benefits of $144,000, and a decrease in FDIC
assessments of $160,000.
Income Taxes
FFBS' effective income tax rate was 26.7% in 1997 versus 29.5% in 1996. The
primary cause of the effective tax rate decline was an increase in tax free
securities income. Management evaluates the deferred tax assets and liabilities
each quarter and has determined that no valuation allowance was needed in 1997
or 1996 for any of the deferred tax assets. Note 8 to the consolidated financial
statements contains additional analysis of income taxes.
78
<PAGE>
Loans and Asset Quality
Loans. The loan portfolio constitutes the major earning assets
of FFBS, and offers the best alternative for maximizing interest spread above
the cost of funds. The following table reflects outstanding balances by loan
type. FFBS' lending area is primarily McMinn County, Tennessee. The majority of
loans are secured by specific items of collateral. FFBS' major lending
guidelines require 75% loan to value ratio for commercial loans and an 90% loan
to value ratio for loans secured by real estate. FFBS does not have any loan
concentration specific to any industry or individual borrower. There are no
loans outstanding to foreign entities. FFBS does sell residential real estate
loans in the secondary market.
LOANS OUTSTANDING
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 29,462 $ 19,328 $ 14,259 $ 26,478 $ 20,697
Real estate-construction 6,895 5,485 3,837 2,609 2,169
Residential real estate 38,908 38,165 43,361 24,683 19,613
Commercial real estate 19,226 15,341 14,139 11,329 11,489
Installment 20,855 19,495 21,955 19,549 18,224
Other 268 395 307 333 287
--------- --------- --------- --------- ---------
Total loans 115,614 98,209 97,858 84,981 72,479
Unearned income (1,213) (665) (677) (580) (788)
--------- --------- --------- --------- ---------
Total loans, net $ 114,401 $ 97,544 $ 97,181 $ 84,401 $ 71,691
========= ========= ========= ========= =========
<CAPTION>
Composition of loan portfolio by type at December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural 25.48% 19.68% 14.57% 31.16% 28.56%
Real estate-construction 5.96% 5.59% 3.92% 3.07% 2.99%
Residential real estate 33.65% 38.86% 44.31% 29.05% 27.06%
Commercial real estate 16.63% 15.62% 14.45% 13.33% 15.85%
Installment 18.04% 19.85% 22.44% 23.00% 25.14%
Other 0.23% 0.40% 0.31% 0.39% 0.40%
--------- --------- --------- --------- ---------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
</TABLE>
FFBS' total loan portfolio increased $16.9 million during 1997, a $10.1
million increase in commercial, financial and agricultural loans, and a $3.9
million increase in commercial real estate loans. Management's strategy was to
increase net interest income by expanding the loan portfolio in the following
loan categories: commercial and financial loans, commercial real estate loans,
real estate construction loans, and consumer installment loans. FFBS' strategy
was to address loan portfolio risk by avoiding industry concentrations, focusing
more on the local market, and to reduce interest rate risk by originating more
variable rate loans.
Loan Liquidity. The Loan Liquidity Table reflects the maturity schedule of
commercial, financial and agricultural loans and each type of real estate loans.
For each of these loan types, the table also reflects the fixed and variable
loans maturing after one year. Real estate loans maturing within one year are
$11.8 million (13% of total), from 1-5 years are $20.7 million (22% of total),
and over 5 years are $32.6 million (34% of total). Commercial, financial and
agricultural loans maturing within one year are $8.6 million (9% of total), from
1-5 years are $14.4 million (15%), and over 5 years are $6.5 million (7%).
Approximately 59% of these loans mature within 5 years. Selected loans maturing
from 1-5 years are 85% fixed rate and 15% variable rate. Selected loans due
after 5 years are 75% variable. During recent years,
79
<PAGE>
management has been focusing on increasing the percentage of variable rate loans
to reduce the amount of interest rate sensitivity to the portfolio.
LOAN LIQUIDITY
(Dollar amounts in thousands)
Loan Maturities at December 31, 1997
--------------------------------------
1 year 1 - 5 Over 5
and less years Years Total
-------- -------- -------- --------
Commercial, financial, and agricultural $ 8,573 $ 14,390 $ 6,499 $ 29,462
Real estate-construction 3,645 1,117 2,133 6,895
Real estate-residential 3,159 7,683 28,066 38,908
Real estate-commercial 4,991 11,867 2,368 19,226
-------- -------- -------- --------
Total selected loans $ 20,368 $ 35,057 $ 39,066 $ 94,491
======== ======== ======== ========
Sensitivity to Changes in Interest Rates
----------------------------------------
Fixed Rate Variable Rate
------------- -------------
Commercial, financial, and agricultural
Due after one year through five years $ 10,573 $ 3,817
Due after five years 1,062 5,437
Real estate-construction
Due after one year through five years 1,117 --
Due after five years 1,950 183
Real estate-residential
Due after one year through five years 7,588 95
Due after five years 4,717 23,349
Real estate-commercial
Due after one year through five years 10,456 1,411
Due after five years 2,087 281
------------- -------------
Total selected loans $ 39,550 $ 34,573
============= =============
Provision and Allowance for Loan Losses. 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 possible losses that may be experienced in the credit 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. A quarterly analysis of the allowance is
prepared to determine a specific allocation for loans which represent
significant loss exposure and an allocation based on historical loan loss
experience and other factors and trends.
Activity in the allowance for loan losses is reflected in the following
table. 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. FFBS' policy is to
charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery.
80
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 1,153 $ 1,283 $ 1,244 $ 1,105 $ 945
Loans charged off
Commercial, financial, and agricultural 578 53 24 19 81
Real estate-construction -- -- -- 45 --
Real estate-residential 54 45 -- 1 61
Real estate-commercial 33 6 -- -- 14
Installment 290 361 277 218 220
--------- --------- --------- --------- ---------
Total charge-offs 955 465 301 283 376
--------- --------- --------- --------- ---------
Charge-offs recovered
Commercial, financial, and agricultural 11 12 16 47 97
Real estate-construction 33 12 -- -- --
Real estate-residential 22 21 13 42 17
Real estate-commercial -- -- -- 7 --
Installment 147 140 136 126 122
--------- --------- --------- --------- ---------
Total recoveries 213 185 165 222 236
--------- --------- --------- --------- ---------
Net loans charged off 742 280 136 61 140
Current year provision 685 150 175 200 300
--------- --------- --------- --------- ---------
Balance at end of year $ 1,096 $ 1,153 $ 1,283 $ 1,244 $ 1,105
========= ========= ========= ========= =========
Loans at year end $ 114,401 $ 97,544 $ 97,181 $ 84,401 $ 71,691
Ratio of allowance to loans
at year end 0.96% 1.18% 1.32% 1.47% 1.54%
Average loans $ 104,906 $ 95,767 $ 93,184 $ 7 ,559 $ 69,220
Ratio of net loans charged off
to average loans 0.71% 0.29% 0.15% 0.08% 0.20%
<CAPTION>
Allocation of allowance for loan losses at December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 153 $ 60 $ 55 $ 28 $ 149
Real estate-construction 30 78 59 65 35
Real estate-residential 173 524 675 582 399
Real estate-commercial 159 62 19 34 113
Installment 563 305 377 447 198
Unallocated 18 124 98 88 211
--------- --------- --------- --------- ---------
Total $ 1,096 $ 1,153 $ 1,283 $ 1,244 $ 1,105
========= ========= ========= ========= =========
</TABLE>
81
<PAGE>
The allowance for loan losses declined $57,000 to $1.1 million in 1997, and
the ratio of the allowance to total loans decreased from 1.18% in 1996 to 0.96%
in 1997. The decline in the allowance was primarily due to a larger provision in
1997, as net charge-offs increased $426,000 from 1996. The increase in the ratio
of net loans charged off to average loans also reflects the increase in net
loans charged off, although average loans increased $9.1 million from 1996 to
1997. FFBS' allocation of the allowance is consistent with the institution's
loss experience. Approximately 51% and 14% of the allowance is allocated to the
installment loans and commercial, financial and agricultural loans,
respectively. These loan categories represent those loan groups having the
highest risk and highest loss experience. The loss experience on real estate
loan categories has been less and accordingly less allowance has been allocated.
The unallocated allowance allocation is $18,000, or 2%, of the total allowance.
Asset Quality. Loan credit risk is the greatest risk that FFBS faces. FFBS
has had a history of moderate to minor levels of problem loans and loan losses.
Below is a discussion on FFBS' problem loans and losses and the relationship to
the level of the allowance for loan losses discussed above.
The level of nonperforming loans is an important element in assessing asset
quality and the relevant risk in the credit portfolio. Nonperforming loans
include nonaccrual loans and loans delinquent 90 days or more. Loans, including
impaired loans under Statement of Financial Accounting Standard No. 114, are
classified as nonaccrual status generally when they become past due 90 days, or
earlier if management assesses that collection of interest is doubtful, but for
which principal is considered collectible. When loans are placed on nonaccrual
status, all unpaid accrued interest is reversed. These loans are returned to
accrual status only when the borrower demonstrates the ability to remain current
for a sustained period of time. Management permits certain loans to accrue past
90 days if the loan is fully secured and either in the process of being renewed
or submitted for collection. Another element associated with asset quality is
other real estate owned "OREO," which represents properties acquired by FFBS
through loan defaults by customers. OREO balances were not material at FFBS.
Nonperforming assets and relative percentage to loan balances is presented in
the following table.
NONPERFORMING ASSETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
as of December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Principal balance
Nonaccrual $ 499 $ 275 $ 283 $ 303 $ 381
Restructured and Nonaccrual 116 -- -- -- --
90 days or more past due 172 95 189 36 --
-------- -------- -------- -------- --------
Total nonperforming loans $ 787 $ 370 $ 472 $ 339 $ 381
======== ======== ======== ======== ========
Nonperforming as a percent of net
loans 0.69% 0.38% 0.49% 0.41% 0.54%
Other real estate owned $ 378 $ 93 -- -- --
OREO as a percent of loans 0.33% 0.10% -- -- --
Allowance as a percent of
nonperforming loans 139.26% 311.62% 271.82% 366.96% 290.03%
</TABLE>
Nonperforming loans, primarily nonaccrual but including 90 days past due but
still accruing, increased $417,000 from 1996 to $787,000 at year end 1997. The
percentage of nonperforming loans to net loans increased to 0.69% in 1997, and
the allowance as a percent of nonperforming loans decreased to 139% in 1997. The
increase in nonaccrual loans is due to real estate loans ($226,000 increase) and
commercial loans ($125,000 increase). The composition of 1997
82
<PAGE>
nonaccrual loans is one loan greater than $100,000, seven loans in the range
from $25,000 to $99,000, and 20 loans below these levels.
Management believes the allowance for loan losses is maintained at a level
sufficient to cover possible losses in the portfolio and is appropriate given
the level of risk in the portfolio. Management recognizes the level of
nonperforming loans and net charge-offs, and therefore initiates a frequent and
detailed loan loss prevention program. Management conducts a monthly analysis of
the adequacy of the allowance for loan losses including a review of
nonperforming and other potentially problem loans. The allowance analysis is
computed based on specific loss exposures on certain loans and a historical loss
factor based on loss experience. The loss exposure on nonperforming loans is
computed monthly.
Information on impaired loans, loans where management believes there is
doubt as to the full repayment of principal and interest, is presented in the
consolidated financial statements in Note 3. Impaired loans are exclusive of
past due loans, since some past due loans may still be accruing interest.
Impaired loans increased from $275,000 in 1996 to $615,000 in 1997. This
increase is primarily due to an increase in problem loans related to commercial
borrowers which are few in number, but which carry larger balances.
Securities
Securities are classified as "available-for-sale." Available-for-sale
securities are those which FFBS may decide to sell if needed for liquidity,
asset-liability management, or other reasons. Securities available-for-sale are
reported at fair value, with unrealized gains and losses included as a separate
component of equity, net of tax. FFBS does not maintain any held-to-maturity
securities or trading securities.
The following table summarizes the carrying values of securities for 1997,
1996 and 1995, and the maturity distribution at December 31, 1997, by
classification. The investment portfolio consists primarily of obligations of
states and political subdivisions. Year-end securities balances were $56.5
million at 1997, a decrease of $2.4 million from 1996. This decrease
demonstrates management's strategy to increase the net interest income by
investing securities proceeds (received from securities sales or maturities)
into loan portfolio products.
Mortgage-backed securities and collateralized mortgage obligations (or
asset-backed securities) are presented in the maturity table by their stated
maturity dates; however, the industry experience is for these securities to
mature earlier than the stated dates due to accelerated payments and
refinancing.
Note 2 to the consolidated financial statements reflects the gross
unrealized gains and losses in the securities portfolio. Total securities in
1997 were at a net $643,000 unrealized gain, up from a net unrealized gain of
$430,000 in 1996. These trends reflect the impact of the market reaction to
longer term securities in FFBS' portfolio.
While FFBS has been decreasing the available-for-sale securities, reinvested
funds were used to purchase securities with longer maturities in order to secure
higher yields.
FFBS sold $21.6 million available-for-sale securities in 1997 and $13
million in 1996. Net realized gains and losses were immaterial in each year.
The securities portfolio carries varying degrees of risk. Investments in
U.S. Treasury and Federal agency securities have little or no credit risk.
Mortgage-backed and asset-backed securities are substantially issues of Federal
agencies. Obligations of states and political subdivisions represent FFBS'
highest exposure in the portfolio. This risk is minimized through the purchase
of high quality investments. When purchased, obligations of states and political
subdivisions must have a rating of within the top four highest grades as
determined by Moody's or Standard and Poor's. The risk of non-rated municipal
bonds is minimized by limiting the amounts invested, and by investing in local
issues. Management believes that the non-rated securities are of a high quality.
FFBS does not use off-balance sheet derivative financial instruments, such as
interest rate swaps.
83
<PAGE>
SECURITIES
(at Market Value - Dollar amounts in thousands)
at December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Securities available-for-sale
U.S. Government & Agencies $ 14,116 $ 18,217 $ 18,878
States and political subdivisions(1) 32,763 20,259 18,615
Mortgage-backed and asset-backed 8,945 19,831 18,260
FHLB and FRB stock 666 626 589
-------- -------- --------
Total securities available-for-sale $ 56,490 $ 58,933 $ 56,342
======== ======== ========
<TABLE>
<CAPTION>
Securities Maturity Schedule
-----------------------------------------------------------------------------------------------------
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
---------------- ---------------- ---------------- ---------------- ----------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Treasury and Agencies $ 3,988 5.39% $ 9,130 6.26% $ 497 6.16% $ 501 7.06% $ 14,116 5.74%
State and municipal(1)(2) 544 6.76% 3,125 5.35% 12,987 4.77% 16,107 4.81% 32,763 4.86%
Mortgage-backed and asset-
backed -- 436 6.19% 1,885 5.98% 6,624 6.49% 8,945 6.33%
FHLB and FRB stock -- -- -- 666 7.11% 666 7.11%
-------- -------- -------- -------- --------
Total available-for-sale $ 4,532 $ 12,691 $ 15,369 $ 15,369 $ 56,490
======== ======== ======== ======== ========
</TABLE>
(1) Rates on state and municipal securities are not tax equivalent rates.
(2) The aggregate book and market value of securities issued by York County,
South Carolina School District is $3 million, or 14.4%, of stockholders'
equity.
Deposits and Borrowings
Deposits. The deposit base provides the major funding source for earning
assets. A three-year schedule of deposits by type and maturities of time
deposits greater than $100,000 is presented in the following table. Total
deposits have grown from 1996 to 1997, increasing $4.6 million to $154.6 million
in 1997. There were not significant variances in the mix of deposit types,
although $3.6 million of the increase was in time deposits. FFBS competes with
other financial institutions and brokerage institutions for deposits in its
market. FFBS' strategy was to maintain the rate paid on savings and demand
accounts and slightly increase the rates paid on certificates to retain these
balances as they compete in the market.
84
<PAGE>
DEPOSIT INFORMATION
(Dollar amounts in thousands)
Deposits at December 31,
--------------------------------------------
1997 1996 1995
-------- -------- --------
Noninterest bearing $ 26,323 $ 26,860 $ 25,387
Interest bearing demand 19,551 18,439 18,076
Savings demand 21,601 21,108 23,272
Time 87,142 83,581 83,698
-------- -------- --------
Total deposits $154,617 $149,988 $150,433
======== ======== ========
Maturity Ranges of Time Deposits
with Balances of $100 or More at December 31,
--------------------------------------------
1997 1996 1995
-------- -------- --------
3 months or less $ 3,906 $ 2,897 $ 5,882
3 through 6 months 2,645 2,124 2,398
6 through 12 months 2,978 4,571 2,939
over 12 months 6,794 4,104 4,415
-------- -------- --------
$ 16,323 $ 13,696 $ 15,634
======== ======== ========
Total time deposits greater than $100,000 increased by $2.6 million during
1997. The growth in time deposits has been primarily in long-term certificates
(those having more than one year maturity).
Borrowings. Other borrowed funds consist of advances from the Federal Home
Loan Bank, federal funds purchased, and the treasury tax and loan note option.
FFBS does not have any securities sold under agreements to repurchase.
In order to promote loan portfolio growth, FFBS borrowed an additional $2
million of advances from the Federal Home Loan Bank in 1997. These additional
advances increased the year-end 1996 advance balance of $154,000 to $2.1 million
in 1997. Information on borrowings is presented in the consolidated financial
statements in Note 7.
Liquidity and Rate Sensitivity
Liquidity management is the process by which FFBS ensures that adequate
liquid funds are available to meet financial commitments on a timely basis.
These commitments include withdrawals by depositors, funding credit obligations
to borrowers, servicing long-term obligations, shareholder dividend payments,
paying operating expenses, funding capital expenditures, and maintaining reserve
requirements. Liquidity is monitored closely by the asset-liability committee,
which establishes policies and rates, makes prudent investing and funds
management decisions, and manages liquidity levels.
The liquidity of FFBS is dependent on the receipt of dividends from the
banking subsidiary. Certain restrictions exist regarding the transfer of funds
from the subsidiary as explained in Note 13 to the consolidated financial
statements. Management expects that in the aggregate, the banking subsidiary
will continue to have the ability to dividend adequate funds to FFBS.
85
<PAGE>
FFBS' source of funding is predominantly core deposits consisting of both
business and individual deposits, maturities and sales of securities, repayments
of loan principal and interest, and advances from the Federal Home Loan Bank.
The deposit base is diversified between individuals and businesses which helps
avoid dependence on large concentrations of funds. FFBS does not solicit
certificates of deposits from brokers. The following table details the main
components of cash flows for 1997 and 1996.
FUNDING USES AND SOURCES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Average Increase/(decrease) Average Increase/(decrease)
------------------ ------------------
Balance Amount Percent Balance Amount Percent
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Funding Uses
Loans, net of unearned income $104,906 $ 9,139 9.54% $ 95,767 $ 2,583 2.77%
Taxable securities 36,166 (2,485) (6.43)% 38,651 (2,088) (5.13)%
Tax exempt securities 20,776 1,323 6.80% 19,453 4,136 27.00%
Other 1,169 197 20.27% 972 187 23.82%
Interest bearing deposits in other
banks 236 (944) (80.00)% 1,180 26 2.25%
Federal funds sold and securities
purchased under agreements to
resell 2,382 (1,563) (39.62) 3,945 651 19.76%
-------- -------- ------- -------- -------- -------
Total Uses $165,635 $ 5,667 3.54% $159,968 $ 5,495 3.56%
======== ======== ======= ======== ======== =======
Funding Sources
Noninterest bearing deposits $ 24,645 $ 1,478 6.38% $ 23,167 $ (1,120) (4.61)%
Interest bearing demand and
savings deposits 41,025 726 1.80% 40,299 (2,054) (4.85)%
Time deposits 85,472 875 1.03% 84,597 7,455 9.66%
Other borrowings 1,139 252 28.41% 887 (43) (4.62)%
Long-term borrowings 971 812 510.69% 159 (394) (71.25)%
-------- -------- ------- ------- -------- -------
Total Sources $153,252 $ 4,143 2.78% $149,109 $ 3,844 2.65%
======== ======== ======= ======== ======== =======
</TABLE>
FFBS' primary funding sources during 1997 were loan repayments and pay-offs,
maturities and sales of securities, deposit growth and borrowings. Primary uses
of funding sources during 1997 were a net increase in loans and purchases of
securities.
Interest rate risk is the exposure to FFBS' earnings and capital from
changes in future interest rates. All financial institutions assume interest
rate risk as an integral part of normal operations. Managing and measuring the
interest rate risk is the process that ranges from reducing the exposure of
FFBS' interest margin regarding swings in interest rates to assuring that there
is sufficient capital and liquidity to support future balance sheet growth.
FFBS' interest rate sensitivity position is influenced by the distribution
of interest earning assets and interest-bearing liabilities among the maturity
categories. The following table reflects interest earning assets and
interest-bearing liabilities by maturity distribution. Product lines re-pricing
in time periods predetermined by contractual agreements are included in the
respective maturity categories.
86
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
at December 31, 1997
--------------------------------------------------------
1 - 90 91 - 365 1 - 5 Over 5
Days Days Years Years Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans $ 22,293 $ 31,901 $ 48,275 $ 11,932 $114,401
Securities available-for-sale
Taxable 1,426 5,125 16,573 576 23,700
Tax-exempt 50 488 3,076 28,533 32,147
-------- -------- -------- -------- --------
Total Securities 1,476 5,613 19,649 29,109 55,847
Other-primarily short-term time deposits
with Federal Home Loan Bank 1,925 -- -- -- 1,925
-------- -------- -------- -------- --------
Total earning assets $ 25,694 $ 37,514 $ 67,924 $ 41,041 $172,173
======== ======== ======== ======== ========
Interest bearing liabilities
Interest-bearing demand deposits $ 19,551 -- -- -- $ 19,551
Savings deposits 21,601 -- -- -- 21,601
Time deposits 16,599 29,748 40,795 -- 87,142
Federal funds purchased 650 -- -- -- 650
Treasury tax and loan note option 1,100 -- -- -- 1,100
Long-term borrowings 25 72 384 1,640 2,121
-------- -------- -------- -------- --------
Total interest bearing liabilities $ 59,526 $ 29,820 $ 41,179 $ 1,640 $132,165
======== ======== ======== ======== ========
Rate sensitive gap $(33,832) $ 7,694 $ 26,745 $ 39,401 $ 40,008
Rate sensitive cumulative gap $(33,832) $(26,138) $ 607 $ 40,008
Cumulative gap as a percentage of earning
assets (131.67)% (69.68)% .89% 97.48%
</TABLE>
The purpose of this GAP chart is to measure interest rate risk utilizing the
re-pricing intervals of interest sensitive assets and liabilities. Rate
sensitive GAPs constantly change as funds are acquired and invested and as rates
change. Rising interest rates are likely to increase net interest income in a
positive GAP position while falling interest rates are beneficial in a negative
GAP position.
FFBS has a negative GAP position for the 1-90 days time period, and a
positive GAP position for all other time periods presented. The Liquidity and
Interest Rate Sensitivity Table places interest-bearing demand and savings
deposits in the shortest maturity category because these liabilities do not have
defined maturities. If these deposits were placed in a maturity distribution
representative of FFBS' deposit base history, the GAP position would increase in
the shortest maturity category, and decrease in both the 1-5 years category and
the over 5 years category. Management feels that funding sources such as
securities and federal funds sold are sufficient to meet any funding uses based
on historical levels and assessment of market demand for loans. Management sets
deposit interest rates competitively to prevent a significant amount of deposits
from withdrawing.
Since most of the assets and liabilities are monetary in nature, inflation
has an effect on financial institutions. Personnel costs, occupancy expenses and
equipment costs all tend to reflect the inflation rate as measured by the
consumer price index. FFBS continues to attempt to offset such increases by
raising noninterest income.
87
<PAGE>
Capital Adequacy
Capital adequacy in the banking industry is evaluated primarily by the use
of three required capital ratios: Leverage capital (Tier I capital divided by
average assets less intangible assets and unrealized security gains/losses);
Tier I risk-based capital (Tier I capital divided by risk weighted assets); and
total risk-based capital (Tier I capital plus Tier II capital divided by risk
weighted assets). Tier I capital is shareholders' equity less intangible assets
plus/less unrealized losses/gains. Tier II capital consists of the allowance for
loan losses limited to 1.25% of risk weighted assets. Risk weights are assigned
to on-and off-balance sheet items in arriving at risk-adjusted total assets.
See Note 13 to the consolidated financial statements for details on the
three capital requirements. FFBS meets the well capitalization capital standards
as of year end 1997.
Pending Changes
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 FFBS is changes in unrealized gains (losses) on
securities, which was $132,000 in 1997 and ($87,000) in 1996.
As of and for the Three Months Ended March 31, 1998
The following discussion is presented to provide additional information
concerning the consolidated financial condition as of March 31, 1998 and the
consolidated results of operations for the three months ended March 31, 1998 and
1997 for FFBS. This discussion and analysis should be read in conjunction with
the consolidated financial statements where this March 31 information is
presented (unaudited).
Overview of Operations. Net income for the three months ended March 31, 1998
was $471,000, or $2.87 per share compared with $507,000 or $3.09 per share for
the same period in 1997. Two primary factors resulted in this variance. First,
the net interest income increased $167,000 in the current year period as
compared to the prior year period.
The second factor was a $309,000 provision for loan losses recorded in March
1998, $249,000 more than the previous year provision for the same period. Due to
the increase in loans charged off in the 1998 period, an increase in the
allowance for loan losses was needed in order to maintain the allowance at a
desired level.
Financial Condition. From December 31, 1997 to March 31, 1998 there were
minor declines in loans and securities, while cash and cash equivalents and
deposits reflected a minor increase. Total assets increased $2.6 million during
this period to $184.6 million at March 31, 1998. The changes in assets and
liabilities are consistent with management's strategy as previously discussed.
88
<PAGE>
BUSINESS OF FFBS
General
FFBS, incorporated in Tennessee, is a bank holding company that commenced
operations in 1983. Its principal asset is the capital stock of Athens. At March
31, 1998, FFBS had total assets of $185 million and stockholder equity of $22
million. Athens, FFBS' wholly-owned subsidiary, is a nationally chartered
banking corporation. The bank was formed in 1872 and received its national
charter in 1884. Athens provides a variety of banking, financial and trust
services to businesses and individuals. FFBS formed a finance company named
Friendly Finance, Inc. ("Friendly Finance") during 1997, which is a wholly-owned
subsidiary of Athens. Friendly Finance is located at 600 Decatur Pike Plaza,
Athens, Tennessee which facility is leased by Athens.
Employees
As of March 31, 1998, FFBS had approximately 99 full-time equivalent
employees. The employees are not represented by a collective bargaining unit.
FFBS believes its relationship with its employees to be good.
Customers
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
materially adverse effect on the business of FFBS.
Properties
FFBS has its principal office in its headquarters building at 204 Washington
Avenue, Athens, Tennessee, which is owned by Athens. Athens owns or leases the
following properties in which it operates five branches, an operations center,
and Friendly Finance.
<TABLE>
<CAPTION>
Description Address Term Extensions Square Footage
- ----------- ------- ---- ---------- --------------
<S> <C> <C> <C> <C>
Operations 3 South Hill Street 2/1/94 - 1/31/99 2 additional 5-year 20,500
Center Madison Park Center terms
Athens, TN 37371-
0110
Branch 1604 Decatur Pike 3/27/90 - 11/20/2003 3 additional 3-year (Land Lease)
Athens, TN 37303-2424 terms
Branch 601 Tennessee Avenue Own ------ ------
Etowah, TN 37331
Branch 3099 U.S. Highway 11 Own ------ ------
Calhoun, TN 37309
Branch 111 South Niota Road Own ------ 10,368
Englewood, TN 37329 12/29/89 - 12/31/99 (Land Lease
on parking lot lease for parking lot)
Branch 3809 U.S. Highway Own ------ ------
South
Riceville, TN 37370
</TABLE>
89
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Friendly 600 Decatur Pike Plaza 7/3/97 - 7/13/99 2 additional 2-year 1,350
Finance, Inc. Athens, TN 37303 terms
</TABLE>
Athens operates six automatic teller machines as follows:
Athens operates six automatic teller machines as follows:
Location Own/Lease Property
-------- ------------------
204 Washington Own
Athens, TN 37303
1604 Decatur Pike Own
Athens, TN 37303
601 Tennessee Avenue Own
Etowah, TN 37331
Walmart Store Lease
1610 Congress Parkway
Athens, TN 37303
BP/Blimpie Subs Lease
947 Congress Parkway
Athens, TN 37303
Phillips 66/Blimpie Subs Lease
1430 Murray's Chapel
Sweetwater, TN 37874
Legal Proceedings
The nature of its business generates a certain amount of litigation against
FFBS and Athens involving matters arising in the ordinary course of business.
None of the legal proceedings currently pending or threatened to which FFBS or
Athens is a party or to which any of their properties are subject will have, in
the opinion of management of FFBS, a material effect on the business or
financial condition of FFBS or Athens.
Banking
Athens conducts its business as a commercial bank, with special emphasis in
retail banking, including the acceptance of checking and savings deposits, and
the making of commercial, real estate, personal, home improvement, automobile
and other installment and term loans. It also offers trusts, notary public
services and other customary bank services to its customers.
Competition
All phases of FFBS' banking activities are highly competitive. Athens
competes actively with seven commercial banks and savings associations, as well
as finance companies, credit unions and other financial institutions located in
its service area, which includes McMinn County in Tennessee.
90
<PAGE>
Executive Compensation
L.A. Walker, Jr. is the Chairman of the Board and Chief Executive Officer of
Athens. For his services to Athens in 1997, Mr. Walker received a salary of
$115,050 and a bonus of $30,856. Neither FFBS nor Athens have an employment
agreement with Mr. Walker or any other executive officer.
Supervision and Regulation
FFBS is a bank holding company within the meaning of the federal Bank
Holding Company Act of 1956, as amended (the "Act"), and is registered with the
Board of Governors of the Federal Reserve System (the "Board"). FFBS is required
to file with the Board annual reports and such additional information as the
Board may require pursuant to the Act. The Board may also make examinations of
FFBS and its subsidiaries. The following summary of the Act and of the other
acts described herein is qualified in its entirety by express reference to each
of the particular acts.
The Act requires every bank holding company to obtain the prior approval of
the Board before acquiring direct or indirect ownership or control of more than
5% of the voting shares of any bank which is not majority owned by the bank
holding company. The Act prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the outstanding voting shares of any company which is not a bank and from
engaging in any business other than banking or furnishing services to or
performing services for its subsidiaries. The 5% limitation is not applicable to
ownership of shares in any company the activities of which the Board has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Athens and Friendly Finance, Inc. are "affiliates" of FFBS within the
meaning of the Federal Reserve Act. This act places restrictions on a bank's
loans or extensions of credit to, purchases of or investments in the securities
of, and purchases of assets from an affiliate, a bank's loans or extensions of
credit to third parties collateralized by the securities or obligations of an
affiliate, the issuance of guarantees, acceptances, and letters of credit on
behalf of an affiliate, and certain bank transactions with an affiliate, or with
respect to which an affiliate acts as agent, participates, or has a financial
interest. Furthermore, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Under Board policy, FFBS is expected to act as a source of financial
strength to its subsidiary bank and to commit resources to support its bank
subsidiary. This support may be required at times when, absent such Board
policy, FFBS may not be inclined to provide it. Under the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. Under FDICIA (see discussion below) a bank holding company may be
required to guarantee the capital plan of an undercapitalized depository
institution. Any capital loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary bank. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Athens is a nationally chartered bank and is subject to examination and
regulation by the OCC. Friendly Finance, Inc. is a state-chartered industrial
loan and thrift company and is subject to examination and regulation by the
TDFI.
The operation of Athens is subject to state and federal statutes applicable
to national banks and the regulations of the OCC and the FDIC. Such statutes and
regulations relate to required reserves, investments, loans, mergers and
91
<PAGE>
consolidations, issuances of securities, payment of dividends, establishment of
branches and other aspects of Athens' operations.
Athens is also subject to the provisions of the Community Reinvestment Act
of 1977, which requires the OCC, in connection with its regular examination of
the bank, to assess Athens' record in meeting the credit needs of the
communities served by Athens, including low- and moderate-income neighborhoods.
Capital Requirements. The OCC's minimum capital standards applicable to
national banks require the most highly-rated institutions to meet a Tier I
leverage capital ratio of at least 3.0% of total assets. Tier I (or "core
capital") consists of common stockholders' equity, noncumulative perpetual
preferred stock and minority interests in consolidated subsidiaries minus all
intangible assets other than limited amounts of purchased mortgage servicing
rights and certain other accounting adjustments. All other banks must have a
Tier I leverage ratio of at least 100-200 basis points above the 3% minimum. The
OCC capital regulations establish a minimum leverage ratio of not less than 4%
for banks that are not highly rated or are anticipating or experiencing
significant growth.
OCC capital regulations require higher capital levels for banks which
exhibit more than a moderate degree of risk or exhibit other characteristics
which necessitate that higher than minimum levels of capital be maintained. Any
insured bank with a Tier I capital to total assets ratio of less than 2% is
deemed to be operating in an unsafe and unsound condition pursuant to Section
8(a) of the FDIA unless the insured bank enters into a written agreement, to
which the FDIC is a party, to correct its capital deficiency. Insured banks
operating with Tier I capital levels below 2% (and which have not entered into a
written agreement) are subject to an insurance removal action. Insured banks
operating with lower than the prescribed minimum capital levels generally will
not receive approval of applications submitted to the FDIC. Also, inadequately
capitalized national banks will be subject to such administrative action as the
FDIC deems necessary.
OCC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital (which
is defined as Tier I capital and Tier II or supplementary capital) to risk
weighted assets of 8% and Tier I capital to risk-weighted assets of 4%. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the OCC believes are inherent in the type of asset or item. The components
of Tier I capital are equivalent to those discussed above under the 3% leverage
requirement. The components of mandatory convertible securities, term
subordinated debt, intermediate-term preferred stock and allowance for possible
loan and lease losses. Allowance for possible loan and lease losses includable
in supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier I capital. The OCC includes in its evaluation of a
bank's capital adequacy an assessment of risk-based capital focussing
principally on broad categories of credit risk. No measurement framework for
assessing the level of a bank's interest rate risk exposure has been codified
but, effective board and senior management oversight of the banks tolerance for
interest rate risk is required.
The OCC has adopted the Federal Financial Institutions Examination Council's
recommendation regarding the adoption of Statement of Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Specifically, the agencies determined that net unrealized holding
gains or losses on available for sale debt and equity securities should not be
included when calculating core and risk-based capital ratios.
OCC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound, which are
well-managed and have no material or significant financial weakness. The OCC
capital regulations state that, where the OCC determines that the financial
history or condition, including off-balance sheet risk, managerial resources
and/or the future earnings prospects of a bank are not adequate and/or a bank
has a significant volume of assets classified substandard, doubtful or loss or
otherwise criticized, the OCC may determine that the minimum adequate amount of
capital for that bank is greater than the minimum standards established in the
regulation.
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
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<PAGE>
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 problemsand the commitment to solutions; identification of
external risks; and operational issues that are relevant to a bank's Year 2000
planning.
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.
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."
Prompt Corrective Action. FDICIA was enacted in December 1991, substantially
revising the bank regulatory and funding provisions of the FDIA and making
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. Athens has capital levels well above the minimum requirements. In
addition, an institution that is not well capitalized is generally prohibited
from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market and also may not be able to "pass
through" insurance coverage for certain employee benefit accounts. FDICIA also
requires the holding company of any undercapitalized depository institution to
guarantee, in part, certain aspect of such depository institution's capital plan
for such plan to be acceptable. FDICIA contains numerous other provisions,
including new accounting, audit and reporting requirements, termination of the
"too big to fail" doctrine except in special cases, limitations on the FDIC's
payment of deposits at foreign branches, new regulatory standards in such areas
as asset quality, earnings and compensation and revised regulatory standards
for, among other things, real estate lending and capital adequacy. FDICIA also
requires that a depository institution provide 90 days prior notice of the
closing of any branches.
Effect of Governmental Policies
FFBS, Athens and Friendly Finance, Inc. are affected by the policies of
regulatory authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national money supply.
Among the instruments of monetary policy used by the Federal Reserve are:
purchases and sales of U.S. Government securities in the marketplace; changes in
the discount rate, which is the rate any depository institution must pay to
borrow from the Federal Reserve; and changes in the reserve requirements of
depository institutions. These instruments are effective in influencing economic
and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of changing conditions in the national economy and in the money market, as well
as the result of actions by monetary and fiscal authorities, it is not possible
to predict with certainty future changes in interest rates, deposit levels, loan
demand or the business and earnings of FFBS or whether the changing economic
conditions will have a positive or negative effect on operations and earnings.
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<PAGE>
Bills are pending before the United States Congress which could affect the
business of FFBS and Athens, and there are indications that other similar bills
may be introduced in the future. It cannot be predicted whether or in what form
any of these proposals will be adopted or the extent to which the business of
FFBS and Athens may be affected thereby.
Ownership of FFBS Common Stock
As of March 31, 1998, FFBS' records indicated the following number of shares
were beneficially owned by (i) a persons who own beneficially 5% or more of FFBS
Common, (ii) each person who is a director or an executive officer of FFBS and
(iii) all directors and executive officers as a group.
Amount and Nature
of Beneficial Ownership Percent
Name of Beneficial Owner (Number of Share) of Class
- ------------------------ ----------------- --------
Michael L. Bevins 1925 1.18%
William P. Biddle, III 1411 *
Charles W. Bivens 1259 *
R. Hal Buttram 214 *
Robert B. Mayfield 319 *
C. Scott Mayfield, Jr. 706 *
John W. Perdue 211 *
Jerry Richardson 250 *
Joel C. Riley 437 *
William R. Rodgers 285 *
W.D. Sullins, Jr. 400 *
L.A. Walker, Jr. 545 *
Directors and Executive
Officers as a Group (12 persons) 7962 4.89%
- ---------
* Less than one percent.
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<PAGE>
DESCRIPTION OF FFBS CAPITAL STOCK
FFBS is authorized by its charter to issue a maximum of 400,000 shares of
common stock, $5.00 par value (the "FFBS Common"), of which 164,125 were
outstanding at March 24, 1998. The holders of FFBS Common are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders. Cumulative voting is not allowed. Holders of FFBS Common are
entitled to receive ratably such dividends, if any, as may be declared by the
FFBS Board out of funds legally available therefor; provided, however, that the
declaration and payment of dividends by the FFBS Board shall be 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 are paid, and the methods,
if any, by which capital stock and surplus may be retired and reduced. In the
event of liquidation, dissolution or winding up of FFBS, holders of FFBS Common
will be entitled to share ratably in all assets remaining after payment of
liabilities. Holders of FFBS Common have no preemptive rights. Holders of FFBS
Common have no right to convert the FFBS Common into any other securities. All
shares of FFBS Common outstanding are fully paid and nonassessable. FFBS acts as
the transfer agent and registrar for FFBS Common.
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EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
Both BFC and FFBS are Tennessee corporations subject to the provisions of
TBCA. Therefore, the Merger will not alter the statutory provisions applicable
to the shareholders of FFBS. However, following the Merger, the rights of
shareholders of FFBS who become shareholders of BFC will be governed by the
Charter and Bylaws of BFC. The following is a summary of the material
differences in the rights of shareholders of FFBS and BFC and is qualified in
its entirety by reference to the governing law and the Charters and Bylaws of
BFC and FFBS. Certain topics discussed below are also subject to federal law and
the regulations promulgated thereunder, including those of the FDIC and FRB.
Authorized Capital Stock
BFC's Charter authorizes the issuance of up to 16,000,000 shares of capital
stock: 15,000,000 shares of common stock, par value $2.50 per share, and
1,000,000 shares of preferred stock, par value $5.00 per share. BFC had issued
and outstanding, as of the BFC Record Date, 1,275,893 shares of BFC Common and
215,805 shares of BFC Preferred.
FFBS' Charter authorizes the issuance of up to 400,000 shares of common
stock, par value $5.00 per share, of which 164,125 shares were issued and
outstanding as of the FFBS Record Date.
Number and Qualifications of Directors
FFBS' Charter provides that the FFBS Board will have a maximum of 15 members
and that the affirmative vote of not less than 80% of the outstanding shares of
FFBS Common is required to change that provision of the Charter. BFC's Charter
provides for no fewer than 5 directors and no more than 25.
FFBS' Bylaws allow for both active and advisory directors. Active directors
must be between the ages of 30 and 70. Advisory directors must be over the age
of 70 and serve in an advisory capacity only; advisory directors do not have
voting powers. BFC's Bylaws have no such age requirements or provisions for
advisory directors.
BFC directors are elected for a term of one year and serve until their
successors are elected and qualified. FFBS' Bylaws provide staggered terms for
directors. FFBS directors are elected for staggered three-year terms and serve
until their successors are elected and qualified.
Removal of Directors
A FFBS director can be removed for cause by either the shareholders or the
FFBS Board. A BFC director may be removed by the shareholders at a meeting
called for such purpose.
Shareholder Approval of Certain Mergers or Sales of Assets
FFBS' Charter requires the approval of 80% of the outstanding shares of FFBS
Common for any merger or sale, exchange or lease of substantially all of the
assets of FFBS, if the FFBS Board does not recommend that the shareholders vote
to approve the merger, sale, exchange or lease. Neither BFC's Charter nor Bylaws
contain a similar provision.
Meetings of Shareholders
BFC's Bylaws authorize the President, a majority of the members of the Board
of Directors or shareholders owning at least 25% of the outstanding common stock
to call a special meeting of shareholders for any purpose. Such a call shall
state the purpose of the proposed meeting and the business transacted at the
special meeting must be confined to the purposes stated in the call.
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FFBS' Bylaws authorize the President, the Chairman of the FFBS Board, a
majority of the FFBS Board, and holders of at least 10% of the outstanding
shares of FFBS Common to call a special meeting of shareholders.
Indemnification
The TBCA provides in certain situations for mandatory and permissive
indemnification of directors and officers. The TBCA provides that statutory
indemnification is not to be deemed exclusive of any other rights to which a
director seeking indemnification may be entitled; provided, however, no
indemnification may be made if a final adjudication adverse to the director or
officer establishes his liability (i) for any breach of loyalty to the
corporation or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; or (iii) for
unlawful distributions. The Bylaws of BFC provide for indemnification of
directors and officers to the full extent allowed by the TBCA.
The Bylaws of FFBS allow for indemnification to the full extent allowed by
the TBCA; provided that, no person can be indemnified or reimbursed in relation
to any matter as to which he is finally adjusted to have been guilty or liable
for gross negligence of his duties to FFBS; and provided that, no person shall
be indemnified or reimbursed in relation to any matter which has been made the
subject of a compromise settlement except with the approval of (i) a court of
competent jurisdiction, (ii) the holders of a majority of the outstanding shares
of FFBS Common, or (iii) the FFBS Board.
Dividends and Other Distributions
The TBCA provides that BFC, generally, may make dividends or other
distributions to its shareholders unless after the distribution either (i) BFC
would not be able to pay its debts as they become due in the usual course of
business or (ii) BFC's assets would be less than the sum of its liabilities plus
the amount that would be needed to satisfy the preferential dissolution rights
of its preferred stock. In addition, the FRB places additional restrictions on
the payment of dividends by bank holding companies.
FFBS has traditionally paid dividends on FFBS Common. BFC, generally, pays
dividends on BFC Preferred and has sporadically paid dividends on BFC Common.
However, BFC has no current intention to pay future cash dividends on BFC
Common.
VALIDITY OF COMMON STOCK
A legal opinion to the effect that the shares of BFC Common when issued in
accordance with the Merger Agreement, will be validly issued, fully paid and
nonassessable, has been rendered by Ritchie & Eubanks PLLC, Knoxville,
Tennessee, counsel to BFC.
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 re port of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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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
Coopers & Lybrand L.L.P. had served as BFC's independent accountants from
June 1996 to June 1997. However, effective June 3, 1997 the Executive Committee
of the BFC Board decided that Coopers & Lybrand L.L.P. would not be reengaged
and, on the Executive Committee's recommendation, the BFC Board engaged Crowe
Chizek and Company LLP as independent accountants for BFC and its subsidiaries,
effective June 3, 1997.
Coopers & Lybrand L.L.P. had been engaged to audit BFC's financial
statements as of and for the period ended December 31, 1996 and to audit
BankFirst's financial statements as of and for the periods ended December 31,
1993, December 31, 1994 and December 31, 1995. Coopers & Lybrand L.L.P.'s
reports on the financial statements of BankFirst and BFC for those years do not
contain an adverse opinion or a disclaimer of opinion, and such reports are not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the time Coopers & Lybrand L.L.P. served as accountant for BankFirst and
BFC, BankFirst and BFC had no disagreements with Coopers & Lybrand L.L.P. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
Coopers & Lybrand L.L.P., would have caused them to make reference thereto in
such reports nor were there any reportable events required to be disclosed. In
accordance with the rules of the SEC, Coopers & Lybrand L.L.P. has reviewed and
concurred with the above discussion. A copy of Coopers & Lybrand L.L.P.'s letter
is filed as an exhibit to the registration statement of which this Joint Proxy
Statement/Prospectus is a part.
Hazlett, Lewis & Bieter, P.L.L.C. served as BFC's independent accountants
prior to June 1996. However, based on bids received from Hazlett, Lewis &
Bieter, P.L.L.C. and Coopers & Lybrand L.L.P., the Executive Committee decided
not to re-engage Hazlett, Lewis & Bieter, P.L.L.C. on or about June 17, 1996.
The BFC Board engaged Coopers & Lybrand L.L.P. as BFC's independent accountants
on or about June 17, 1996.
Hazlett, Lewis & Bieter, P.L.L.C. had been engaged to audit the financial
statements of BFC (formerly known as Smoky Mountain Bancorp, Inc.) as of and for
the period ended December 31, 1995. Hazlett, Lewis & Bieter, P.L.L.C. report on
the financial statements of BFC for 1995 did not contain an adverse opinion or a
disclaimer of opinion, and such report is not qualified or modified as to
uncertainty, audit scope or accounting principles. During the time Hazlett,
Lewis & Bieter, P.L.L.C. served as accountants for BFC (formerly know as Smoky
Mountain Bancorp, Inc.), BFC had no disagreements with Hazlett, Lewis & Bieter,
P.L.L.C. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of Hazlett, Lewis & Bieter, P.L.L.C., would have caused them to
make reference thereto in such reports nor were there any reportable events
required to be disclosed. In accordance with the rules of the SEC, Hazlett,
Lewis & Bieter, P.L.L.C. has reviewed and concurred with the above discussion. A
copy of Hazlett, Lewis & Bieter, P.L.L.C.'s letter is filed as an exhibit to the
registration statement of which this Joint Proxy Statement/Prospectus is a part.
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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-28
Consolidated Statements of Income.....................................F-29
Consolidated Statement of Changes in Stockholders' Equity.............F-30
Consolidated Statements of Cash Flows.................................F-31
Notes to Consolidated Financial Statements............................F-32
Financial Statements of First Franklin Bancshares, Inc.
1997, 1996 and 1995 (audited)
Independent Auditors' Report .........................................F-35
Consolidated Balance Sheets...........................................F-36
Consolidated Statements of Income.....................................F-37
Consolidated Statements of Changes in Stockholders' Equity............F-38
Consolidated Statements of Cash Flows.................................F-39
Notes to Consolidated Financial Statements............................F-40
Financial Statements of First Franklin Bancshares, Inc.
March 31, 1998 (unaudited)
Consolidated Balance Sheets...........................................F-56
Consolidated Statements of Income.....................................F-57
Consolidated Statements of Changes in Stockholders' Equity............F-58
Consolidated Statements of Cash Flows.................................F-59
Notes to Consolidated Financial Statements............................F-51
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
(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
(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 - (Contined)
(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 - (Contined)
(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 AND 1996
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 AND 1996
<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 AND 1996
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
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
<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)
DECEMBER 31, 1997 AND 1996
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)
DECEMBER 31, 1997 AND 1996
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>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
SMOKY MOUNTAIN BANCORP, INC.
AND
FIRST FRANKLIN BANCSHARES, INC.
<PAGE>
INDEX
ARTICLE I ............................................................. Page 2
DEFINITIONS.......................................................... Page 2
1.1 Definitions.................................................... Page 2
Act................................................................ Page 2
Affiliate ......................................................... Page 2
Agreement ......................................................... Page 2
BankFirst ......................................................... Page 2
BankFirst Subsidiaries............................................. Page 2
Certificate........................................................ Page 2
Closing ......................................................... Page 2
Closing Date....................................................... Page 2
Code............................................................... Page 2
Confidential Information........................................... Page 3
ERISA.............................................................. Page 3
Effective Time..................................................... Page 3
Eligible First Franklin Shareholder............................... Page 3
Exchange Act....................................................... Page 3
Exchange Agent..................................................... Page 3
Exchange Ratio..................................................... Page 3
FDIA............................................................... Page 3
FDIC............................................................... Page 3
FRB................................................................ Page 3
Federal Reserve.................................................... Page 3
First Franklin..................................................... Page 3
First Franklin Common Stock........................................ Page 3
First Franklin Employee Plans...................................... Page 4
First Franklin Financial Statements................................ Page 4
First Franklin Interim Financial Statements........................ Page 4
First Franklin Shareholders........................................ Page 4
First Franklin Shareholders' Meeting............................... Page 4
First Franklin Tax Returns......................................... Page 4
First Franklin Taxes............................................... Page 4
First National..................................................... Page 4
First National Subsidiary.......................................... Page 4
GAAP .............................................................. Page 4
Governmental Approvals............................................. Page 5
IRS ............................................................... Page 5
Merger ............................................................ Page 5
OCC ............................................................... Page 5
Other Plan ........................................................ Page 5
(i)
<PAGE>
Parties............................................................ Page 5
Pension Plan....................................................... Page 5
Person............................................................. Page 5
Previously Disclosed............................................... Page 5
Proxy Statement.................................................... Page 5
Records............................................................ Page 5
Registration Statement............................................. Page 6
Regulatory Approval................................................ Page 6
Regulatory Authorities............................................. Page 6
S-4 Registration Statement......................................... Page 6
SEC................................................................ Page 6
Securities Act..................................................... Page 6
Shareholders Meetings.............................................. Page 6
Smoky Mountain..................................................... Page 6
Smoky Mountain Common Stock........................................ Page 6
Smoky Mountain Financial Statements................................ Page 6
Smoky Mountain's Interim Financial Statements...................... Page 6
Smoky Mountain's Shareholders' Meeting............................. Page 7
Smoky Mountain Taxes............................................... Page 7
Smoky Mountain Tax Returns......................................... Page 7
Stock Event........................................................ Page 7
Subsidiary or Subsidiaries......................................... Page 7
TDFI............................................................... Page 7
Takeover Proposal.................................................. Page 7
Welfare Plan....................................................... Page 7
ARTICLE 2 ............................................................. Page 8
MERGER OF SMOKY MOUNTAIN AND FIRST FRANKLIN.......................... Page 8
2.1 Merger....................................................... Page 8
2.2. Effective Time of the Merger................................. Page 8
2.3 Closing...................................................... Page 8
2.4 Effect of the Merger......................................... Page 8
2.5 Effect of the Merger on the Capital Stock.................... Page 9
(a) Cancellation of Treasury Stock........................... Page 9
(b) Conversion of First Franklin Common Stock................ Page 9
(c) Dissenter's Rights....................................... Page 9
2.6 Exchange of Certificates..................................... Page 9
(a) Exchange Agent........................................... Page 9
(b) Exchange Procedures...................................... Page 10
(c) Distributions with Respect to the Unexchanged Share...... Page 10
(d) No Further Ownership Rights in First Franklin
Common Stock........................................... Page 11
(e) No Fractional Shares..................................... Page 11
(ii)
<PAGE>
(f) Termination of Exchange Fund............................. Page 11
(g) No Liability............................................. Page 11
2.7 Shareholders' Meetings....................................... Page 12
2.8 Regulatory Approvals......................................... Page 12
2.9 Certain Undertakings......................................... Page 13
(a) Undertakings of First Franklin........................... Page 13
(b) Undertakings of Smoky Mountain........................... Page 14
ARTICLE 3............................................................... Page 15
REPRESENTATIONS AND WARRANTIES OF SMOKY MOUNTAIN..................... Page 15
3.1 Organization and Corporate Authority......................... Page 15
3.2 Authorization, Execution and Delivery;
Agreement Not in Breach...................................... Page 16
3.3 No Legal Bar................................................. Page 17
3.4 Regulatory Approvals......................................... Page 17
3.5 Capitalization............................................... Page 17
3.6 Smoky Mountain Financial Statements.......................... Page 18
3.7 Tax Matters.................................................. Page 18
3.8 Insurance.................................................... Page 20
3.9 Legal Proceedings............................................ Page 20
3.10 Compliance with Law.......................................... Page 21
3.11 Governmental Authorizations.................................. Page 21
3.12 Supervisory Matters.......................................... Page 22
3.13 Rights and Licenses.......................................... Page 22
3.14 Properties................................................... Page 23
3.15 Absence of Certain Changes or Events......................... Page 23
3.16 Public Offering of Smoky Mountain Stock...................... Page 23
3.17 Representations and Warranties True on and as of
Closing Date................................................. Page 23
3.18 Material Contracts........................................... Page 23
3.19 Employee Benefit Plans....................................... Page 24
3.20 Brokers...................................................... Page 26
3.21 Books of Account; Corporate Records.......................... Page 26
3.22. Reserves for Loan Losses..................................... Page 26
3.23. Labor Relations.............................................. Page 26
3.24 No Undisclosed Liabilities................................... Page 27
3.25 Year 2000 Compliance......................................... Page 28
3.26. Environmental Law Violations................................. Page 28
(1) Environmental Law........................................ Page 28
(2) Hazardous Substance...................................... Page 28
(3) Loan Portfolio Properties and Other Properties Owned..... Page 29
(iii)
<PAGE>
ARTICLE 4 ............................................................. Page 29
REPRESENTATIONS AND WARRANTIES OF FIRST FRANKLIN..................... Page 29
4.1 Organization and Standing.................................... Page 29
4.2 Authorization, Execution and Delivery; Agreement
Not in Breach................................................ Page 30
4.3 No Legal Bar................................................. Page 30
4.4 Regulatory Approvals......................................... Page 31
4.5 Capitalization and Ownership................................. Page 31
4.6 First Franklin Financial Statements.......................... Page 32
4.7 Tax Matters.................................................. Page 33
4.8 Insurance.................................................... Page 35
4.9 Legal Proceedings............................................ Page 35
4.10 Compliance with Law.......................................... Page 35
4.11 Brokers...................................................... Page 36
4.12 Governmental Authorizations.................................. Page 36
4.13 Supervisory Matters.......................................... Page 37
4.14 Rights and Licenses.......................................... Page 37
4.15 Material Contracts........................................... Page 37
4.16 Properties................................................... Page 38
4.17 Employee Benefit Plans....................................... Page 38
4.18 Absence of Certain Changes or Events......................... Page 40
4.19 Books of Account; Corporate Records......................... Page 40
4.20 Representations and Warranties True on and as of
Closing Date................................................. Page 40
4.21. Reserves for Loan Losses..................................... Page 41
4.22. Labor Relations.............................................. Page 41
4.23 No Undisclosed Liabilities................................... Page 42
4.24 Year 2000 Compliance......................................... Page 42
4.25. Environmental Law Violations................................. Page 43
(1) Environmental Law........................................ Page 43
(2) Hazardous Substance...................................... Page 43
(3) Loan Portfolio Properties and Other Properties Owned..... Page 43
ARTICLE 5 ............................................................. Page 43
COVENANTS AND AGREEMENTS............................................. Page 43
5.1 Pre-Merger Conduct of Business by First Franklin, First
National and the First National Subsidiary................... Page 43
5.2 Pre-Merger Conduct of Business by Smoky
Mountain and BankFirst....................................... Page 46
5.3 Access....................................................... Page 49
5.4 Confidential Information..................................... Page 49
5.5 Proxy Statement.............................................. Page 50
5.6 Furnishing of Information.................................... Page 50
5.7 Filing for all Regulatory Approvals.......................... Page 51
5.8 Increase in Authorized Shares................................ Page 51
(iv)
<PAGE>
5.9 No Control of First Franklin by Smoky Mountain............... Page 51
5.10 Agreements to Use Best Efforts............................... Page 51
5.11 Press Releases and Public Information........................ Page 52
5.12 Updating of the Schedules.................................... Page 52
5.13 Accounting Treatment......................................... Page 52
5.14. Current SEC Reports.......................................... Page 52
5.15 Exchange Act Registration.................................... Page 52
5.16 Indemnification and Insurance................................ Page 53
ARTICLE 6 ............................................................. Page 54
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE.......................... Page 54
6.1 Conditions to Both Parties' Obligation to Close.............. Page 54
(a) Governmental Approvals................................... Page 54
(b) Shareholder Approval..................................... Page 54
(c) Pooling Opinion.......................................... Page 54
(d) Securities Laws.......................................... Page 54
6.2 Conditions to First Franklin's Obligation to Close........... Page 55
(a) Accuracy of Representations and Warranties............... Page 55
(b) Performance of Covenants and Agreements.................. Page 55
(c) No Material Change....................................... Page 55
(d) Fairness Opinion......................................... Page 55
(e) Consent of Other Persons................................. Page 55
(f) Legal Opinion of Counsel................................. Page 56
(g) Updated Smoky Mountain Schedules......................... Page 57
(h) Tax Treatment............................................ Page 57
(i) Outstanding Shares....................................... Page 57
(j) Comfort Letter........................................... Page 58
6.3 Conditions to Smoky Mountain's Obligation to Closing......... Page 58
(a) Accuracy of Representations and Warranties............... Page 58
(b) Performance of Covenants and Agreements.................. Page 58
(c) Consent of Other Persons................................. Page 58
(d) No Material Change....................................... Page 58
(e) Legal Opinion of First Franklin's Counsel................ Page 59
(f) Updated First Franklin Schedules......................... Page 60
(g) Outstanding Shares....................................... Page 60
(h) Resignations of Directors................................ Page 60
(i) Other Information and Actions............................ Page 60
(j) Comfort Letter........................................... Page 60
(v)
<PAGE>
ARTICLE 7 ............................................................. Page 60
TERMINATION.......................................................... Page 60
7.1 Termination.................................................. Page 60
7.2 Effect of Termination........................................ Page 61
7.3 Termination Without Cause.................................... Page 62
ARTICLE 8 ............................................................. Page 62
MISCELLANEOUS........................................................ Page 62
8.1 Smoky Mountain and First National Boards of Directors........ Page 62
8.2 Continuation of First National............................... Page 62
8.3 Expenses..................................................... Page 62
8.4 Entire Agreement; Amendment.................................. Page 62
8.5 Waiver....................................................... Page 63
8.6 Governing Law................................................ Page 63
8.7 Governmental Agencies........................................ Page 63
8.8 Specific Performance......................................... Page 63
8.9 Notices...................................................... Page 63
8.10 No Third Party Beneficiaries................................. Page 65
8.11 No Assignment................................................ Page 65
8.12 Headings..................................................... Page 65
8.13 Termination of Representations and Warranties................ Page 65
8.14 Construction................................................. Page 65
8.15 Counterparts................................................. Page 66
8.16 Severability................................................. Page 66
(vi)
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement") is made and entered
into as of the 19th day of March, 1998, by and between SMOKY MOUNTAIN BANCORP,
INC., 625 Market Street, Knoxville, Tennessee 37902 ("Smoky Mountain") and FIRST
FRANKLIN BANCSHARES, INC., 204 Washington Avenue, Athens, Tennessee 37371-0100
("First Franklin").
W I T N E S S E T H:
WHEREAS, Smoky Mountain, a Tennessee corporation, and a registered bank
holding company under the Bank Holding Company Act of 1956, as amended, (the
"Act"), is the owner of all of the issued and outstanding shares of common stock
of BankFirst, a Tennessee banking corporation, located at 625 Market Street,
Knoxville, Tennessee 37902 ("BankFirst"); BankFirst has two (2) wholly-owned
subsidiaries, Curtis Mortgage Company, Inc. and Eastern Life Insurance Company;
and
WHEREAS, First Franklin, a Tennessee corporation, and a registered bank
holding company under the Act is the owner of all of the issued and outstanding
shares of common stock of First National Bank and Trust Company of Athens, a
national banking association, located at 204 Washington Avenue, Athens,
Tennessee 37371 ("First National"); and First National Bank has one wholly-owned
subsidiary, Friendly Finance Company, Inc., a Tennessee chartered industrial
loan and thrift company, located at 620 Decatur Pike, Athens, Tennessee 37303;
and
WHEREAS, Smoky Mountain is undertaking an underwritten public offering of
Smoky Mountain common stock; and
WHEREAS, the parties hereto deem it desirable for First National to be
acquired by Smoky Mountain through the Merger of First Franklin with and into
Smoky Mountain, pursuant to the applicable laws of the United States and the
State of Tennessee, in accordance with the provisions of this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended; and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interest"; and
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<PAGE>
WHEREAS, the parties hereto desire to enter into this Agreement for the
purpose of setting forth certain representations, warranties, agreements,
covenants, conditions and other provisions with respect to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and other
provisions herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Acquisition Agreement, the following
terms have the definitions indicated:
"Act" shall mean the Bank Holding Company Act of 1956, as amended.
"Affiliate" shall mean, for purposes of Section 3.19 of this
Agreement only, as it applies to Smoky Mountain, BankFirst and BankFirst
Subsidiary, and Section 4.17 of this Agreement only, as it applies to First
Franklin, First National and First National Subsidiary, all persons under common
control with Smoky Mountain, BankFirst, BankFirst Subsidiary, First Franklin,
First National and First National Subsidiary, within the meaning of Sections
4001(a)(14) or (b)(1) of ERISA or any regulations promulgated thereunder, or
Section 414(b) or (c) of the Code.
"Agreement" shall mean this Agreement and Plan of Merger.
"BankFirst" shall mean BankFirst, a Tennessee banking corporation
located at 625 Market Street, Knoxville, Tennessee 37902.
"BankFirst Subsidiaries" shall mean Curtis Mortgage Company, Inc.
and Eastern Life Insurance Company as described in Section 3.1.
"Certificate" shall mean the certificate or certificates
representing the shares of Smoky Mountain Common Stock to be issued in exchange
for the First Franklin Common Stock.
"Closing" shall mean the closing of the transactions contemplated by
this Agreement which shall take place at BankFirst, 625 Market Street,
Knoxville, Tennessee 37902 on June 30, 1998, or as specified in Section 2.3
hereof.
"Closing Date" shall mean June 30, 1998, or such other date on which
the Closing is completed as set forth in Section 2.3 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Page 2 of 66
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<PAGE>
"Confidential Information" shall mean any and all commercial,
financial, technical, or other information regarding Smoky Mountain or First
Franklin, or their respective businesses, properties, and personnel, or those of
their respective subsidiaries, joint ventures, officers, directors, control
persons, or affiliates which is derived or results from one party's access to
the properties, books, contracts, commitments, and records of the other pursuant
to the provisions of this Agreement, whether obtained before or after the
execution of this Agreement, except for information (i) otherwise known to the
acquiring party, (ii) already in the public domain, (iii) released without
restriction by the proprietor of the information to another person, or (iv)
received by the acquiring party on a non-confidential basis from another person
lawfully possessing and lawfully entitled to disclose such information.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Effective Time" shall have the meaning assigned in Section 2.2 of
this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean BankFirst, and Smoky Mountain shall
deposit with the BankFirst, Trust Department, for the benefit of Eligible First
Franklin Shareholders, Certificates representing shares of Smoky Mountain Common
Stock for exchange in accordance with the provisions of Section 2.6 of this
Agreement.
"Exchange Ratio" shall have the meaning described in Section 2.5(b)
hereof.
"FDIA" shall mean the Federal Deposit Insurance Act of 1950, as
amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FRB" shall have the same meaning as Federal Reserve.
"Federal Reserve" shall mean the Board of Governors of the Federal
Reserve System and shall include the Federal Reserve Bank of Atlanta acting
under delegated authority.
"First Franklin" shall mean First Franklin Bancshares, Inc., a
Tennessee corporation and a registered bank holding company with its principal
office located at 204 Washington Avenue, Athens, Tennessee 37371-0100.
"First Franklin Common Stock" shall mean the Five Dollar ($5.00) par
value common stock of which 400,000 shares are authorized and 164,125 shares are
issued and outstanding.
Page 3 of 66
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<PAGE>
"First Franklin Employee Plans" shall mean First National's 401-K
Profit Sharing Plan adopted on January 1, 1984, as amended on May 5, 1994, and
First National Pension Plan adopted on January 1, 1973, as amended on May 21,
1996.
"First Franklin Financial Statements" shall mean First Franklin's
Audited Consolidated Financial Statements for the calendar years ended December
31, 1997 and 1996.
"First Franklin Interim Financial Statements" shall mean First
Franklin's unaudited consolidated statement of condition (including related
notes and schedules, if any), statement of changes in shareholders' equity, and
statement of changes in financial position or cash flows (including related
notes and schedules, if any) for each quarter ended after December 31, 1997.
"First Franklin Shareholders" means the holders of record (other
than a dissenting shareholder who perfects statutory dissenter's rights) of all
of the issued and outstanding First Franklin Common Stock immediately prior to
the Effective Time.
"First Franklin Shareholders' Meeting" shall mean the special
meeting of shareholders to be held pursuant to Section 2.7(a) of this Agreement.
"First Franklin Tax Returns" shall mean all federal, state, local
and foreign tax returns, reports and declarations of estimated tax with respect
to income, sales, and all other applicable taxes, and all other tax returns and
reports (including, without limitation, income, profit, franchise, sales, use,
real property, personal property, ad valorem, excise, employment, social
security, and wage withholding taxes of every kind, character, or description
imposed by any governmental or quasi-governmental authority), the filing of
which by First Franklin, First National and First National Subsidiary is
required by applicable law (without regard to extensions of time permitted by
law, regulation, or otherwise) at or before the Effective Time.
"First Franklin Taxes" shall mean income, profits, gross receipts,
franchise, value added, payroll, sales, employment, use, property, withholding,
excise and occupancy taxes, and any penalties, interest, or additions to tax
imposed thereon or in connection therewith, due or claimed to be due by any
taxing authority in connection with any of the First Franklin Tax Returns.
"First National" shall mean the First National Bank and Trust
Company, a national banking association, located at 204 Washington Avenue,
Athens, Tennessee 37371.
"First National Subsidiary" shall mean Friendly Finance Company,
Inc., a Tennessee chartered industrial loan and thrift company, located at 620
Decatur Pike, Athens, Tennessee 37303.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
Page 4 of 66
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<PAGE>
"Governmental Approvals" shall mean the approval of the FRB, the
FDIC, the SEC and/or the TDFI and any other regulatory agency which approves
transactions of this type, "Regulatory Approval" and "Governmental Approval" are
used interchangeably in this document.
"IRS" shall mean the Internal Revenue Service.
"Merger" shall mean the Merger of First Franklin with and into Smoky
Mountain pursuant to the applicable laws of the United States and the State of
Tennessee, and in accordance with the provisions of this Agreement.
"OCC" shall mean the Office of the Comptroller of the Currency, a
bureau of the United States Department of the Treasury and the regulator of
national banks, or any successor agency.
"Other Plan" shall mean any deferred compensation, bonus, stock
option, stock purchase, or other employee benefit plan, agreement, commitment,
or arrangement except a Pension Plan or a Welfare Plan.
"Parties" shall mean Smoky Mountain and First Franklin collectively;
each individually may sometimes be referred to as a "Party."
"Pension Plan" shall mean any employee pension benefit plan as such
term is defined in Section 3(2) of ERISA which is maintained by the referenced
Party.
"Person" shall mean any natural person, fiduciary, corporation,
partnership, joint venture, business trust or any other entity of any kind.
"Previously Disclosed" shall mean information (i) delivered prior to
the date of this Agreement in the manner prescribed for the giving of notices
pursuant to Section 8.9 of this Agreement and describing in reasonable detail
the matters contained therein, or (ii) disclosed prior to the date of this
Agreement in any report or registration statement filed (or required to be
filed) by any party to this Agreement and delivered by that party to the other
party hereto.
"Proxy Statement" shall mean the joint proxy statement to be used by
First Franklin and Smoky Mountain to solicit the approval of its shareholders of
this Agreement.
"Records" means with respect to Smoky Mountain, BankFirst and
BankFirst Subsidiaries, First Franklin, First National and First National
Subsidiary, all available records, original instruments and other documentation,
pertaining to their respective assets,
Page 5 of 66
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<PAGE>
liabilities, the Smoky Mountain Common Stock and the First Franklin Common
Stock, the deposits and the loans, and all other business and financial records
which are necessary or customary for use in the conduct of their respective
businesses, as it was conducted prior to the Closing Date.
"Registration Statement" shall mean the registration statement on
form S-1 filed by Smoky Mountain with the SEC to register shares for an
underwritten public offering of Smoky Mountain Common Stock.
"Regulatory Approval" shall mean the same as Governmental Approval.
"Regulatory Authorities" shall collectively mean the FRB, the FDIC,
the SEC, the TDFI, or any other state or federal governmental or
quasi-governmental entity which has, or may hereafter have, jurisdiction over
any of the transactions described in this Agreement
"S-4 Registration Statement" shall mean the registration statement
filed with the SEC covering the shares of Smoky Mountain Common Stock issuable
in the merger and containing a Prospectus/Proxy Statement with respect to each
of the Shareholder's Meetings.
"SEC" shall mean the United States Securities and Exchange
Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shareholders Meetings" shall mean the special meetings of the
shareholders of Smoky Mountain and First Franklin to be held pursuant to Section
2.7(a) and Section 2.7(b) of this Agreement, including any adjournment or
adjournments thereof.
"Smoky Mountain" shall mean Smoky Mountain Bancorp, Inc., a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended, (the "Act"), which is the owner of all of the issued and outstanding
shares of common stock of BankFirst, a Tennessee banking corporation, located at
625 Market Street, Knoxville, Tennessee 37902.
"Smoky Mountain Common Stock" shall mean the 3,000,000 authorized
shares of the voting common stock of Smoky Mountain, $2.50 par value of which
Smoky Mountain has 1,275,079 shares issued and outstanding.
"Smoky Mountain Financial Statements" shall mean Smoky Mountain's
audited, consolidated financial statements for the calendar years ended December
31, 1997 and 1996.
"Smoky Mountain's Interim Financial Statements" shall mean Smoky
Mountain's unaudited consolidated statement of condition (including related
notes and schedules, if any), statement of changes in stockholder's equity, and
statement of changes in financial
Page 6 of 66
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<PAGE>
position of cash-flows for each quarter ended after December 31, 1997.
"Smoky Mountain's Shareholders' Meeting" shall mean a special
meeting of Smoky Mountain's shareholders to be held pursuant to Section 2.7(b)
of this Agreement.
"Smoky Mountain Taxes" shall mean income, profits, gross, receipts,
franchise, value added, payroll, sales, employment, use, property, withholding,
excise, and occupancy taxes, and any penalties, interest, or additions to tax
imposed thereon or in connection therewith, due or claimed to be due by any
taxing authority in connection with any of the Smoky Mountain Tax Returns.
"Smoky Mountain Tax Returns" shall mean all federal, state, local,
and foreign tax returns, reports and declarations of estimated tax with respect
to income, sales, and all other applicable taxes, and all other tax returns and
reports (including, without limitation, income, profit, franchise, sales, use,
real property, personal property, ad valorem, excise, employment, social
security, and wage withholding taxes, of every kind, character, or description
imposed by any governmental or quasi-governmental authority), the filing of
which by Smoky Mountain, BankFirst, or the BankFirst Subsidiaries is required by
applicable law (without regard to extensions of time permitted by law,
regulation, or otherwise) at or before the Effective Time.
"Stock Event" shall mean any subdivision of the outstanding shares
of Smoky Mountain Common Stock into a greater number of shares by means of a
stock split, stock dividend, or reclassification.
"Subsidiary" or "Subsidiaries" shall mean all of those corporations,
banks, associations or other entities of which the entity in question owns or
controls 5% or more of the outstanding equity securities either directly or
through an unbroken chain of entities as to each of which 5% or more of the
outstanding equity securities is owned directly or indirectly by its parent;
provided, however, that there shall not be included any such entity acquired
through foreclosure or in satisfaction of a debt previously contracted in good
faith, any such entity that owns or operates an automatic teller machine
interchange network, any such entity that is a joint venture of the parent or of
a Subsidiary of the parent, or any such entity the equity securities of which
are owned or controlled in a fiduciary capacity or through a small business
investment corporation.
"TDFI" shall mean the Tennessee Department of Financial
Institutions.
"Takeover Proposal" shall have the meaning assigned in Section
5.1(j) or Section 5.2(j) of this Agreement, as the case may be.
"Welfare Plan" shall mean any "employee welfare benefit plan" as
such term is defined in Section 3(1) of ERISA.
Page 7 of 66
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<PAGE>
ARTICLE 2
MERGER OF SMOKY MOUNTAIN AND FIRST FRANKLIN
2.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time of the Merger, First Franklin shall be merged into and with Smoky
Mountain in accordance with the provisions of and the effect provided in
Tennessee Code Annotated ss.48-21- 101, et. seq., of the Tennessee Business
Corporation Act. Smoky Mountain shall be the surviving corporation and shall be
governed by the laws of the State of Tennessee.
2.2. Effective Time of the Merger. Subject to the provisions of this
Agreement, Articles of Merger shall be duly prepared, executed and acknowledged
by Smoky Mountain and First Franklin and thereafter delivered to the Secretary
of State of the State of Tennessee for filing, as provided in the Tennessee
Business Corporation Act, Tennessee Code Annotated ss. 48-21-101, et seq., as
soon as practical on or after the Closing Date. The Merger shall become
effective upon the filing of the Articles of Merger with the Secretary of State
of the State of Tennessee, or at such other time as provided in the Articles and
Plan of Merger as attached as Schedule 2.2 executed and acknowledged by Smoky
Mountain and First Franklin.
2.3 Closing. The closing of the Merger will take place at 10:00 A.M. on
June 30, 1998 at the offices of BankFirst, 625 Market Street, Knoxville,
Tennessee 37902, unless another time, date or place is agreed to in writing by
the parties hereto. If Regulatory Approvals of the Merger have not been
received, the Closing Date will be extended, but in any event not later than
September 30, 1998. If the Closing Date is after June 30, 1998, the Closing
shall be the last business day of the month after Regulatory Approval.
2.4 Effect of the Merger. At the Effective Time,
(a) The separate existence of First Franklin shall cease and First
Franklin shall be merged with and into Smoky Mountain;
(b) The Charter of Smoky Mountain as in effect immediately prior to
the Effective Time, shall be the charter of the surviving corporation; and
(c) The Bylaws of Smoky Mountain as in effect immediately prior to
the Effective Time shall be the bylaws of the corporation.
Page 8 of 66
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<PAGE>
2.5 Effect of the Merger on the Capital Stock. As of the Effective Time by
virtue of the Merger, and without any action on the part of the holders of any
shares of First Franklin Common Stock:
(a) Cancellation of Treasury Stock. All shares of First Franklin
Common Stock that are owned by First Franklin as treasury stock shall be
canceled and retired and shall cease to exist, and no stock of Smoky Mountain or
other consideration shall be delivered in exchange therefor.
(b) Conversion of First Franklin Common Stock. Each issued and
outstanding share of First Franklin Common Stock (other than shares to be
canceled in accordance with Section 2.5(a) above) shall without any action on
the part of the holder thereof be converted into four point four one zero
(4.410) fully paid and non-assessable shares of Smoky Mountain Common Stock
("Exchange Ratio"). All such shares of First Franklin Common Stock shall no
longer be outstanding, and shall automatically be canceled and retired and shall
cease to exist, and each certificate previously representing any such shares
shall thereafter represent the shares of Smoky Mountain Common Stock into which
First Franklin Common Stock has been converted. Certificates previously
representing shares of First Franklin Common Stock shall be exchanged for
Certificates representing whole shares of Smoky Mountain Common Stock issued in
consideration therefor upon the surrender of such certificates in accordance
with Section 2.6, without interest. Fractional shares shall be paid for by Smoky
Mountain in cash based on a value of Sixty Dollars ($60.00) per share of Smoky
Mountain Common Stock.
(c) Dissenter's Rights. If holders of shares of First Franklin
Common Stock are entitled to dissent from the Merger and obtain payment for
shares under Tennessee Code Annotated ss. 48-23-101, et seq., issued and
outstanding shares of First Franklin Common Stock held by a dissenting
shareholder who has not voted in favor of the Merger and who has delivered
written demand in accordance with Tennessee Code Annotated ss. 48-23-202 shall
not be converted as described in Section 2.5(b) above, but shall from and after
the Effective Time represent only the right to receive such consideration as may
be determined to be due to such dissenting shareholder pursuant to Tennessee
Code Annotated ss. 48-23-101, et seq.; provided, however, that each share of
First Franklin Common Stock outstanding immediately prior to the Effective Time
and held by a dissenting shareholder who shall, after the Effective Time,
withdraw his demand to obtain payment for shares, or lose his/her dissenter's
rights, in either case, pursuant to Tennessee Code Annotated ss. 48-23-101, et
seq., shall be deemed to be converted into shares of Smoky Mountain Common Stock
as of the Effective Time, based upon the Exchange Ratio as provided in Section
2.5(b).
2.6 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Smoky Mountain shall
deposit or cause to be deposited with BankFirst, or such other bank or trust
company designated by Smoky Mountain (and reasonably acceptable to First
Franklin) for the benefit of the holders of
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shares of First Franklin Common Stock, for exchange in accordance with this
Section 2 through the Exchange Agent, Certificates representing the shares of
Smoky Mountain Common Stock (such Certificates of Smoky Mountain Common Stock,
together with any dividends or other distributions with respect thereto, and
amounts sufficient to pay for fractional shares based on the Exchange Ratio,
being hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 2.5(b) upon conversion of outstanding shares of First Franklin Common
Stock.
(b) Exchange Procedures. As soon as reasonably practical after the
Effective Time, the Exchange Agent will send to each First Franklin shareholder
whose stock shall have been converted into Smoky Mountain Common Stock a notice
and transmittal form advising such shareholder of the effectiveness of the
Merger and the procedure for surrender to the Exchange Agent of outstanding
certificates formerly evidencing First Franklin Common Stock in exchange for new
certificates for Smoky Mountain Common Stock. The Exchange Agent shall send: (1)
a letter of transmittal, which shall specify that delivery shall be effective,
and risk of loss and title to the certificate shall pass, only upon delivery of
the certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Smoky Mountain and First Franklin may reasonably specify;
and (2) instructions for use in effecting the surrender of the certificates
evidencing First Franklin Common Stock in exchange for certificates representing
shares of Smoky Mountain Common Stock. Upon surrender of a certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, the holder of such certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Smoky Mountain Common Stock which such holder has the right to receive in
respect of the certificate surrendered pursuant to the provisions of this
Section 2 (after taking to account all shares of First Franklin Common Stock
then held by such holder) and the certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of First Franklin Common
Stock, which is not registered in the transfer records of First Franklin, a
certificate representing the proper number of shares of Smoky Mountain Common
Stock may be issued to a transferee, if the certificate representing such First
Franklin Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer. Until surrendered as
contemplated by this Section 2.6, each certificate representing shares of First
Franklin Common Stock shall be deemed at anytime after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of Smoky Mountain Common Stock and cash in lieu of
fractional shares of Smoky Mountain Common Stock as contemplated by Section 2.5.
(c) Distributions with Respect to the Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to Smoky Mountain Common Stock with a record date after the Effective
Time shall be paid to the holder of any unsurrendered certificate with respect
to the shares of Smoky Mountain Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to such holder pursuant to
Section 2.5(b) until the holder of such certificate shall surrender such
certificate. Subject to the effect of applicable laws, following the surrender
of any such certificate, there shall be paid to the holder of the certificates
representing whole shares of Smoky Mountain Common
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Stock issued in exchange therefor, without interest, (1) at the time of such
surrender, the amount of cash payable with respect to a fractional share of
Smoky Mountain Common Stock to which such holder is entitled pursuant to Section
2.5(b), and the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to such whole shares
of Smoky Mountain Common Stock, and (2) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time, but prior to surrender and payment date subsequent to surrender
payable with respect to such whole shares of Smoky Mountain Common Stock.
(d) No Further Ownership Rights in First Franklin Common Stock. All
shares of Smoky Mountain Common Stock issued upon conversion of shares of First
Franklin Common Stock in accordance with the terms hereof (including any cash
paid pursuant to Section 2.5(b) or 2.6(c)) shall be deemed to have been issued
in full satisfaction of all rights pertaining to such shares of First Franklin
Common Stock, subject, however, to the surviving corporation's obligations to
pay any dividends or make any other distributions with a record date prior to
the Effective Time, which may have been declared or made by First Franklin on
such shares of First Franklin Common Stock in accordance with the terms of this
Agreement on or prior to the Effective Time and which remain unpaid at the
Effective Time, and there shall be no further registration of transfers on the
stock transfer books of Smoky Mountain of the shares of First Franklin Common
Stock, which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, certificates are presented to Smoky Mountain for any reason,
they shall be canceled and exchanged as provided in this Section 2.
(e) No Fractional Shares. No certificates or script representing
fractional shares of Smoky Mountain Common Stock shall be issued upon the
surrender or exchange of certificates and such fractional share interest will
not entitle the owner thereof to vote or to any rights of a shareholders of
Smoky Mountain.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the shareholders of First Franklin for six months
after the Effective Time shall be delivered to Smoky Mountain, upon demand, and
any shareholders of First Franklin who have not theretofore complied with this
Section 2 shall thereafter look only to Smoky Mountain for payment of their
claim for Smoky Mountain Common Stock, any cash in lieu of fractional shares of
Smoky Mountain Common Stock, and any dividends or distributions with respect to
Smoky Mountain Common Stock.
(g) No Liability. Neither Smoky Mountain nor First Franklin shall be
liable to any holder of shares of First Franklin Common Stock or Smoky Mountain
Common Stock for such shares (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
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2.7 Shareholders' Meetings.
(a) Simultaneous with the execution of this Agreement, the members
of the Board of Directors of First Franklin shall execute the letter in the form
attached hereto as Schedule 2.7(a) agreeing, inter alia, to vote for and support
the Merger. First Franklin shall call a special meeting of First Franklin
shareholders in accordance with the applicable provisions of Tennessee Code
Annotated ss. 48-21-104 for the purpose of considering and voting on this
Agreement and the transactions contemplated hereby. Subject to the effectiveness
of the S-4 Registration Statement, the First Franklin Shareholders' Meeting
shall be held as soon as practicable.
(b) Smoky Mountain shall call a special meeting of Smoky Mountain
shareholders entitled to vote on the Merger in accordance with the applicable
provisions of Tennessee Code Annotated ss.48-21-104 for the purpose of
considering and voting on this Agreement and the transactions contemplated
hereby. Subject to the effectiveness of the S-4 Registration Statement, the
Smoky Mountain Shareholders' Meeting shall be held as soon as practicable. The
Board of Directors of Smoky Mountain, consistent with its fiduciary duties and
to the extent permitted by law, shall use its best efforts to solicit the
requisite vote for approval of the Merger by the shareholders of Smoky Mountain
and shall recommend to such shareholders that they approve the Merger and adopt
and approve this Agreement.
2.8 Regulatory Approvals. Subject to the terms and conditions of this
Agreement, Smoky Mountain and First Franklin shall cooperate, and shall cause
each of their subsidiaries to cooperate in the preparation and submission by
Smoky Mountain and First Franklin as promptly as reasonably practicable such
applications, petitions and other documents and materials as any of them may
reasonably deem necessary or desirable to the FRB, the FDIC, the SEC and the
TDFI, the respective shareholders of Smoky Mountain and First Franklin, and any
other persons for the purpose of obtaining any approvals or consents necessary
to consummate the transactions contemplated by this Agreement. Prior to making
any such filings with any regulatory authority or making any written disclosures
with respect to the transactions contemplated hereby to shareholders or to any
third person (such as mailings to shareholders or press releases), the parties
shall submit to each other the materials to be filed, mailed or released. Any
materials shall be reasonably acceptable to all parties, prior to the filing
with any regulatory authorities, or the disclosures to shareholders or to any
third person, except to the extent that any person is legally required to
proceed prior to obtaining approvals from the other parties.
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2.9 Certain Undertakings.
(a) Undertakings of First Franklin. First Franklin undertakes and
agrees:
(1) To adopt through action of its Board of Directors this
Agreement and to join with Smoky Mountain in executing and delivering the same.
(2) To cooperate with Smoky Mountain in the preparation of the
S-4 Registration Statement under the Securities Act, and to furnish Smoky
Mountain with all information concerning First Franklin and First National and
the First National Subsidiary reasonably requested by Smoky Mountain or required
for (i) inclusion in the S-4 Registration Statement to be filed by Smoky
Mountain for the purpose of registering the shares of Smoky Mountain Common
Stock to be exchanged for shares of First Franklin Common Stock in the Merger;
(ii) any application made by Smoky Mountain to any governmental or regulatory
body in connection with the transactions contemplated by this Agreement; and
(iii) finalizing and distributing all material in furtherance of the purposes
set forth in this Agreement.
(3) To use its best efforts and to take any and all necessary
or appropriate actions (including the payment of all required filing fees, other
than filing fees required to be paid by Smoky Mountain), and to cause its
officers, directors, employees, agents, and representatives to use their best
efforts and to take all steps in good faith within their power, to cause to be
fulfilled those of the conditions precedent to its or to Smoky Mountain's (or
their respective subsidiaries') obligations to consummate the Merger which are
dependent upon its or their actions, including, but not limited to, (i)
requesting the delivery of appropriate opinions and letters from its counsel;
and (ii) obtaining any consents, approvals, or waivers required to be obtained
from other parties to loan agreements or other contracts material to its
business or the business of First National.
(4) To join with Smoky Mountain, upon the fulfillment of the
conditions precedent to First Franklin's obligations to consummate the Merger,
in executing and delivering such documents and making such filings as shall
cause the consummation of the Merger.
(5) To keep Smoky Mountain closely advised of all material
developments relevant to the consummation of the Merger, to give prompt written
notice to Smoky Mountain upon becoming aware of any impending or threatened
occurrence of any event that would cause or constitute a breach of any of the
representations and warranties of First Franklin contained or referred to in
this Agreement (including, without limitation, any representations and
warranties made on behalf of First National and the First National Subsidiary),
and to use its best efforts to prevent or promptly to remedy the same.
(6) To maintain, and to cause its officers, directors,
employees, agents, and representatives (including the First National Subsidiary
and its officers, directors,
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employees, agents and representatives) to maintain, in accordance with the
provisions of Section 5.4 hereof, the confidentiality of all Confidential
Information, abstracts and derivatives thereof, furnished to it or them by Smoky
Mountain or any Smoky Mountain Subsidiary concerning its business, assets, and
financial condition; and not to use, and to cause its officers, directors,
employees, agents and representatives (including First National and the First
National Subsidiary and their respective officers, directors, employees, agents,
and representatives) to not use, such information for a period of two (2) years,
except in furtherance of the transactions contemplated by this Agreement; and to
return, and to cause its officers, directors, employees, agents, and
representatives (including First National and the First National Subsidiary and
their respective officers, directors, employees, agents and representatives) to
return, if this Agreement is terminated, all documents and copies of
Confidential Information, abstracts and derivatives thereof, received from Smoky
Mountain or any Smoky Mountain Subsidiary.
(7) The undertakings of First Franklin set forth in this
Section 2.9(a) shall terminate on the Effective Time.
(b) Undertakings of Smoky Mountain. Smoky Mountain undertakes and
agrees:
(1) To adopt through action of its Board of Directors this
Agreement and to join with First Franklin in executing and delivering the same.
(2) To prepare or cause to be prepared, as soon as practicable
after the date of this Agreement, a draft of the S-4 Registration Statement, to
share such draft with First Franklin, and to cooperate with First Franklin in
finalizing such S-4 Registration Statement (and any amendments thereto) and to
use its best efforts to cause the S-4 Registration Statement to become effective
as soon as practicable.
(3) To use its best efforts and to take any and all necessary
or appropriate actions (including the payment of all required filing fees, other
than filing fees required to be paid by First Franklin) and to cause its
officers, directors, employees, agents and representatives to use their best
efforts and to take all steps in good faith within their power, to cause to be
fulfilled those of the conditions precedent to its or First Franklin's (or their
respective Subsidiaries') obligations to consummate the Merger which are
dependent upon its or their actions, including but not limited to (i) requesting
the delivery of appropriate opinions and letters from its counsel; and (ii)
obtaining any consents, approvals, or waivers required to be obtained from other
parties to loan agreements or other contracts material to its business or the
business of the Smoky Mountain Subsidiary.
(4) To join with First Franklin, upon the fulfillment of the
conditions precedent to Smoky Mountain's obligations to consummate the Merger,
in executing and delivering such documents and making such filings as shall
cause the consummation of the Merger.
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(5) To keep First Franklin closely advised of all material
developments relevant to the consummation of the Merger, to give prompt written
notice to First Franklin upon becoming aware of any impending or threatened
occurrence of any event that would cause or constitute a breach of any of the
representations and warranties of Smoky Mountain contained or referred to in
this Agreement, (including, without limitation, any representations and
warranties made on behalf of BankFirst and the BankFirst Subsidiaries), and to
use its best efforts to prevent or promptly to remedy the same.
(6) To maintain, and to cause its officers, directors,
employees, agents, and representatives (including BankFirst and the BankFirst
Subsidiaries and their respective officers, directors, employees, agents and
representatives) to maintain, in accordance with the provisions of Section 5.4
hereof, the confidentiality of all Confidential Information, abstracts and
derivatives thereof, furnished to it or them by First Franklin, First National
or the First National Subsidiary concerning their respective businesses, assets,
and financial condition; and not to use, and to cause their respective officers,
directors, employees, agents and representatives (including BankFirst and the
BankFirst Subsidiaries and their officers, directors, employees, agents and
representatives) not to use, Confidential Information for a period of two (2)
years except in furtherance of the transactions contemplated by this Agreement;
and to return, and to cause their respective officers, directors, employees,
agents and representatives (including BankFirst and the BankFirst Subsidiaries
and their respective officers, directors, employees, agents and representatives)
to return, if this Agreement is terminated, all documents and copies of
Confidential Information, abstracts and derivatives thereof, received from First
Franklin, First National and the First National Subsidiary.
(7) The undertakings of Smoky Mountain set forth in Section
2.9(b) shall terminate at the Effective Time.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SMOKY MOUNTAIN
As of the date hereof and as of the Closing Date, Smoky Mountain
represents and warrants on its behalf and on behalf of BankFirst and the
BankFirst Subsidiaries to First Franklin as follows:
3.1 Organization and Corporate Authority. Smoky Mountain, BankFirst,
Curtis Mortgage Company and Eastern Life Insurance Company are corporations duly
incorporated, validly existing, and in good standing under the laws of the State
of Tennessee. BankFirst, a wholly-owned subsidiary of Smoky Mountain, is a
Tennessee state banking institution, duly incorporated, validly existing, and in
good standing under the laws of the State of Tennessee. Curtis Mortgage Company,
Inc., a wholly-owned subsidiary of BankFirst, is a Tennessee corporation, duly
incorporated, validly existing, and in good standing under the laws of the State
of Tennessee. Eastern Life Insurance Company, a wholly-owned subsidiary of
BankFirst,
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is an insurance corporation, duly incorporated, validly existing, and in good
standing under the laws of the State of Tennessee. Smoky Mountain, BankFirst and
the BankFirst Subsidiaries have all necessary corporate power and authority to
own or lease their respective properties and to conduct their respective
businesses as they are now being conducted, are duly qualified to do business
and are in good standing in every jurisdiction in which the nature of the
business conducted by them or the character or location of the properties owned
or leased by them makes such qualification necessary, except to the extent that
any failure to so qualify would not, in the aggregate, have a material adverse
effect on the business, financial condition, or results of operations of Smoky
Mountain, BankFirst or the BankFirst Subsidiaries, taken as a whole. The deposit
accounts of BankFirst are insured by the FDIC to the full extent permitted under
applicable law and the rules and regulations of the FDIC. The Charters and
Bylaws of Smoky Mountain, BankFirst, Curtis Mortgage Company and Eastern Life
Insurance Company, and all amendments thereto to the date hereof (true, correct,
and complete copies of which are attached hereto as Schedule 3.1) are in full
force and effect as of the date of this Agreement. Smoky Mountain and BankFirst
have taken such action and executed and filed such documents and notices as may
be necessary to enable BankFirst to exercise the powers conferred on Tennessee
banking corporations.
3.2 Authorization, Execution and Delivery; Agreement Not in Breach.
(a) Smoky Mountain has all requisite corporate power and authority
to execute and deliver this Agreement and Plan of Merger and to consummate the
transactions contemplated hereby. This Agreement, and all other agreements
contemplated to be executed in connection herewith by Smoky Mountain, have been
(or upon execution will have been) duly executed and delivered by Smoky
Mountain, have been (or upon execution will have been) duly authorized by the
Smoky Mountain Board of Directors, and the matter will be submitted to a
specially called meeting of the Smoky Mountain Shareholders to be held as
provided in Section 2.7(b). Thereafter, assuming proper shareholder approval, no
other corporate proceedings on the part of Smoky Mountain are (or will be)
necessary to authorize such execution and delivery, and this Agreement
constitutes (or upon execution will constitute) the legal, valid and enforceable
obligation of Smoky Mountain, subject, as to enforceability, to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, and to the application of equitable
principles and judicial discretion.
(b) The execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby and the fulfillment of the terms hereof
will not result in a breach of any of the terms or provisions of, or constitute
a default under (or an event which, with the passage of time or the giving of
notice or both, would constitute a default under), or conflict with, or permit
the acceleration of any obligation under, any mortgage, lease, covenant,
agreement, indenture or other instrument to which any of Smoky Mountain,
BankFirst or BankFirst Subsidiaries is a party or by which it or its property or
any of its assets are bound; the Restated Charter or Bylaws of Smoky Mountain;
the Charter or Bylaws of BankFirst, the Charter or Bylaws of BankFirst
Subsidiaries; or any judgment, decree, order or award of any court, governmental
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body or arbitrator by which either Smoky Mountain, BankFirst or BankFirst
Subsidiaries is bound; or any permit, concession, grant, franchise, license,
law, statute, ordinance, rule or regulation applicable to Smoky Mountain or its
properties; or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever upon the property or assets of Smoky Mountain, except that the
Government Approvals shall be required in order for Smoky Mountain to consummate
this Agreement.
(c) The shares of Smoky Mountain Common Stock to be issued to
Eligible First Franklin Shareholders pursuant to the Merger and as contemplated
in this Agreement are duly authorized and, when properly issued and delivered
following consummation of the Merger, will be validly issued, fully paid and
nonassessable. Such shares of Smoky Mountain Common Stock will be delivered to
First Franklin Shareholders pursuant to the terms of this Agreement free and
clear of all claims, encumbrances, security interests and liens whatsoever and
will be fully transferrable by any such holder without any restrictions required
under federal or applicable state securities laws, except restrictions
applicable to such holders who are deemed "affiliates" of First Franklin under
Rule 145 under the Securities Act.
3.3 No Legal Bar. Smoky Mountain is not a party to, subject to or bound by
any agreement, judgment, order, writ, prohibition, injunction or decree of any
court or other governmental body of competent jurisdiction which would prevent
the execution of this Agreement by Smoky Mountain, its delivery to First
Franklin or the consummation of the transactions contemplated hereby, and no
action or proceeding is pending against Smoky Mountain in which the validity of
this Agreement, any of the transactions contemplated hereby or any action which
has been taken by any of the parties in connection herewith or in connection
with any of the transactions contemplated hereby is at issue.
3.4 Regulatory Approvals. No consent, approval, order or authorization of,
or registration, declaration or filing with, any federal, state or local
governmental authority is required to be made or obtained by Smoky Mountain in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby by Smoky Mountain, except for (a) the
prior approval of the FRB of the Agreement under the Act; (b) the prior approval
of the FDIC of the Agreement; (c) the approval of the SEC; (d) the prior
approval of the TDFI under Tennessee Code Annotated ss. 45-2-1401 et seq and the
regulations promulgated by the TDFI thereunder; and (e) a Proxy Statement in
definitive form relating to the Smoky Mountain Stockholders Meeting.
3.5 Capitalization. The authorized capital stock of Smoky Mountain
consists of 3,000,000 shares of voting Common Stock of par value of Two Dollars
and Fifty Cents ($2.50) per share ("Smoky Mountain Common Stock"); 1,000,000
shares of non-voting Common Stock of par value of Two Dollars and Fifty Cents
($2.50) per share ("Non-Voting Common Stock"), and 1,000,000 shares of preferred
stock of par value of Five Dollars ($5.00) per share ("Smoky Mountain Preferred
Stock"). As of the date of this Agreement, 1,275,079 shares of Smoky Mountain
Common Stock are issued and outstanding and 215,805 shares of Smoky Mountain
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Preferred Stock are issued and outstanding, which are presently convertible at
the option of the holders thereof to 133,259 shares of Smoky Mountain Common
Stock. Additionally, Smoky Mountain is responsible to issue, when vested and if
exercised, 201,286 shares of Smoky Mountain Common Stock to option holders. As
of February 10, 1998, 93,693 shares are vested and exercisable by the option
holders. In addition, Smoky Mountain is holding 1,141 shares of Smoky Mountain
Common Stock as treasury stock. No shares of Non-Voting Common Stock are issued
and outstanding. All of the outstanding Smoky Mountain Common Stock is validly
issued, fully paid, and non-assessable, and has not been issued in violation of
any preemptive rights of any Smoky Mountain Shareholder. BankFirst is a
wholly-owned subsidiary of Smoky Mountain. Curtis Mortgage Company, Inc. and
Eastern Life Insurance Company are wholly-owned subsidiaries of BankFirst.
3.6 Smoky Mountain Financial Statements. Smoky Mountain has delivered and,
to the extent reference is made to financial statements not yet available or
capable of development, will deliver to First Franklin true and complete copies
of: (i) Smoky Mountain's audited Consolidated Financial Statements for the
calendar years ended December 31, 1997, 1996 and 1995; and (ii) Smoky Mountain's
unaudited consolidated financial statements for each of the calendar quarters in
calendar year 1998 and thereafter, ending prior to the Closing Date. Such
financial statements and the notes thereto present fairly, or will present
fairly when issued, in all material respects, the consolidated financial
position of Smoky Mountain at the respective dates thereof and the consolidated
results of operations and consolidated cash flow of Smoky Mountain for the
periods indicated, and in each case in conformity with GAAP consistently applied
and maintained, subject to normal year-end adjustments.
3.7 Tax Matters. Except as set forth in Schedule 3.7 hereto:
(a) Smoky Mountain, BankFirst and BankFirst Subsidiaries have, or,
in the case of returns which become due after the date hereof and at or before
the Effective Time of the Merger, will have, prior to the Effective Time of the
Merger, duly filed with the appropriate governmental agencies all federal,
state, local and foreign tax returns, reports, and declarations of estimated tax
with respect to income, sales, and all other applicable taxes, and all other tax
returns and reports, the filing of which is required by applicable law (without
regard to extensions of time permitted by law, regulation, or otherwise) at or
before the Effective Time of the Merger (including, without limitation, income,
profit, franchise, sales, use, real property, ad valorem, excise, personal
property, employment, social security, and wage withholding taxes of every kind,
character, or description imposed by any governmental or quasi-governmental
authority). All of the Smoky Mountain Tax Returns are (or, in the case of
returns becoming due after the date hereof and at or before the Effective Time
of the Merger, will be) accurate and complete in all material respects.
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(b) Smoky Mountain, BankFirst and the BankFirst Subsidiaries have
collected and withheld all taxes that they are or have been required to collect
or withhold and have timely submitted all such collected and withheld amounts to
the appropriate authorities. Smoky Mountain, BankFirst and the BankFirst
Subsidiaries are in compliance with the back-up withholding and information
reporting requirements under the Code and the rules and regulations of the IRS
thereunder.
(c) All federal, state, local, and foreign taxes due and payable
pursuant to the Smoky Mountain Tax Returns or pursuant to any installments of
estimated taxes, and all other taxes, assessments, deficiencies, levies,
imposts, duties, license fees, registration fees, withholding, or other similar
governmental charges, and any penalties, interest, or additions to tax imposed
thereon or in connection therewith, due or claimed to be due by any taxing
authority, have been accrued , adequately reserved against, or paid.
(d) The reserves for taxes contained in the Smoky Mountain Financial
Statements are adequate to cover the payment of all liabilities of Smoky
Mountain, BankFirst and the BankFirst Subsidiaries for federal, state, local,
and foreign taxes (including installments of estimated taxes and all other
taxes, assessments, deficiencies, levies, imposts, duties, license fees,
registration fees, withholding, or other similar governmental charges), and any
penalties, interest, or additions to tax imposed thereon or in connection
therewith due or claimed to be due by any taxing authority in connection with
any of the Smoky Mountain Tax Returns. As of December 31, 1997, Smoky Mountain
had no net operating loss carryforward (for federal or state income tax
purposes), and neither Smoky Mountain, BankFirst or the BankFirst Subsidiaries
have a net operating loss carryforward (for federal or state income tax
purposes). The reserves for taxes in all of the Smoky Mountain Interim Financial
Statements will be adequate to cover liabilities for taxes for all periods up to
and including the dates of such financial statements.
(e) Neither Smoky Mountain, BankFirst nor BankFirst Subsidiaries
have received any notice of deficiency or assessment or proposed deficiency or
assessment by the IRS or any other taxing authority in connection with the Smoky
Mountain Tax Returns. All federal income tax returns of Smoky Mountain,
BankFirst and the BankFirst Subsidiaries have been examined by the Internal
Revenue Service, or closed without audit by the applicable statute, for all
taxable years prior to and including the taxable year ended December 31, 1994.
There is no action, suit, proceeding, audit, examination, investigation, or
claim pending, or to the knowledge of Smoky Mountain, threatened, in respect of
any Smoky Mountain Taxes for which Smoky Mountain, BankFirst or any BankFirst
Subsidiary is or may become liable.
(f) Neither Smoky Mountain nor BankFirst nor the BankFirst
Subsidiaries has waived any law or regulation fixing, or consented to the
extension of, any period of time with respect to assessment or collection of any
Smoky Mountain Taxes, and no power of attorney has been granted by Smoky
Mountain, BankFirst or BankFirst Subsidiaries with respect to any tax matters is
currently in force.
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(g) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
has made an election under Section 341(f) of the Code.
(h) Smoky Mountain, BankFirst and the BankFirst Subsidiaries have
provided, and until the Effective Time of the Merger will continue to provide,
to First Franklin complete and correct copies of their income tax returns and
all material correspondence and documents, if any, in their possession relating
directly or indirectly to Smoky Mountain Taxes for each taxable year of Smoky
Mountain, BankFirst and the BankFirst Subsidiaries for all years as to which the
applicable statute of limitations have not run on the date hereof. For this
purpose, "correspondence and documents" include amended tax returns, claims for
refund, notices from taxing authorities of proposed changes or adjustments to
taxes or tax returns, consents to assessment or collection of taxes, acceptances
of proposed adjustments, closing agreements, rulings and determination letters
and requests therefor, and all other written communications to or from taxing
authorities relating to any material tax liability of Smoky Mountain, BankFirst
or BankFirst Subsidiaries.
3.8 Insurance. Schedule 3.8 hereto lists all insurance policies presently
carried by Smoky Mountain, BankFirst and the BankFirst Subsidiaries which are
currently in force with respect to their business and properties, including
without limitation title insurance policies on real property owned (exclusive of
foreclosed property). The existing insurance carried by Smoky Mountain,
BankFirst, and the BankFirst Subsidiaries is and will continue to be with
reputable insurers and, in respect of the nature of the risks insured against
and the amount of coverage provided, not less than that customarily carried by
parties similarly situated who own properties and engage in businesses
substantially similar to that of Smoky Mountain, BankFirst and the BankFirst
Subsidiaries, and such insurance is and will continue to be sufficient for
compliance by Smoky Mountain, BankFirst and the BankFirst Subsidiaries with all
material requirements of law and agreements to which any of Smoky Mountain,
BankFirst or a BankFirst Subsidiary is a party. Except as noted in Schedule 3.8,
neither Smoky Mountain, BankFirst, nor the BankFirst Subsidiaries is in default
in the payment of any premium, currently has outstanding any claim with respect
to such insurance coverage, or has received notification of, or has knowledge
of, the existence of any grounds for the cancellation of proposed cancellation
of any such policies or bonds.
3.9 Legal Proceedings. Except as set forth in Schedule 3.9 hereto, there
are no judicial or administrative proceedings of any kind or nature pending or,
to the knowledge of Smoky Mountain, threatened against Smoky Mountain, BankFirst
or the BankFirst Subsidiaries before any court or arbitral tribunal or before or
by any governmental department, agency, or instrumentality in any manner
involving Smoky Mountain, BankFirst or the BankFirst Subsidiaries or any of
their respective properties or capital stock, or the transactions contemplated
by this Agreement. Except as set forth in Schedule 3.9 (i) there is, to the best
of Smoky Mountain's knowledge, no basis for any action, suit, investigation, or
proceeding against Smoky Mountain, BankFirst or the BankFirst Subsidiaries
before any court or arbitral tribunal or before or by any governmental
department, agency, or instrumentality, which, if determined adversely to Smoky
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Mountain, BankFirst or the BankFirst Subsidiaries, would have a material adverse
effect on the assets, business, employees, revenue, income, prospects, condition
(financial or otherwise),liabilities, net worth or results of operations of
Smoky Mountain, BankFirst or the BankFirst Subsidiaries, and (ii) there are no
actions, suits, or proceedings pending or, to the knowledge of Smoky Mountain,
threatened by or against any officer, director, agent, or employee of Smoky
Mountain , BankFirst or the BankFirst Subsidiaries in connection with the
business, properties, affairs or prospects of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries. To the knowledge of Smoky Mountain, neither Smoky
Mountain, BankFirst nor the BankFirst Subsidiaries is in default with respect to
any judgment, order, writ, injunction, decree, award, rule or regulation of any
court, arbitrator, or governmental department, agency, or instrumentality.
3.10 Compliance with Law. Other than as set forth in Schedule 3.10 hereto,
to the knowledge of Smoky Mountain, (i) Smoky Mountain, BankFirst and the
BankFirst Subsidiaries are in full compliance with the back-up withholding
requirements of Section 3406 of the Code and the Treasury Regulations
promulgated thereunder; (ii) Smoky Mountain, BankFirst and the BankFirst
Subsidiaries are in full compliance with the reporting and other requirements of
the Bank Secrecy Act (including the Currency and Foreign Transaction Reporting
Act) and the regulations promulgated thereunder by the Department of the
Treasury; (iii) Smoky Mountain, BankFirst and the BankFirst Subsidiaries are in
substantial compliance with the provisions of all other applicable federal,
state, and local statutes, and all rules, regulations, or orders of, or
understandings or agreements with, governmental agencies having jurisdiction
over the assets, business, properties, operations, employees, revenue, income,
condition (financial or otherwise), liabilities, net worth, or results of
operations of Smoky Mountain, BankFirst and the BankFirst Subsidiaries; and (iv)
neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries is subject to
or has been threatened with any material fine, penalty, liability, or legal
disability with respect to the assets, business, operations, revenue, income,
condition (financial or otherwise), liabilities, net worth, or results of
operations of Smoky Mountain, BankFirst and the BankFirst Subsidiaries as the
result of the failure of Smoky Mountain, BankFirst or the BankFirst Subsidiaries
to comply with any requirement of any governmental body or agency having
jurisdiction over them, the conduct of their business, the use of their assets
and properties, or any premises occupied by them. Smoky Mountain, BankFirst and
the BankFirst Subsidiaries have filed, and until the Effective Time of Merger
will continue to file, all reports required to be filed by them with any
regulatory agency on or prior to the date such reports were due, and all such
reports, as finally amended, complied and will comply in all material respects
with applicable requirements of law and, as of their respective dates or the
dates as amended, did not and will not contain any 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, in light of the circumstances under
which they were or will be made, not misleading. Except to the extent stated
therein, all financial statements and schedules included and to be included in
such reports were and will be prepared in accordance with GAAP or such other
regulatory accounting requirements as were applicable thereto, applied on a
consistent basis with prior periods, subject to normal year-end adjustments, and
fairly presented and will fairly present the information purported to be shown
therein.
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3.11 Governmental Authorizations. Each of Smoky Mountain, BankFirst and
the BankFirst Subsidiaries have all licenses, permits, approvals, and other
authorizations from all federal, state, and local authorities as are necessary
for the conduct of its business and operations, and all such licenses,
franchises, permits, approvals, and other authorizations are in full force and
effect and are not subject to any condition, qualification, or limitation.
Neither Smoky Mountain, BankFirst nor any of the BankFirst Subsidiaries has
received any notification from any agency, department, or instrumentality (or
the staff thereof) of federal, state, or local government asserting
noncompliance with any of the laws, rules, regulations or orders that such
governmental authority enforces or threatening to revoke any license, franchise,
permit, or governmental authorization.
3.12 Supervisory Matters. Neither Smoky Mountain, BankFirst nor any of the
BankFirst Subsidiaries has been advised by any regulatory agency that it is
contemplating issuing (or requesting ) any written agreement, memorandum of
understanding, order, decree, directive, extraordinary supervisory letter,
commitment letter, or similar document or taking (or considering the
appropriateness of taking) any prompt corrective action (within the meaning of
the FDIA). The last examination of BankFirst by the Staff of the FDIC and the
Tennessee Department of Financial Institutions prior to the date of this
Agreement was performed as of August 29, 1997. The last examination of Smoky
Mountain by the Staff of the FRB prior to the date of this Agreement was
performed as of December 31, 1996. If either or both of Smoky Mountain or
BankFirst was notified of any deficiency as a result of such examinations, or
any prior examinations, each such deficiency has been corrected to the
satisfaction of the appropriate agency and if changes in the operating methods
or organization were required by reason of such examination or such other
examination, such changes have been made. The reserve for loan losses for
BankFirst has been calculated in accordance with GAAP applied on a consistent
basis, as the same are applied to comparable banking institutions, and in
accordance with all applicable rules and regulations. The reserves for loan
losses set forth in BankFirst's Financial Statements are adequate in all
respects to provide for all losses, net of recoveries relating to loans
previously charged off, on loans outstanding as of the dates thereof. Further,
BankFirst has not been notified in writing that such reserves violated any
minimum requirements or that the independent auditors of BankFirst believes such
reserves to be inadequate or inconsistent with historical loan loss experience.
3.13 Rights and Licenses. Set forth in Schedule 3.13 hereto is a list and
description of all trademarks, trademark rights, trade names, and licenses owned
and/or used by Smoky Mountain, Bank First and the BankFirst Subsidiaries,
including all registrations thereof. To the knowledge of Smoky Mountain, neither
Smoky Mountain, BankFirst or the BankFirst Subsidiaries are subject to any
material disability to conduct their respective businesses as currently
conducted or liability by reason of their failure to own or possess the rights
to use any other trademark, trademark right, trade name, trade name right, or
license. Each of Smoky Mountain, BankFirst and the BankFirst Subsidiaries have
full right and authority to own and use all the trademarks, trade names, and
licenses listed in Schedule 3.13. Neither Smoky Mountain, BankFirst nor any of
the BankFirst Subsidiaries have been held liable for, and no actions, suits, or
proceedings are pending or, to the knowledge of Smoky Mountain, threatened
against Smoky
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Mountain, BankFirst or the BankFirst Subsidiaries, alleging that Smoky Mountain,
BankFirst or the BankFirst Subsidiaries are liable for infringement of any
trademark, trademark right, trade name, trade name right, or license owned
and/or used by any other person or entity. Neither Smoky Mountain, BankFirst or
the BankFirst Subsidiaries have knowledge of any infringement on the trademarks,
trademark rights, trade names, and licenses owned and/or used by Smoky Mountain,
BankFirst and the BankFirst Subsidiaries.
3.14 Properties. Each of Smoky Mountain, BankFirst and the BankFirst
Subsidiaries has good and marketable title to all of their respective assets and
properties, including all real, personal, and intangible properties, and such
properties and assets are subject to no liens, mortgages, security interests,
encumbrances, or charges of any kind except (i) as noted in the Financial
Statements described in Section 3.6, (ii) statutory liens not yet delinquent,
and (iii) minor defects and irregularities in title and encumbrances that do not
materially impair the value or use thereof for the purposes for which they are
held.
3.15 Absence of Certain Changes or Events. Since December 31, 1997,
neither Smoky Mountain, BankFirst or the BankFirst Subsidiaries have, except as
set forth in Schedule 3.15 heretofore delivered by Smoky Mountain to First
Franklin, (i) incurred any material liability, except in the ordinary course of
business, consistent with their past practice; (ii) suffered any material
adverse change in their respective businesses, operations, assets, or condition
(financial or other); (iii) made any material change in its mode of management
or operation or method of accounting; or (iv) failed to operate their respective
businesses in all material respects in the ordinary course consistent with its
past practice.
3.16 Public Offering of Smoky Mountain Stock. Smoky Mountain,
contemporaneous with this Agreement, is undertaking an underwritten public
offering of Smoky Mountain Common Stock under the Securities Act. Smoky Mountain
has made, or will make, available a true and complete copy of the Registration
Statement filed by Smoky Mountain in connection with such public offering, and
any correspondence with the SEC related thereto.
3.17 Representations and Warranties True on and as of Closing Date. All
the representations and warranties of Smoky Mountain, on behalf of itself and on
behalf of BankFirst and the BankFirst Subsidiaries, contained in this Agreement
will be materially true on and as of the Closing Date, except to the extent
affected (i) by the transactions contemplated hereby, and (ii) by circumstances
disclosed to First Franklin occurring subsequent to the date hereof which in the
aggregate are not materially adverse to Smoky Mountain, BankFirst and the
BankFirst Subsidiaries.
3.18 Material Contracts. Except as set forth in Schedule 3.18 heretofore
delivered by Smoky Mountain to First Franklin, neither Smoky Mountain, BankFirst
nor the BankFirst Subsidiaries are a party to or bound by any (i) employment or
consulting contract which is not terminable by Smoky Mountain, BankFirst or any
of the BankFirst Subsidiaries on 60 or fewer days' notice, (ii) bonus, stock
option, deferred compensation or profit sharing, pension, or
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retirement plan or arrangements; (iii) material lease or license with respect to
any property, real or personal, whether as landlord, tenant, licensor, or
licensee, which cannot be terminated without substantial penalty and on notice
of not more than 30 days; (iv) contract or commitment for capital expenditures
in excess of $5,000 for any one project or $25,000 in the aggregate; (v)
material contract or commitment, whether or not made in the ordinary course of
business, for the purchase of materials or supplies or for the performance of
services over a period of more than 60 days from the date of this Agreement and
which cannot be terminated without substantial penalty and on notice of not more
than 30 days; (vi) agreement or instrument or charter or other restriction which
materially and adversely affects or in the future may materially or adversely
affect the business, operations, prospects, properties, assets, or financial
condition of Smoky Mountain, BankFirst or any of the BankFirst Subsidiaries;
(vii) contract or option to purchase or sell any real or personal property
otherwise than in the ordinary course of business which cannot be terminated
without substantial penalty and on notice of not more than 30 days; or (viii)
material contract, other than the foregoing, not made in the ordinary course of
business, which cannot be terminated without substantial penalty and on notice
of not more than 30 days. Smoky Mountain, BankFirst and the BankFirst
Subsidiaries have in all material respects performed all obligations required to
be performed by them to date and are not in default under, and no event has
occurred which with the lapse of time or action by a third party could result in
default under, any outstanding indenture, mortgage, contract, lease, or other
agreement to which Smoky Mountain, BankFirst or any of the BankFirst
Subsidiaries are bound, or under the provisions of their respective Charters or
Bylaws.
3.19 Employee Benefit Plans.
(a) Schedule 3.19 heretofore delivered by Smoky Mountain to First
Franklin lists each pension plan, each welfare plan, and each deferred
compensation, bonus, stock option, stock purchase, or other employee benefit
plan, agreement, commitment, or arrangements which is or has at any time been
established, sponsored, maintained, or contributed to by Smoky Mountain,
BankFirst, or any Affiliate. Except as set out in Schedule 3.19, none of Smoky
Mountain, BankFirst, or any Affiliate has at any time (i) established,
sponsored, maintained, or made any contribution to any Pension Plan; (ii) been a
party to any collective bargaining agreement, contract, or other arrangement, or
been subject to any statute, rule, or regulation, which required Smoky Mountain,
BankFirst, or any Affiliate to establish, maintain, sponsor, or make any
contribution to any Welfare Plan; or (iii) established, sponsored, maintained,
been a party to, or incurred any obligation or liability under any Other Plan.
Smoky Mountain, BankFirst, and their Affiliates have no obligations or
liabilities (whether accrued, absolute, contingent, or unliquidated, whether or
not known or whether or not due or to become due) with respect to any "employee
benefit plan" (as defined in Section 3(3) of ERISA) or Other Plan which is not
listed in Schedule 3.19. For the purposes of this Section 3.19, the term
"Affiliate" shall include all persons under common control with Smoky Mountain
or BankFirst within the meaning of Sections 4001(a)(14) or (b)(1) of ERISA or
any regulations promulgated thereunder, or Sections 414(b) or (c) of the Code.
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(b) Smoky Mountain has delivered to First Franklin a copy of each
plan or arrangement listed in Schedule 3.19 and any related trust agreements,
insurance contracts, and other documents pursuant to which benefits under such
plan or arrangement are funded or paid, including all amendments, modifications,
and supplements thereto, all of which (except as otherwise indicated in Schedule
3.19) are legally valid and binding and in full force and effect.
(c) Smoky Mountain has delivered to First Franklin copies of (i) the
annual report and actuarial report for each plan or arrangement listed in
Schedule 3.19 for the most recent plan year and the four preceding plan years,
if applicable; (ii) all IRS determination letters and rulings, together with all
amendments, modifications, or supplements thereto, if applicable, with respect
to each such plan and each amendment, modification, or supplement thereto; (iii)
all Department of Labor prohibited transaction exemptions letter and
determinations with respect to each such plan or arrangement; and (iv) all
Pension Benefit Guaranty Corporation determinations and notices with respect to
each such plan or arrangement.
(d) As of the date of this Agreement and as of the Effective Time of
the Merger, in the case of each plan or arrangement listed in Schedule 3.19
which is a defined benefit plan (within the meaning of Section 3(35) of ERISA),
the net fair market value of the assets held to fund such plan or arrangement
will equal or exceed the present value of all accrued benefits thereunder, both
vested and nonvested, as determined in accordance with an actuarial costs method
acceptable under Section 3(31) of ERISA.
(e) On a timely basis, Smoky Mountain, BankFirst and their
Affiliates have made all contributions or payments to or under each plan or
arrangement listed in Schedule 3.19 as required pursuant to each such plan or
arrangement, any collective, bargaining agreements or other agreements, ERISA,
or other applicable laws, and have made adequate provision for reserves to meet
contributions and payments under such plans or arrangements which have not been
made because they are not yet due.
(f) Each Pension Plan listed in Schedule 3.19 has been determined to
be qualified under Section 401(a) and, if applicable, Section 401(k) of the Code
by the IRS, and nothing has occurred or been omitted since the date of the last
such determination which resulted or will result in the revocation of such
determination.
(g) Each plan or arrangement listed in Schedule 3.19 (and any
related trust, insurance contract, or other vehicle pursuant to which benefits
under such plan or arrangement are funded or paid) has been administered in all
respects in full compliance with applicable provisions of ERISA, the Code, the
Consolidated Omnibus Budget Reconciliation Act of 1986 and regulations
promulgated thereunder ("COBRA"), and other applicable law. Without limiting the
generality of the foregoing, none of Smoky Mountain, BankFirst, or any Affiliate
has (i) incurred any liability for tax under Section 4971 of the Code on account
of any accumulated funding deficiency and no plan or arrangement listed in
Schedule 3.19 has incurred any accumulated funding deficiency within the meaning
of Sections 412 or 418(B) of the Code; (ii)
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applied for or obtained a waiver by the IRS of any minimum funding requirement
under Section 412 of the Code; (iii) become subject to any disallowance of
deductions under Sections 419 or 419(A) of the Code; (iv) incurred any liability
for excise tax under Sections 4972, 4975, or 4976 of the Code or any liability
under Section 406 of ERISA; (v) incurred any liability to the Pension Benefit
Guaranty Corporation; (vi) had a reportable event (within the meaning of Section
4043 of ERISA); or (vii) breached any of the duties or failed to perform any of
the obligations imposed upon the fiduciaries or plan administrators under Title
I of ERISA.
(h) Neither Smoky Mountain, BankFirst nor any Affiliate has incurred
any material liability under Section 4201 of ERISA for a complete or partial
withdrawal from or have agreed to participate in a multi-employer plan as
defined in Section 4001(a)(3) of ERISA.
3.20 Brokers. No agent, broker, finder, investment banker, person, or firm
acting on behalf or under authority of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries is or will be entitled to any broker's or finder's fee or
any other commissions or similar fee incurred directly or indirectly by or on
behalf of Smoky Mountain, BankFirst or the BankFirst Subsidiaries in connection
with the transactions contemplated by this Agreement.
3.21 Books of Account; Corporate Records. The Books of Account of Smoky
Mountain, BankFirst and BankFirst Subsidiaries are maintained in substantial
compliance with all applicable legal and accounting requirements. The minutes of
meetings maintained by Smoky Mountain, BankFirst and the BankFirst Subsidiaries
contain complete and accurate records in all material respects of the corporate
actions of its shareholders and Board of Directors and all committees thereof.
3.22. Reserves for Loan Losses. Except as described in Schedule 3.22, the
loan loss reserves reflected in the BankFirst Financial Statements are adequate
to provide for possible losses on loans (including accrued interest receivable)
in the loan portfolio of BankFirst and any losses associated with "Real Estate
Owned" by BankFirst, and each such provision has been established in accordance
with GAAP.
3.23. Labor Relations. Except to the extent set forth in Schedule 3.23:
(a) Smoky Mountain, BankFirst and the BankFirst Subsidiaries are in
compliance with all applicable laws and collective bargaining agreements
described in Schedule 3.23 respecting employment and employment practices, terms
and conditions of employment and employment practices, terms and conditions of
employment and wages and hours and occupational safety and health, and are not
engaged in any unfair labor practice within the meaning of Section 8 of the
National Labor Relations Act;
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(b) There is no unfair labor practice, charge or complaint or any
other matter against or involving Smoky Mountain, BankFirst or the BankFirst
Subsidiaries pending or, to the knowledge of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries, threatened before the National Labor Relations Board or
any court of law;
(c) There is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against Smoky Mountain, BankFirst or the BankFirst
Subsidiaries;
(d) No certification or decertification question or organizational
drive exists or has existed within the past twelve (12) months respecting the
employees of any of Smoky Mountain, BankFirst or the BankFirst Subsidiaries;
(e) No grievance or arbitration proceeding arising out of or under
any collective bargaining agreement is pending against Smoky Mountain, BankFirst
or any of the BankFirst Subsidiaries, or, to the knowledge of Smoky Mountain,
BankFirst or the BankFirst Subsidiaries, threatened; and, to the knowledge of
Smoky Mountain, BankFirst or the BankFirst Subsidiaries, no basis for any claim
therefor exists;
(f) No agreement (including any collective bargaining agreement),
arbitration or court decision or governmental order which is binding on Smoky
Mountain, BankFirst or the BankFirst Subsidiaries in any way limits or restricts
Smoky Mountain, BankFirst or the BankFirst Subsidiaries from relocating or
closing any of its operations;
(g) Smoky Mountain, BankFirst or the BankFirst Subsidiaries have not
experienced any organized work stoppage or other labor difficulty within the
past three (3) years;
(h) There are no charges, investigations, administrative proceedings
or formal complaints of discrimination (including discrimination based upon sex,
age, marital status, race, national origin, sexual preference, handicap or
veteran status) pending or, to the knowledge of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries, threatened before the Equal Opportunity Commission or
any federal, state or local agency or court against Smoky Mountain, BankFirst or
the BankFirst Subsidiaries. There have been no audits of the equal employment
opportunity practices of Smoky Mountain, BankFirst or the BankFirst Subsidiaries
and, to the knowledge of Smoky Mountain, BankFirst or the BankFirst
Subsidiaries, no basis for any such audit exists.
3.24 No Undisclosed Liabilities. Except as set forth in Schedule 3.24
neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries have any
liabilities (absolute, accrued, contingent or otherwise), except liabilities (a)
disclosed in the Smoky Mountain Financial Statements; (b) incurred in the
ordinary course of business and not required under GAAP to be reflected on the
Smoky Mountain Financial Statements; (c) incurred since December 31, 1997 in the
ordinary course of business consistent with past practice; or (d) incurred in
connection with this Agreement.
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3.25 Year 2000 Compliance. The management and directors of Smoky Mountain,
BankFirst and the BankFirst Subsidiaries are aware of the significant risks
posed by information systems which are not Year 2000 compliant and have taken
appropriate measures and have initiated appropriate plans to require that any
vendor or service provider with which Smoky Mountain, BankFirst and the
BankFirst Subsidiaries do business be Year 2000 compliant, including, without
limitation, vendors and service providers which have supplied or will supply not
only information and data processing systems, but environmental systems,
elevators, telephone and facsimile machines, heating, ventilation, and air
conditioning systems, automatic teller machines, and vaults. Neither Smoky
Mountain, BankFirst nor the BankFirst Subsidiaries shall contract with any
vendor or service provider for any affected service unless the vendor or service
provider can offer written assurances of Year 2000 compliance.
3.26. Environmental Law Violations.
(a) For purposes of this Section 3.26, the following terms shall
have the indicated meanings:
(1) "Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
governmental entity relating to (a) the protection, preservation or restoration
of the environment (including, without limitation, air, water, vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource); and/or (b) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
"Environmental Law: includes, without limitation, (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss.9601, et seq., the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss.6901, et seq., the Clear Air Act, as amended, 42 U.S.C. ss.7401, et
seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss.1251, et
seq., the Toxic Substances Control Act, as amended 15 U.S.C. ss.9601, et seq.,
the Safe Drinking Water Act, 42 U.S.C. ss.300(f), et seq., all comparable state
and local laws; and (2) any common law (including, without limitation, common
law that may impose strict liability) that may impose liability or obligations
for injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Substance.
(2) "Hazardous Substance" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, under any Environmental Law, whether by type
or by quantity, including any material containing any such substance as a
component. Hazardous Substances include, without limitation, petroleum or any
derivative or by-product thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
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(3) "Loan Portfolio Properties and Other Properties Owned"
means those properties now or previously owned or operated by Smoky Mountain,
BankFirst or the BankFirst Subsidiaries, including properties owned or operated
in a fiduciary capacity.
(b) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
have been in violation of or liable under any Environmental Law, except any such
violations or liabilities which would not reasonably be expected to singly or in
the aggregate have a material adverse effect.
(c) None of the Loan Portfolio Properties and Other Properties Owned
by Smoky Mountain, BankFirst or the BankFirst Subsidiaries have been or are in
violation of or liable under any Environmental Law, except any such violations
or liabilities which singly or in the aggregate will not have a material adverse
effect on such entities.
(d) To the best knowledge of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries, there are no actions, suits, demands, notices, claims,
investigations or proceedings pending or threatened relating to the liability of
the Loan Portfolio Properties and Other Properties Owned by either Smoky
Mountain, BankFirst or the BankFirst Subsidiaries under any Environmental Law,
including, without limitation, any notices, demand letters or requests for
information from any federal or state environmental agency relating to any such
liabilities under or violations of Environmental Law, except such which will not
have or result in a material adverse effect on such entities.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF FIRST FRANKLIN
First Franklin represents and warrants to Smoky Mountain, on its own
behalf and on behalf of First National and the First National Subsidiary as
follows:
4.1 Organization and Standing. First Franklin is a corporation, duly
incorporated, validly existing, and in good standing under the laws of the State
of Tennessee. First National, a wholly-owned subsidiary of First Franklin, is a
national banking association duly incorporated, validly existing, and in good
standing under the laws of the United States. Friendly Finance Company, Inc. is
a Tennessee chartered loan and industrial thrift corporation, validly existing,
and in good standing under the laws of the State of Tennessee. First Franklin,
First National and the First National Subsidiary have all necessary corporate
power and authority to own or lease their properties and assets and to conduct
their business and are in good standing in every jurisdiction in which the
nature of the business conducted by them or the character or location of the
properties owned or leased by them makes such qualification necessary, except to
the extent that any failure to so qualify would not, in the aggregate, have a
material adverse effect on the business, financial condition, or results of
operations of First National, taken as a whole. The deposit accounts of First
National are insured by the FDIC to the full extent permitted under applicable
law and the rules and regulations of the FDIC. The Charters and Bylaws of First
Franklin and the First National Subsidiary, and the Articles of Association and
Bylaws of First
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National and all amendments thereto to the date hereof (true, correct, and
complete copies of which have been previously delivered to Smoky Mountain and
are attached hereto as Schedule 4.1) are in full force and effect as of the date
of this Agreement. First Franklin and First National have taken such action and
executed and filed such documents and notices as may be necessary to enable
First National to exercise the powers conferred on national banking
associations.
4.2 Authorization, Execution and Delivery; Agreement Not in Breach
(a) First Franklin has all requisite corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement, and all other agreements contemplated to be
executed in connection herewith by First Franklin, have been (or upon execution
will have been) duly executed and delivered by First Franklin, have been (or
upon execution will have been) duly authorized by the First Franklin Board of
Directors, and the matter will be submitted to a specially called meeting of the
First Franklin Shareholders to be held as provided in Section 2.7(a).
Thereafter, assuming proper shareholder approval, no other corporate proceedings
on the part of First Franklin are (or will be) necessary to authorize such
execution and delivery, and constitute (or upon execution will constitute) the
legal, valid and enforceable obligation of First Franklin, subject, as to
enforceability, to applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally, and to
the application of equitable principles and judicial discretion.
(b) The execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby and the fulfillment of the terms hereof
will not result in a breach of any of the terms or provisions of, or constitute
a default under (or an event which, with the passage of time or the giving of
notice or both, would constitute a default under), or conflict with, or permit
the acceleration of any obligation under, any mortgage, lease, covenant,
agreement, indenture or other instrument to which either First Franklin, First
National or the First National Subsidiary is a party or by which it or its
property or any of its assets are bound; the Charter or Bylaws of First
Franklin; the Articles of Association or Bylaws of First National; the Charter
or Bylaws of the First National Subsidiary; or any judgment, decree, order or
award of any court, governmental body or arbitrator by which either First
Franklin, First National or the First National Subsidiary is bound; or any
permit, concession, grant, franchise, license, law, statute, ordinance, rule or
regulation applicable to First Franklin or its properties; or result in the
creation of any lien, claim, security interest, encumbrance, charge, restriction
or right of any third party of any kind whatsoever upon the property or assets
of First Franklin, except that the Government Approvals shall be required in
order for First Franklin to consummate this Agreement.
4.3 No Legal Bar. First Franklin is not a party to, subject to or bound by
any agreement, judgment, order, writ, prohibition, injunction or decree of any
court or other governmental body of competent jurisdiction which would prevent
the execution of this Agreement by First Franklin, its delivery to Smoky
Mountain or the consummation of the
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transactions contemplated hereby, and no action or proceeding is pending against
First Franklin in which the validity of this Agreement, any of the transactions
contemplated hereby or any action which has been taken by any of the parties in
connection herewith or in connection with any of the transactions contemplated
hereby is at issue.
4.4 Regulatory Approvals. No consent, approval, order or authorization of,
or registration, declaration or filing with, any federal, state or local
governmental authority is required to be made or obtained by First Franklin in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby by First Franklin, except for (a) the
prior approval of the FRB of the Agreement under the Bank Holding Company Act of
1956, as amended; (b) the prior approval of the FDIC of the Agreement; (c) the
approval of the SEC; and (d) the Proxy Statement in definitive form relating to
the Smoky Mountain Stockholders Meeting.
4.5 Capitalization and Ownership.
(a) The authorized capital stock of First Franklin consists of
400,000 shares of Common Stock of par value of Five Dollars ($5.00) per share
("First Franklin Common Stock"). As of the date of this Agreement, 164,125
shares of First Franklin Common Stock are issued and outstanding. In addition,
First Franklin is holding 35,872 shares of First Franklin Common Stock as
treasury stock. All of the outstanding First Franklin Common Stock is validly
issued, fully paid and nonassessable, and has not been issued in violation of
any preemptive right of any First Franklin Shareholder. As of the Effective Time
of the Merger, there will be no more than 164,125 shares of First Franklin
issued or outstanding. The authorized capital stock of First National consists
solely of 120,000 shares of common stock, par value $10.00 per share, of which,
as of the date of this Agreement, 120,000 shares are issued and outstanding,
fully paid and non-assessable (except to the extent that capital stock of a
national banking association is assessable under the national banking laws),
wholly-owned by First Franklin, and have not been issued in violation of the
preemptive rights of any person. All of the outstanding shares of common stock
of First National owned beneficially and of record by First Franklin are free
and clear of any security interest, lien, claim, charge, restriction or
encumbrance. The authorized capital stock of Friendly Finance Company, Inc.
consists solely of 100,000 shares of common stock at par value of $.01 per
share, of which, as of the date of this Agreement, 10,000 shares are issued and
outstanding, fully paid and non-assessable, wholly owned by First National, and
have not been issued in violation of the preemptive rights of any person. All of
the outstanding shares of common stock of Friendly Finance Company, Inc. owned
beneficially and of record by First National are free and clear of any security,
interest, lien, claim, charge, restriction, or encumbrance. Other than as set
forth in this Section, First Franklin does not own directly or indirectly,
beneficially or of record, more than five percent (5%) of the outstanding stock
of any other corporation and does not otherwise "control" any "company" or
"bank" (as those terms are defined in the Act). There are no owners of record of
five (5%) percent or more of First Franklin Common Stock.
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(b) Except as previously disclosed to Smoky Mountain in writing, as
of the date of this Agreement, there are no, and as of the Closing Date there
will not be, outstanding securities convertible into, or exercisable or
exchangeable for, First Franklin Common Stock, the common stock of First
National, or the common stock of Friendly Finance Company, Inc., or any
outstanding options, rights (preemptive or otherwise), or warrants to purchase
or to subscribe for any shares of First Franklin Common Stock, of the common
stock of First National, or of the common stock of Friendly Finance Company,
Inc., or any other securities of First Franklin, First National or Friendly
Finance Company, Inc. Except as previously disclosed to Smoky Mountain in
writing, as of the date of this Agreement there are, and as of the Closing Date
and thereafter there will be, no outstanding agreements, arrangements,
commitments, or understandings of any kind, to which First Franklin, First
National or the First National Subsidiary or, to the knowledge of management of
First Franklin is a party, affecting or relating to the voting, issuance,
purchase, redemption, repurchase, or transfer of First Franklin's Common Stock,
or any other securities of First Franklin, any shares of the capital stock of
First National, or any shares of the capital stock of the First National
Subsidiary.
4.6 First Franklin Financial Statements. First Franklin has delivered and,
to the extent reference is made to financial statements not yet available or
capable of development, will deliver to Smoky Mountain true and complete copies
of (i) First Franklin's audited Consolidated Financial Statements for the
calendar years ended December 31, 1997, 1996 and 1995; and (ii) First Franklin's
unaudited consolidated financial statements for each of the calendar quarters in
calendar year 1998 and thereafter, ending prior to the Closing Date. Such
financial statements and the notes thereto present fairly, or will present
fairly when issued, in all material respects, the consolidated financial
position of First Franklin at the respective dates thereof and the consolidated
results of operations and consolidated cash flow of First Franklin for the
periods indicated, and in each case in conformity with GAAP consistently applied
and maintained, subject to normal year-end adjustments. All of the documents
referred to in this Section 4.6, and all such documents hereafter filed by First
Franklin, First National and the First National Subsidiary with the appropriate
regulatory authorities prior to the Effective Time of the Merger, complied and
will comply in all material respects with applicable requirements of law and, as
of their respective dates or the dates as amended, did not and will not contain
any 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, in
light of the circumstances under which they were or will be made, not
misleading. Except to the extent stated therein, the First Franklin Financial
Statements and other schedules included in the documents referred to in this
Section 4.6 or to be included in such documents hereafter filed by First
Franklin, First National or the First National Subsidiary with the appropriate
Regulatory Authorities prior to the Effective Time of the Merger, and the First
Franklin Interim Financial Statements and any other such financial statements
provided by First Franklin, First National or the First National Subsidiary to
Smoky Mountain prior to the Effective Time of the Merger, (i) were prepared, and
will be prepared, in accordance with GAAP, applied on a consistent basis with
all prior periods, and (ii) fairly present, and will fairly present, the
financial position of each of First Franklin, First National and the First
National Subsidiary and the results of operations and changes in financial
positions for each of First Franklin, First National and the
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First National Subsidiary at the dates and for the periods referred to therein
in conformity with GAAP applied on a consistent basis throughout the periods
involved, subject to normal year-end adjustments. All material liabilities of
First Franklin, First National and the First National Subsidiary, actual or
contingent, which in accordance with GAAP, consistently applied, were required
to be reflected or reserved against the consolidated balance sheet or deducted
from gross revenues in a consolidated income statement for the periods covered
in the First Franklin Financial Statements and the First National Financial
Statements are disclosed therein.
4.7 Tax Matters. Except as set forth in Schedule 4.7 heretofore delivered
by First Franklin to Smoky Mountain.
(a) First Franklin, First National and the First National Subsidiary
have (or, in the case of returns becoming due after the date hereof and at or
before the Effective Time of the Merger, will have, prior to the Effective Time
of the Merger) duly filed with the appropriate governmental agencies all
federal, state, local, and foreign tax returns, reports, and declarations of
estimated tax with respect to income, sales, and all other applicable taxes, and
all other tax returns and reports, the filing of which is required by applicable
law (without regard to extensions of time permitted by law, regulation, or
otherwise) at or before the Effective Time of the Merger, (including, without
limitation, income, profit, franchise, sales, use, real property, personal
property, ad valorem, excise, employment, social security, and wage withholding
taxes of every kind, character, or description imposed by any governmental or
quasi-governmental authority). All of the First Franklin Tax Returns are (or, in
the case of returns becoming due after the date hereof and at or before the
Effective Time of the Merger, will be) accurate and complete in all material
respects.
(b) First Franklin, First National and First National Subsidiary
have collected and withheld all taxes which they are or have been required to
collect or withhold and have timely submitted all such collected and withheld
amounts to the appropriate authorities. First Franklin, First National and First
National Subsidiary are in compliance with the back-up withholding and
information reporting requirements under the Code and the rules and regulations
of the IRS.
(c) All federal, state, local, and foreign taxes due and payable
pursuant to First Franklin Tax Returns or pursuant to any installments of
estimated taxes, all other taxes, assessments, deficiencies, levies, imposts,
duties, license fees, registration fees, withholding, or other similar
governmental charges, and any penalties, or interest, or additions to tax
imposed thereon or in connection therewith due or claimed to be due by any
taxing authority, have been accrued, adequately reserved against, or paid.
(d) The reserves for taxes contained in the First Franklin Financial
Statements, and the First Franklin Interim Financial Statement are adequate to
cover the payment by First Franklin, First National or First National Subsidiary
of their respective liabilities for federal, state, local, and foreign taxes
(including installments of estimated taxes) and all other
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taxes, assessments, deficiencies, levies, imposts, duties, license fees,
registration fees, or other similar governmental charges (including without
limitation income, profits, gross receipts, franchise, value added, payroll,
sales, employment, use, property, withholding, excise, and occupancy taxes, and
any penalties, interest, or additions to tax imposed thereon or in connection
therewith due or claimed to be due by any taxing authority in connection with
any of the First Franklin Tax Returns for all periods up to and including
December 31, 1997. As of February 10, 1998, First Franklin had no net operating
loss carryforward (for federal or state income tax purposes), First National had
no net operating loss carryforward (for federal or state income tax purposes),
and the First National Subsidiary had no net operating loss carryforward (for
federal or state income tax purposes) The reserves for taxes in all of the First
Franklin Interim Financial Statements will be adequate to cover all liabilities
for taxes for all periods up to and including the dates of such financial
statements.
(e) Neither First Franklin, First National nor the First National
Subsidiary has received any notice of deficiency or assessment or proposed
deficiency or assessment by the IRS or any other taxing authority in connection
with the First Franklin Tax Returns. All federal income tax returns of First
Franklin, First National and the First National Subsidiary have been examined by
the IRS or closed without audit (or the statute of limitations with respect to
such returns has expired and no waiver extending the statute of limitations has
been requested or granted) for all taxable years prior to and including the
taxable year ended 1994. There is no action, suit, proceeding, audit,
examination, investigation, or claim pending, or to the knowledge of First
Franklin, threatened, in respect of any First Franklin Taxes for which First
Franklin, First National or the First National Subsidiary is or may become
liable.
(f) Neither First Franklin, First National nor the First National
Subsidiary has waived any law or regulation fixing, or consented to the
extension of, any period of time with respect to the assessment or collection of
any First Franklin Taxes, and no power of attorney granted by First Franklin,
First National or the First National Subsidiary with respect to any tax matters
is currently in force.
(g) Neither First Franklin, First National nor the First National
Subsidiary has made an election under Section 341(f) of the Code.
(h) First Franklin, First National and the First National Subsidiary
have provided, and until the Effective Time of the Merger will continue to
provide, to Smoky Mountain complete and correct copies of their income tax
returns and all material correspondence and documents, if any, in their
possession relating directly or indirectly to First Franklin Taxes for each
taxable year of First Franklin, First National and the First National Subsidiary
as to which the applicable statute of limitations has not run on the date
hereof. For this purpose, "correspondence and documents" include amended tax
returns, claims for refund, notices from taxing authorities of proposed changes
or adjustments to taxes or tax returns, consents to assessment or collection of
taxes, acceptances of proposed adjustment, closing agreement, rulings and
determination letters and requests therefor, and all other written
communications to or from taxing authorities relating to
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any material liability of First Franklin, First National or the First National
Subsidiary.
4.8 Insurance. Schedule 4.8 hereto lists all insurance policies presently
carried by First Franklin, First National and the First National Subsidiary
which are currently in force with respect to their business and properties,
including without limitation title insurance policies on real property owned
(exclusive of foreclosed property). The existing insurance carried by First
Franklin, First National and the First National Subsidiary is and will continue
to be with reputable insurers and, in respect of the nature of the risks insured
against and the amount of coverage provided, not less than that customarily
carried by parties similarly situated who own properties and engage in
businesses substantially similar to that of First Franklin, First National and
the First National Subsidiary, and such insurance is and will continue to be
sufficient for compliance by First Franklin, First National and the First
National Subsidiary with all material requirements of law and agreements to
which any of First Franklin, First National or the First National Subsidiary is
a party. Except as noted in Schedule 4.8, neither First Franklin, First National
nor the First National Subsidiary is in default in the payment of any premium,
currently has outstanding any claim with respect to such insurance coverage, or
has received notification of, or has knowledge of, the existence of any grounds
for the cancellation or proposed cancellation of any such policies or bonds.
4.9 Legal Proceedings. Except as set forth in Schedule 4.9 heretofore
delivered by First Franklin to Smoky Mountain, there are no judicial or
administrative proceedings of any kind or nature now pending or, to the
knowledge of First Franklin, threatened against First Franklin, First National
or the First National Subsidiary before any court or arbitral tribunal or before
or by any governmental department, agency, or instrumentality in any manner
involving First Franklin, First National or the First National Subsidiary or any
of its or their properties or capital stock to the transactions contemplated by
this Agreement. Except as set forth in Schedule 4.9, (i) there is, to the best
of First Franklin's knowledge, no basis for any action, suit, investigation, or
proceeding against First Franklin, First National or the First National
Subsidiary before any court or arbitral tribunal or before or by any
governmental department, agency, or instrumentality, which, if determined
adversely to First Franklin. First National or First National Subsidiary, would
have a material adverse effect on the respective assets, businesses, employees,
revenue, income, prospects, condition (financial or otherwise), liabilities, net
worth, or results of operations of First Franklin, First National or the First
National Subsidiary, (ii) there are no actions, suits, or proceedings pending
or, to the knowledge of First Franklin, threatened by or against any officer,
director, agent, or employee of First Franklin, First National or the First
National Subsidiary in connection with the business, properties, affairs, or
prospects of First Franklin, First National or the First National Subsidiary.
Neither First Franklin, First National nor the First National Subsidiary is in
default with respect to any judgment, order, writ, injunction, decree, award,
rule, or regulation of any court, arbitrator, or governmental department, agency
or instrumentality.
4.10 Compliance with Law. Other than as set forth in Schedule 4.10 hereto,
(i) First Franklin, First National and the First National Subsidiary are in full
compliance with the
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back-up withholding requirements of section 3406 of the Code and the Treasury
Regulations promulgated thereunder, (ii) First Franklin, First National and the
First National Subsidiary are in full compliance with the reporting and other
requirements of the Bank Secrecy Act (including the Currency and Foreign
Transaction Reporting Act), and the regulations promulgated thereunder by the
Department of the Treasury; (iii) First Franklin, First National and the First
National Subsidiary are in compliance with the provisions of all other
applicable federal, state, and local statutes, and all rules, regulations, or
orders of, or understandings or agreements with, governmental agencies having
jurisdiction over the assets, business, properties, operations, employees,
revenue, income, condition (financial or otherwise), liabilities, net worth, or
results of operations of First Franklin, First National and the First National
Subsidiary; and (iv) neither First Franklin, First National nor the First
National Subsidiary is subject to or has been threatened with any material fine,
penalty, liability, or legal disability with respect to the assets, business,
operations, revenue, income, condition (financial or otherwise), liabilities,
net worth, or results of operations of First Franklin, First National and the
First National Subsidiary as the result of the failure of First Franklin, First
National or the First National Subsidiary to comply with any requirement of any
governmental body or agency having jurisdiction over them, the conduct of their
business, the use of their assets and properties, or any premises occupied by
them. First Franklin, First National and the First National Subsidiary have
filed, and until the Effective Time of the Merger will continue to file, all
reports required to be filed by any of them with any Regulatory Agency on or
prior to the date such reports were due, and all such reports, as finally
amended, complied and will comply in all material respect with applicable
requirements of law and, as of their respective dates or the dates as amended,
did not and will not contain any 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, in light of the circumstances under which they were made,
not misleading. Except to the extent stated therein, all financial statements
and schedules included and to be included in such reports were and will be
prepared in accordance with GAAP or other regulatory accounting requirements as
were applicable thereto, applied on a consistent basis with prior periods
subject to normal year-end adjustments, and fairly presented and will fairly
present the information purported to be shown therein.
4.11 Brokers. No agent, broker, finder, investment banker, person, or firm
acting on behalf or under authority of First Franklin, First National or the
First National Subsidiary is or will be entitled to any broker's or finder's fee
or any other commissions or similar fee incurred directly or indirectly by or on
behalf of First Franklin, First National or the First National Subsidiary in
connection with the transactions contemplated by this Agreement.
4.12 Governmental Authorizations. First Franklin, First National and the
First National Subsidiary have all licenses, permits, approvals, and other
authorizations from all federal, state, and local authorities as are necessary
for the conduct of their respective business and operations, and all such
licenses, franchises, permits, approvals, and other authorizations are in full
force and effect and are not subject to any condition, qualification, or
limitation. Neither First Franklin, First National nor the First National
Subsidiary has received any notification from any agency, department, or
instrumentality of federal, state, or local government or the staff thereof
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asserting noncompliance with any of the laws, rules, regulations, or orders that
such governmental authority enforces or threatening to revoke any license,
franchise, permit, or governmental authorization.
4.13 Supervisory Matters. Neither First Franklin, First National nor the
First National Subsidiary has been advised by any Regulatory Agency that it is
contemplated issuing or requesting (or considering the appropriateness of
issuing or requesting) any written agreement, memorandum of understanding,
order, decree, directive, extraordinary supervisory letter, commitment letter,
or similar document or taking (or considering the appropriateness of taking) any
prompt corrective action (within the meaning of the FDIA). The last examination
of First National by the staff of the OCC prior to the date of this Agreement
was performed as of June 30, 1996. The last examination of the holding company,
First Franklin, prior to the date of this Agreement was performed as of December
31, 1996. The First National Subsidiary was examined by the TDFI on December 11,
1997. If either or both of First National or First Franklin was notified of any
deficiencies as a result of such examinations or any prior examinations, each
such deficiency has been corrected to the satisfaction of the appropriate
agency, and if any changes in operating methods or organization were required by
reason of such examination or such other examinations, such changes have been
made. The loan portfolios of First National reflected in the First National
Financial Statements in excess of reserves are, to the best knowledge and belief
of First Franklin and First National, collectible. Further, First National has
not been notified in writing that such reserves violated any minimum
requirements or that the independent auditors of First Franklin believe such
reserves to be inadequate or inconsistent with historical loan loss experience.
4.14 Rights and Licenses. Set forth in Schedule 4.14 hereto is a list and
description of all trademarks, trademark rights, trade names, and licenses owned
and/or used by First Franklin, First National and the First National Subsidiary,
including all registrations thereof. To the knowledge of First Franklin, neither
First Franklin, First National nor the First National Subsidiary is subject to
any material disability to conduct its business as currently conducted or
liability by reason of its failure to own or possess the rights to use any other
trademark, trademark right, trade name, trade name right, or license. Each of
First Franklin, First National and the First National Subsidiary have full right
and authority to own and use all the trademarks, trade names, and licenses
listed in Schedule 4.14. Neither First Franklin, First National nor the First
National Subsidiary has been held liable for, and no actions, suits or
proceedings are pending or, to the knowledge of First Franklin, threatened
against First Franklin, First National or the First National Subsidiary,
alleging that First Franklin, First National or the First National Subsidiary is
liable for infringement of any trademark, trademark right, trade name, trade
name right, or license owned and/or used by any other person or entity. Neither
First Franklin, First National nor the First National Subsidiary has knowledge
of any infringement on the trademarks, trademark rights, trade names, and
licenses owned and/or used by First Franklin, First National and the First
National Subsidiary.
4.15 Material Contracts. Except as set forth in Schedule 4.15 heretofore
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delivered by First Franklin to Smoky Mountain, neither First Franklin, First
National nor the First National Subsidiary is a party to or bound by any (i)
employment or consulting contract which is not terminable by First Franklin,
First National and the First National Subsidiary on 60 or fewer days' notice;
(ii) bonus, stock option, deferred compensation or profit sharing, pension, or
retirement plan or arrangements; (iii) material lease or license with respect to
any property, real or personal, whether as landlord, tenant, licensor, or
licensee, which cannot be terminated without substantial penalty and on notice
of not more than 30 days; (iv) contract or commitment for capital expenditures
in excess of $5,000 for any one project or $25,000 in the aggregate; (v)
material contract or commitment, whether or not made in the ordinary course of
business, for the purchase of materials or supplies or for the performance of
services over a period of more than 60 days from the date of this Agreement and
which cannot be terminated without substantial penalty and on notice of not more
than 30 days; (vi) agreement or instrument or charter or other restriction which
materially and adversely affects or in the future may materially or adversely
affect the business, operations, prospects, properties, assets, or financial
condition of First Franklin, First National or the First National Subsidiary;
(vii) contract or option to purchase or sell any real or personal property
otherwise than in the ordinary course of business which cannot be terminated
without substantial penalty and on notice of not more than 30 days; or (viii)
material contract, other than the foregoing, not made in the ordinary course of
business, which cannot be terminated without substantial penalty and on notice
of not more than 30 days. First Franklin, First National and the First National
Subsidiary have in all material respects performed all obligations required to
be performed by it to date and is not in default under, and no event has
occurred which with the lapse of time or action by a third party could result in
default under, any outstanding indenture, mortgage, contract, lease, or other
agreement to which First Franklin, First National or the First National
Subsidiary is bound, or under the provisions of the Charters of First Franklin
and the First National Subsidiary, or Articles of Association of First National,
or the Bylaws of First Franklin, First National and the First National
Subsidiary.
4.16 Properties. Each of First Franklin, First National and the First
National Subsidiary have good, clear, and marketable title to all of its assets
and properties, including all real, personal, and intangible properties, and
such properties and assets are subject to no liens, mortgages, security
interests, encumbrances, or charges of any kind except (a) as noted in the
financial statements described in Section 4.6, (b) statutory liens not yet
delinquent, and (c) minor defects and irregularities in title and encumbrances
which do not materially impair the value or use thereof for the purposes for
which they are held.
4.17 Employee Benefit Plans.
(a) Schedule 4.17 heretofore delivered by First Franklin to Smoky
Mountain lists each pension plan, each welfare plan, and each deferred
compensation, bonus, stock option, stock purchase, or other employee benefit
plan, agreement, commitment, or arrangements which is or has at any time been
established, sponsored, maintained, or contributed to by First Franklin, First
National and the First National Subsidiary, or any Affiliate (as defined below).
Except as set out in Schedule 4.17, none of First Franklin, First National or
the First National
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Subsidiary, or any Affiliate has at any time (i) established, sponsored,
maintained, or made any contribution to any Pension Plan; (ii) been a party to
any collective bargaining agreement, contract, or other arrangement, or been
subject to any statute, rule, or regulation, which required First Franklin,
First National or the First National Subsidiary, or any Affiliate to establish,
maintain, sponsor, or make any contribution to any Welfare Plan; or (iii)
established, sponsored, maintained, been a party to, or incurred any obligation
or liability under any Other Plan. First Franklin, First National or the First
National Subsidiary, and their Affiliates have no obligations or liabilities
(whether accrued, absolute, contingent, or unliquidated, whether or not known or
whether or not due or to become due) with respect to any "employee benefit plan"
(as defined in Section 3(3) of ERISA) or Other Plan which is not listed in
Schedule 4.17. For the purposes of this Section 4.17, the term "Affiliate" shall
include all persons under common control with First Franklin, First National or
the First National Subsidiary within the meaning of Sections 4001(a)(14) or
(b)(1) of ERISA or any regulations promulgated thereunder, or Sections 414(b) or
(c) of the Code.
(b) First Franklin has delivered to Smoky Mountain a copy of each
plan or arrangement listed in Schedule 4.17 and any related trust agreements,
insurance contracts, and other documents pursuant to which benefits under such
plan or arrangement are funded or paid, including all amendments, modifications,
and supplements thereto, all of which (except as otherwise indicated in Schedule
4.17) are legally valid and binding and in full force and effect.
(c) First Franklin has delivered to Smoky Mountain copies of (i) the
annual report and actuarial report for each plan or arrangement listed in
Schedule 4.17 for the most recent plan year and the four preceding plan years,
if applicable; (ii) all IRS determination letters and rulings, together with all
amendments, modifications, or supplements thereto, if applicable, with respect
to each such plan and each amendment, modification, or supplement thereto; (iii)
all Department of Labor prohibited transaction exemptions letter and
determinations with respect to each such plan or arrangement; and (iv) all
Pension Benefit Guaranty Corporation determinations and notices with respect to
each such plan or arrangement.
(d) As of the date of this Agreement and as of the Effective Time of
the Merger, in the case of each plan or arrangement listed in Schedule 4.17
which is a defined benefit plan (within the meaning of Section 3(35) of ERISA),
the net fair market value of the assets held to fund such plan or arrangement
will equal or exceed the present value of all accrued benefits thereunder, both
vested and nonvested, as determined in accordance with an actuarial costs method
acceptable under Section 3(31) of ERISA.
(e) On a timely basis, First Franklin, First National and the First
National Subsidiary and their Affiliates have made all contributions or payments
to or under each plan or arrangement listed in Schedule 4.17 as required
pursuant to each such plan or arrangement, any collective, bargaining agreements
or other agreements, ERISA, or other applicable laws, and have made adequate
provision for reserves to meet contributions and payments under such plans or
arrangements which have not been made because they are not yet due.
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(f) Each Pension Plan listed in Schedule 4.17 has been determined to
be qualified under Section 401(a) and, if applicable, Section 401(k) of the Code
by the IRS, and nothing has occurred or been omitted since the date of the last
such determination which resulted or will result in the revocation of such
determination.
(g) Each plan or arrangement listed in Schedule 4.17 (and any
related trust, insurance contract, or other vehicle pursuant to which benefits
under such plan or arrangement are funded or paid) has been administered in all
respects in full compliance with applicable provisions of ERISA, the Code, the
Consolidated Omnibus Budget Reconciliation Act of 1986 and regulations
promulgated thereunder ("COBRA"), and other applicable law. Without limiting the
generality of the foregoing, none of First Franklin, First National or the First
National Subsidiary, or any Affiliate has (i) incurred any liability for tax
under Section 4971 of the Code on account of any accumulated funding deficiency
and no plan or arrangement listed in Schedule 4.17 has incurred any accumulated
funding deficiency within the meaning of Sections 412 or 418(B) of the Code;
(ii) applied for or obtained a waiver by the IRS of any minimum funding
requirement under Section 412 of the Code; (iii) become subject to any
disallowance of deductions under Sections 419 or 419(A) of the Code; (iv)
incurred any liability for excise tax under Sections 4972, 4975, or 4976 of the
Code or any liability under Section 406 of ERISA; (v) incurred any liability to
the Pension Benefit Guaranty Corporation; (vi) had a reportable event (within
the meaning of Section 4043 of ERISA); or (vii) breached any of the duties or
failed to perform any of the obligations imposed upon the fiduciaries or plan
administrators under Title I of ERISA.
(h) Neither First Franklin, First National, nor the First National
Subsidiary, or any Affiliate has incurred any material liability under Section
4201 of ERISA for a complete or partial withdrawal from or have agreed to
participate in a multi-employer plan as defined in Section 4001(a)(3) of ERISA.
4.18 Absence of Certain Changes or Events. Since December 31, 1997,
neither First Franklin, First National nor the First National Subsidiary has,
except as set forth in Schedule 4.18 heretofore delivered by First Franklin to
Smoky Mountain, (i) incurred any material liability, except in the ordinary
course of business, consistent with its past practice; (ii) suffered any
material adverse change in its business, operations, assets, or condition
(financial or other); (iii) made any material change in its mode of management
or operation or method of accounting; or (iv) failed to operate its business in
all material respects in the ordinary course consistent with its past practice.
4.19 Books of Account; Corporate Records. The books of account of First
Franklin, First National and the First National Subsidiary are maintained in
substantial compliance with all applicable legal and accounting requirements.
The minutes of meetings maintained by First Franklin, First National and the
First National Subsidiary contain complete and accurate records in all material
respects of the corporate actions of its shareholders and Board of Directors and
all committees thereof.
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4.20 Representations and Warranties True on and as of Closing Date. All
the representations and warranties of First Franklin, on behalf of itself and
First National and the First National Subsidiary, contained in this Agreement
will be materially true on and as of the Closing Date, except to the extent
affected (i) by the transactions contemplated hereby, and (ii) by circumstances
disclosed to Smoky Mountain occurring subsequent to the date hereof which in the
aggregate are not materially adverse to First Franklin, First National or the
First National Subsidiary.
4.21. Reserves for Loan Losses. Except as described in Schedule 4.21, the
loan loss reserves reflected in the First Franklin Financial Statements are
adequate to provide for possible losses on loans (including accrued interest
receivable) in the loan portfolio of First National and the First National
Subsidiary and any losses associated with "Real Estate Owned" by First National
or the First National Subsidiary, and each such provision has been established
in accordance with GAAP.
4.22. Labor Relations. Except to the extent set forth in Schedule 4.22:
(a) First Franklin, First National and the First National Subsidiary
are in compliance with all applicable laws and collective bargaining agreements
described in Schedule 4.22 respecting employment and employment practices, terms
and conditions of employment and employment practices, terms and conditions of
employment and wages and hours and occupational safety and health, and are not
engaged in any unfair labor practice within the meaning of Section 8 of the
National Labor Relations Act;
(b) There is no unfair labor practice, charge or complaint or any
other matter against or involving First Franklin, First National and the First
National Subsidiary pending or, to the knowledge of First Franklin threatened
before the National Labor Relations Board or any court of law;
(c) There is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against First Franklin, First National or the First
National Subsidiary;
(d) No certification or decertification question or organizational
drive exists or has existed within the past twelve (12) months respecting the
employees of First Franklin, First National and the First National Subsidiary;
(e) No grievance or arbitration proceeding arising out of or under
any collective bargaining agreement is pending against First Franklin, First
National or the First National Subsidiary, or, to the knowledge of First
Franklin threatened; and, to the knowledge of First Franklin no basis for any
claim therefor exists;
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(f) No agreement (including any collective bargaining agreement),
arbitration or court decision or governmental order which is binding on First
Franklin, First National or the First National Subsidiary in any way limits or
restricts First Franklin, First National or the First National Subsidiary from
relocating or closing any of its operations;
(g) First Franklin, First National or First National Subsidiary have
not experienced any organized work stoppage or other labor difficulty within the
past three (3) years;
(h) There are no charges, investigations, administrative proceedings
or formal complaints of discrimination (including discrimination based upon sex,
age, marital status, race, national origin, sexual preference, handicap or
veteran status) pending or, to the knowledge of First Franklin threatened before
the Equal Opportunity Commission or any federal, state or local agency or court
against First Franklin, First National or the First National Subsidiary. There
have been no audits of the equal employment opportunity practices of First
Franklin, First National and the First National Subsidiary and, to the knowledge
of First Franklin, First National or the First National Subsidiary, no basis for
any such audit exists.
4.23 No Undisclosed Liabilities. Except as set forth in Schedule 4.23
neither First Franklin, First National or the First National Subsidiary has any
liabilities (absolute, accrued, contingent or otherwise), except liabilities (a)
disclosed in the First Franklin Financial Statements; (b) incurred in the
ordinary course of business and not required under GAAP to be reflected on the
First Franklin Financial Statements; (c) incurred since December 31, 1997 in the
ordinary course of business consistent with past practice; or (d) incurred in
connection with this Agreement.
4.24 Year 2000 Compliance. The management and directors of First Franklin,
First National and the First National Subsidiary are aware of the significant
risks posed by information systems which are not Year 2000 compliant and have
taken appropriate measures and have initiated appropriate plans to require that
any vendor or service provider with which First Franklin, First National and the
First National Subsidiary do business be Year 2000 compliant, including, without
limitation, vendors and service providers which have supplied or will supply not
only information and data processing systems, but environmental systems,
elevators, telephone and facsimile machines, heating, ventilation, and air
conditioning systems, automatic teller machines, and vaults. Neither First
Franklin, First National nor the First National Subsidiary shall contract with
any vendor or service provider for any affected service unless the vendor or
service provider can offer written assurances of Year 2000 compliance.
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4.25. Environmental Law Violations.
(a) For purposes of this Section 4.25, the following terms shall
have the indicated meanings:
(1) "Environmental Law" shall have the meaning assigned in
Section 3.26.
(2) "Hazardous Substance" shall have the meaning assigned in
Section 3.26.
(3) "Loan Portfolio Properties and Other Properties Owned"
means those properties now or previously owned or operated by First Franklin,
First National or the First National Subsidiary, including properties owned or
operated in a fiduciary capacity.
(b) Neither First Franklin, First National nor the First National
Subsidiary has been in violation of or liable under any Environmental Law,
except any such violations or liabilities which would not singly or in the
aggregate have a material adverse effect.
(c) None of the Loan Portfolio Properties and Other Properties Owned
by First Franklin, First National or the First National Subsidiary have been or
are in violation of or liable under any Environmental Law, except any such
violations or liabilities which singly or in the aggregate will not have a
material adverse effect on such entities.
(d) To the best knowledge of First Franklin, First National and the
First National Subsidiary, there are no actions, suits, demands, notices,
claims, investigations or proceedings pending or threatened relating to the
liability of the Loan Portfolio Properties and Other Properties Owned by either
First Franklin, First National or the First National Subsidiary under any
Environmental Law, including, without limitation, any notices, demand letters or
requests for information from any federal or state environmental agency relating
to any such liabilities under or violations of Environmental Law, except such
which will not have or result in any material liability of First Franklin, First
National or the First National Subsidiary.
ARTICLE 5
COVENANTS AND AGREEMENTS
5.1 Pre-Merger Conduct of Business by First Franklin, First National and
the First National Subsidiary. First Franklin covenants and agrees, on its own
behalf and on behalf of First National and the First National Subsidiary, that
from the date hereof until the Effective Time of the Merger, unless Smoky
Mountain shall otherwise specifically agree in writing or as otherwise
specifically authorized herein:
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(a) The business of First Franklin, First National and the First
National Subsidiary shall be conducted only in the usual, regular and ordinary
course and in substantially the same manner as heretofore conducted, and, to the
extent consistent with such business, First Franklin shall use all reasonable
efforts to preserve, and shall cause First National and the First National
Subsidiary to preserve, intact their business organization, to keep available
the services of their officers and employees, to maintain their rights and
franchises, and to preserve their relationships with customers, suppliers, and
others having business with First Franklin, First National and the First
National Subsidiary to the end that their goodwill and continuing business shall
be unaffected in all material respects at the Effective Time of the Merger.
Without limiting the generality of the foregoing, First National and the First
National Subsidiary shall not enter into or become bound by any contract, plan,
commitment, or instrument described in Section 4.15 hereof or enter into any
transaction (whether or not described in Section 4.15 hereof) involving the
expenditure, commitment, or lending of money or credit in excess of its legal
lending limit.
(b) Neither First Franklin, First National nor the First National
Subsidiary shall (i) issue any shares of capital stock, except for shares to be
issued prior to the Effective Time of the Merger in connection with the exercise
of options or warrants outstanding on the date hereof and disclosed to Smoky
Mountain pursuant to Section 4.5(b) hereof; (ii) declare, set aside, or pay any
dividend or other distribution payable in cash, stock, or property with respect
to shares of its outstanding capital stock, except for the semi-annual dividend
on First Franklin Common Stock as agreed to in writing by the parties; (iii)
make any change in its capital stock by split, reverse split, reclassification,
reorganization, subdivision, or otherwise; (iv) acquire any shares of its
capital stock by tender, redemption, or otherwise; (v) amend its Charter or
Articles of Association (whichever is applicable) or Bylaws; or (vi) merge or
consolidate with or into, or permit the merger into it of, any other
association, corporation, trust, or entity or change the character of its
business.
(c) Neither First Franklin, First National nor the First National
Subsidiary shall grant any stock options, warrants, rights, or other securities
convertible into, or exercisable or exchangeable for, shares of its capital
stock.
(d) Neither First Franklin, First National nor the First National
Subsidiary shall incur any obligations, commitments, or liabilities, whether
primarily or by way of guaranty, in excess of its legal lending limit or having
a maturity of more than one year from the date of its creation, other than in
the ordinary course of business consistent with past practice.
(e) Except in the ordinary course of business, neither First
Franklin, First National nor the First National Subsidiary shall enter into any
supply contracts, leases, or other agreements that cannot be terminated without
substantial penalty and/or notice of not more than 30 days.
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(f) Except as required by law, neither First Franklin, First
National nor the First National Subsidiary shall change any loan, investment, or
management policies or make any material alteration in the manner of keeping its
books, accounts, and records.
(g) Except in the ordinary course of business, neither First
Franklin, First National nor the First National Subsidiary shall grant any
salary increase (other than as required by any existing contract) or bonus or
enter into any new employment or employee benefit contract or arrangement.
(h) Except in the ordinary course of business, neither First
Franklin, First National nor the First National Subsidiary shall sell or
otherwise dispose of, or agree to sell or otherwise dispose of, any assets.
(i) Neither First Franklin, First National nor the First National
Subsidiary shall take any action that would in any manner adversely affect the
ability of any party hereto to obtain the approvals of any Regulatory
Authorities required for consummation of the transactions contemplated hereby or
otherwise interfere with, impede, delay, or make more costly the consummation of
the transactions contemplated hereby.
(j) Neither First Franklin, First National nor the First National
Subsidiary shall authorize or permit any officer, director, employee, investment
banker, financial consultant, attorney, accountant, or other agent or
representative of First Franklin, directly or indirectly, to initiate contact
with any person or entity in an effort to solicit, initiate, or encourage any
Take Over Proposal. In addition, except as the fiduciary duties of the Board of
Directors of First Franklin, First National or the First National Subsidiary may
otherwise require (as evidenced by a reasoned opinion of counsel received prior
thereto, with a copy promptly furnished to Smoky Mountain) with respect to an
unsolicited, bona fide, written Takeover Proposal, neither First Franklin, First
National nor the First National Subsidiary shall authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant, or other agent or representative of First Franklin, First National
or the First National Subsidiary, directly or indirectly, (i) to cooperate with,
or furnish or cause to be furnished any non-public information concerning the
assets, operations, business, properties, prospects, or condition (financial or
otherwise), of First Franklin, First National or the First National Subsidiary
to any person or entity in connection with any Takeover Proposal; (ii) to
negotiate any Takeover Proposal with any person or entity; or (iii) to enter
into any agreement or agreement in principle as to any Takeover Proposal. First
Franklin shall promptly give notice to Smoky Mountain upon becoming aware of any
Takeover Proposal. As used in this paragraph, "Takeover Proposal" shall mean any
proposal, other than as contemplated by this Agreement, for a Merger or other
business combination involving First Franklin, First National or the First
National Subsidiary or for the acquisition of a five (5%) percent equity
interest in First Franklin, First National or the First National Subsidiary, or
for the acquisition of five (5%) percent or more of the assets of First
Franklin, First National or the First National Subsidiary.
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(k) First Franklin shall not take or fail to take, and shall cause
First National and the First National Subsidiary not to take or fail to take,
any action that would cause any of the representations or warranties made by
First Franklin on its own behalf or on behalf of First National and the First
National Subsidiary in this Agreement to be or become untrue. First Franklin
shall promptly notify Smoky Mountain in writing of the existence or happening of
any fact, event, or occurrence that alters, will alter, or may be expected to
alter, in a material respect, the accuracy or completeness of any representation
or warranty by First Franklin contained in this Agreement, including, without
limitation, any representations and warranties made on behalf of First National
and the First National Subsidiary.
(l) Neither First Franklin, First National nor the First National
Subsidiary shall extend credit or accept any deposit or engage in any similar
transaction other than on substantially the same terms (including, without
limitation, interest rates and collateral) as those prevailing at the time for
comparable transactions by other banks in the same geographic market.
5.2 Pre-Merger Conduct of Business by Smoky Mountain and BankFirst. Smoky
Mountain covenants and agrees, on its own behalf and on behalf of BankFirst and
the BankFirst Subsidiaries, that from the date hereof until the Effective Time
of the Merger, unless First Franklin shall otherwise specifically agree in
writing or as otherwise specifically authorized herein:
(a) The business of Smoky Mountain, BankFirst and the BankFirst
Subsidiaries shall be conducted only in the usual, regular and ordinary course
and in substantially the same manner as heretofore conducted, and, to the extent
consistent with such business, Smoky Mountain shall use all reasonable efforts
to preserve, and shall cause BankFirst and the BankFirst Subsidiaries to
preserve, intact their respective business organizations, to keep available the
services of their respective officers and employees, to maintain their
respective rights and franchises, and to preserve their respective relationships
with customers, suppliers, and others having business with Smoky Mountain,
BankFirst and the BankFirst Subsidiaries to the end that their goodwill and
continuing business shall be unaffected in all material respects at the
Effective Time of the Merger.
Without limiting the generality of the foregoing, BankFirst and the BankFirst
Subsidiaries shall not enter into or become bound by any contract, plan,
commitment, or instrument described in Section 3.18 hereof or enter into any
transaction (whether or not described in Section 3.18 hereof) involving the
expenditure, commitment, or lending of money or credit in excess of its legal
lending limit; provided, however, Smoky Mountain, BankFirst and the BankFirst
Subsidiaries shall not be prohibited from taking whatever action is reasonably
necessary to accomplish the terms of Section 3.16.
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(b) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
shall (i) issue any shares of capital stock, except for shares to be issued
prior to the Effective Time of the Merger in connection with the exercise of
options or warrants outstanding on the date hereof and disclosed to First
Franklin pursuant to Section 3.5(b) hereof; (ii) declare, set aside, or pay any
dividend or other distribution payable in cash, stock, or property with respect
to shares of its outstanding capital stock, except for the quarterly dividend on
Smoky Mountain Preferred Stock as agreed to in writing by the parties; (iii)
make any change in its capital stock by split, reverse split, reclassification,
reorganization, subdivision, or otherwise; (iv) acquire any shares of its
capital stock by tender, redemption, or otherwise; (v) amend its Charter or
Bylaws; or (vi) merge or consolidate with or into, or permit the Merger into it
of, any other association, corporation, trust, or entity or change the character
of its business.
(c) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
shall grant any stock options, warrants, rights, or other securities convertible
into, or exercisable or exchangeable for, shares of its capital stock.
(d) Neither Smoky Mountain, BankFirst and the BankFirst Subsidiaries
shall incur any obligations, commitments, or liabilities, whether primarily or
by way of guaranty, in excess of its legal lending limit or having a maturity of
more than one year from the date of its creation, other than in the ordinary
course of business consistent with past practice.
(e) Except in the normal course of business, neither Smoky Mountain,
BankFirst nor the BankFirst Subsidiaries shall enter into any supply contracts,
leases, or other agreements that cannot be terminated without substantial
penalty and/or notice of not more than 30 days.
(f) Except as required by law, neither Smoky Mountain, BankFirst nor
the BankFirst Subsidiaries shall change any loan, investment, or management
policies or make any material alteration in the manner of keeping its books,
accounts, and records.
(g) Except in the normal course of business, neither Smoky Mountain,
BankFirst nor the BankFirst Subsidiaries shall grant any salary increase (other
than as required by any existing contract) or bonus or enter into any new
employment or employee benefit contract or arrangement.
(h) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
shall sell or otherwise dispose of, or agree to sell or otherwise dispose of,
any assets
(i) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
shall take any action that would in any manner adversely affect the ability of
any party hereto to obtain the approvals of any Regulatory Authorities required
for consummation of the transactions contemplated hereby or otherwise interfere
with, impede, delay, or make more costly the consummation of the transactions
contemplated hereby.
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(j) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
authorize or permit any officer, director, employee, investment banker,
financial consultant, attorney, accountant, or other agent or representative of
Smoky Mountain, directly or indirectly, to initiate contact with any person or
entity in an effort to solicit, initiate, or encourage any Takeover Proposal. In
addition, except as the fiduciary duties of the Board of Directors of Smoky
Mountain, BankFirst or the BankFirst Subsidiaries may otherwise require (as
evidenced by a reasoned opinion of counsel received prior thereto, with a copy
promptly furnished to First Franklin) with respect to an unsolicited, bona fide,
written Takeover Proposal, neither Smoky Mountain, BankFirst nor the BankFirst
Subsidiaries shall authorize or permit any officer, director, employee,
investment banker, financial consultant, attorney, accountant, or other agent or
representative of Smoky Mountain, BankFirst or the BankFirst Subsidiaries,
directly or indirectly, (i) to cooperate with, or furnish or cause to be
furnished any non-public information concerning the assets, operations,
business, properties, prospects, or condition (financial or otherwise), of Smoky
Mountain, BankFirst or the BankFirst Subsidiaries to any person or entity in
connection with any Takeover Proposal; (ii) to negotiate any Takeover Proposal
with any person or entity; or (iii) to enter into any agreement or agreement in
principle as to any Takeover Proposal. Smoky Mountain shall promptly give notice
to First Franklin upon becoming aware of any Takeover Proposal. As used in this
paragraph, "Takeover Proposal" shall mean any proposal, other than as
contemplated by this Agreement, for a merger or other business combination
involving Smoky Mountain, BankFirst or the BankFirst Subsidiaries or for the
acquisition of a five (5%) percent equity interest in Smoky Mountain, BankFirst
or the BankFirst Subsidiaries, or for the acquisition of five (5%) percent or
more of the assets of Smoky Mountain, BankFirst or the BankFirst Subsidiaries.
Notwithstanding the terms of this Agreement, nothing shall prohibit Smoky
Mountain, BankFirst and the BankFirst Subsidiaries from taking the action
contemplated under 3.16.
(k) Smoky Mountain shall not take or fail to take, and shall cause
each of BankFirst and the BankFirst Subsidiaries not to take or fail to take,
any action that would cause any of the representations or warranties made by
Smoky Mountain on its own behalf or on behalf of BankFirst and the BankFirst
Subsidiaries in this Agreement to be or become untrue. Smoky Mountain shall
promptly notify First Franklin in writing of the existence or happening of any
fact, event, or occurrence that alters, will alter, or may be expected to alter,
in an important or potentially important respect, the accuracy or completeness
of any representation or warranty by Smoky Mountain contained in this Agreement,
including, without limitation, any representations and warranties made on behalf
of BankFirst and the BankFirst Subsidiaries.
(l) Neither Smoky Mountain, BankFirst nor the BankFirst Subsidiaries
shall extend credit or accept any deposit or engage in any similar transaction
other than on substantially the same terms (including, without limitation,
interest rates and collateral) as those prevailing at the time for comparable
transactions by other banks in the same geographic market.
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5.3 Access. First Franklin, First National and the First National
Subsidiary shall afford to Smoky Mountain, and Smoky Mountain, BankFirst and the
BankFirst Subsidiaries shall afford to First Franklin, and to each of their
respective accountants, counsel, and other representatives, full access during
normal business hours and for reasonable periods throughout the period prior to
the Effective Time of the Merger all of the records, including their respective
properties, books, contracts, commitments, and records (including but not
limited to tax returns) and, during such period, shall furnish promptly to each
other or their representatives (i) a copy of each report, schedule, piece of
correspondence, and other document delivered to, filed with, or received by any
of them pursuant to the requirements of federal or state laws in connection with
this Agreement; (ii) written notice of any event or development (A) which, had
it been known on the date of this Agreement, would have been required to be
disclosed under this Agreement, (B) which would cause any of the representations
and warranties of First Franklin or of Smoky Mountain contained herein to be
inaccurate or incomplete or otherwise misleading, or (C) which materially
relates to the satisfaction of the conditions set forth in Article Six of this
Agreement, or which are material to the activities of First Franklin and Smoky
Mountain; and (iii) all other information concerning their assets, operations,
business, employees, revenue, income, prospects, condition (financial or
otherwise), liabilities, net worth, or results of operations as they or their
representatives may reasonably request. Any inspection or investigation
performed pursuant to this Section 5.3 shall be conducted in a manner so as not
to interfere unreasonably with the operation of the business of the entity being
inspected or investigated and shall not affect or limit in any way any of their
respective representations and warranties hereunder.
5.4 Confidential Information. All Confidential Information shall be held
in strict confidence; and the party gaining access to such Confidential
Information shall exercise the same degree of care with respect thereto that any
such party uses to preserve and safeguard its own confidential proprietary
information. Such Confidential Information shall not directly or indirectly be
divulged, disclosed, or communicated to any other person or entity or used for
any purposes other than those expressly contemplated by this Agreement, except
as otherwise required by judicial or regulatory authorities having jurisdiction
in respect thereof. In the event the transactions contemplated by this Agreement
are not consummated for any reason, all copies of all documents and other
recorded material comprising such Confidential Information shall immediately be
returned and shall not thereafter be used for any purpose by the acquiring party
or any subsidiary or affiliate thereof, and the confidentiality of such
Confidential Information shall be maintained, except to the extent that such
Confidential Information can be shown to be or to have been (i) otherwise known
to the acquiring party, (ii) already in the public domain, (iii) released
without restriction by the proprietor of the Confidential Information to another
person, or (iv) received by the acquiring party on a non-confidential basis from
another person lawfully possessing and lawfully entitled to disclose such
information. This undertaking with respect to nondisclosure of Confidential
Information is of the essence and will survive any termination of this Agreement
or the transactions contemplated hereby.
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5.5 Proxy Statement. First Franklin shall timely mail the Proxy Statement
to the shareholders of First Franklin who are entitled to notice of, and to vote
at the First Franklin Shareholders' Meeting. First Franklin shall publish such
notice or notices of the First Franklin Shareholders' Meeting as may be
required, and at the times and in the form and manner required, by applicable
provisions of state and federal statutes, regulations, rules and orders and by
its Charter. Smoky Mountain shall timely mail the Proxy Statement to the
shareholders of Smoky Mountain who are entitled to notice of, and to vote at the
Smoky Mountain Shareholders' Meeting. Smoky Mountain shall publish such notice
or notices of the Smoky Mountain Shareholders' Meeting as may be required, and
at the times and in the form and manner required, by applicable provisions of
state and federal statutes, regulations, rules and orders and by its Charter.
5.6 Furnishing of Information.
(a) Smoky Mountain and First Franklin shall promptly furnish each
other with such information relating to Smoky Mountain and First Franklin as is
required under applicable laws and regulations for inclusion in the Registration
Statement.
(b) Each party shall promptly furnish the other such information
relating to Smoky Mountain and First Franklin (i) as is required under
applicable laws and regulations for inclusion in any filing with state or
federal authorities necessary to obtain approval for, or to give notice of, the
Merger or any other transaction contemplated hereby (including, without
limitation, any documents filed or to be filed by Smoky Mountain or First
Franklin with the FRB, the SEC, the TDFI and the FDIC for authority to
consummate the transactions contemplated hereby); (ii) as is necessary for
disclosure to First Franklin's and Smoky Mountain's shareholders; or (iii) as
reasonably requested by Smoky Mountain and First Franklin. Each party will
promptly furnish to the other copies of all quarterly and annual financial
reports filed by First Franklin, First National, the First National Subsidiary,
Smoky Mountain, BankFirst and the BankFirst Subsidiaries with the state or
federal Regulatory Authorities, as well as any examination or similar reports
received from such persons, and any correspondence related thereto, to the
extent permitted by applicable law. Until the Effective Time of the Merger, each
party shall provide to the other party, on or before the twentieth day of each
calendar month, monthly financial statements generated by First Franklin, First
National, Smoky Mountain and BankFirst for the preceding calendar month period,
including a balance sheet and income statement.
(c) Smoky Mountain and First Franklin shall provide to each other
copies of all applications, documents, correspondence, or oral (to the extent
material) or written comments that each of them or any of their affiliates files
with, send to, or receives from the SEC relative to the Registration Statement
and the S-4 Registration Statement, the FRB, the TDFI, and the FDIC, or any
other state or federal authorities, or the staff or agents of any of them,
relating to this Agreement and the transactions contemplated hereby, including
any applications filed for the purpose of obtaining any required regulatory
approvals. Copies of all such applications, documents, correspondence, or
comments shall be provided by each of the Smoky Mountain and First Franklin to
the other's counsel. In the case of applications, documents, correspondence, and
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comments to be filed by First Franklin or First National or by Smoky Mountain or
BankFirst with a Regulatory Authority, copies are to be provided to each other's
counsel for review and comment with as much as advance notice as is reasonably
practicable, and in the case of correspondence or comments (written or oral)
received by First Franklin, First National, the First National Subsidiary, Smoky
Mountain, BankFirst or the BankFirst Subsidiaries from a regulatory authority ,
copies (or, with respect to oral comments, a written summary thereof) are to be
provided to each others counsel as promptly as possible after receipt thereof.
5.7 Filing for all Regulatory Approvals. Subject to the provisions of
Section 5.6 hereof, for the purpose of obtaining Regulatory Approval of the
Merger, Smoky Mountain shall prepare and file all necessary documents with the
FRB, the SEC, the TDFI, and the FDIC. Smoky Mountain and First Franklin shall
each diligently pursue the Regulatory Approval process by taking such actions,
and causing their respective subsidiaries to take such actions, as may be
required to effect the Merger and all other transactions contemplated by this
Agreement. Notwithstanding the foregoing, nothing herein shall require Smoky
Mountain to take any action, accept any condition, or make any concession which
Smoky Mountain reasonably determines to be materially adverse to the assets,
business, operations, employees, revenues, income, prospects, condition
(financial or otherwise), liabilities, net worth, or results of operations of
Smoky Mountain or First Franklin or their subsidiaries.
5.8 Increase in Authorized Shares If it is necessary to authorize any
additional shares of Smoky Mountain Common Stock in order to effect the Merger,
and the public offering as described in Section 3.16, Smoky Mountain shall call
a meeting of its shareholders in accordance with the applicable provisions of
Tennessee law and of Smoky Mountain's Charter for the purpose of amending such
Charter.
5.9 No Control of First Franklin by Smoky Mountain. Notwithstanding any
other provision hereof, until the Effective Time of the Merger, the management
of First Franklin and the authority to establish and implement its business
policies shall continue to reside solely in First Franklin's officers and Board
of Directors, and the election of First Franklin's directors shall be solely the
prerogative of First Franklin's shareholders.
5.10 Agreements to Use Best Efforts. Subject to the terms and conditions
set forth in this Agreement, First Franklin and Smoky Mountain each agrees to
use its best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper, or advisable to consummate and
make effective, as promptly as practicable, the transactions contemplated by
this Agreement and to cooperate with each other in connection with the
foregoing, including using best efforts (i) to obtain all necessary consents,
approvals, and authorizations as are required to be obtained under applicable
state and federal statutes and regulations, (ii) to defend all lawsuits or other
legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby, (iii) to lift or rescind any injunction or
restraining order or any other order or condition adversely affecting the
ability of the parties to consummate the transactions contemplated by this
Agreement, (iv) to effect all necessary filings
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with state and federal regulatory agencies, and (v) to continue the business
enterprise of First Franklin, within the meaning of Section 368 of the Code, for
the purpose of causing the merger to be a tax-free transaction to the First
Franklin Shareholders. In the event of the imposition of a condition to any
approval by any state or federal Regulatory Authority necessary for the valid
consummation of the transactions contemplated by this Agreement which Smoky
Mountain and First Franklin deem to be materially burdensome, Smoky Mountain
may, after consultation with First Franklin, take such action as Smoky Mountain
may deem appropriate for the purpose of obtaining the removal or modification of
such condition; provided, however, that nothing in this Section 5.10 shall
require Smoky Mountain to institute any litigation in connection therewith, to
continue any actions subsequent to any termination of this Agreement, or to
assume any obligation that it deems not to be in its best interest.
5.11 Press Releases and Public Information. Smoky Mountain and First
Franklin further agree that no press releases shall mention the public offering
being made by Smoky Mountain under the terms of Section 3.16 of this Agreement,
unless approved in writing by Smoky Mountain. Subject to compliance with their
respective legal obligations, Smoky Mountain and First Franklin will advise and
confer with each other and otherwise cooperate in good faith prior to releasing
any statement to the press or otherwise making public any information concerning
any of the transactions contemplated herein.
5.12 Updating of the Schedules. First Franklin and Smoky Mountain shall,
from time to time, prepare and deliver to each other such supplements to the
Schedules attached hereto as may be necessary or appropriate to ensure the
accuracy and completeness of the information required to be disclosed in such
Schedules at all times prior to the Effective Time of the Merger.
5.13 Accounting Treatment. Smoky Mountain shall obtain from Crowe Chizek &
Company an opinion letter stating that the Merger will qualify for pooling of
interests accounting treatment.
5.14. Current SEC Reports. For so long as and to the extent necessary to
permit First Franklin Shareholders to sell Smoky Mountain Common Stock pursuant
to Rule 145 and, to the extent applicable, Rule 144 under the Securities Act,
Smoky Mountain shall file, on a timely basis, all reports required to be filed
with the SEC by it pursuant to Section 13 of the Exchange Act, so long as it is
subject to such requirement, shall furnish to any such First Franklin
Shareholder upon request a written statement as to whether Smoky Mountain has
complied with such reporting requirements during the twelve (12) months
preceding any proposed sale under Rule 145 and shall otherwise use its
reasonable best efforts to permit such sales pursuant to Rule 145 and 144.
5.15 Exchange Act Registration. Regardless of whether the offering of
Smoky Mountain Common Stock described in Section 3.16 is consummated, Smoky
Mountain shall, after the Effective Time of the Merger, take such action as may
be required to register with the SEC the
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Smoky Mountain Common Stock under Section 12(g) of the Exchange Act.
5.16 Indemnification and Insurance.
(a) Smoky Mountain shall, to the fullest extent permitted under
applicable law or under its Charter or By-Laws, indemnify and hold harmless,
each present and former director, officer or employee of First Franklin, First
National and First National Subsidiary (collectively, the "Indemnified Parties")
against any costs or expenses (including attorneys' fees), judgment, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, (x) arising out of or
pertaining to the transactions contemplated by this Agreement or (y) otherwise
with respect to any acts or omissions occurring at or prior to the Effective
Time, to the same extent as provided in the Charter, Articles of Association or
By-Laws, as the case may be, of First Franklin, First National or First National
Subsidiary or any applicable contract or agreement as in effect on the date
hereof, in each case for a period of six years after the date hereof. In the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time, (i) any counsel retained by the
Indemnified Parties for any period after the Effective Time shall be reasonably
satisfactory to Smoky Mountain, (ii) after the Effective Time, Smoky Mountain
shall pay the reasonable fees and expenses of such counsel, promptly after
statements therefor are received, and (iii) Smoky Mountain will cooperate in the
defense of any such matter, provided, however, that Smoky Mountain shall not be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and provided further that, in the event
that any claim or claims for indemnification are asserted or made within such
six-year period, all rights to indemnification in respect of any such claim or
claims shall continue until the disposition of any and all such claims. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to any single action unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties, in which case each Indemnified Person
with respect to whom such a conflict exists (or group of such Indemnified
Persons who among them have no such conflict) may retain one separate law firm.
(b) Smoky Mountain shall honor and fulfill in all respects the
obligations of First Franklin pursuant to indemnification agreements and
employment agreements, if any, with First Franklin's directors and officers
existing at or before the Effective Time.
(c) For a period of three (3) years after the Effective Time, Smoky
Mountain shall maintain in effect, if available, directors' and officers'
liability insurance covering those persons who are currently covered by First
Franklin's directors' and officers' liability insurance policy (a copy of which
has been made available to Smoky Mountain) on terms comparable to those now
applicable to directors and officers of First Franklin.
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ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE
6.1 Conditions to Both Parties' Obligation to Close. The obligations of
Smoky Mountain and First Franklin under this Agreement to consummate the
transactions contemplated hereby are subject to the satisfaction of the
following conditions precedent at or prior to (as the case may be) the Closing,
unless any one or more of such conditions, to the extent legally permitted,
shall be waived in writing by the parties hereto on or before the Closing Date:
(a) Governmental Approvals. Any and all orders, permits, approvals,
or qualifications from all appropriate state and federal governmental
authorities, including without limitation the FRB, the SEC, the TDFI and the
FDIC for the lawful consummation of the Merger and the transactions contemplated
by this Agreement shall have been obtained within three (3) months following the
date of this Agreement, subject to no conditions which in the reasonable
judgment of Smoky Mountain and First Franklin would restrict the Surviving
Corporation in its spheres of operation and business activities subsequent to
the Effective Time of the Merger; provided, however, that if Smoky Mountain is
continuing in good faith to seek regulatory approvals at the end of such three
(3) month period, Smoky Mountain may request that First Franklin agree to extend
the term of this Agreement by three (3) months, approval of which request shall
not be unreasonably withheld by First Franklin. Any waiting period required
prior to the consummation of such transactions pursuant to any applicable laws
or regulations shall have elapsed, and no court, arbitral tribunal, or
governmental agency shall have enjoined, restrained, or prohibited the
transactions contemplated by this Agreement, which injunction, restraint, or
prohibition shall not have been removed.
(b) Shareholder Approval. This Agreement shall have been duly
adopted and approved by the shareholders of First Franklin and Smoky Mountain,
which are entitled to vote with respect to the Merger. If necessary, the
shareholders of Smoky Mountain shall have adopted and approved an amendment to
the Charter of Smoky Mountain increasing the number of authorized shares of
Smoky Mountain Common Stock as contemplated hereby.
(c) Pooling Opinion. The parties shall have received the pooling
opinion letter from Crowe Chizek & Company.
(d) Securities Laws. The S-4 Registration Statement filed by Smoky
Mountain shall be declared effective by the SEC and no order suspending the sale
of the shares of Smoky Mountain Common Stock in any jurisdiction shall have been
issued, and no proceedings for that purpose shall have been instituted or shall
be, to Smoky Mountain's knowledge, contemplated.
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6.2 Conditions to First Franklin's Obligation to Close. The obligations of
First Franklin under this Agreement to consummate the transactions contemplated
hereby are, in addition, subject to the satisfaction of the following conditions
on or prior to the Closing Date, unless any one or more of such conditions, to
the extent legally permitted, are waived in writing by First Franklin on or
before the Closing Date:
(a) Accuracy of Representations and Warranties. The representations
and warranties of Smoky Mountain herein contained shall have been true and
correct in all material respects when made, and, in addition, shall be true and
correct in all material respects on and as of the Closing Date, with the same
force and effect as though made on and as of the Closing Date, except as
affected by transactions specifically contemplated or permitted hereby and
except for any such representations and warranties made as of a specific date,
which shall be true and correct in all material respects as of such date, and
except for any changes occurring in the ordinary course of business, none of
which individually or in the aggregate has been materially adverse to Smoky
Mountain. Smoky Mountain shall present to First Franklin a certificate of the
Chief Executive Officer that Section 6.2(a) is true and complete and correct as
of the date of Closing.
(b) Performance of Covenants and Agreements. Smoky Mountain shall
have performed in all material respects all obligations and agreements and
complied with all covenants contained in this Agreement to be performed and
complied with by Smoky Mountain on or prior to the Closing Date.
(c) No Material Change. Between the date of this Agreement and the
Closing Date, there shall not have occurred any material adverse change in the
assets, including loan portfolio, business, operations, employees, revenue,
income, prospects, condition (financial or otherwise), liabilities, net worth,
or results of operations of Smoky Mountain, BankFirst, or the BankFirst
Subsidiaries.
(d) Fairness Opinion. First Franklin shall, as soon as practicable,
have obtained an opinion, dated as of the date of this Agreement and issued to
First Franklin and its shareholders by Professional Bank Services, Inc. or
another investment banking firm or consulting firm acceptable to both Smoky
Mountain and First Franklin, suitable for inclusion in shareholder proxy
materials, that the transactions contemplated by this Agreement are fair from a
financial point of view.
(e) Consent of Other Persons. To the extent that any lease,
contract, or agreement to which First Franklin or First National is a party or
by which any of them is bound or to which any of their properties is subject
shall require the consent of any other person or entity to the transactions
contemplated hereby, such consent shall have been obtained by the Closing Date,
unless Smoky Mountain specifically agrees that such consent need not be obtained
by the Closing
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Date; provided, however, that First National shall not make, as a condition for
the obtaining of any such consent, any agreements, representations, warranties,
or undertakings that are not specifically approved by Smoky Mountain. Smoky
Mountain shall furnish such information and shall take such other actions as
First Franklin may reasonably request in order to obtain any consent of any
third party required by Section 6.3(c).
(f) Legal Opinion of Counsel. Smoky Mountain shall have delivered to
First Franklin an opinion or opinions of counsel, dated as of the Closing, in
form and substance satisfactory to First Franklin and its counsel, to the effect
that:
(i) Smoky Mountain is a corporation organized, validly
existing, and in good standing under the laws of the State of Tennessee and is
duly registered as a bank holding company under the Act; BankFirst is a banking
corporation organized, validly existing, and in good standing under the laws of
the State of Tennessee; Curtis Mortgage and Eastern Life Insurance Company are
nonbank corporations organized, validly existing, and in good standing under the
laws of the State of Tennessee; and each of Smoky Mountain, BankFirst and
BankFirst Subsidiaries has full corporate power to own and operate its business
and properties and to carry on its business as currently conducted.
(ii) Execution, delivery, and performance of this Agreement by
Smoky Mountain and consummation of the transactions contemplated hereby do not
and will not conflict with, or result in the breach of, or constitute a default
under, any of the provisions of the Charters or Bylaws of Smoky Mountain,
BankFirst or the BankFirst Subsidiaries, or to such counsel's knowledge, any
agreement to which any of Smoky Mountain, BankFirst or the BankFirst
Subsidiaries is a party or by which their respective properties or assets may be
bound.
(iii) To the knowledge of such Counsel, except as disclosed
herein, there are no outstanding subscriptions, options, warrants or rights to
acquire or issue or any outstanding securities or obligations convertible into,
shares of Smoky Mountain Common Stock, except as disclosed herein
(iv) To the knowledge of such Counsel, there are no
outstanding obligations to purchase, reacquire, or redeem any shares of Smoky
Mountain Common Stock.
(v) Smoky Mountain has full corporate power and corporate
authority to make, execute, deliver and perform this Agreement, and this
Agreement has been duly authorized and approved by all necessary corporate
action of Smoky Mountain and constitutes a valid and legally binding obligation
of Smoky Mountain.
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(vi) All filings and registrations with, and notifications to,
all Regulatory Authorities (including, without limitation, the FRB, the SEC, the
TDFI and the FDIC) required on the part of Smoky Mountain for the consummation
of the Merger have been made, all approvals and authorizations of all federal
and state authorities (including, without limitation, the FRB, the TDFI and the
FDIC) required with respect to Smoky Mountain for consummation of the Merger are
in full force and effect, and all applicable waiting periods have passed.
(vii) The Registration Statement has become effective and, to
such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated.
(viii) The shares of Smoky Mountain Common Stock to be issued
to First Franklin Shareholders pursuant to the Merger and as contemplated in the
Agreement are duly authorized and, when properly issued and delivered following
consummation of the Merger, will be validly issued, fully paid and
nonassessable. Such shares of Smoky Mountain Common Stock will be delivered to
First Franklin Shareholders pursuant to the terms of the Plan of Merger free and
clear of all claims, encumbrances, security interests and liens whatsoever and
will be fully transferable by any such holder without any restrictions required
under federal or applicable state securities laws, except restrictions
applicable to such holders who are deemed "affiliates" of First Franklin under
Rule 145 under the Securities Act.
(g) Updated Smoky Mountain Schedules. Smoky Mountain shall have
delivered to First Franklin such supplements as may be necessary or appropriate
to ensure the accuracy and completeness as of the Closing Date of the
information disclosed in the schedules provided by Smoky Mountain pursuant
hereto.
(h) Tax Treatment. First Franklin shall have obtained an opinion
dated the Closing Date, that the Merger shall be treated for federal income
purposes as a tax-free reorganization with respect to First Franklin's
shareholders.
(i) Outstanding Shares. No more than 1,275,079 shares of Smoky
Mountain Common Stock and 215,805 shares of Smoky Mountain Preferred Stock shall
be outstanding immediately prior to the Effective Time of the Merger, unless
options are exercised or preferred shares are converted, and Smoky Mountain
shall have no other outstanding equity securities or other securities
convertible into, or exercisable or exchangeable for, equity securities of Smoky
Mountain, except as shall be disclosed to First Franklin, in accordance with
Smoky Mountain's Registration Statement.
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(j) Comfort Letter. First Franklin shall have received from Crowe
Chizek and Company letters dated not more than five (5) days prior to (i) the
date of the Proxy Statement; and (ii) the Effective Time with respect to the
certain financial information concerning Smoky Mountain in form and substance
which is customary in transactions of the nature contemplated by this Agreement.
6.3 Conditions to Smoky Mountain's Obligation to Close. The obligations of
Smoky Mountain under this Agreement to consummate the transactions contemplated
hereby are subject to the satisfaction of the following additional conditions,
on or prior to the Closing Date, unless any one or more of such conditions, to
the extent legally permitted, shall be waived in writing by Smoky Mountain on or
before the Closing Date:
(a) Accuracy of Representations and Warranties. The representations
and warranties of First Franklin herein contained shall have been true and
correct in all material respects when made, and, in addition, shall be true and
correct in all material respects on and as of the Closing Date, with the same
force and effect as though made on and as of the Closing Date, except as
affected by transactions specifically contemplated or permitted hereby and
except for any such representations and warranties made as of a specific date,
which shall be true and correct in all material respects as of such date, and
except for any changes occurring in the ordinary course of business, none of
which individually or in the aggregate has been materially adverse to First
Franklin. First Franklin shall present to Smoky Mountain a certificate of its
Chief Executive Officer that Section 6.3(a) is true and complete and correct as
of the date of Closing.
(b) Performance of Covenants and Agreements. First Franklin shall
have performed in all material respects all obligations and agreements and
complied with all covenants contained in this Agreement to be performed and
complied with by First Franklin on or prior to the Closing Date.
(c) Consent of Other Persons. To the extent that any lease,
contract, or agreement to which First Franklin or First National is a party or
by which any of them is bound or to which any of their properties is subject
shall require the consent of any other person or entity to the transactions
contemplated hereby, such consent shall have been obtained by the Closing Date,
unless Smoky Mountain specifically agrees that such consent need not be obtained
by the Closing Date; provided, however, that First National shall not make, as a
condition for the obtaining of any such consent, any agreements,
representations, warranties, or undertakings that are not specifically approved
by Smoky Mountain. Smoky Mountain shall furnish such information and shall take
such other actions as First Franklin may reasonably request in order to obtain
any consent of any third party required by this Section 6.3(c).
(d) No Material Change. Between the date of this Agreement and the
Closing Date, there shall not have occurred any material adverse change in the
assets (including loan portfolio), business, operations, employees, revenue,
income, prospects, condition (financial or otherwise), liabilities, net worth,
or results of operations of First Franklin or First National.
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(e) Legal Opinion of First Franklin's Counsel. First Franklin shall
have delivered to Smoky Mountain an opinion or opinions of counsel, dated as of
the Closing, in form and substance reasonably satisfactory to Smoky Mountain and
its counsel, to the effect that:
(i) First Franklin is a corporation organized, validly
existing, and in good standing under the laws of the State of Tennessee and is
duly registered as a bank holding company under the Act; First National is a
national banking association organized, validly existing, and in good standing
under the laws of the United States; Friendly Finance Company, Inc., is a
Tennessee chartered industrial loan and thrift company, validly existing, and in
good standing under the laws of the State of Tennessee; and First Franklin,
First National and the First National Subsidiary each have full corporate power
to own and operate their respective business and properties and to carry on
their respective business as currently conducted.
(ii) The authorized capital stock of First Franklin consists
solely of 400,000 shares of First Franklin Common Stock, of which 164,125 shares
are validly issued and outstanding, fully paid and nonassessable, and have not
been issued in violation of the preemptive rights of any person; the authorized
capital stock of First National consists solely of 120,000 shares of common
stock, of which 120,000 shares are validly issued and outstanding, fully paid
and nonassessable (except to the extent that capital stock of a national banking
association is assessable under the national banking laws), have not been issued
in violation of the preemptive rights of any person, and wholly-owned by First
Franklin; the authorized capital stock of Friendly Finance Company, Inc.
consists solely of 100,000 shares of Common Stock of which 10,000 shares are
validly issued and outstanding, fully paid and nonassessable, and have not been
issued in violation of the preemption rights of any person, and wholly owned by
First National.
(iii) To the knowledge of such counsel, there are no
outstanding subscriptions, options, warrants, or rights to acquire or issue, or
any outstanding securities or obligations convertible into, shares of First
Franklin Common Stock.
(iv) To the knowledge of such counsel, there are no
outstanding obligations to purchase, reacquire, or redeem any shares of First
Franklin Common Stock.
(v) Execution, delivery, and performance of this Agreement by
First Franklin and consummation of the transactions contemplated hereby do not
and will not conflict with, or result in the breach of, or constitute a default
under, any of the provisions of the Charter or Bylaws of First Franklin or, to
such counsel's knowledge, of any other agreement to which First Franklin is a
party or by which its properties or assets or the properties or assets of First
National) may be bound.
(vi) First Franklin has full corporate power and corporate
authority to execute, deliver, and perform this Agreement, and this Agreement
has been duly authorized, approved, and adopted by all requisite corporate
action of First Franklin, and by the shareholders of First Franklin, and
constitutes a valid and binding obligation of First Franklin.
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(vii) All filings and registrations with, and notifications
to, all federal and state authorities required on the part of First Franklin for
the consummation of the Merger have been made; all approvals and authorizations
of all federal and state authorities required with respect to First Franklin for
consummation of the Merger are in full force and effect, and all applicable
waiting periods have passed.
(f) Updated First Franklin Schedules. First Franklin shall have
delivered to Smoky Mountain such supplements as may be necessary or appropriate
to ensure the accuracy and completeness as of the Closing Date of the
information disclosed in the Schedules provided by First Franklin pursuant
hereto.
(g) Outstanding Shares. No more than 164,125 shares of First
Franklin Common Stock shall be outstanding immediately prior to the Effective
Time of the Merger, and First Franklin shall have no other outstanding equity
securities or other securities convertible into, or exercisable or exchangeable
for, equity securities of First Franklin.
(h) Resignations of Directors. The directors of First Franklin shall
have submitted their resignations, effective as of the Effective Time of the
Merger, subject to acceptance by Smoky Mountain and subject to Section 7.1 of
this Agreement.
(i) Other Information and Actions. First Franklin shall have
delivered or caused to be delivered to Smoky Mountain such other documents or
instruments, and shall have taken or caused to be taken such other actions, as
may reasonably have been requested by Smoky Mountain or its counsel with respect
to the transactions contemplated by this Agreement.
(j) Comfort Letter. Smoky Mountain shall have received from G. R.
Rush and Company letters dated not more than five (5) days prior to (i) the date
of the Proxy Statement; and (ii) the Effective Time with respect to the certain
financial information concerning First Franklin in form and substance which is
customary in transactions of the nature contemplated by this Agreement.
ARTICLE 7
TERMINATION
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval by the
shareholders of First Franklin and Smoky Mountain by any one of the following
means:
(a) By mutual written consent authorized by the boards of director
of each of Smoky Mountain and First Franklin.
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(b) By the Board of Directors of Smoky Mountain, upon delivery of
written notice of termination to First Franklin, if any event occurs which
renders impossible of satisfaction in any material respect one or more of the
conditions to the obligations of Smoky Mountain to effect the Merger set forth
in Sections 6.1 and 6.3 hereof and noncompliance is not waived by Smoky
Mountain.
(c) By the Board of Directors of First Franklin, upon delivery of
written notice of termination of Smoky Mountain, if any event occurs which
renders impossible of satisfaction in any material respect one or more of the
conditions to the obligations of First Franklin to effect the Merger set forth
in Sections 6.1 and 6.2 hereof and noncompliance is not waived by First
Franklin.
(d) By the Board of Directors of Smoky Mountain or the Board of
Directors of First Franklin in the event (i) the Effective Time of Merger shall
not have occurred on or before September 30, 1998, and provided that no further
government, regulatory, or shareholder approvals are necessary as of such date;
or (ii) any court of competent jurisdiction in the United States or other
federal or state governmental body shall have issued an order, decree, or ruling
or taken any other action restraining, enjoining, or otherwise prohibiting the
Merger or other transactions contemplated hereunder and such order, decree,
ruling, or other action shall become final and non-appealable, and it is not
relieved within thirty (30) days.
7.2 Effect of Termination.
(a) If this Agreement is terminated pursuant to Section 7.1 hereof,
all further obligations of the parties hereto under this Agreement shall
terminate and the Merger shall be abandoned, except that the provisions of this
Section 7.2(a) and Sections 4.11 (brokers), 5.4 (Confidential Information), and
7.2(b) (expenses in the event of termination) hereof shall survive any such
termination and abandonment of the Merger.
(b) Notwithstanding the foregoing, (i) in the event this Agreement
is terminated by Smoky Mountain pursuant to Section 7.1(b) hereof (because of
any act, condition or omission of First Franklin, First National, or the First
National Subsidiary) or by First Franklin pursuant to Section 7.1(c) hereof
(because of any act, condition, or omission of Smoky Mountain, BankFirst or the
BankFirst Subsidiaries), the party terminating this Agreement shall be entitled
to reimbursement from the other party for the costs and expenses (including fees
and expenses of attorneys, auditors and financial advisors) actually and
reasonably incurred by it in connection with this Agreement and the transactions
contemplated hereby.
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7.3 Termination Without Cause. In the event that either party desires to
terminate this Agreement, after approval by the stockholders of Smoky Mountain
and First Franklin, for any reason, other than as set forth in Section 7.1(b)
and Section 7.1(c) hereof, the terminating party shall pay to the
non-terminating party the sum of Four Million ($4,000,000.00) Dollars as
liquidated damages ("terminating sum"). The terminating sum shall be due and
payable at the termination of the Agreement.
ARTICLE 8
MISCELLANEOUS
8.1 Smoky Mountain and First National Boards of Directors. The parties
hereto agree that, at the Effective Time of Merger, the number of directors of
Smoky Mountain's Board of Directors shall be increased by three (3) persons.
Smoky Mountain shall use its best efforts to have these additional Smoky
Mountain directorships filled by the election of three (3) current directors of
First Franklin, who shall serve as Smoky Mountain directors. Additionally, the
parties agree that the number of directors of First National's Board of
Directors shall be increased by at least one (1) person. First National shall
use its best efforts to have the additional First National directorship filled
by the election of one (1) current director of Smoky Mountain whose name will be
set forth in Exhibit 8.1 hereto, who shall serve as a First National Director.
8.2 Continuation of First National. For a minimum of two (2) years from
the Closing Date, the legal status of First National shall not be changed nor
shall its name be changed.
8.3 Expenses. Except as provided in Section 7.2(b) hereof, each party
shall bear and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereby, including the fees and
expenses of its own financial or other consultants, investment bankers,
accountants, and counsel.
8.4 Entire Agreement; Amendment. This Agreement, including any Exhibits
and Schedules hereto and other writings specifically referred to, constitutes
the entire agreement among the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior oral or written agreements,
commitments, or understandings with respect to the matters provided for herein.
No amendment, modification, or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, or discharge is sought; provided,
however, that, subject to Section 8.4 hereof, after approval by First Franklin's
Shareholders, there can be no amendment which will affect the rights of such
shareholders in a manner which, in the judgment of First Franklin's Board of
Directors, is materially adverse to First Franklin's Shareholders.
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8.5 Waiver. No delay or failure on the part of any party hereto to
exercise any right, power, or privilege under this Agreement or under any other
instrument given in connection with or pursuant to this Agreement shall impair
any such right, power or privilege or be construed as a waiver of any default or
as acquiescence therein. No single or partial exercise of any such right, power,
or privilege shall preclude the further exercise of any such right, power or
privilege or the exercise of any other right, power or privilege. No waiver
shall be valid against any party hereto unless made in writing and signed by the
party against whom enforcement of such waiver is sought and then only to the
extent expressly specified therein.
8.6 Governing Law. This Agreement, the rights and obligations of the
parties hereto, and any claims or disputes relating hereto, shall be governed by
and construed in accordance with the substantive laws and the procedural
provisions of the State of Tennessee as applied to contracts executed in and to
be performed in the State of Tennessee, to the extent federal law does not
control.
8.7 Governmental Agencies. All references herein to various applicable
governmental regulatory agencies shall be deemed to include, to the extent
required by law, any other such regulatory agency that, by virtue of legislative
change or any action permitted to a party hereunder, properly assumes
jurisdiction of any of the transactions contemplated in this Agreement.
8.8 Specific Performance. The parties recognize and hereby acknowledge
that it is impossible adequately to measure in money the damages that would
result to a party by reason of the failure of any of the parties to perform any
of the obligations imposed upon it by this Agreement. Accordingly, if, after
approval by the shareholders of First Franklin and Smoky Mountain, any party
should institute an action or proceeding seeking specific performance of the
provisions hereof, each party against which such action or proceeding is brought
hereby waives the claim or defense that the party instituting such action or
proceeding has an adequate remedy at law and hereby agrees not to assert in any
such action or proceeding the claim or defense that such a remedy at law exists.
8.9 Notices. All notices, demands, requests, or other communications that
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be hand delivered
or mailed by registered or certified mail, return receipt requested, postage
prepaid, or transmitted by telegram, telex, or facsimile transmission, addressed
as follows:
If to Smoky Mountain:
Mr. Fred R. Lawson
President and Chief Executive Officer
Smoky Mountain Bancorp, Inc.
625 Market Street
Knoxville, TN 37902
Page 63 of 66
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With a copy to:
Robert G. McCullough, Esq.
Baker, Donelson, Bearman and Caldwell
511 Union Street, Suite 1700
Nashville, TN 37219
Thomas McAdams, Esq.
Bernstein, Stair and McAdams
531 South Gay Street
Suite 700
Knoxville, TN 37902
If to First Franklin:
Mr. L. A. Walker
Chairman and Chief Executive Officer
First Franklin Bancshares, Inc.
204 Washington Avenue
Post Office Box 100
Athens, TN 37371-0100
With a copy to:
Scott McGinness, Esq.
Miller & Martin
Suite 1000, Volunteer Building
832 Georgia Avenue
Chattanooga, TN 37402
Kathryn R. Edge, Esq.
Miller & Martin
Suite 2325
SunTrust Center
Nashville, TN 37219
Page 64 of 66
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Each party may designate by notice in writing a new address to which any notice,
demand, request, or communication may thereafter be so given, served, or sent.
Each notice, demand, request, or communication sent by mail shall be deemed to
have been given two business days after the date of such mailing (except that a
notice of change of address shall not be deemed to have been given until
received by the addressee). Notices sent by telegram, telex, facsimile
transmission, or hand delivery shall be deemed to have been given as of the date
received.
8.10 No Third Party Beneficiaries. It is the explicit intention of the
parties hereto that no person or entity other than the parties hereto is or
shall be entitled to bring any action to enforce any provision of this Agreement
against any of the parties hereto, and the covenants, undertakings and
agreements set forth in this Agreement shall be solely for the benefit of, and
shall be enforceable only by, the parties hereto or their respective successors,
legal representatives as permitted hereunder, and any other persons or entities
specifically designated herein, except to the extent that other persons or
entities are direct beneficiaries of the provisions of Sections 5.14, 5.15 and
5.16 hereof.
8.11 No Assignment. This Agreement may not be assigned by any of the
parties hereto , by operation of law, or otherwise, except as contemplated
hereby and shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and legal representatives.
8.12 Headings. Article and section headings contained in this Agreement
are inserted for convenience of reference only, shall not be deemed to be a part
of this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction, or scope of any of the provisions hereof.
8.13 Termination of Representations and Warranties. Except for the
provisions of Sections 5.14, 5.15 and 5.16, the undertakings, covenants,
representations and warranties of the parties set forth in this Agreement or in
certificates, schedules, or other documents delivered pursuant hereto shall
expire at, and be terminated and extinguished at, the Closing; provided,
however, that in the case of consummation of the Merger, no representation or
warranty of First Franklin provided for herein shall be deemed to be terminated
or extinguished so as to deprive Smoky Mountain of any defense in law or equity
that it otherwise would have to any claim against it by any person or any claim
against any person, including, without limitation, any shareholder or former
shareholder of First Franklin.
8.14 Construction. Should any provision of this Agreement require judicial
interpretation, the parties hereto agree that the court interpreting or
construing the same shall not apply a presumption that the term shall be more
strictly construed against one party by the reason of the construction that a
document is to be more strictly construed against the party than itself or
through its agent prepared the same, it being agreed that Smoky Mountain and
First Franklin and their respective agents have participated in the preparation
hereof.
Page 65 of 66
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8.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original instrument, but all of
which counterparts shall constitute one and the same Agreement.
8.16 Severability. If any portion or provision of this Agreement should be
determined by a court of competent jurisdiction to be invalid, illegal or
unenforceable in any jurisdiction, such portion or provision shall be
ineffective as to that jurisdiction to the extent of such invalidity, illegality
or unenforceability, without affecting in any way the validity or enforceability
of the remaining portions or provisions hereof in such jurisdiction or rendering
that or any other portions or provisions of this Agreement invalid, illegal or
unenforceable in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their behalf and in their name, on the day and year first above
written.
SMOKY MOUNTAIN BANCORP, INC.
By: /s/ Fred R. Lawson
---------------------------------------
Fred R. Lawson
Its: President and Chief Executive Officer
ATTEST:
/s/ Vickie T. Mynatt
- ----------------------------
Secretary
FIRST FRANKLIN BANCSHARES, INC.
By: /s/ L. A. Walker, Jr
---------------------------------------
L. A. Walker, Jr.
Its: Chairman and Chief Executive Officer
ATTEST:
/s/ Michael L. Bevins
- ----------------------------
Secretary
Page 66 of 66
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APPENDIX B
FAIRNESS OPINION
OF
PROFESSIONAL BANK SERVICES, INC.
<PAGE>
[Letterhead of Professional Bank Services, Inc.]
March 17, 1998
Board of Directors
First Franklin Bancshares, Inc.
204 Washington Avenue
Athens, Tennessee 37303
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of First Franklin Bancshares,
Inc., Athens, Tennessee (the "Company") of the proposed merger of the Company
with Smoky Mountain Bancorp, Inc., Knoxville, Tennessee ("SMB"). In the proposed
merger, Company common shareholders will receive, 4.410 SMB common shares per
Company common share or an aggregate of 723,791 SMB common shares for all
164,125 Company common shares outstanding, as further defined in the Agreement
and Plan of Merger between SMB and the Company (the "Agreement"). The most
recent trading activity in SMB common shares took place on February 27, 1998,
when 1,785 shares traded at $50.00 per share. Under the terms of the Agreement,
upon completion of the proposed merger, SMB will seek to commence a secondary
offering of shares in the public market at $60.00 per common share and begin
trading on the National Association of Securities Dealers Automated Quotations
system (NASDAQ). At the pro forma offering price of $60.00 per SMB common share,
the consideration to be received by Company common shareholders represents an
aggregate value of $43,427,460 or $264.60 per Company common share.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as part
of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of the Company and its wholly owned subsidiaries First
National Bank and Trust Company, Athens, Tennessee (the "Bank") contained in:
(i) December 31, 1997 and
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June 30, 1997 FR Y-9C Consolidated Financial Statements filed by the Company
with the Federal Reserve; (ii) December 31, 1997 consolidated audited financial
statements and annual report Board of Directors of the Company; and (iii)
September 30, 1997 Uniform Bank Performance Reports of the Company. We have
reviewed and tabulated statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics. Financial projections
were prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of this opinion. In review of
the aforementioned information, we have taken into account our assessment of
general market and financial conditions, our experience in other transactions,
and our knowledge of the banking industry generally.
As part of preparing this Fairness Opinion, PBS performed a due diligence review
of SMB the week of March 9, 1998. As part of the due diligence, PBS reviewed the
following items: minutes of the Board of Directors meetings of the subsidiary
bank, BankFirst, from January 1997 through January 1998; reports of independent
auditors and management letters and response thereto, for the years ending
December 31, 1996 and 1997; the most recent analysis and calculation of
allowance for loan and lease losses for the subsidiary bank; internal loan
review reports; investment portfolio activity reports; asset/liability
management reports; asset quality reports; Uniform Holding Company Report for
SMB as of December 31, 1996 and September 30, 1997; December 31, 1997 report of
Condition and Income and September 30, 1997 Uniform Bank Performance Report for
the subsidiary bank; discussion of pending litigation and other issues with
senior management of SMB.
We have not compiled, reviewed or audited the financial statements of the
Company or SMB, nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made independent evaluation of the assets of
the Company or SMB.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the merger consideration
proposed to be received the holders of all classes of stock of the Company under
the Agreement is fair and equitable from a financial perspective.
Very truly yours,
/s/ PROFESSIONAL BANK SERVICES, INC.
----------------------------------------
Professional Bank Services, Inc.
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APPENDIX C
PROVISIONS OF
TENNESSEE BUSINESS CORPORATION ACT
GOVERNING
DISSENTERS' RIGHTS
<PAGE>
TENNESSEE CODE ANNOTATED
TITLE 48. CORPORATIONS AND ASSOCIATIONS
CHAPTER 23. BUSINESS CORPORATIONS-- DISSENTERS' RIGHTS
PART 1-- RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
ss. 48-23-101. Definitions
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 48-23-102. Shareholders rights
(a) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If shareholder approval is required for the merger by ss.
48-21-103 or the charter and the shareholder is entitled to vote on the merger;
or
(B) If the corporation is a subsidiary that is merged with its
parent under ss. 48-21-104;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
(4) An amendment of the charter that materially and adversely
affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the redemption
or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
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(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for cash under
ss. 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the charter, bylaws, or a resolution of the board of directors provides
that voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under ss. 6 of the Securities Exchange Act of
1934, as amended, or is a "national market system security," as defined in rules
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
ss. 48-23-103. Partial dissenters; beneficial owners
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the record shareholder asserts dissenters' rights.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the partial dissenter dissents and the partial dissenter's
other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares of
any one (1) or more classes held on the beneficial shareholder's behalf only if
the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) Does so with respect to all shares of the same class of which
the person is the beneficial shareholder or over which the person has power to
direct the vote.
ss. 48-23-201. Notice of shareholders right to dissent
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
ss. 48-23-202. Dissenting shareholders duties
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed
action. No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provide the notice required by ss.
48-23-201.
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(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for the shareholder's shares under this chapter.
ss. 48-23-203. Dissenters' notice
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the principal terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person asserting dissenters'
rights acquired beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2) months
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant to ss.
48-23-201.
ss. 48-23-204. Shareholder demanding payment and depositing share certificates
(a) A shareholder sent a dissenters' notice described in ss. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to ss. 48-23-203(b)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
ss. 48-23-205. Restricting transfer of uncertificated shares
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effectuated or the restrictions released under ss.
48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed corporate
action.
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ss. 48-23-206. Payments to dissenters
(a) Except as provided in ss. 48-23-208, as soon as the proposed corporate
action is effectuated, or upon receipt of a payment demand, whichever is later,
the corporation shall pay each dissenter who complied with ss. 48-23-204 the
amount the corporation estimates to be the fair value of each dissenter's
shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under ss.
48-23-209; and
(5) A copy of this chapter if the corporation has not previously
sent a copy of this chapter to the shareholder pursuant to ss. 48-23-201 or ss.
48-23-203.
ss. 48-23-207. Corporations failure to effectuate proposed action
(a) If the corporation does not effectuate the proposed action that gave
rise to the dissenters' rights within two (2) months after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
ss. 48-23-208. After-acquired shares; withholding payment
(a) A corporation may elect to withhold payment required by ss. 48-23-206
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the principal terms of the
proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under ss.
48-23-209.
ss. 48-23-209. Disagreement between dissenter and corporation regarding fair
value
(a) A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate (less any payment under ss.
48-23-206), or reject the corporation's offer under ss. 48-23-208 and demand
payment of the fair value of the dissenter's shares and interest due, if:
(1) The dissenter believes that the amount paid under ss. 48-23-206
or offered under ss. 48-23-208 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss. 48-23-206 within
two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after the
date set for demanding payment.
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(b) A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection (a) within one (1) month after the corporation made
or offered payment for the dissenter's shares.
ss. 48-23-301. Commencement of proceeding; parties; jurisdiction; judgment
(a) If a demand for payment under ss. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the two-month period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value
of the dissenter's shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
ss. 48-23-302. Costs and attorney fees
(a) The court in an appraisal proceeding commenced under ss. 48-23-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable against:
(1) The corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of part 2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
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================================================================================
This prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon request from C.
David Allen, Chief Financial Officer, BankFirst Corporation, 625 Market Street,
Knoxville, Tennessee 37902; (423) 595-1100. In order to ensure timely delivery
of the documents, any request should be made by June __, 1998.
----------------------
TABLE OF CONTENTS
Page
----
Available Information.........................................................2
Summary.......................................................................3
Forward Looking Statements....................................................9
Risk Factors..................................................................9
The Special Meetings.........................................................13
The Merger...................................................................15
Pro Forma Financial Information..............................................29
BFC Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................................................36
Business of BFC..............................................................57
Management of BFC............................................................66
Description of BFC Capital Stock.............................................72
FFBS Management's Discussion and
Analysis of Financial Condition and
Results of Operations.....................................................73
Business of FFBS.............................................................89
Description of FFBS Capital Stock............................................95
Effect of the Merger on Rights of Shareholders...............................96
Validity of Common Stock.....................................................97
Experts......................................................................97
Index to Financial Statements...............................................F-I
================================================================================
================================================================================
723,791 Shares
BankFirst Corporation
Common Stock
-------------
JOINT PROXY STATEMENT
PROSPECTUS
-------------
June _____, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
------ -----------
2 Agreement and Plan of Merger between Smoky Mountain Bancorp,
Inc. and First Franklin Bancshares, Inc., dated March 19,
1998. (Included as Appendix A to the Joint Proxy
Statement/Prospectus).
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 Ritchie & Eubanks PLLC regarding the
validity of the Common Stock registered hereunder.
8 Opinion of Miller & Martin LLP regarding tax matters.
10.1* BankFirst Corporation Incentive Stock Option Plan.
10.2* Smoky Mountain Bancorp, Inc. Employee Stock Ownership Plan, as
amended April 1, 1989.
10.3* Stock Option Plan of BankFirst dated March 14, 1995.
10.4* BankFirst Incentive Stock Option Plan dated October 11, 1995.
10.5*
Agreement to Purchase Stock between BankFirst and Cutis
Mortgage Company; William H. Curtis and Gordon C. Curtis,
dated January 13, 1998.
10.6* Agreement and Plan of Merger of BankFirst and First National
Bank of Gatlinburg, dated January 16, 1997.
10.7* Acquisition Agreement between Smoky Mountain Bancorp, Inc. and
BankFirst, dated August 15, 1996.
10.8* BankFirst v. Electronic Communication Corporation, et. al.,
Partial Settlement Agreement, dated March 18, 1998.
10.9* Lease Agreement between BankFirst and Clayton Homes, Inc.,
dated July 1, 1997.
10.10* Form of Letter Agreement between Smoky Mountain Bancorp, Inc.
and the Directors of First Franklin Bancshares, Inc.
16.1 Letter of Coopers & Lybrand, L.L.P. Regarding Change in
Certifying Accountant.
II-1
<PAGE>
16.2 Letter of Hazlett, Lewis & Bieter, P.L.L.C. regarding change
in Certifying Accountant
21* List of Subsidiaries.
23.1* Consent of Ritchie & Eubanks PLLC (included in Exhibit 5).
23.2 Consent of Miller & Martin LLP (included in Exhibit 8).
23.3 Consent of Crowe, Chizek and Company LLP
23.4 Consent of Coopers & Lybrand L.L.P.
23.5 Consent of G.R. Rush & Company, P.C.
23.6 Consent of Hazlett, Lewis & Bieter, P.L.L.C.
23.7* Consent of Professional Bank Services, Inc.
24* Powers of Attorney.
27* Financial Data Schedule.
99.1* Form of Proxy for Special Meeting of Shareholders of BankFirst
Corporation.
99.2* Form of Proxy for Special Meeting of Shareholders of First
Franklin Bancshares, Inc.
99.3* Fairness Opinion of Professional Bank Services, Inc.
99.4* Charter of First Franklin Bancshares, Inc.
99.5* Bylaws of First Franklin Bancshares, Inc.
99.6 Consent of L. A. Walker, Jr., W. D. Sullins, Jr. and C. Scott
Mayfield, Jr.
*Filed previously with S-4 Registration Statement No. 333-52051, dated
May 7, 1998.
(b) Financial Statement Schedules.
Not applicable.
(c) Not Applicable.
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(b) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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-2
<PAGE>
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers 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 for 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.
(d) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus files 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 to be part of this registration statement as of the time it was
declared effective.
The undersigned Registrant hereby further undertakes that, for purposes of
determining 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 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.
(e) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Proxy
Statement-Prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Knoxville,
State of Tennessee on June 12, 1998.
BANKFIRST CORPORATION
By: /s/ FRED R. LAWSON
-------------------------------------
Fred R. Lawson, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Name Position Date
---- -------- ----
*
- ------------------------------
James L. Clayton Chairman and Director June 12, 1998
/s/ FRED R. LAWSON
- ------------------------------
Fred R. Lawson President, Chief Executive June 12, 1998
Officer and Director
*
- ------------------------------
C. David Allen Chief Financial Officer June 12, 1998
*
- ------------------------------
C. Warren Neel Director June 12, 1998
*
- ------------------------------
Charles Earl Ogle, Jr. Director June 12, 1998
*
- ------------------------------
Geoffrey A. Wolpert Director June 12, 1998
*Fred R. Lawson hereby signs this Amendment on
June 12, 1998 on behalf of each of the indicated
persons for whom he is attorney-in-fact pursuant to a
power of attorney previously filed.
/s/ FRED R. LAWSON
- --------------------------------
Fred R. Lawson, Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
Number Description Page
------ ----------- ----
2 Agreement and Plan of Merger between Smoky Mountain Bancorp,
Inc. and First Franklin Bancshares, Inc., dated March 19,
1998. (Included as Appendix A to the Joint Proxy
Statement/Prospectus).
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 Ritchie & Eubanks PLLC regarding the
validity of the Common Stock registered hereunder.
8 Opinion of Miller & Martin LLP regarding tax matters.
10.1* BankFirst Corporation Incentive Stock Option Plan.
10.2* Smoky Mountain Bancorp, Inc. Employee Stock Ownership Plan,
as amended April 1, 1989.
10.3* Stock Option Plan of BankFirst dated March 14, 1995.
10.4* BankFirst Incentive Stock Option Plan dated October 11,
1995.
10.5* Agreement to Purchase Stock between BankFirst and Cutis
Mortgage Company; William H. Curtis and Gordon C. Curtis,
dated January 13, 1998.
10.6* Agreement and Plan of Merger of BankFirst and First National
Bank of Gatlinburg, dated January 16, 1997.
10.7* Acquisition Agreement between Smoky Mountain Bancorp, Inc.
and BankFirst, dated August 15, 1996.
10.8* BankFirst v. Electronic Communication Corporation, et. al.,
Partial Settlement Agreement, dated March 18, 1998.
<PAGE>
Number Description Page
------ ----------- ----
10.9* Lease Agreement between BankFirst and Clayton Homes, Inc.,
dated July 1, 1997.
10.10* Form of Letter Agreement between Smoky Mountain Bancorp,
Inc. and the Directors of First Franklin Bancshares, Inc.
16.1 Letter of Coopers & Lybrand, L.L.P. Regarding Change in
Certifying Accountant.
16.2 Letter of Hazlett, Lewis & Bieter, P.L.L.C. regarding change in
Certifying Accountant
21* List of Subsidiaries.
23.1* Consent of Ritchie & Eubanks PLLC (included in Exhibit 5).
23.2 Consent of Miller & Martin LLP (included in Exhibit 8).
23.3 Consent of Crowe, Chizek and Company, LLP
23.4 Consent of Coopers & Lybrand, L.L.P.
23.5 Consent of G.R. Rush & Company, P.C.
23.6 Consent of Hazlett, Lewis & Bieter, P.L.L.C.
23.7* Consent of Professional Bank Services, Inc.
24* Powers of Attorney.
27* Financial Data Schedule.
99.1* Form of Proxy for Special Meeting of Shareholders of
BankFirst Corporation.
99.2* Form of Proxy for Special Meeting of Shareholders of First
Franklin Bancshares, Inc.
99.3* Fairness Opinion of Professional Bank Services, Inc.
99.4* Charter of First Franklin Bancshares, Inc.
99.5* Bylaws of First Franklin Bancshares, Inc.
99.6 Consent of L.A. Walker, Jr., W.D. Sullins, Jr. and
C. Scott Mayfield, Jr.
*Filed previously with S-4 Registration Statement No. 333-52051, dated
May 7, 1998.
EXHIBIT 8
[Letterhead of Miller & Martin LLP]
_________, 1998
Mr. L. A. Walker, Jr.
Chairman and Chief Executive Officer
First Franklin Bancshares, Inc.
204 Washington Avenue
P.O. Box 100
Athens, Tennessee 37371-0100
Dear Mr. Walker:
We have acted as special counsel to First Franklin Bancshares, Inc., a
corporation organized under the laws of Tennessee ("FFBS"), in connection with
the planned acquisition of FFBS by BankFirst Corporation, a corporation
organized under the laws of Tennessee ("BFC"), accomplished by means of a merger
of FFBS with and into BFC (the "Merger"), pursuant to the Agreement and Plan of
Merger, dated as of the 19th day of March, 1998, by and between FFBS and BFC
(the "Merger Agreement"). Capitalized terms used but not defined herein shall
have the meanings specified in the Proxy Statement-Prospectus pertaining to the
Merger.
We have assumed with your consent that:
(a) the Merger will be effected in accordance with the Merger
Agreement; and
(b) the representations contained in the letters of representation
from FFBS, BFC and certain management shareholders of FFBS to us will be true on
the Effective Date;
(c) all signatures and documents (whether originals or certified or
photostatic copies) are authentic and genuine;
<PAGE>
(d) all participants in the Merger possess adequate legal capacity;
and
(e) FFBS and BFC will comply with all reporting obligations with
respect to the Merger required under the Internal Revenue Code of 1986, as
amended (the "Code"), and the Treasury Regulations promulgated thereunder.
On the basis of the foregoing, and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, and subject to the
conditions and limitations expressed herein:
(i) it is our opinion for federal income tax purposes that the
Merger will constitute a reorganization under Section 368(a) of the Code; and
(ii) it is our opinion for federal income tax purposes that the
statements contained in lettered paragraphs a-g of the section of the Proxy
Statement-Prospectus entitled "The Merger - Certain Federal Income Tax
Consequences," are correct.
The tax consequences described above may not be applicable to FFBS
shareholders that (i) are subject to the alternative minimum tax; (ii) acquired
their FFBS Common pursuant to the exercise of an employee stock option or right
or otherwise as compensation; (iii) hold FFBS Common as part of a "straddle,"
"conversion transaction," "hedging transaction" or other risk reduction
transaction; or (iv) are insurance companies, securities dealers, financial
institutions, tax-exempt organizations, or foreign persons.
The foregoing opinion addresses only certain consequences of a corporate
reorganization for federal income tax purposes. We have not considered the
effect on this transaction, if any, of foreign, state and local taxes, sales and
use taxes, or any other taxes. Moreover, the discussion of United States federal
income tax consequences set forth above is based upon the Code, the Treasury
Regulations promulgated thereunder and administrative rulings and court
decisions effective as of the date hereof. All of the foregoing authorities are
subject to
<PAGE>
change, possibly with retroactive effect, and any such change could affect the
validity of the foregoing opinion.
The foregoing opinion is intended for and may be relied upon solely by
FFBS and its shareholders.
We hereby consent to the reference to us under the heading "THE MERGER --
Certain Federal Income Tax Consequences" in the Proxy Statement-Prospectus
pertaining to the Merger and to the filing of this opinion as an exhibit to the
related Registration Statement on Form S-4 filed with the Securities and
Exchange Commission. In giving this consent, we do not hereby admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
MILLER & MARTIN LLP
By: _____________________________
Partner
EXHIBIT 16.1
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Commissioners:
We have read the statements made by BankFirst Corporation (formerly known as
Smoky Mountain Bancorp. Inc. (copy attached), which we understand will be filed
with the Commission, as an exhibit to the Registration Statement on Form S-4
dated June 12, 1998. We agree with the statements concerning our Firm in such
Registration Statement.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
---------------------------
Coopers & Lybrand L.L.P.
EXHIBIT 16.2
[Letterhead of Hazlett, Lewis & Bieter, PLLC]
June 12, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Commissioners:
We have read the statements made by BankFirst Corporation (formerly known as
Smoky Mountain Bancorp, Inc.) (copy attached), which we understand will be filed
with the Commission, as an exhibit to the Registration Statement on Form S-4
dated June 12, 1998. We agree with the statements concerning our Firm in such
Registration Statement.
Very truly yours,
HAZLETT, LEWIS & BIETER, PLLC
/s/ Casey M. Stuart
Casey M. Stuart
CMS/psb
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-4 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 11, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 dated
June 12, 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 11, 1998
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-4 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 11, 1998
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Registration Statement on Form S-4 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 11, 1998
EXHIBIT 99.6
June 12, 1998
Re: Form S-4, 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-4 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.
