SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-14417
BANKFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 58-1790903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Market Street
Knoxville, Tennessee 37902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 423.595.1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___ No _X_
The number of shares outstanding of each of the registrant's classes of
common stock as of July 31, 1998:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 9,998,295
<PAGE>
BANKFIRST CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements ................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 15
Item 2. Changes in Securities .................................. 15
Item 3. Defaults Upon Senior Securities ........................ 15
Item 4. Submission of Matters to a Vote of Security Holders .... 15
Item 5. Other information ...................................... 15
Item 6. Exhibits and Reports on Form 8-K ....................... 56
SIGNATURES
Note: The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles.
2
<PAGE>
Part I - Financial Information
Item 1. Fiancial Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
June 30, Dec. 31,
1998 1997
-------- --------
ASSETS
Cash and due from banks $ 28,453 $ 24,290
Federal Funds Sold 9,450 7,000
Securities available for sale, at fair value 126,664 127,736
Mortgage loans held for sale 18,999 395
Loans, net 478,222 458,474
Premises and equipment, net 22,888 21,466
Mortgage servicing rights 7,191 0
Federal Home Loan Bank Stock, at cost 3,078 3,046
Intangible assets 2,147 289
Accrued interest receivable and other asset 9,507 8,021
-------- --------
Total assets $706,599 $650,717
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $103,031 $ 92,749
Interest-bearing deposits 485,704 457,020
-------- --------
Total deposits 588,735 549,769
Securities sold under agreements to repurchase 22,888 16,302
Federal funds purchased and other borrowings 9,600 1,959
Advances from the Federal Home Loan Bank 12,314 12,121
Accrued interest payable and other liabilities 8,379 9,134
-------- --------
Total liabilities 641,916 589,285
Employee Stock Ownership Plan 1,745 1,539
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares
authorized, 9,998,045 and 9,995,519 shares
outstanding 24,559 24,553
Noncumulative convertible preferred stock: $5 par
value, 1,000,000 shares authorized, 215,805 and
218,508 shares outstanding 1,079 1,093
Additional paid-in capital 22,520 22,674
Retained earnings 13,599 10,612
Unrealized gain on securities available for sale 1,181 961
-------- --------
Total stockholders' equity 62,938 59,893
-------- --------
Total liabilities and stockholders' equity $706,599 $650,717
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
(Unaudited) (Unaudited)
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 11,822 $ 10,053 $ 24,390 $ 20,618
Taxable securities 1,440 1,786 2,969 3,701
Nontaxable securities 454 288 917 589
Other 80 118 125 110
-------- -------- -------- --------
13,796 12,245 28,401 25,018
Interest expense
Deposits 5,321 5,152 11,106 10,418
Short-term borrowings 535 179 872 330
Long-term borrowings 144 169 478 364
-------- -------- -------- --------
6,000 5,500 12,456 11,112
-------- -------- -------- --------
Net interest income 7,796 6,745 15,945 13,906
Provision for loan losses 534 360 1,067 720
-------- -------- -------- --------
Net interest income after provision
for loan losses 7,262 6,385 14,878 13,186
Noninterest income
Service charges and fees 767 801 2,308 2,022
Loan servicing income, net of 325 0 625 --
amortization
Net gain on loan sales 206 52 463 95
Trust department income 185 161 347 300
Other 476 284 222 100
-------- -------- -------- --------
1,959 1,298 3,965 2,517
Noninterest expenses
Salaries and employee benefits 3,646 2,798 7,146 5,664
Occupancy expense 541 359 1,111 673
Equipment expense 663 644 1,290 938
Office expense 355 105 904 583
Data processing fee 365 298 752 613
FDIC assessments 11 29 39 34
Merger expense 39 0 276 --
Other 1,018 1,107 2,400 2,250
-------- -------- -------- --------
6,638 5,340 13,918 10,755
-------- -------- -------- --------
Income before income taxes 2,583 2,343 4,925 4,948
Provision for income taxes 880 776 1,746 1,562
-------- -------- -------- --------
Net Income $ 1,703 $ 1,567 $ 3,179 $ 3,386
======== ======== ======== ========
Other comprehensive income (loss, net
of tax
Change in unrealized gain 330 (1,302) 220 (37)
(loss) on securities
Reclassification of realized
amount -- -- -- 18
-------- -------- -------- --------
Comprehensive income $ 2,033 $ 265 $ 3,399 $ 3,367
======== ======== ======== ========
Earnings per share:
Basic $ 0.17 $ 0.16 $ 0.31 $ 0.34
Diluted $ 0.16 $ 0.14 $ 0.29 $ 0.31
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months ended June 30, 1998
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 24,553 $ 1,093 $ 22,674 $ 10,612 $ 961 $ 59,893
Sales of common stock, 428 shares 1 -- 15 -- -- 16
Stock options exercised, 857 shares 1 -- 27 -- -- 28
Conversion of 2,703 shares of
preferred stock into 1,669 shares
common stock 4 (14) 10 -- -- --
Cash dividend on preferred stock -- -- -- (78) -- (78)
Cash dividend on common stock -- -- -- (114) -- (114)
Net income -- -- -- 3,179 -- 3,179
Reclassification of ESOP shares
subject to put options -- -- (206) -- -- (206)
Change in unrealized gains -- -- -- -- 220 220
(losses)
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 1998 $ 24,559 $ 1,079 $ 22,520 $ 13,599 $ 1,181 $ 62,938
============ ============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Six months ended June 30,
(Unaudited)
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 3,179 $ 3,386
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses 1,067 720
Depreciation 1,042 667
Security amortization and accretion, net 62 114
Gain on sale of mortgage loans (463) (95)
Proceeds from sales of mortgage loans held for sale 56,767 3,000
Purchases of mortgage loans held for sale (20,482) --
Originations of mortgage loans held for sale (69,778) (16,159)
Changes in assets and liabilities
Accrued interest receivable and other assets (3,018) 2,028
Accrued interest payable and other liabilities (738) 630
-------- --------
Net cash used in operating activities (32,362) (5,709)
Cash flows from investing activities
Net cash paid for mortgage company (7,449) --
Purchase of securities (12,098) (26,545)
Proceeds from maturities of securities 13,555 17,747
Proceeds from sale of securities -- 7,963
Net increase in loans 2,110 (10,782)
Purchase of FHLB stock (86) (2,255)
Premises and equipment expenditures, net (1,868) (1,224)
-------- --------
Net cash used in investing activities (5,836) (15,096)
Cash flows from financing activities
Net change in deposits 38,965 17,744
Net change in securities sold
under agreements to repurchase (6,252) 6,883
Net change in federal funds purchased 7,851 1,500
Increase in other borrowed funds 650 386
Repayment of other borrowed funds (6,505) (7)
Advances from the FHLB 15,500 1,000
Repayment of notes payable (5,250) (251)
Preferred stock dividends paid (78) (81)
Common stock dividends paid (114) (344)
Stock options exercised 28 --
Repurchase of common stock 16 (156)
-------- --------
Net cash provided by financing activities 44,811 26,674
Net change in cash and cash equivalents 6,613 5,869
Cash and cash equivalents, beginning of period 31,290 25,132
-------- --------
Cash and cash equivalents, end of period $ 37,903 $ 31,001
======== ========
Supplemental disclosures:
Interest paid $ 12,232 $ 11,230
Income taxes paid 1,692 827
Loans converted to other real estate 178 107
Preferred stock converted to common stock 14 --
Reclassification of ESOP shares 209 --
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
6
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.) (the
"Company") and its wholly-owned subsidiaries, BankFirst and First National Bank
and Trust Company (the "Banks"), and BankFirst's wholly-owned subsidiary, Curtis
Mortgage Company. These financial statements have been prepared to give
retroactive effect to the merger with First Franklin Bancshares, Inc. on July 2,
1998. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not extend through the date of
consummation. These financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of BankFirst Corporation after financial statements covering the date
of consummation of the business combination are issued.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month periods
ended June 30, 1998 and 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998, or for the year ended
December 31, 1997. For further information, refer to the supplemental
consolidated financial statements and footnotes thereto included BankFirst's
supplemental consolidated financial statements for the year ended December 31,
1997.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated aggregate
market value. Mortgage loans are sold into the secondary market at market
prices, which includes consideration for normal servicing fees. The total cost
of mortgage loans purchased or originated with the intent to sell is allocated
between the loan servicing right and the mortgage loan without servicing, based
on their relative fair values. The capitalized cost of loan servicing rights is
amortized in proportion to, and over the period of, estimated net future
servicing revenue. Mortgage servicing rights are periodically evaluated for
impairment by stratifying them based on predominant risk characteristics of the
underlying serviced loans, such as loan type, term and note rate. Impairment
represents the excess of cost of an individual mortgage servicing rights stratum
over its fair value, and is recognized through a valuation allowance.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings.
Comprehensive Income: The Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income", effective for the interim
period ended June 30, 1998. This Standard requires reporting of comprehensive
income, defined as changes in equity other than those resulting from investments
by or distributions to stockholders. Net income, plus or minus "other
comprehensive income" results in comprehensive income. The only item of other
comprehensive income applicable to the Company is the change in unrealized gain
or loss on securities available for sale. Comprehensive income is reported on
the statement of income. The period ended June 30, 1997 was restated to meet the
current reporting format.
Purchase Transaction: On January 16, 1998, the Bank acquired Curtis Mortgage
Company, a mortgage loan origination and servicing company, for $7,500 in a
business combination accounted for as a purchase. The results of operations of
Curtis Mortgage Company is included in the accompanying financial statements
since the date of acquisition. The excess of the purchase price over the fair
value of net assets acquired resulted in $1,900 of goodwill, which is being
amortized on a straight-line basis over 15 years. Upon the transaction, $6,065
of the purchase price was allocated to mortgage servicing rights, which are
being amortized on a level-yield basis over the life of the underlying loans.
7
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Assets and liabilities acquired were:
Cash $ 51
Loans held for sale 6,267
Mortgage servicing rights 7,000
Furniture and equipment 165
Accrued interest receivable and other assets 375
Notes payable (5,798)
Accrued and other liabilities (2,460)
Earnings Per Share: Basic earnings per share is based on weighted average common
shares outstanding. Diluted earnings per share further assumes issuance of any
dilutive potential common shares. Earnings per share are restated for all
subsequent stock dividends and splits.
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below
Six months ended
June 30,
(Unaudited)
1998 1997
----------- -----------
Earnings Per Share
Net income $ 3,179 $ 3,386
Less: Dividends declared on preferred stock (78) (81)
----------- -----------
Net income available to common
stockholders $ 3,101 $ 3,305
=========== ===========
Weighted average common shares outstanding 9,998,012 9,829,962
=========== ===========
Earnings per share $ .31 $ .34
=========== ===========
8
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Earnings Per Share (Continued):
Earnings Per Share Assuming Dilution
Net income available to common stockholders $ 3,101 $ 3,305
Add back dividends upon assumed conversion
of preferred stock 78 81
----------- -----------
Net income available to common
stockholders assuming conversion $ 3,179 $ 3,386
=========== ===========
Weighted average common shares outstanding 9,998,012 9,829,962
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock 666,298 696,413
Stock options 380,898 286,066
----------- -----------
Weighted average common and dilutive
potential common shares outstanding 11,045,208 10,812,441
----------- -----------
Earnings per share assuming dilution $ .29 $ .31
=========== ===========
9
<PAGE>
Part I - Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation ("Company"). The consolidated financial information
discussed herein primarily reflects the activities of the Company's wholly-owned
community bank subsidiaries, BankFirst and The First National Bank and Trust
Company ("FNB") or collectively the "Banks". The discussion identifies trends
and material changes that occurred during the reported periods and should be
read in conjunction with the consolidated financial statements and accompanying
notes appearing elsewhere herein. The periods included within this document are
the six months ending June 30, 1998 and 1997.
All statements other than statements of historical facts included in this
discussion regarding capital expenditures, the Company's financial position,
business strategies and other plans and objectives for future operations, are
forward-looking statements. The Company cautions readers that all
forward-looking statements are necessarily speculative and not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various risks and uncertainties, including
without limitation, regional and national economic conditions, changes in levels
of market interest rates, credit risks of lending activities and competitive and
regulatory factors, could affect financial performance and could cause actual
results for future periods to differ materially from those anticipated or
projected.
Overview
The Company is a community banking organization, headquartered in Knoxville,
Tennessee, which generates loans and deposits through its 29 branches throughout
East Tennessee. The Company's operations principally involve commercial and
residential real estate lending, commercial business lending, consumer lending,
construction lending and other financial services, including trust operations,
credit card services and brokerage services. The Company includes two
wholly-owned bank subsidiaries: BankFirst, headquartered in Knoxville, and First
National Bank and Trust Company ("FNB"), headquartered in Athens. Curtis
Mortgage Company, Inc. ("Curtis Mortgage") a wholly-owned subsidiary of
BankFirst, was acquired in January 1998 and accounted for as a purchase
transaction. FNB was a merger consummated on July 2, 1998 and accounted for as a
pooling of interests, and accordingly, this document presents the combined
financial information as if the entities were merged for all periods presented.
General
Total assets grew from $650.7 million at year-end 1997 to $706.6 million at June
30, 1998, a $55.9 million increase. The primary changes in assets included a
$18.6 million increase in loans held for sale, a $19.7 million increase in net
loans, $7.2 million of mortgage servicing assets, and other intangible assets
which were each attributable to the purchase of the mortgage company in January,
1998. For the period from January 16, 1998 purchase date to June 30, 1998,
Curtis Mortgage purchased and originated $84.7 million of loans held for sale,
and had payoffs totaling $48.3 million. Total intangible assets at June 30, 1998
included goodwill from the purchase of Curtis Mortgage and approximately
$305,000 of intangibles from previous transactions.
Total liabilities grew from $589.3 million at year-end 1997 to $641.9 million at
June 30, 1998, an increase of $52.6 million. Of this growth, deposits accounted
for $38.9 million, federal funds purchased were $8.5 million, and repurchase
agreements accounted for $3.7 million. Federal funds purchased were used to fund
mortgage loans in process and held for sale.
10
<PAGE>
From year-end 1997 to June 30, 1998, equity grew $3.0 million primarily from
retained net income. The leverage capital ratio fell from 9.7% at year-end 1997
to 8.7% at June 30, 1998 resulting from asset growth and goodwill recorded in
the purchase of the mortgage company previously referred to. This ratio still
maintains the Company in the "well capitalized" category. The individual bank
subsidiaries' leverage ratios at year-end 1997 were 8.3% for BankFirst and 11.2%
for FNB.
Management expects growth to continue through expansion of retail locations,
through expansion of products and services, including mortgage servicing
opportunities by Curtis Mortgage and trust services through FNB, and through
possible future mergers or acquisitions. At the present time, the Company has no
present agreements, arrangements or commitments with respect to any other
acquisition.
Results of Operations
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
Net interest income increased $2.0 million, or 14.7%, to $15.9 million for the
six months ended June 30, 1998, from $13.9 million for the six months ended June
30, 1997. The increase in net interest income was due primarily to an increase
in average earning assets and an increase in the percentage of average earning
assets invested in loans, the Company's highest yielding assets. Average earning
assets increased $48.2 million, or 8.4%, primarily as a result of growth in
loans.
The Company's net interest spread and net interest margin were 4.43% and 5.26%,
respectively, for the six months ended June 30, 1998, as compared to 4.22% and
4.93% for the six months ended June 30, 1997. The increase in the net interest
spread and the net interest margin were primarily the result of an increase in
asset yields due to loan growth.
The provision for loan losses was $1.1 million for the six months ended June 30,
1998, compared to $720,000 for the six months ended June 30, 1997. The increase
in the provision was attributable to general loan growth. The Company
experienced net charge-offs of $396,000 for the six months ended June 30, 1998
resulting in a ratio of net charge-offs to average loans of 0.16%.
Noninterest income increased $1.5 million, or 57.5%, to $4.0 million for the six
months ended June 30, 1998 from $2.5 million for the six months ended June 30,
1997, primarily attributable to operations of the January 16, 1998 purchase of
Curtis Mortgage.
Noninterest expense increased $3.2 million, or 29.4%, to $13.9 million for the
six months ended June 30, 1998, from $10.8 million for the six months ended June
30, 1997. The primary component of noninterest expense is salaries and benefits,
which increased $1.5 million, or 26.2%, to $7.1 million for the six months ended
June 30, 1998, from $5.6 million for the six months ended June 30, 1997.
Salaries and benefits as well as other noninterest expense categories increased
primarily due to additional employees associated with Curtis Mortgage and the
opening of three additional branches. Merger expenses were $276,000 as of June
30, 1998. Other increases in noninterest expense were due to a major computer
system conversion in the second quarter and Year 2000 costs. The Company's
efficiency ratio for the six months ended June 30, 1998 was 68.29%, compared to
64.30% for the six months ended June 30, 1997.
Net income decreased $207,000, or 6.1%, to $3.2 million for the six months ended
June 30, 1998 from $3.4 million for the six months ended June 30, 1997. The
decrease in net income was primarily due to increases in noninterest expense
associated with increases in salaries and benefits resulting from both internal
and external growth, merger costs, costs associated with the integration of
Curtis Mortgage, the opening of three branches, a computer system conversion
cost, and Year 2000 costs. This was partially offset by increases in net
interest income and noninterest income.
Liquidity and Capital Adequacy
11
<PAGE>
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets and long and short term
borrowings, based upon management's consideration of expected loan demand,
expected deposit flows and securities sold under repurchase agreements.
The Company believes it has the ability to raise deposits quickly within its
market area by slightly raising interest rates, but has typically been able to
achieve deposit growth without paying above market interest rates. The current
strategy calls for the subsidiary banks to be no higher than second highest in
their pricing as compared to their primary competitors. Deposit growth has
funded most of the significant asset growth in the past several years, but has
decreased modestly as a percent of total funding.
The Company actively solicits customer cash management relationships which often
includes a securities repurchase agreement feature. Under these agreements,
commercial customers are able to generate earnings on otherwise idle funds on
deposits with the subsidiary banks. These accounts are considered volatile under
regulatory requirements, although the Company has found them to be a steady
source of funding. The Company has been able to increase customer relationships
because of its strong business lending program. While more costly than deposit
funding, these deposit-related accounts are typically the lowest cost borrowed
funds available to the Company.
The Company maintains significant lines of credit with other financial
institutions, totaling approximately $36 million under agreements with six
commercial banks. The subsidiary banks also have the capacity to borrow from the
FHLB without purchasing additional FHLB stock.
The primary source of capital for the Company is retained earnings. The Company
paid cash dividends of $192,370 for the first six months of 1998. The Company
retained $3.1 million of earnings for the first six months of 1998.
The Company and its bank subsidiaries 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.
Under guidelines issued by banking regulators, the Company and its bank
subsidiaries are required to maintain a minimum Tier 1 risk-based capital ratio
of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios
weight the relative risk factors of all assets and consider the risk associated
with off-balance sheet items. The Company's Tier 1 risk-based and total
risk-based ratios were 9.00% and 10.19% respectively, as of June 30, 1998. Both
bank subsidiaries also individually met the definition of "well capitalized" as
of June 30, 1998.
Market Risk
The Company uses an earnings simulation model to analyze the net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effect on interest income is then evaluated. The model projects the effect of
instantaneous movements in interest rates of 100 and 200 bp. Assumptions based
on the historical behavior of the Company'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.
12
<PAGE>
Management believes that the Company's market risk profile is not materially
different than year-end 1997.
Even though the Company's cumulative GAP at one year is negative, the earnings
simulation model indicates that an increase in interest rates of 100 bp and 200
bp would result in increased net interest income. This occurs because management
believes that if overall market interest rates increase modestly, the market
would not require an immediate, corresponding repricing of non-term deposit
liabilities.
Year 2000
The Company 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 year rolls over to "00". If not corrected, computer
applications could fail or create inaccurate results by or at the Year 2000. The
Company must not only evaluate and test its own Year 2000 readiness, it must
also coordinate with other entities with which it routinely interacts such as
suppliers, creditors, borrowers, customers, and other financial service
organizations. Regulations require the Company and the affiliates to accomplish
specific Year 2000 actions by specific dates.
The Company has initiated an implementation plan providing for Year 2000
readiness by the end of 1998. Management believes the plan is on target with the
goals established by its regulators. The affiliates have completed the awareness
and assessment phases and have substantially completed the remediation phase of
the plan. BankFirst's data processing service bureau implemented new software,
which has been Year 2000 certified, and BankFirst completed its conversion to
this new software in April 1998. Conversion to the new host system necessitated
an upgrade of BankFirst's personal computer and their operating systems, which
have been tested for Year 2000 compliance. Prior to the merger, FNB implemented
its own Year 2000 Preparedness Plan. The Company is entering the testing phase
of its implementation plan, which is scheduled to be substantially completed by
year-end 1998. A contingency plan for Year 2000 has been developed to address
mission critical systems. Management believes that the Company and the
affiliates are currently in compliance with each applicable directive issued by
the Bank Regulation Authorities.
The Company has determined that the Year 2000 issue may be critical to its
operations; however, management does not believe customer readiness is or will
be material to its overall performance. Management believes that the total costs
of becoming Year 2000 compliant will not be material. Through 1997, expenditures
for Year 2000 were immaterial, and Year 2000 related expenditures for 1998 are
projected to be $235,000.
New Accounting and Reporting Requirements
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 period following the first required
full fiscal year disclosure. This Statement established 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 established standard for related
disclosures about products and services, geographic areas and major customers.
The Company plans to include segment reporting in the year-end 1999 financial
statements.
13
<PAGE>
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities". SFAS No. 133 requires companies to record derivative on the balance
sheet as assets or liabilities at fair value. Depending on the use of the
derivative and whether it qualifies for hedge accounting, gains or losses from
changes in the value of those derivative would either be recorded as a component
of net income or as a change in stockholders' equity. BankFirst is required to
adopt the new standard January 1, 2000. Management has not yet determined the
impact of this standard.
FDIC Improvement Act (FDICIA) of 1991. The FDICIA stipulates many
responsibilities of financial institutions, its boards of directors and
accountants. Many of the provisions have already been effective for the Company;
however there are certain filing requirements which are only applicable to banks
with assets over $500 million. This threshold is measured on an individual bank
basis, not on consolidated assets. BankFirst, taken alone, has 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. FNB had total year-end 1997 assets of $182
million, and will not be subject of the FDICIA reporting requirements for the
foreseeable future.
Subsequent Events
As of August 1, 1998 which is thirty days after completion of the merger with
FNB, BankFirst and FNB had combined total assets of $710.2 million and
year-to-date earnings of $3.9 million. Effective July 2, 1998 the Company
completed a 5-for-1 stock split on its common stock, $2.50 par value, resulting
in the issuance of 7,998,436 new common shares. After adjusting for the stock
split, the Company's basic and diluted earnings per share for the period ending
August 1, 1998 were $0.39 and $0.35, respectively.
Part I - Fiancial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information is disclosed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
14
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a vote
of Security Holders
The Company's Annual Meeting of Shareholders was held on April 27, 1998. The
following items were approved:
a. Election of the following persons to the Company's Board of
Directors for the ensuing year:
James L. Clayton
Fred R. Lawson
C. Warren Neel
Charles Earl Ogle, Jr.
Geoffrey A. Wolpert
C. Scott Mayfield, Jr.
W. D. Sullins, Jr.
L.A. Walker, Jr.
b. Increase the total number of shares of capital stock to 16,000,000
of which 15,000,000 shares shall be voting common stock of $2.50 par
value and 1,000,000 shares shall be preferred stock of $5.00 par
value.
c. Change of the Corporation's name from "Smoky Mountain Bancorp, Inc."
to "BankFirst Corporation", effective upon approval from the
Tennessee Secretary of State.
Item 5. Other Information
The following presents the 1997, 1996 and 1995 financial information and
discussion of BankFirst Corporation ("Company"), reflecting the merger with
First Franklin Bancshares, Inc. as if the entities were combined for all periods
presented.
15
<PAGE>
INDEX TO ITEM 5. OTHER INFORMATION
Page
----
Supplemental Consolidated Financial Statements of BankFirst Corporation
1997, 1996 and 1995 (audited)
Report of Independent Accountants for 1997 17
Report of Independent Accountants for 1996 and 1995 18
Report of Independent Auditors for 1995 19
Independent Auditors' Report 20
Supplemental Consolidated Balance Sheets 21
Supplemental Consolidated Statements of Income 22
Supplemental Consolidated Statements of Changes in Stockholders'
Equity 23
Supplemental Consolidated Statements of Cash Flows 24
Notes to Supplemental Consolidated Financial Statements 25
Management's Discussion of Analysis of Financial Condition
and Results of Operations for 1997, 1996 and 1995 40
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
BankFirst Corporation
Knoxville, Tennessee
We have audited the accompanying supplemental consolidated balance sheet of
BankFirst Corporation as of December 31, 1997, and the related supplemental
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year then ended. These supplemental financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental financial statements based on our audit. We did
not audit the financial statements of First Franklin Bancshares, Inc. which
statements reflect total assets constituting approximately 28% of the related
1997 total and net income constituting 39% of the related 1997 total. The First
Franklin Bancshares, Inc. financial statements were audited by other auditors,
whose report dated January 22, 1998 thereon has been furnished to us and our
opinion expressed herein, insofar as it relates to the amounts included for
First Franklin Bancshares, Inc. in the supplemental consolidated financial
statements, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe our audit provides a reasonable basis for our opinion.
The supplemental financial statements for 1997, 1996 and 1995 give retroactive
effect to a business combination with First Franklin Bancshares, Inc. on July 2,
1998, which has been accounted for using the pooling of interests method, as
described in Note 2 to the supplemental consolidated financial statements.
Generally accepted accounting principles do not allow giving effect to a
consummated business combination accounted for using the pooling of interests
method in historical financial statements that do not include the date of the
consummation. These supplemental financial statements do not extend through the
date of the consummation; however, they will become the historical consolidated
financial statements of BankFirst Corporation after financial statements
covering the date of the consummation of the business combination are issued.
In our opinion, based on our audit and the report of other auditors, the 1997
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BankFirst Corporation as of
December 31, 1997, and its results of operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
The 1996 and 1995 financial statements of BankFirst Corporation were audited by
other auditors. The report of the other auditors, dated February 6, 1997, stated
that they expressed an unqualified opinion on those statements for 1996 and that
for 1995 they had expressed an unqualified opinion on the financial statements
of BankFirst Corporation prior to its 1996 combination with Smoky Mountain
Bancorp, Inc., which financial statements represented 43% of the then-reported
1995 net income total and for which they relied on the report of other auditors
dated January 24, 1996, and that they had audited the combination of the
financial statements for 1995 for that merger. The 1996 and 1995 financial
statements of First Franklin Bancshares, Inc. were audited by other auditors
whose report, dated January 22, 1998, expressed an unqualified opinion on those
statements. We also audited the combination of the accompanying supplemental
consolidated balance sheets as of December 31, 1996 and the supplemental
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995, for the July 2, 1998
pooling of interests between BankFirst Corporation and First Franklin
Bancshares, Inc. as discussed above. In our opinion, such supplemental
consolidated statements for 1996 and 1995 have been properly combined on the
basis described in Note 2 of the notes to the supplemental consolidated
financial statements.
Crowe, Chizek and Company LLP
Louisville, Kentucky
July 2, 1998
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
BankFirst Corporation (formerly known as Smoky Mountain Bancorp, Inc.)
We have audited the accompanying consolidated balance sheet of BankFirst
Corporation (formerly known as Smoky Mountain Bancorp, Inc.) and Subsidiaries as
of December 31, 1996, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the year then ended, prior to the
restatement for the 1998 combination with First Franklin Bancshares, Inc.
accounted for using the pooling of interests method. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated financial statements give retroactive effect to a business
combination with BankFirst, which has been accounted for in a manner similar to
a pooling of interest, as described in Note 2 to the consolidated financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BankFirst Corporation (formerly known as Smoky Mountain Bancorp, Inc.) and
Subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
We previously audited and reported on the balance sheet, statements of income,
changes in stockholders' equity and cash flows of BankFirst as of and for the
year ended December 31, 1995, prior to the restatement for the 1996 combination
accounted for in a manner similar to a pooling of interest. The contribution of
BankFirst to interest income and net income represented 46% and 57% of the
respective 1995 restated totals. Separate consolidated financial statements of
Smoky Mountain Bancorp, Inc. included in the 1995 restated consolidated balance
sheet and statements of income, changes in stockholders' equity and cash flows
were audited and reported on separately by other auditors. We also audited the
combination of the accompanying consolidated balance sheet and statements of
income, changes in stockholders' equity and cash flows as of and for the year
ended December 31, 1995, after restatement for the 1996 pooling of interest; in
our opinion, such consolidated statements have been properly combined on the
basis described in Note 2 of the notes to the consolidated financial statements.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
February 6, 1997
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors BankFirst Corporation (formerly Smoky
Mountain Bancorp, Inc.)
We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows of BankFirst Corporation (formerly Smoky Mountain
Bancorp, Inc.) and subsidiary for the year ended December 31, 1995, prior to the
restatement for the 1998 combination with First Franklin Bancshares, Inc.
accounted for using the pooling of interest method, and the 1996 combination
with BankFirst accounted for in a manner similar to a pooling interest. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.) and subsidiary
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles, prior to the restatement for the 1998 combination with
First Franklin Bancshares, Inc. accounted for using the pooling of interest
method, and the 1996 combination with BankFirst accounted for in a manner
similar to a pooling of interest.
/s/ Hazlett, Lewis & Bieter
Chattanooga, Tennessee
January 24, 1996
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
First Franklin Bancshares, Inc. and Subsidiary
Athens, Tennessee
We have audited the consolidated balance sheets of First Franklin Bancshares,
Inc. and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform these audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Franklin
Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
G. R. RUSH & COMPANY, P.C.
Chattanooga, Tennessee
January 22, 1998
(except for Note 16, as to which the
date is March 19, 1998)
20
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks .................................... $ 24,290 $ 15,432
Federal funds sold ......................................... 7,000 9,700
-------- --------
Total cash and cash equivalents ........................ 31,290 25,132
Securities available for sale, at fair value ............... 127,736 134,781
Loans, net ................................................. 458,869 408,070
Premises, furniture and equipment, net ..................... 21,466 17,043
Federal Home Loan Bank Stock, at cost ...................... 3,046 2,552
Accrued interest receivable and other assets ............... 8,310 7,706
-------- --------
Total assets ........................................... $650,717 $595,284
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ............................... $ 92,749 $ 74,161
Interest-bearing deposits .................................. 457,020 442,178
-------- --------
Total deposits ......................................... 549,769 516,339
Securities sold under agreements to repurchase ............. 16,302 5,966
Other borrowed funds ....................................... 1,959 1,264
Advances from the Federal Home Loan Bank ................... 12,121 12,154
Accrued interest payable and other liabilities ............. 9,134 4,346
-------- --------
Total liabilities ...................................... 589,285 540,069
Employee Stock Ownership Plan ................................... 1,539 1,389
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares authorized,
9,995,519 and 8,616,159 shares outstanding in 1997 and 1996 24,553 3,886
Noncumulative convertible preferred stock: $5 par value,
1,000,000 shares authorized, 218,508 and 225,559 shares
outstanding in 1997 and 1996 .............................. 1,093 1,128
Additional paid-in capital ................................. 22,674 22,484
Retained earnings .......................................... 10,612 25,992
Unrealized gain on securities available for sale ........... 961 336
-------- --------
Total stockholders' equity ............................. 59,893 53,826
-------- --------
Total liabilities and stockholders' equity ............. $650,717 $595,284
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
21
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
1997 1996 1995
------- -------- --------
Interest income
Interest and fees on loans ............. $ 42,880 $ 37,589 $ 33,799
Taxable securities ..................... 6,874 7,288 6,614
Nontaxable securities .................. 1,173 1,188 1,074
Other .................................. 360 633 632
-------- -------- --------
51,287 46,698 42,119
Interest expense
Deposits ............................... 21,104 20,097 18,216
Short-term borrowings .................. 744 562 177
Long-term borrowings ................... 804 579 689
-------- -------- --------
22,652 21,238 19,082
Net interest income ......................... 28,635 25,460 23,037
Provision for loan losses ................... 2,935 667 553
-------- -------- --------
Net interest income after provision
for loan losses ........................... 25,700 24,793 22,484
Noninterest income
Service charges and fees ............... 3,811 3,796 3,305
Net securities gains ................... 309 (20) 5
Net gain on loan sales ................. 226 234 181
Trust department income ................ 704 620 582
Other .................................. 607 613 296
-------- -------- --------
5,657 5,243 4,369
Noninterest expenses
Salaries and employee benefits ......... 11,110 10,539 9,749
Occupancy expense ...................... 1,716 2,129 1,543
Equipment expense ...................... 2,537 2,382 1,685
Office expense ......................... 775 371 736
Data processing fees ................... 1,253 897 674
FDIC assessments ....................... 48 406 739
Other .................................. 3,884 4,075 4,031
-------- -------- --------
21,323 20,799 19,157
Income before income taxes .................. 10,034 9,237 7,696
Provision for income taxes .................. 3,406 3,188 2,517
-------- -------- --------
Net income .................................. $ 6,628 $ 6,049 $ 5,179
======== ======== ========
Earnings per share:
Basic .................................. $ .66 $ .63 $ .63
Diluted ................................ $ .61 $ .59 $ .59
See accompanying notes to supplemental consolidated financial statements.
22
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
------- ------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ................... $ 3,286 $ 641 $15,288 $17,599 $(2,740) $ 34,074
Sales of common stock, 40,379 shares ....... 101 -- 1,207 -- -- 1,308
Cash dividends on preferred stock .......... -- -- -- (74) -- (74)
Cash dividends on common stock ............. -- -- -- (1,152) -- (1,152)
Repurchased common stock, 5,292 shares ..... (13) -- (107) -- -- (120)
Net income ................................. -- -- -- 5,179 -- 5,179
Reclassification of ESOP shares subject to
put options ................................ -- -- (385) -- -- (385)
Change in unrealized gains (losses) ........ -- -- -- -- 3,681 3,681
------- ------ ------- ------- ------- -------
Balance, January 1, 1996 ................... 3,374 641 16,003 21,552 941 42,511
Sales of preferred stock, 97,297 shares .... -- 487 1,314 -- -- 1,801
Sales of common stock, 159,606 shares ...... 399 -- 4,073 -- -- 4,472
Conversion of debenture into
common stock, 25,000 shares ................ 63 -- 437 -- -- 500
Cash dividends on preferred stock .......... -- -- -- (162) -- (162)
Cash dividend on common stock .............. -- -- -- (876) -- (876)
Common stock dividend, 12,695 shares ....... 31 -- 540 (571) -- --
Repurchased common stock, 5,402 shares ..... (14) -- (171) -- -- (185)
Net income ................................. -- -- -- 6,049 -- 6,049
Reclassification of ESOP shares subject to
put options ................................ 33 -- 288 -- -- 321
Change in unrealized gains (losses) ........ - -- -- -- (605) (605)
------- ------ ------- ------- ------- -------
Balance, January 1, 1997 ................... 3,886 1,128 22,484 25,992 336 53,826
Sales of common stock, 1,177 shares ....... 4 -- 39 -- -- 43
Stock options exercised, 23,659 shares ..... 59 -- 465 -- -- 524
Conversion of 7,051 shares preferred
stock into 3,482 shares common stock ....... 9 (35) 26 -- -- --
Cash dividends on preferred stock .......... -- -- -- (161) -- (161)
Cash dividends on common stock ............. -- -- -- (1,214) -- (1,214)
Common stock split, 253,727 shares ......... 634 -- -- (634) -- -
Cash paid for fractional shares in stock
split ...................................... -- -- -- (3) -- (3)
Repurchased common stock, 6,173 shares, as
restated for pooling of interests .......... (16) -- (209) -- -- (225)
Net income ................................. -- -- -- 6,628 -- 6,628
Reclassification of ESOP shares subject
to put options ............................. 6 -- (156) -- -- (150)
Change in unrealized gains (losses) ........ -- -- -- -- 625 625
Common stock split, 7,988,436 shares ....... 19,971 -- 25 (19,996) -- --
------- ------ ------- ------- ------- -------
Balance, December 31, 1997 ................. $24,553 $1,093 $22,674 $10,612 $ 961 $59,893
======= ====== ======= ======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
23
<PAGE>
BANKFIRST CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ........................................................ $ 6,628 $ 6,049 $ 5,179
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses ..................................... 2,935 667 553
Depreciation .................................................. 1,754 1,415 1,181
Amortization and accretion, net ............................... (120) (293) (72)
Net (gains) losses on securities sales ........................ (309) 20 (5)
Gain on sale of mortgage loans ................................ (226) (234) (181)
Proceeds from sales of mortgage loans ......................... 15,491 12,297 10,462
Originations of mortgage loans held for sale .................. (15,562) (12,267) (10,436)
Proceeds from sale of trading securities ...................... -- -- 8,169
Purchase of trading securities ................................ -- -- (8,115)
Net (gains) losses on sales of assets ......................... 77 620 (1)
Changes in assets and liabilities
Accrued interest receivable and other assets ............. (571) (115) (139)
Accrued interest payable and other liabilities ........... 4,340 174 843
------- ------- --------
Net cash flows provided by operating activities ........ 14,437 8,333 7,438
Cash flows from investing activities
Time deposits in other banks ...................................... -- -- 1,350
Purchase of securities ............................................ (59,276) (100,924) (67,905)
Proceeds from maturities of securities ............................ 32,224 87,269 45,573
Proceeds from sales of securities ................................. 35,530 12,995 14,089
Net increase in loans ............................................. (53,437) (62,737) (44,773)
Purchase of FHLB stock ............................................ (494) -- --
Premises and equipment expenditures, net .......................... (6,255) (2,242) (3,182)
------- ------- --------
Net cash used in investing activities ......................... (51,708) (65,639) (54,848)
Cash flows from financing activities
Net change in deposits ............................................ 33,430 35,993 49,938
Net change under repurchase agreements and other borrowed funds ... 11,068 (554) 4,917
Advances from the Federal Home Loan Bank .......................... 2,000 10,000 --
Repayments of advances from Federal Home Loan Bank ................ (2,033) (3,009) (8)
Payments of notes payable ......................................... -- (3,244) --
Preferred stock dividends paid .................................... (161) (162) (74)
Common stock dividends paid ....................................... (1,214) (876) (1,152)
Cash paid for fractional shares in stock split .................... (3) -- --
Sales of stock and stock options exercised ........................ 567 6,273 1,308
Repurchase of common stock ........................................ (225) (186) (120)
------- ------- --------
Net cash provided by financing activities ......................... 43,429 44,235 54,809
------- ------- --------
Net change in cash and cash equivalents ................................ 6,158 (13,071) 7,399
Cash and cash equivalents, beginning of year ........................... 25,132 38,203 30,804
------- ------- --------
Cash and cash equivalents, end of year ................................. $31,290 $25,132 $ 38,203
Supplemental disclosures:
Interest paid ..................................................... 22,619 21,312 18,089
Income taxes paid ................................................. 3,186 3,473 2,729
Loans converted to other real estate .............................. 1,082 373 789
Debenture converted to common stock ............................... -- 500 --
Preferred stock converted to common stock ......................... 35 -- --
Reclassification of ESOP shares ................................... (150) 321 (385)
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
24
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The supplemental consolidated financial statements
of BankFirst Corporation (formerly Smoky Mountain Bancorp, Inc.) (the "Company")
have been prepared to give retroactive effect to the merger with First Franklin
Bancshares, Inc. on July 2, 1998. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling of interests method in financial statements that do not extend
through the date of consummation. These financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of BankFirst Corporation after financial
statements covering the date of consummation of the business combination are
issued.
Principles of Consolidation: The consolidated financial statements include
the accounts of BankFirst Corporation and its wholly-owned subsidiaries,
BankFirst and First National Bank and Trust Company (together referred to as the
"Banks"). In April, 1998, the Company changed its name to BankFirst Corporation.
All significant inter-company balances and transactions have been eliminated in
consolidation.
Nature of Operations: The Bank generates commercial, mortgage and
installment loans, and receives deposits from customers located throughout East
Tennessee. The majority of the loans are secured by specific items of collateral
including business assets, real property and consumer assets. Borrowers' cash
flow is expected to be a primary source of repayment. Real estate loans are
secured by both residential and commercial real estate.
Substantially all operations are in the banking industry.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. Estimates that are more
susceptible to change in the near term include the allowance for loan losses and
fair values of securities.
Cash Flow Reporting: Cash and cash equivalents include cash on hand,
balances due from banks, and federal funds sold. Net cash flows are reported for
customer loan and deposit transactions and other borrowed funds.
Securities: Securities are classified as held to maturity and are carried
at amortized cost when management has the positive intent and ability to hold to
maturity. Securities are classified as available for sale when they might be
sold prior to maturity for liquidity, asset-liability management, or other
reasons. Available for sale securities are carried at fair value, with
unrealized gains or losses included as a separate component of equity, net of
tax. Trading securities are carried at fair value, with changes in unrealized
holding gains and losses included in income. Realized gains or losses are
determined based on the amortized cost of the specific security sold. Interest
income includes amortization of purchase premium or discounts. Securities are
written down to fair value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs. Interest income on real estate, commercial and
consumer loans is accrued over the term of the loans based on the principal
outstanding. Interest income is not reported when full loan repayment is in
doubt.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loans are considered impaired if full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at the
fair value of the collateral if the loan is collateral dependent.
25
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A portion of the allowance for loan losses is allocated to impaired loans. Loans
are evaluated for impairment when payments are delayed, or when the internal
grading system indicates a doubtful classification. Payments on such loans are
reported as principal reductions.
Mortgage Loans Held for Sale: Mortgage loans held for sale are carried at
the lower of aggregate cost or market. The cost of mortgage loans held for sale
is the mortgage note amount plus certain net origination costs less discounts
collected. The aggregate cost of mortgage loans held for sale at year-end 1997
and 1996, is less than their aggregate net realizable value.
Premises, Furniture and Equipment: Premises, furniture and equipment are
stated at cost less accumulated depreciation. Depreciation expense is computed
using the straight line and declining-balance methods over the estimated useful
lives of the assets. Maintenance and repairs are expensed and major improvements
are capitalized. These assets are reviewed for impairment when events indicate
the carrying amount may not be recoverable.
Other Real Estate: Real estate acquired through foreclosure or acceptance
of a deed in lieu of foreclosure is recorded at the lower of cost (fair value at
date of foreclosure) or fair value less estimated selling costs. Expenses
incurred in carrying other real estate are charged to operations as incurred.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers that are not covered by federal
deposit insurance and are secured by securities owned.
Income Taxes: The Company files consolidated federal and state income tax
returns. Income tax expense is the sum of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Loss Contingencies: The Company is involved in various legal actions. In
the opinion of management, the outcome of these matters will not have a material
effect on the Company's financial position, results of operations, or cash
flows.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
disclosed in Note 15. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Preferred Stock: The preferred stock pays dividends at a rate of 5%, and
is noncumulative, nonvoting, and each share is convertible into 3.0875 shares of
common stock at the option of the holder. The conversion ratio of preferred
stock into common stock is adjusted for common stock dividends and splits.
Preferred stock has equal liquidation rights to common stock.
Earnings Per Common Share: Basic earnings per share is based on weighted
average common shares outstanding. Diluted earnings per share further assumes
issuance of any dilutive potential common shares.
Earnings per share are restated for all subsequent stock dividends and splits.
Reclassifications: Certain items in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 presentation.
Current Accounting Issues: Statement of Financial Accounting Standard
(SFAS) No. 130, "Reporting Comprehensive Income" was issued in June 1997. This
Statement requires that certain items be reported in a separate statement of
comprehensive income, be included as a separate, additional component of the
statement of income, or be added to the statement of stockholders' equity. Such
items include foreign currency translations,
26
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accounting for futures contracts, accounting for defined benefit pension plans,
and accounting for certain investments in debt and equity securities. The
periodic change in net appreciation or depreciation on securities available for
sale reported in the Company's balance sheet is an element of comprehensive
income under this standard. This Statement is effective for the Company in 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This Statement changes the way public
companies report information about operating segments in annual financial
statements and requires that those companies report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Operating segments are parts of a company for which separate
information is available which is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in evaluating
performance. Required disclosures for operating segments include total segment
revenues, total segment profit or loss, and total segment assets. The Statement
also requires disclosures regarding revenues derived from products and services
(or similar groups of products or services), countries in which the company
derives revenue or holds assets, and about major customers, regardless of
whether this information is used in operating decision making. The Company is
required to adopt the disclosure requirements in its 1998 annual report, and in
interim periods in 1999. The 1999 interim period disclosures are required to
include comparable 1998 information.
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities." SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivative and whether it qualifies for hedge accounting, gains or losses
resulting from changes in the values of those derivatives would either be
recorded as a component of net income or as a change in stockholders' equity.
BankFirst is required to adopt this new standard January 1, 2000. Management has
not yet determined the impact of this standard.
NOTE 2 -- BUSINESS COMBINATION
At the close of business on December 31, 1996, BankFirst stockholders
exchanged 1,154,652 shares of its common stock for 570,380 shares of BankFirst
Corporation (formerly Smoky Mountain Bancorp, Inc.) common stock. In addition,
outstanding employee stock options to purchase 1,107,330 shares of BankFirst
common stock were converted into options to purchase approximately 547,020
shares of BankFirst Corporation common stock, as adjusted for subsequent stock
splits. The combination has been accounted for in a manner similar to a pooling
of interests and, accordingly, the Company's consolidated financial statements
were restated in 1996 and 1995 to include the accounts and operations of
BankFirst for the period prior to the combination. Smoky Mountain Bancorp,
Inc.'s wholly owned subsidiary, First National Bank of Gatlinburg, was merged
into BankFirst in March 1997.
On July 2, 1998, BankFirst Corporation acquired all of the outstanding
common stock of First Franklin Bancshares, Inc. ("First Franklin") in a business
combination accounted for as a pooling of interest. Stockholders of First
Franklin exchanged 164,125 shares of stock for 723,693 shares of the Company's
common stock. In the business combination, First Franklin was merged into
BankFirst Corporation, and its wholly-owned subsidiary, First National Bank and
Trust Company, remains a subsidiary of BankFirst Corporation. These supplemental
consolidated financial statements give retroactive effect to the merger, and as
a result, the financial statements are presented as if the combining companies
had been consolidated for all periods presented. As required by generally
accepted accounting principles, the supplemental consolidated financial
statements will become the historical financial statements upon issuance of the
financial statements for the period that includes the date of the merger.
27
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 2 -- BUSINESS COMBINATION (Continued)
Separate interest income and net income of the merged entities are as
follows:
1997 1996 1995
------- ------- -------
Interest income
BankFirst Corporation ................ $37,625 $17,081 $15,934
BankFirst ............................ -- 16,503 13,315
First Franklin ....................... 13,662 13,114 12,870
------- ------- -------
$51,287 $46,698 $42,119
======= ======= =======
Net income
BankFirst Corporation ................ $ 4,066 $ 1,450 $ 1,224
BankFirst ............................ -- 2,214 1,601
First Franklin ....................... 2,562 2,385 2,354
------- ------- -------
$ 6,628 $ 6,049 $ 5,179
======= ======= =======
<TABLE>
<CAPTION>
January 1, January 1,
1995 Effect of Effect of 1995
As Previously BankFirst First Franklin As
Reported Combination Combination Restated
------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Stockholders' equity
Common stock ................. $ 464 $ 1,303 $ 1,519 $ 3,286
Noncumulative convertible
preferred stock ........... -- 641 -- 641
Additional paid-in capital ... 2,167 10,177 2,944 15,288
Retained earnings ............ 3,818 1,550 12,231 17,599
Unrealized loss on
securities available
for sale .................. (668) (618) (1,454) (2,740)
-------- -------- -------- --------
Total $ 5,781 $ 13,053 $ 15,240 $ 34,074
======== ======== ======== ========
</TABLE>
NOTE 3 -- SECURITIES
Securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1997
U.S. Treasury securities ............................. $ 31,250 $ 360 $ (41) $ 31,569
Obligations of U.S.government agencies ............... 45,948 492 (40) 46,400
Obligations of states and political subdivisions .... 38,292 715 (8) 38,999
Mortgage-backed securities ........................... 10,696 134 (62) 10,768
--------- --------- --------- ---------
$ 126,186 $ 1,701 $ (151) $ 127,736
========= ========= ========= =========
1996
U.S. Treasury securities ............................. $ 25,997 $ 133 $ (156) $ 25,974
Obligations of U.S.government agencies ............... 65,571 284 (309) 65,546
Obligations of states and political subdivisions ..... 22,328 667 (24) 22,971
Mortgage-backed securities ........................... 20,342 80 (132) 20,290
--------- --------- --------- ---------
$ 134,238 $ 1,164 $ (621) $ 134,781
========= ========= ========= =========
</TABLE>
The amortized cost and estimated market value of debt securities available
for sale at year-end 1997, by contractual maturity, is shown below. Securities
not due at a single maturity date, primarily mortgage-backed securities, are
shown separately.
28
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 3 -- SECURITIES (Continued)
Amortized Fair
Cost Value
--------- --------
Due in one year or less .................... $ 12,744 $ 12,733
Due after one year through five years ...... 45,906 46,411
Due after five years through ten years ..... 39,677 40,324
Due after ten years ........................ 17,163 17,500
-------- --------
Mortgage-backed securities ................. 10,696 10,768
Total maturities ........................... $126,186 $127,736
======== ========
1997 1996 1995
---- ---- ----
Sales of securities available for sale
Realized gains ................................ $343 $ 33 $ 20
Realized losses ............................... 34 53 88
Sales of trading securities
Realized gains ................................ $-- $-- $ 75
Realized losses ............................... -- -- 2
Securities with a carrying value of 79,650 and 79,415 at year-end 1997 and
1996, were pledged for public deposits and securities sold under agreements to
repurchase.
NOTE 4 -- LOANS AND ALLOWANCE FOR LOANS LOSSES
At year-end 1997 and 1996, loans consisted of the following:
1997 1996
-------- --------
Commercial, industrial and agricultural .... $ 95,143 $ 69,614
Commercial real estate ..................... 164,102 155,389
Real estate construction ................... 24,977 26,379
Residential real estate .................... 120,143 110,636
Loans to individuals ....................... 59,947 50,277
Lease financing ............................ 1,845 1,055
Mortgage loans held for sale ............... 395 324
Other ...................................... 383 656
-------- --------
Total loans ............................ 466,935 414,330
Less: Unearned interest income and fees (1,968) (1,537)
Allowance for loan losses ............ (6,098) (4,723)
-------- --------
$458,869 $408,070
======== ========
Activity in the allowance for loan losses is as follows:
1997 1996 1995
------- ------- -------
Beginning balance .................... $ 4,723 $ 4,690 $ 4,526
Provision ............................ 2,935 667 553
Loans charged off .................... (1,833) (904) (701)
Recoveries of loans charged off ...... 273 270 312
------- ------- -------
Balance, end of year ................. $ 6,098 $ 4,723 $ 4,690
======= ======= =======
29
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 4 -- LOANS AND ALLOWANCE FOR LOANS LOSSES (Continued)
Impaired loans consisted of the following at year-end:
1997 1996
---- ----
Impaired loans
Loans with allowance allocated ....................... $552 $616
Amount of allowance for loan losses allocated ........ 61 216
Loans with no allowance allocated .................... 615 275
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Impaired loans
Average balance during the year ............. $1,312 $941 $189
Interest income recognized thereon .......... 30 50 7
Cash-basis interest income recognized ....... 30 50 7
</TABLE>
The aggregate amount of loans to executive officers and directors of the
Company and their related interests was approximately $18,443 and $10,821 at
year-end 1997 and 1996. During 1997 and 1996, new loans aggregating
approximately $9,761 and $1,782 and amounts collected of approximately $2,139
and $1,794 were transacted with such parties.
NOTE 5 -- PREMISES, FURNITURE, AND EQUIPMENT
A summary of premises and equipment as of year-end 1997 and 1996 is as
follows:
1997 1996
---- ----
Land ........................................... $ 5,246 $ 4,565
Premises ....................................... 14,255 11,289
Furniture, fixtures and equipment .............. 10,390 8,810
Construction in progress ....................... 963 360
-------- --------
Total cost ..................................... 30,854 25,024
Accumulated depreciation ....................... (9,388) (7,981)
-------- --------
$ 21,466 $ 17,043
======== ========
NOTE 6 -- DEPOSITS
Certificates of deposit of $100 thousand or more were $78,260 and $69,468
at year-end 1997 and 1996.
At year-end 1997, maturities of time deposits with a term of over one year
were as follows, for the next five years.
1998 ................................ $195,578
1999 ................................ 48,341
2000 ................................ 15,759
2001 ................................ 7,045
2002 ................................ 1,941
Thereafter .......................... 325
The aggregate amount of deposits to executive officers and directors of
the Company and their related interests was approximately $2,477 and $1,376 at
year end 1997 and 1996.
30
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 7 -- BORROWINGS
Securities sold under agreements to repurchase and treasury tax and loan
deposits are financing arrangements. Securities involved with the agreements are
recorded as assets and are held by a safekeeping agent and the obligations to
repurchase the securities are reflected as liabilities. Securities sold under
agreements to repurchase consist of short term excess funds from repurchase
agreements and overnight liabilities to deposit customers arising from a cash
management program. While effectively deposit equivalents, such arrangements are
in the form of repurchase agreements. Other borrowed funds were comprised of
treasury tax and loan deposits which bear interest at the federal funds rate
less .25%.
Information concerning securities sold under agreements to repurchase at
year-end 1997 and 1996 is summarized as follows:
1997 1996
---- ----
Average month-end balance during the year .......... $ 9,137 $ 7,365
Average interest rate during the year .............. 4.76% 4.84%
Maximum month-end balance during the year .......... $16,302 $ 9,715
The aggregate amount of securities sold under agreements to repurchase
from executive officers and directors of the Company and their related interests
were $4,014 and $-0- at year-end 1997 and 1996.
Federal Home Loan Bank advances consist of the following at year-end 1997
and 1996:
1997 1996
---- ----
6.40% fixed rate advance, interest only
monthly, principal due at maturity on
April 25, 1997 ............................. $ -- $1,000
6.60% fixed rate advance, interest only
monthly, principal due at maturity on
October 24, 1997 ........................... -- 1,000
Variable rate, interest only monthly,
principal due at maturity on
September 30, 1998 ......................... 5,000 5,000
Variable rate, interest only monthly,
principal due at maturity on
April 30, 1998 ............................. 5,000 5,000
6.75% fixed rate advance, principal and
interest monthly, maturing on
September 1, 2012 .......................... 743 --
6.51% fixed rate advance, principal and
interest monthly, maturing on
January 1, 2013 ............................ 500 --
7.20% fixed rate advance, principal and
interest monthly, maturing on
June 1, 2012 ............................... 490 --
6.80% fixed rate advance, principal and
interest monthly, maturing on
March 1, 2012 .............................. 243 --
5.95% fixed rate advance, principal and
interest monthly, maturing on
August 1, 2008 ............................. 80 85
5.70% fixed rate advance, principal and
interest monthly, maturing on
September 1, 2008 .......................... 65 69
------- -------
$12,121 $12,154
======= =======
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $18,182 and $18,231 at year-end 1997 and 1996.
At year-end 1997, the Company had approximately $33,350 of federal funds
lines of credit available from correspondent institutions, $8,680 unused lines
of credit with the Federal Home Loan Bank, and $2,000 unused line of credit with
the Federal Reserve Bank of Atlanta.
31
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 8 -- RETIREMENT PLANS
A 401(k) profit sharing plan covers substantially all BankFirst
Corporation and BankFirst employees. Employee contributions are voluntary and
employer contributions are discretionary. Employee contributions are fully
vested and employer contributions are fully vested after five years.
Another 401(k) profit sharing plan covers substantially all First National
Bank and Trust Company employees. Employee contributions are voluntary. If a
participant elects to make a contribution to the Plan, the employer must make a
matching contribution of 50% of the first 3% of the participants annual
contributions. In addition, the employer may award a bonus match. Employee
contributions are immediately vesting and employer contributions are vested 20%
immediately, 40% after four years, 60% after five years, 80% after six years,
and 100% after seven years.
Expense for both Plans was $218, $187 and $162 for 1997, 1996 and 1995.
The Company has an Employee Stock Ownership Plan (ESOP) which enables
employees who have met minimum service and age requirements to acquire shares of
the Company's common stock. Cost of the Plan is borne by the Company through
discretionary contributions to an employee stock ownership trust. All shares
under the plan were allocated at year end 1997, 1996 and 1995. Shares of common
stock are allocated to each participating employee and are held in trust until
the employee's termination, retirement or death. The Company's contribution to
the ESOP was $30 in 1996. There was no contribution in 1997 or 1995.
Upon withdrawal from the plan, participants are entitled to require the
Company to repurchase the stock (referred to as a put option). At year-end 1997,
1996, and 1995, the fair value of ESOP shares subject to repurchase was $1,539,
$1,389, and $1,710, the fair value per share was $8.80, $7.68, and $6.96, and
shares held by the ESOP were 174,845, 180,845, and 245,725. The value of shares
subject to the put option have been presented outside of stockholders' equity
since no active market existed for the Company's common stock.
The First National Bank and Trust Company has a defined benefit pension
plan covering substantially all employees. The following sets forth the plan's
funded status at December 31, 1997, 1996 and 1995 and the components of net
pension expense:
1997 1996 1995
---- ---- ----
Accumulated benefit obligation
(including vested benefits of
$ 3,924, $ 2,708,and $ 2,396 ......... $(3,976) $(2,735) $(2,421)
======= ======= =======
Plan assets at fair value ............... $ 4,927 $ 4,177 $ 3,733
Projected benefit obligation for
service rendered to date ............. (5,239) (3,786) (3,431)
Unrecognized loss ....................... 959 150 152
Unrecognized transition asset ........... (150) (171) (193)
------- ------- -------
Prepaid accrued pension expense ......... $ 497 $ 370 $ 261
======= ======= =======
Net pension expense for the year included the following:
1997 1996
---- ----
Service cost for the period ................. $ 173 $ 159
Interest cost on projected benefit
obligation ................................ 318 287
Actual return on plan assets ................ (629) (305)
Other ....................................... 249 (21)
----- -----
$ 111 $ 120
===== =====
Contribution expense was $238, $229, and $243 for the years ending 1997,
1996, and 1995.
Significant assumptions made in computing pension liability and expense
for each year ended 1997, 1996, and 1995 include a weighted average discount
rate of 8.5%, increase in compensation of 6.5%, and long-term rate of return of
8.5%.
32
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 9 -- INCOME TAXES
Income tax expense is summarized as follows:
1997 1996 1995
---- ---- ----
Current ......................... $3,612 $3,134 $2,434
Deferred ........................ (206) 54 83
------ ------ ------
$3,406 $3,188 $2,517
====== ====== ======
Federal ......................... $2,817 $2,643 $2,174
State ........................... 589 545 343
------ ------ ------
$3,406 $3,188 $2,517
====== ====== ======
Deferred income taxes reflect the effect of "temporary differences"
between values recorded for assets and liabilities for financial reporting
purposes and values utilized for measurement in accordance with tax laws. The
tax effects of the primary temporary differences giving rise to the Company's
net deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- --------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Allowance for loan losses .................... $1,154 $ -- $619 $ --
Unearned loan income ......................... 57 -- 68 --
Unrealized gain on securities ................ -- (589) -- (207)
Depreciation ................................. -- (832) -- (732)
Other real estate ............................ 19 -- 19 --
FHLB dividends ............................... -- (201) -- (124)
Defined benefit plan ......................... -- (189) -- --
Other ........................................ 86 (261) 89 (169)
------ ------- ---- -------
Total deferred income taxes ............... $1,316 $(2,072) $795 $(1,232)
====== ======= ==== =======
</TABLE>
A reconciliation of expected income tax expense at the statutory federal
income tax rate of 34% with the actual effective income tax rates, is as
follows:
1997 1996 1995
---- ---- ----
Statutory federal tax rate ........... 34.0% 34.0% 34.0%
State income tax, net of
federal benefit .................... 4.0 4.0 4.0
Tax exempt income .................... (3.7) (4.6) (5.7)
Other ................................ (0.4) 1.1 0.4
---- ---- ----
33.9% 34.5% 32.7%
==== ==== ====
NOTE 10 -- COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
The Banks are party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These financial instruments include loan commitments and standby letters of
credit. The substantial majority of these instruments are with parties in the
Knoxville and surrounding East Tennessee area. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the financial statements.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those instruments. The same
credit policies are used in making commitments and conditional obligations as
are used for on-balance-sheet instruments. There are no significant
concentrations of credit risk with any individual counterparty to originate
loans.
33
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 10 -- COMMITMENTS AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK (Continued)
Financial instruments whose contract amounts represent credit risk at
year-end 1997 and 1996 were as follows:
1997 1996
---- ----
Loan commitments ............................ $ 9,016 $ 1,574
Standby letters of credit ................... 6,760 9,256
Unused lines of credit ...................... 64,667 60,104
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. Each customer's credit worthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property,
plant, and equipment, and/or income-producing commercial properties.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The aggregate
amount of loan commitments and standby letters of credit to executive officers
and directors of the Company was approximately $3,165 and $1,752 at year-end
1997 and 1996.
NOTE 11 -- RELATED PARTY TRANSACTIONS
BankFirst was a 50% partner with a related party, the purpose of which was
to own and operate a building in downtown Knoxville, Tennessee. BankFirst's main
offices occupy a portion of this building. During 1997, BankFirst purchased the
other partner's interest in the building at a fair market value of $924 based on
an independent appraisal. The partnership was dissolved following the
consummation of the transaction. Total payments received from tenants of the
buildings other than BankFirst totaled $105 in 1997. BankFirst's contributions
to the partnership expenses were approximately $169, $313 and $192 in 1997, 1996
and 1995.
NOTE 12 -- REGULATORY MATTERS
The Company and Banks are subject to regulatory capital requirements
administered by federal and state banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. The prompt corrective action regulations
provide five classifications, including well capitalized, adequately
capitalized, under capitalized, significantly under capitalized, and critically
under capitalized, although these terms are not used to represent overall
financial condition. If under capitalized, capital distributions are limited, as
is asset growth and expansion, and plans for capital restoration are required.
At year-end, the capital requirements were met. Actual capital levels (in
millions) and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Amounts to
be Well Capitalized
Minimum Required Under Prompt
Actual for Capital Corrective Action
------------------ Adequacy Purposes Provisions
Actual Ratio Actual Ratio Actual Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997
Total Capital (to Risk Weighted Assets)
Consolidated ........................... $61.4 12.8% $38.4 8.0% $48.0 10.0%
BankFirst .............................. 42.5 11.6 29.2 8.0 36.5 10.0
First National Bank and Trust Co. ...... 21.3 18.8 9.1 8.0 11.3 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ........................... $60.1 12.5% $19.2 4.0% $28.8 6.0%
BankFirst .............................. 37.9 10.4 14.6 4.0 21.9 6.0
First National Bank and Trust Co. ...... 20.2 17.8 4.5 4.0 6.8 6.0
</TABLE>
34
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 12 -- REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
Minimum Amounts to
be Well Capitalized
Minimum Required Under Prompt
Actual for Capital Corrective Action
------------------ Adequacy Purposes Provisions
Actual Ratio Actual Ratio Actual Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 (continued)
Tier 1 Capital (to Average Assets)
Consolidated ........................... $60.1 9.7% $24.9 4.0% $31.1 5.0%
BankFirst .............................. 37.9 8.3 18.3 4.0 22.9 5.0
First National Bank and Trust Co. ...... 20.2 11.2 7.2 4.0 9.0 5.0
1996
Total Capital (to Risk Weighted Assets)
Consolidated ........................... $55.2 13.1% $33.8 8.0% $42.3 10.0%
BankFirst .............................. 22.2 13.1 13.6 8.0 17.0 10.0
FNB of Gatlinburg ...................... 15.3 9.9 12.3 8.0 15.4 10.0
First National Bank and Trust Co. ...... 20.2 20.0 8.1 8.0 10.1 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated ........................... $54.5 12.9% $16.9 4.0% $25.4 6.0%
BankFirst .............................. 20.3 12.0 6.8 4.0 10.2 6.0
FNB of Gatlinburg ...................... 13.7 8.9 6.2 4.0 9.2 6.0
First National Bank and Trust Co. ...... 19.1 18.9 4.0 4.0 6.1 6.0
Tier 1 Capital (to Average Assets)
Consolidated ........................... $54.5 9.6% $22.7 4.0% $28.3 5.0%
BankFirst .............................. 20.3 9.4 8.6 4.0 10.8 5.0
FNB of Gatlinburg ...................... 13.7 6.5 8.4 4.0 10.6 5.0
First National Bank and Trust Co. ...... 19.1 11.3 6.8 4.0 8.5 5.0
</TABLE>
The Company and subsidiary banks were well capitalized at year-end 1997.
The Company's primary source of funds to pay dividends to stockholders is
the dividends it receives from the Banks. The Banks are subject to certain
regulations on the amount of dividends it may declare without prior regulatory
approval. Under these regulations, the amount of dividends that may be paid in
any year is limited to that year's net profits, as defined, combined with the
retained net profits of the preceding two years, less dividends declared during
those periods. At year-end 1997, $9,057 of retained earnings was available for
dividends in future periods.
The Banks were required to have approximately $4,659 and $3,542 of cash on
hand to meet regulatory reserve requirements at year-end 1997 and 1996.
NOTE 13 -- STOCK OPTIONS
The Company maintains a stock option plan, which is administered by the
Executive Committee of the Board of Directors. A maximum of 3,125,000 stock
options may be issued to selected directors, officers, and other key employees.
The exercise price of each option is the fair market value of the Company's
common stock on the date of grant. The maximum term of the options is ten years.
Certain options may be exercised immediately upon grant, and certain options
vest at an annual rate of 20%, allowing 20% of the options to be exercised at
each grant anniversary date. At year-end 1997, 2,067,005 shares are authorized
for future grant.
35
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 13 -- STOCK OPTIONS (Continued)
A summary of the Company's option activity, and related information for
the year-ended 1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ........ 887,645 $5.21 547,020 $4.25 469,830 $3.72
Granted ................................. 164,380 7.68 340,625 6.96 77,190 6.48
Exercised ............................... (140,765) 3.72 -- -- --
Forfeited ............................... (49,260) 7.12 -- -- -- --
-------- ---- ------- ---- ------- ----
Outstanding at end of year .............. 862,000 6.19 887,645 5.21 547,020 4.11
Options exercisable at year-end ......... 461,030 4.55 541,590 4.09 540,230 4.08
-------- ---- ------- ---- ------- ----
Weighted-average fair value of
options granted during the year ........ $3.09 $2.46 $2.92
======== ======= =======
</TABLE>
Options outstanding at year-end 1997 had a range of exercise prices from
$3.72 to $7.68 and had a weighted average remaining life of seven years. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995: risk-free interest rate of
6.75%, 7.03% and 7.04%, and expected lives of seven, eight and nine years. No
assumption was made for estimated volatility since it is not feasible to
determine this assumption for a non-public entity whose stock is not actively
traded. With estimated volatility excluded, the option pricing model produces
the option's minimum value.
No expense for stock options is recorded, as the grant price equals the
market price of the stock at grant date. The following disclosures show the
effect on income and earnings per share had the options' fair value been
recorded using an option pricing model. If additional options are granted, the
proforma effect will increase in the future.
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
As As As
Reported Proforma Reported Proforma Reported Proforma
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income ................................ $6,628 $6,400 $6,049 $6,046 $5,179 $4,971
Basic earnings per share .................. $.66 $.63 $.63 $.63 $.63 $.60
Diluted earnings per share ................ .61 .58 .59 .58 .59 .51
</TABLE>
36
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 14 -- EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations are
presented below.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Earnings Per Share
Net income ............................ $ 6,628 $ 6,049 $ 5,179
Less: Dividends declared
on preferred stock .......... (161) (162) (74)
----------- ----------- ----------
Net income available to
common stockholders .............. $ 6,467 $ 5,887 $ 5,105
=========== =========== ==========
Weighted average common
shares outstanding ................. 9,876,735 9,347,725 8,098,170
=========== =========== ==========
Earnings per share ................. $ .66 $ .63 $ .63
=========== =========== ==========
Earnings Per Share Assuming Dilution
Net income available to
common stockholders ................ $ 6,467 $ 5,887 $ 5,105
Add back dividends upon assumed
conversion of preferred stock ...... 161 162 74
----------- ----------- ----------
Net income available to
common stockholders
assuming conversion .............. $ 6,628 $ 6,049 $ 5,179
=========== =========== ==========
Weighted average common
shares outstanding ................. 9,876,735 9,347,725 8,098,170
Add: Dilutive effects of assumed
conversions and exercises:
Convertible preferred stock ........ 685,830 696,415 397,610
Convertible debenture .............. -- 39,065 39,065
Stock options ......................... 313,025 158,165 199,240
----------- ----------- ----------
Weighted average common and
dilutive potential common
shares outstanding ................. 10,875,590 10,241,370 8,734,085
----------- ----------- ----------
Earnings per share assuming dilution $ .61 $ .59 $ .59
=========== =========== ==========
</TABLE>
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments are as follows at year-end 1997 and 1996.
1997 1996
------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ----------------------------------
Financial assets:
Cash and cash
equivalents .............. $31,290 $31,290 $25,132 $25,132
Securities available
for sale ................. 127,736 127,736 134,781 134,781
Loans, net ................. 458,869 462,168 408,070 407,499
Financial liabilities:
Demand, savings, and money
market accounts .......... 280,781 280,781 249,890 249,890
Certificate of deposits .... 268,988 268,347 266,449 267,045
Advances from FHLB ......... 12,121 12,005 12,154 11,265
Repurchase agreement
and other ................ 18,261 18,261 7,230 7,230
37
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair
values for financial instruments. The carrying amount is considered to estimate
fair value for cash and short-term instruments, demand deposits, liabilities for
borrowed money, and variable rate loans or deposits that reprice frequently and
fully. Securities available for sale fair values are based on quoted market
prices or, if no quotes are available, on the rate and term of the security and
on information about the issuer. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits,
the fair value is estimated by discounted cash flow analysis using current
market rates for the estimated life and credit risk. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable. Liabilities for borrowed money are estimated using
rates of debt with similar terms and remaining maturities.
NOTE 16 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEETS
Years ended December 31, 1997 and 1996
1997 1996
------- -------
Assets
Cash and cash equivalents ........................... $ 2,019 $ 121
Interest bearing deposit ............................ -- 1,200
Investment in subsidiary banks ...................... 59,329 53,674
Other ............................................... 516 356
------- -------
Total assets .................................. $61,864 $55,351
======= =======
Total liabilities ................................... 432 136
Employee stock ownership plan .......................... 1,539 1,389
Stockholders' equity
Common stock ........................................ 24,553 3,886
Preferred stock ..................................... 1,093 1,128
Additional paid-in capital .......................... 22,674 22,484
Retained earnings ................................... 10,612 25,992
Unrealized gain on securities ....................... 961 336
------- -------
Total stockholders' equity .................... 59,893 53,826
------- -------
Total liabilities and
stockholders' equity ....................... $61,864 $55,351
======= =======
STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
------- ------- -------
Dividends from subsidiary banks ................ $ 1,593 $ 1,470 $ 1,725
Other income ................................... 220 178 134
------- ------- -------
Total income ............................. 1,813 1,648 1,859
Interest expense ............................... -- 120 296
Other expense .................................. 213 350 867
------- ------- -------
Total expenses ........................... 213 470 1,163
------- ------- -------
Income before income taxes ..................... 1,600 1,178 696
Income tax expense (benefit) ................... 2 (105) (379)
------- ------- -------
Income before equity in
undistributed income
of subsidiaries .............................. 1,598 1,283 1,075
Equity in undistributed net
income of subsidiaries ....................... 5,030 4,766 4,104
------- ------- -------
Net income ..................................... $ 6,628 $ 6,049 $ 5,179
======= ======= =======
38
<PAGE>
BANKFIRST CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
NOTE 16 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net income ........................................ $ 6,628 $ 6,049 $ 5,179
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed net income of subsidiaries ....... (5,030) (4,766) (4,104)
Change in assets ............................... (160) 7 38
Change in liabilities .......................... 296 (9) (24)
------- ------- -------
Net cash provided by operating activities ... 1,734 1,281 1,089
Net cash used in investment activities
Change in time deposit with other banks ........... 1,200 (1,200) --
------- ------- -------
Financing activities
Payments of notes payable ......................... -- (3,244) --
Preferred stock dividends paid .................... (161) (162) (74)
Common stock dividends paid ....................... (1,214) (876) (1,152)
Cash paid for fractional shares in stock split .... (3) -- --
Effect of internal reorganization ................. -- (1,846) (1,235)
Sales of common stock and stock options exercised . 567 6,273 1,308
Repurchase of common stock ........................ (225) (186) (120)
------- ------- -------
Net cash provided by (used in) financing activities (1,036) (41) (1,273)
------- ------- -------
Net change in cash and cash equivalents .............. 1,898 40 (184)
Cash and cash equivalents, beginning of year ......... 121 81 265
------- ------- -------
Cash and cash equivalents, end of year ............... $ 2,019 $ 121 $ 81
======= ======= =======
</TABLE>
NOTE 17 -- SUBSEQUENT EVENTS
On January 16, 1998, the Bank acquired a mortgage loan origination and
servicing company for $7.5 million cash in a business combination accounted for
as a purchase. The mortgage company's primary asset was loan servicing rights of
approximately $7.0 million. The excess of the purchase price over the fair value
of net asset acquired, $1.9 million, will be amortized on a straight-line basis
over 15 years. In July, 1998, the Company effected a 5 for 1 common stock split,
which has been reflected in the Consolidated Statements of Changes in
Stockholders' Equity. All per share information has been retroactively restated
for this stock split.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation, formerly Smoky Mountain Bancorp, Inc., and of First
Franklin Bancshares, Inc. ("First Franklin"). Unless otherwise indicated, the
discussion herein refers to BankFirst Corporation and its subsidiaries on a
consolidated basis (the "Company").
The consolidated financial information discussed herein primarily reflects
the activities of the Company's wholly-owned community bank subsidiaries,
BankFirst and The First National Bank and Trust Company ("Athens," or
collectively, the "Banks"). The discussion identifies trends and material
changes that occurred during the reported periods and should be read in
conjunction with the supplemental consolidated financial statements and
accompanying notes. The periods included within this discussion are the years
1997, 1996 and 1995.
General
The Company is a community banking organization, headquartered in
Knoxville, Tennessee, which generates loans and deposits through its 29 branches
throughout East Tennessee. BankFirst has 23 offices in Knox, Sevier, Blount,
Loudon, and Jefferson counties, and Athens has six offices in McMinn County. The
Company's operations principally involve commercial and residential real estate
lending, commercial business lending, consumer lending, construction lending and
other financial services, including trust operations, credit card services and
brokerage services.
In the fall of 1992, James L. Clayton acquired control of BankFirst,
formerly known as First Heritage National Bank of Loudon County, N.A. ("First
Heritage"), and installed an experienced bank management team the following
year. Drawing upon management's existing relationships with loan and deposit
customers who followed management from their previous bank, BankFirst increased
its assets from approximately $60 million in 1993 to approximately $230 million
in 1996. During 1996, Mr. Clayton acquired control of Smoky Mountain Bancorp,
Inc. ("Smoky Mountain") and its wholly-owned subsidiary, First National Bank of
Gatlinburg. At year-end 1996, these entities were combined with the Company in a
share exchange accounted for in a manner similar to a pooling of interests.
Following the combination, the Company had total assets of $423 million. The
combined entity continued growth in 1997, primarily through commercial real
estate lending financed through deposit growth.
In January 1998, BankFirst purchased Curtis Mortgage Co., Inc. ("Curtis
Mortgage") for $7.5 million as an opportunity to increase mortgage originations,
which had not been a significant line of business, and as an opportunity to
diversify revenues through loan servicing. Curtis Mortgage is a 54 year old
mortgage company which originates and purchases mortgage loans for sale and
servicing. Curtis Mortgage generally has not retained loans for its portfolio,
although its servicing portfolio was approximately $451 million at the date of
acquisition. This transaction was accounted for as a purchase, and accordingly,
is not reflected in the historical financial statements of the Company for
periods prior to that time.
The Company changed its name from Smoky Mountain Bancorp, Inc. to
BankFirst Corporation following the April 27, 1998 shareholder meeting. On July
2, 1998, the Company acquired First Franklin in a statutory merger accounted for
as a pooling of interests. At year-end 1997, First Franklin had total assets of
$182 million, total equity of $21 million, and net income of $2.6 million.
Shareholders of First Franklin received 22.05 shares of Company common stock for
each share of First Franklin common stock, giving effect to the subsequent five
for one stock split. As a consequence of the merger, Athens became a separate
subsidiary of the Company, adding risk diversification and trust expertise to
the combined entity. Athens also has a small consumer finance subsidiary.
40
<PAGE>
Results of Operations
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
Net interest income increased $3.1 million, or 12.2%, to $28.6 million in
1997 from $25.5 million in 1996. The increase in net interest income was due
primarily to an increase in average earning assets and an increase in the
percentage of average earning assets invested in loans. Average earning assets
increased $49.0 million, or 9.3%, primarily as a result of loan growth,
particularly growth of commercial business loans.
The Company's net interest spread and net interest margin were 4.24% and
5.05%, respectively, in 1997 as compared to 4.13% and 4.92% in 1996. The
increase in the net interest spread and the net interest margin was primarily
the result of the growth in the volume of loans, which are traditionally higher
yielding assets than investment securities, as a percentage of average earning
assets.
The provision for loan losses was $2.9 million in 1997 compared to
$667,000 in 1996. The increase in the provision was attributable to additional
reserves established for the risks associated with the commercial real estate
loan portfolio acquired in the merger with Smoky Mountain in December 31, 1996
and the increase in 1997 charge-offs. The Company experienced net charge-offs of
$1.6 million in 1997, resulting in a ratio of net charge-offs to average loans
of 0.35%. Management considers these recent losses to be isolated events and
does not believe that they signal the increase of a trend toward larger
percentage loan losses in the future.
Noninterest income increased $414,000, or 7.95%, to $5.7 million in 1997
from $5.2 million in 1996, primarily as a result of security gains of $309,000.
Noninterest expense increased $524,000, or 2.5%, to $21.3 million in 1997
from $20.8 million in 1996. The primary component of noninterest expense is
salaries and benefits, which increased $571,000, or 5.4%, to $11.1 million in
1997 from $10.5 million in 1996. The increase in salaries and benefits is
primarily attributable to overall growth of the Company. Data processing
expenses also increased $356,000, or 39.7%, to $1.3 million in 1997 from
$897,000 in 1996 primarily as a result of volume growth and adjustments
necessitated by the merger with Smoky Mountain. The Company's efficiency ratio
in 1997 was 61.1%, compared to 66.4% in 1996.
Net income increased $579,000 or 9.6%, to $6.6 million in 1997 from $6.0
million in 1996. The increase in net income was due primarily to an increase in
net interest income, and was reduced by the impact of increased loan loss
provisions. Return on average assets during 1997 and 1996 was 1.07%, and return
on average equity was 11.75% for 1997 compared to 12.66% for 1996.
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Net interest income increased $2.4 million, or 10.5%, to $25.5 million in
1996 from $23.0 million in 1995. The increase in net interest income was due
primarily to an increase in average earning assets and an increase in the
percentage of average earning assets invested in loans, particularly higher
yielding commercial business and commercial real estate loans. Average earning
assets increased $39.5 million, or 8.0%, primarily as a result of loan growth,
particularly growth of commercial business and commercial real estate loans.
The Company's net interest spread and net interest margin were 4.13% and
4.92%, respectively, in 1996 as compared to 4.12% and 4.82% in 1995. The
increase in the net interest spread and the net interest margin was primarily
the result of the growth in the volume of loans, traditionally higher yielding
assets than investment securities, as a percentage of average earning assets.
The provision for loan losses was $667,000 in 1996 compared to $553,000 in
1995. The increase in the provision was primarily the result of general growth
in the Company's loan portfolio. The Company experienced net charge-offs of
$634,000 in 1996, resulting in a ratio of net charge-offs to average loans of
0.17%.
Noninterest income increased $874,000, or 20.0%, to $5.2 million in 1996
from $4.4 million in 1995, primarily attributable to increases in service
charges on customer accounts.
Noninterest expense increased $1.6 million, or 8.6%, to $20.8 million in
1996 from $19.2 million in 1995. The primary component of noninterest expense is
salaries and benefits, which increased $790,000, or 8.1%, to $10.5 million in
1996 from $9.7 million in 1995. Equipment expenses increased $697,000, or 41.4%,
to $2.4 million in 1996 from $1.7 million in 1995. Occupancy expenses increased
$586,000, or 38.0%, to $2.1 million in 1996 from $1.5 million in 1995. Data
processing expenses increased $223,000, or 33.09%, to $897,000 in 1996 from
$674,000 in 1995. These increases are primarily attributable to the combination
of the operations of Smoky Mountain and BankFirst. The Company's efficiency
ratio in 1996 was 66.4%, compared to 68.5% in 1995.
41
<PAGE>
Net income increased $870,000, or 16.8%, to $6.0 million in 1996 from $5.2
million in 1995. The increase in net income was due primarily to increases in
net interest income and noninterest income, and was reduced by the impact of
increased noninterest expense. Return on average assets for 1996 was 1.07%
compared to 0.98% during 1995, and return on average equity was 12.66% for 1996
compared to 13.53% during 1995.
Lending
Total loans were $465.0 million at year-end 1997, and $412.8 million at
year-end 1996. Loan growth was $52.2 million, or 12.6%, during 1997, and $62.1
million, or 17.7%, during 1996. Management was able to achieve growth from 1993
through 1996 because of long term relationships developed by current management
while at other financial institutions. Loans in all categories continued to grow
during 1997 primarily as a result of strong economic conditions in the Banks'
primary markets, with commercial lending experiencing the largest growth.
Management expects loan growth in 1998 to continue at a rate comparable to 1997.
Commercial lending will continue to be the primary focus, although management
will work to generate additional consumer loans, as well as additional
residential mortgage loans through Curtis Mortgage.
A banking company's credit risk profile is generally reflected in the
level and types of loans held, since loans are usually the highest risk assets
owned. Even though the majority of the Company's loans are commercial, which is
typically the highest risk loan type, management believes that two factors
mitigate the credit risk in this portfolio. First, 63.3% of commercial loans are
secured primarily by income producing real estate, and second, BankFirst's early
growth was generated through seasoned loan relationships. The Company's
relatively low levels of charge-offs and non-performing loans reflect the effect
of these mitigating factors.
Lending activities are under the direct supervision of the Boards of
Directors and senior management of the Banks. The Banks operate under loan
policies which state, among other things, guidelines for underwriting, credit
criteria, loan composition, concentrations and administration. See
"Business--Lending Activities" for a discussion of such policies.
Loans Outstanding
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial business ............. $ 95,143 $ 69,614 $ 53,430 $ 57,680 $ 43,448
Commercial real estate .......... 164,102 155,389 116,372 103,312 91,052
Construction loans .............. 24,977 26,379 22,021 19,431 12,153
Residential real estate ......... 120,143 110,636 108,276 81,472 73,488
Installment ..................... 59,947 50,277 50,569 45,093 33,981
Other ........................... 2,623 2,035 1,754 1,918 953
-------- -------- -------- -------- --------
Total loans ............... 466,935 414,330 352,422 308,906 255,075
Unearned income ................. (1,968) (1,537) (1,770) (2,001) (1,383)
-------- -------- -------- -------- --------
Total loans, net ....... $464,967 $412,793 $350,652 $306,905 $253,692
======== ======== ======== ======== ========
At December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial business ............. 20.38% 16.80% 15.16% 18.67% 17.03%
Commercial real estate .......... 35.14 37.50 33.02 33.44 35.70
Construction loans .............. 5.35 6.37 6.25 6.29 4.76
Residential real estate ......... 25.73 26.70 30.72 26.37 28.81
Installment ..................... 12.84 12.13 14.35 14.60 13.32
Other ........................... 0.56 0.50 0.50 0.63 0.38
----- ----- ----- ----- -----
Total loans ............... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
42
<PAGE>
Securities
The Banks use their securities portfolios primarily as a source of
liquidity and a base from which to pledge assets for repurchase agreements and
public deposits. Generation of income from securities is not a primary focus of
the Banks. Total securities were $127.7 million at year-end 1997, which is
slightly lower than the $134.8 million balance in 1996. The Banks' policy
guidelines are designed to minimize credit, market, and liquidity risk, and
securities generally must be "investment grade" or higher to be purchased. All
securities are classified as "available for sale" to provide flexibility for
asset liability management. Approximately 62.4% of year-end 1997 securities were
pledged for public deposits and repurchase agreements. Other than commitments to
originate or sell mortgage loans, the Banks do not invest in off-balance sheet
derivative financial instruments, such as interest rate swaps.
Securities
At December 31,
---------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Available for sale:
U.S. Government and agencies ............ $ 77,969 $ 91,520 $ 95,129
States and political subdivisions ....... 38,999 22,971 21,940
Mortgage-backed and asset-backed ........ 10,768 20,290 18,558
-------- -------- --------
Total available for sale ......... $127,736 $134,781 $135,627
======== ======== ========
Securities Maturity Schedule
<TABLE>
<CAPTION>
1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
-------------- -------------- -------------- -------------- --------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government
& agencies .......... $ 11,978 5.87% $40,554 6.42% $24,936 6.57% $501 7.06% $77,969 6.33%
State and municipal .... 755 6.70% 5,857 6.92% 15,388 4.92% 16,999 4.97% 38,999 5.27%
Mortgage-backed
and asset-backed (1) -- -- -- -- 10,768 6.43%
------- ------- ------- ------- --------
Total available
for sale ..... $12,733 $46,411 $40,324 $17,500 $127,736 6.01%
======= ======== ======= ======= =========
</TABLE>
- --------------
(1) These securities are not identified with a specific maturity because they
do not have a defined maturity.
Deposits and Borrowings
Although deposits have been the Company's primary source of funding for
loans, although the Company also utilizes borrowed funds, including customer
repurchase agreements. See "--Liquidity" and "--Interest Rate Sensitivity." The
Company believes it has the ability to raise deposits quickly within its market
areas by slightly raising interest rates. The Company's deposit strategy,
however, has been to remain competitive in its markets, without paying the
highest yield, because of the availability and attractiveness of other sources
of funding. Customer repurchase agreements and FHLB advances, while more costly
than deposit funding, are typically the lowest cost borrowed funds available in
the marketplace, and are utilized by management to raise identified amounts of
funds with more precision than deposit solicitations. Although management
expects to continue using repurchase agreements, short-term borrowings and FHLB
advances, deposits will continue to be the Company's primary funding source.
Total deposits grew at a rate of 6.5% during 1997 and 7.5% during 1996,
resulting from an increase in deposit taking branch locations and effective
marketing strategies. Despite the increase in deposit growth, loan growth
outpaced the growth of deposit sources, resulting in an increase in the loan to
deposit ratio to 83.5% at year-end 1997, from 77.2% at year-end 1996. To supply
the needed liquidity, BankFirst increased its repurchase agreements from $6.0
million in 1996 to $16.3 million in 1997. While BankFirst actively solicits
customer repurchase agreement accounts, Athens has not used repurchase
agreements as a source of liquidity. These accounts are considered volatile
under regulatory requirements, although BankFirst has found them to be a steady
source of funding. BankFirst and Athens have both utilized the Federal Home Loan
Bank of Cincinnati ("FHLB") as a borrowing source. FHLB borrowings were $12.1
million at year-end 1997 and 1996, $10.0 million of which matures during 1998.
The FHLB will continue to be a source for funding loan growth in the future, as
BankFirst intends to draw additional borrowings to fund the Curtis Mortgage
warehouse line of credit and for other loan growth.
43
<PAGE>
Deposit Information
December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Noninterest bearing .................. $ 92,749 $ 74,161 $ 74,325
Interest bearing demand .............. 150,761 139,152 125,558
Savings deposits ..................... 37,270 36,576 41,507
Time ................................. 268,989 266,450 238,956
-------- -------- --------
Total deposits ............. $549,769 $516,339 $480,346
======== ======== ========
Maturity Ranges of Time Deposits
with Balances of $100,000
or more at December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
3 months or less .................. $25,686 $28,578 $25,508
3 through 6 months ................ 14,324 11,182 14,188
6 through 12 months ............... 21,167 19,619 11,867
Over 12 months .................... 17,083 10,089 11,352
------- ------- -------
$78,260 $69,468 $62,915
======= ======= =======
In general, large certificate of deposit customers tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding from liquidity planning purposes than core deposits. However, the
Company does not believe that its deposits of this type are materially more
sensitive to interest rate changes than its other certificates of deposits
because such certificates are principally held by long-term customers located in
the Banks' market areas.
Equity and Capital Resources
The Company and each of the Banks were "well capitalized" for regulatory
purposes during 1997, 1996 and 1995. The leverage capital ratio of the Company
was 9.7% in 1997, 9.6% in 1996 and 8.4% in 1995, with total stockholders' equity
of $59.9 million at year-end 1997. For a discussion of capital requirements see
"Regulation--Capital Requirements." The Company has issued stock upon the
exercise of stock options, conversion of preferred stock to common stock, and in
connection with a five for four common stock split in 1997 and five for one
split in 1998. During 1996, $4.5 million was raised from sales of common stock
and $1.8 million from sales of preferred stock. These stock sales were primarily
motivated by the desire to increase operating capital and to achieve and
maintain "well capitalized" levels and comply with regulatory requirements while
supporting asset growth. The cash dividends reflected in the Company's 1997 and
1996 Financial Statements were paid by First Franklin prior to the merger. The
Company does not intend to pay cash dividends on common stock in the foreseeable
future. The Company's current strategy is to support equity growth by retaining
net profits rather than paying cash dividends on common stock.
Items that represent common stock equivalents include 218,508 shares of 5%
preferred stock, $5.00 par value per share (the "Preferred Stock"), and 862,000
common stock options outstanding at year-end 1997. Each share of the Preferred
Stock is convertible into 3.0875 shares of common stock, adjustable for stock
splits and future recapitalizations. There are 1,000,000 authorized shares of
Preferred Stock; however, management currently has no plans to issue additional
shares. There are 2,067,005 additional common shares available for grant under
the stock option plan. The Company plans to continue granting stock options to
selected officers, directors and other key employees.
Net Interest Income
Net interest income is the difference between interest and fees earned on
earning assets, principally loans and investments, and the interest paid on
deposits and other interest bearing funds. It is the major component of earnings
for the Company. For analytical purposes, the interest earned on loans and
investments is measured and
44
<PAGE>
expressed on a fully tax equivalent (FTE) basis. Tax-exempt interest income is
increased to an amount comparable to interest subject to federal income taxes in
order to properly evaluate the effective yields earned on earning assets. The
tax equivalent adjustment is based on a combined federal and state tax rate of
34%.
Net interest income is influenced primarily by market interest rates,
changes in the balance and mix of earning assets and interest-bearing
liabilities, the proportion of earning assets that are funded by demand deposits
and equity capital and the relative repricing periods for earning assets and
interest-bearing liabilities. Some of these factors are controlled to a certain
extent by management. Conditions beyond management's control may have a
significant impact on changes in net interest income from one period to another.
Examples of such external factors are Federal Reserve Board monetary policy,
introduction of new loan or deposit products by bank and non-bank financial
competitors and the fiscal and debt management policies of the federal
government.
45
<PAGE>
Average Balance Sheets and Interest Rates
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- --------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Securities
Taxable ................ $105,180 $ 6,783 6.45% $113,420 $7,213 6.36% $115,842 $6,562 5.66%
Tax-exempt (1) ....... 23,328 1,795 7.69 23,336 1,813 7.77 19,705 1,641 8.33
Unrealized gain on A.F.S. .. 288 (156) (38)
-------- ------- -------- ------ -------- ------
Total securities ........... 128,796 8,578 6.66 136,600 9,026 6.61 135,509 8,203 6.05
Loans (2) ................ 442,296 42,880 9.70 379,930 37,589 9.89 339,989 33,791 9.94
Interest bearing deposits
with other banks ....... 236 15 6.36 1,180 61 5.17 1,154 75 6.50
Federal funds sold and
other .................. 5,850 346 5.90 10,469 572 5.46 12,182 557 4.57
-------- ------- -------- ------ -------- ------
Total earning assets . 577,178 51,819 8.98 528,179 47,248 8.95 488,834 42,626 8.72
Noninterest earning assets
Allowance for loan losses (4,796) (4,802) (4,541)
Premises and equipment ... 19,769 16,961 17,395
Cash and due from banks .. 20,876 17,942 17,991
Accrued interest and
other assets ........... 8,692 8,336 7,816
-------- -------- --------
Total assets ......... $621,719 $ 566,616 $ 527,495
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand
deposits ..............$ 141,941 $ 5,007 3.53% $ 128,048 $5,185 4.05% $125,466 $ 4,866 3.88%
Savings deposits ......... 36,803 1,034 2.81 37,855 1,107 2.92 41,667 1,236 2.97
Time deposits ............ 270,782 15,063 5.56 254,448 13,805 5.43 232,640 12,115 5.21
-------- ------- -------- ------ -------- ------
Total interest-bearing \
deposits ................. 449,526 21,104 4.69 420,351 20,097 4.78 399,773 18,217 4.56
Borrowed funds
Securities sold under
agreements to repurchase 9,110 438 4.81 7,346 347 4.72 4,839 276 5.70
Other borrowings ....... 7,173 414 5.77 4,710 254 5.39 4,674 205 4.39
Long-term borrowings ... 12,214 696 5.70 8,544 540 6.32 5,553 384 6.92
-------- ------- -------- ------ -------- ------
Total borrowed funds ....... 28,497 1,548 5.43 20,600 1,141 5.54 15,066 865 5.74
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities ......... 478,023 22,652 4.74 440,951 21,238 4.82 414,839 19,082 4.60
Noninterest-bearing liabilities
Employee stock ownership
plan .................. 1,536 1,389 1,710
Noninterest-bearing demand
deposits .............. 80,294 72,084 68,295
Other liabilities ........ 6,320 4,405 4,369
Stockholders' equity. .... 55,546 47,787 38,282
-------- -------- --------
Total liabilities and
stockholders' equity .. $621,719 $566,616 $527,495
======== ======== ========
Interest margin recap
Net interest income and
interest rate spread .. $ 29,167 4.24% $26,010 4.13% $ 23,544 4.12%
======== ======= ========
Net interest income margin 5.05% 4.92% 4.82%
</TABLE>
- ---------------
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of 34% for all
years. Tax equivalent adjustments were $532 for 1997, $550 for 1996 and
$507 for 1995.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $1,113 for 1997, $1,327 for
1996 and $1,072 for 1995.
46
<PAGE>
An analysis of the changes in net interest income from period to period is
presented in the following table. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Volume/Rate Analysis
<TABLE>
<CAPTION>
1997 change from 1996 due to 1996 change from 1995 due to
---------------------------- ---------------------------
Volume Rate Total Volume Rat Total
------ ----- ----- ------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans ........................ $ 6,281 $ (989) $ 5,292 $ 3,987 $ (189) $ 3,798
Securities
Taxable .................... (515) 85 (430) (141) 792 651
Tax-exempt ................. (1) (17) (18) 317 (145) 172
Total securities interest (516) 68 (448) 177 646 823
Interest-bearing deposits with
other banks ................ (33) (13) (46) 2 (16) (14)
Federal funds sold ........... (228) 1 (227) (118) 133 15
------- ------- ------- ------- ------- -------
Total interest income .... 5,504 (933) 4,571 4,048 574 4,622
------- ------- ------- ------- ------- -------
Interest expense
Interest-bearing demand
deposits ................... 596 (774) (178) 102 217 319
Savings deposits ............. (34) (39) (73) (111) (18) (129)
Time deposits ................ 902 356 1,258 1,169 521 1,690
Repurchase agreements ........ 85 6 91 161 (90) 71
Other borrowings ............. 141 19 160 2 47 49
Long-term borrowings ......... 251 (95) 156 222 (66) 156
------- ------- ------- ------- ------- -------
Total interest expense ... 1,941 (527) 1,414 1,544 612 2,156
------- ------- ------- ------- ------- -------
Net interest income ...... $ 3,563 $ (406) $ 3,157 $ 2,504 $ (38) $ 2,466
======= ======= ======= ======= ======= =======
</TABLE>
Net interest income (FTE) increased $3.2 million, or 12.1%, from 1996 to
1997, and $2.5 million, or 10.4%, from 1995 to 1996. Net interest margin also
improved each period, growing from 4.8% in 1995, to 4.9% in 1996 and to 5.1% in
1997. The increase in net interest income, and improvement in net interest
margin, is primarily attributable to an increase in the level of earning assets
and a change the makeup of those assets.
Average earning assets increased from $528.2 million to $577.1 million, or
9.3%, from 1996 to 1997, and from $488.8 million to $528.2 million, or 8.0%,
from 1995 to 1996. Loan growth, which was 16.4% in 1997 and 11.7% in 1996, was
the primary cause of the overall growth in earning assets. Management has been
able to achieve this growth in loans because of long term relationships
developed by current management while at other financial institutions and most
recently, as a result of strong economic conditions in the Banks' primary
markets. Management expects loan growth in 1998 to continue at a rate equivalent
to 1997.
The growth in loans has improved the net interest rate spread and net
interest margin. Loans are the highest yielding earning assets. During 1995,
loans represented 69.5% of earning assets. During 1996 this ratio increased to
71.9%, and in 1997 it increased further to 76.7%. Although the average rate
earned on loans has decreased in each of the last two years from 9.89% to 9.70%,
the yield on total interest earning assets has increased in each period. The
increased yield on securities has also supported the increase in average yield
on earning assets. The increase in yield from 1995 to 1996 of 0.56% was
consistent with general market rate increases. The increase in 1997 was
primarily attributable to the Bank's reinvesting of securities proceeds in
longer-term securities with higher yields. Average yields on investments
increased in 1997, from 6.61% to 6.66%, while general market rates declined to
some extent.
Net interest income and net interest margin have also been helped by
several factors related to funding. Most of the Company's asset growth has
continued to be funded with deposits, the least costly source of funding.
Average interest-bearing deposits grew 6.9% from 1996 to 1997, almost keeping
pace with the growth in earning
47
<PAGE>
assets. Even with this deposit growth, the average rate paid on deposits fell
from 4.78% in 1996 to 4.69% in 1997. The Company is generally asset driven,
managing funding to support assets gathered. See " -- Deposits and Borrowings."
The portion of earning assets funded by non-interest bearing deposits,
other liabilities and equity has increased from 22.7% in 1995, to 23.5% in 1996,
and to 24.6% in 1997. These sources of funding do not carry an interest cost,
and thus the amount of interest earning assets supported by non interest-bearing
liabilities has increased. This factor does not impact net interest spread, but
has a positive impact on net interest margin.
The increase in deposits plus non-interest bearing sources of funding has
been lower than the growth in earning assets. As a result, borrowed funds have
increased from 3.1% of average earning assets in 1995 to 3.9% in 1996 and 4.9%
in 1997. These funds are more costly than deposits and their increase relative
to total funding has put some downward pressure on net interest margin and
spread. In 1995, the average cost of borrowing exceeded the average cost of
deposits by 118 basis points ("bp"). In 1996, this difference fell to 76 bp, and
in 1997 it decreased further to 74 bp. The narrowing of spread between average
costs of borrowings and average costs of deposits is attributable primarily to a
deliberate shift by management of the nature of FHLB borrowings from fixed to
variable rate, as part of its overall asset/liability strategy. See "-- Deposits
and Borrowings."
Provision for Loan Losses and Asset Quality
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb losses in the loan portfolio.
Factors considered in establishing an appropriate allowance include a careful
assessment of the financial condition of the borrower; a realistic determination
of the value and adequacy of underlying collateral; the condition of the local
economy and the condition of the specific industry of the borrower; a
comprehensive analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans. The Company applies a systematic process for
determining the adequacy of the allowance for loan losses including an internal
loan review function and a monthly analysis of the adequacy of the allowance.
The monthly analysis includes determination of specific potential loss factors
on individual classified loans, historical potential loss factors derived from
actual net charge-off experience and trends in nonperforming loans, and
potential loss factors for other loan portfolio risks such as loan
concentrations, local economy, and the nature and volume of loans.
The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out recoveries
on previously charged-off assets, become net charge-offs. The Company's policy
is to charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery. The
Company's level of net charge-offs to average loans was 0.35% in 1997, 0.17% in
1996 and 0.11% in 1995. Charge-offs were relatively immaterial through 1996, but
increased to $1.8 million in 1997, due to two commercial credits charged off by
BankFirst, and a smaller increase in loan charge-offs by Athens. Management does
not believe that 1997 charge-offs are indicative of an overall deterioration in
the credit quality of the portfolio.
48
<PAGE>
Analysis of Allowance for Loan Losses
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,723 $ 4,690 $ 4,526 $ 4,054 $ 3,392
Loans charged off
Commercial business ....... (1,079) (182) (203) (234) (241)
Commercial real estate .... (161) 6 -- -- (14)
Construction loans ........ -- -- -- (45) --
Residential real estate ... (76) (55) (44) (1) (61)
Installment ............... (503) (661) (454) (291) (289)
Lease financing ........... (14) -- -- -- --
--------- --------- --------- --------- ---------
Total charge-offs ....... (1,833) (904) (701) (571) (605)
--------- --------- --------- --------- ---------
Charge-offs recovered
Commercial business ....... 41 53 146 149 184
Commercial real estate .... 2 -- -- 7 --
Construction loans ........ 33 12 -- -- --
Residential real estate ... 39 21 13 42 17
Installment ............... 158 184 153 141 142
Lease financing ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries ........ 273 270 312 339 343
--------- --------- --------- --------- ---------
Net loans charged off ....... (1,560) (634) (389) (232) (262)
Current year provision ...... 2,935 667 553 704 924
--------- --------- --------- --------- ---------
Balance at end of year ...... $ 6,098 $ 4,723 $ 4,690 $ 4,526 $ 4,054
========= ========= ========= ========= =========
Loans, net at year end ...... $ 464,967 $ 412,793 $ 350,652 $ 306,905 $ 253,692
Ratio of allowance to loans at
year end .................. 1.31% 1.14% 1.34% 1.47% 1.60%
Average loans ............... $ 442,296 $ 379,930 $ 339,989 $ 282,812 $ 243,431
Ratio of net loans charged off
to average loans .......... 0.35% 0.17% 0.11% 0.08% 0.11%
</TABLE>
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in the credit portfolio. Non-performing
loans include non-accrual loans, restructured loans and loans delinquent 90 days
or more. Loans are classified as non-accrual when management believes that
collection of interest is doubtful but principal is considered collectible. When
loans are placed on nonaccrual status, all unpaid accrued interest is reversed.
Another element associated with asset quality is other real estate owned (OREO),
which represents properties reacquired through loan defaults by customers.
Non-performing loans were 0.61% of loans in 1997 and 0.59% of loans in 1996, and
the allowance for loan losses is more than double the amount of non-performing
loans at year-end 1997. The dollar increase in non-performing loans during 1997
is due to the maturing portfolio, and less attributable to conditions in the
marketplace. The Company considers commercial loans on nonaccrual or classified
as doubtful under the internal grading system to be impaired. See "Business--
Lending Activities." For these loans, a specific reserve is computed using
discounted expected cash flows or conversion of collateral. There were no
material impaired loans at year-end 1997.
Even though the Company has relatively low levels of non-performing loans
and has experienced low charge-offs, management has sought to maintain the
allowance for loan losses at a level adequate to cover credit losses inherent in
the portfolio. Management's judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events which it believes to be
reasonable, but are likely to change. There can be no
49
<PAGE>
assurance that charge-offs in future periods will not exceed the allowance or
that additional increases in the allowance will not be required. During 1997,
BankFirst recorded a provision for loan losses of $2.9 million, which was
substantially higher than the two preceding years. Factors which gave rise to
the 1997 increased provision and the resultant 29.1% increase in the allowance
included a 36.6% increase in commercial business loans during the year and a
146.1% increase in net charge-offs during the year, which increased the
historical loss factors applied to the portfolio.
Non-Performing Assets
As of December 31,
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Principal balance
Nonaccrual ................... $1,141 $ 900 $ 581 $ 871 $ 477
90 days or more past due
and still accruing ......... 1,705 1,518 461 264 125
------ ------ ------ ------ ------
Total non-performing loans $2,846 $2,418 $1,042 $1,135 $ 602
====== ====== ====== ====== ======
Non-perf. as a percent of loans 0.61% 0.59% 0.30% 0.37% 0.24%
Other real estate owned ....... $ 878 $ 309 $ 770 $ 317 $ 396
OREO as a percent of loans .... 0.19% 0.07% 0.22% 0.10% 0.16%
Allowance as a percent of
nonperforming loans ......... 214.27% 195.33% 450.10% 398.77% 673.42%
The 1997 loan portfolio was 55.5% commercial and commercial real estate
loans, which represent higher risk than residential mortgage and consumer loans
because of their larger size and greater dependency on cash flow. The Company
also has a concentration of commercial real estate loans to the hospitality
industry, substantially in Sevier County, Tennessee. Management has determined
that a total allowance level of $6.1 million, or 1.31% of total loans for 1997,
is adequate for losses inherent in the total portfolio. Future provisions for
loan losses will be dependent on loan growth, loan mix, portfolio credit risk
and actual losses incurred. Provisions during 1998 are expected to be less than
1997 levels.
Allowance Allocation
As of December 31,
---------------------------------------------
1997 1996 1995 1994 1993
----- ------ ----- ------ ------
(Dollars in thousands)
Commercial business .......... $1,231 $ 801 $ 714 $ 617 $ 754
Commercial real estate ....... 1,874 1,366 1,263 1,187 1,161
Construction loans ........... 244 338 276 273 167
Residential real estate ...... 839 1,126 1,227 1,063 811
Installment .................. 986 666 709 764 409
Unallocated .................. 924 426 501 622 752
------ ------ ------ ------ ------
Total ...................... $6,098 $4,723 $4,690 $4,526 $4,054
====== ====== ====== ====== ======
50
<PAGE>
Noninterest Income and Expense
Noninterest Income and Expense
<TABLE>
<CAPTION>
% change % change
1997 from `96 1996 from `95 1995
---- -------- ---- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Noninterest Income
Deposit service charges and fees $ 3,811 0.40% $ 3,796 14.86% $ 3,305
Trust department income ........ 704 13.55 620 6.53 582
Other .......................... 607 (0.98) 613 107.10 296
Realized gain on sale of loans . 226 (3.42) 234 29.28 181
Security gains/(losses) ........ 309 1,645.00 (20) (500.00) 5
-------- -------- --------
Total noninterest income ..... $ 5,657 7.90% $ 5,243 20.00% $ 4,369
======== ======== ========
Noninterest Expense
Salaries and employee benefits . $ 11,110 5.42% $ 10,539 8.10% $ 9,749
Occupancy expenses ............. 1,716 (19.40) 2,129 37.98 1,543
Equipment expenses ............. 2,537 6.51 2,382 41.36 1,685
Office expenses ................ 775 108.90 371 (49.59) 736
Data processing expenses ....... 1,253 39.69 897 33.09 674
FDIC assessments ............... 48 (88.18) 406 (45.06) 739
Other .......................... 3,884 (4.69) 4,075 1.09 4,031
-------- -------- --------
Total noninterest expense .... $ 21,323 2.52% $ 20,799 8.57% $ 19,157
======== ======== ========
</TABLE>
The primary recurring source of noninterest income is service charges on
deposit accounts. Service charges on deposit accounts increased 0.4% from 1996
to 1997, and increased 14.9% from 1995 to 1996. Trust department income provided
$704,000 in 1997, an increase of 13.6% from 1996. The majority of this trust
income is generated by Athens; however, management expects that the combined
trust departments of both Banks will provide future growth in trust income to
the Company.
Another component of noninterest income is gains on sales of securities
and loans. The Company classifies all of its securities as "available for sale"
to provide flexibility for asset liability management. Security sales were $35.5
million in 1997, generating $309,000 in gains. There were $13.0 million of
security sales in 1996, resulting in $20,000 in losses. In 1995, security sales
of $14.1 combined with $8.2 million sales of trading securities by BankFirst in
generating $5,000 in gains. BankFirst discontinued trading securities during
1995, and current policies do not permit trading. Gains from loan sales of
$226,000 in 1997, $234,000 in 1996 and $181,000 in 1995 were solely gains
realized from sales of mortgage loan servicing to private investors. Proceeds
from sales of these mortgage loans were $15.5 million during 1997. BankFirst
generally has not retained mortgage loans in its portfolio. With the acquisition
of Curtis Mortgage, BankFirst expects to utilize its various retail locations as
a source for expanded mortgage loan origination volume. Curtis Mortgage, through
increased volume, is expected to provide a significant increase in gains on loan
sales as well as to enhance earnings from loan servicing income.
Noninterest expense increased 2.5% in 1997 from 1996. Increases in office
administration and data processing costs were offset by declines in occupancy
and FDIC assessments. The Company's FDIC insurance rate is at the lowest level
charged by the FDIC, which is currently close to zero. Noninterest expenses
increased 8.6% from 1995 to 1996, primarily from occupancy, equipment and data
processing expenses resulting from the combination of Smoky Mountain's and
BankFirst's operations, offset by a decline in FDIC assessments and other
expenses. Future occupancy expenses are expected to increase as a result of new
branch locations currently being constructed, and the 1997 purchase of
additional main office space. Data processing expenses are expected to increase
with growth and from new software purchased by BankFirst during 1998. In 1998,
noninterest expense will include costs associated with the First Franklin
merger, which are estimated to be $500,000.
51
<PAGE>
Income Taxes
The Company's effective income tax rate has remained fairly constant, at
34% in 1997, 34.5% in 1996, and 32.7% in 1995. The Company had deferred tax
liabilities of $756,000 at year-end 1997 and $437,000 at year-end 1996. Note 9
to the consolidated financial statements contains additional analysis of income
taxes.
Interest Rate Sensitivity
A key element in the financial performance of financial institutions is
the level and type of interest rate risk assumed. The single most significant
measure of interest rate risk is the relationship of the repricing periods of
earning assets and interest-bearing liabilities. The more closely the repricing
periods are correlated, the less interest rate risk assumed by the Company. In
general, community bank customer preferences tend to push the average repricing
period for costing liabilities to a shorter time frame than the average
repricing period of earning assets, resulting in a net liability sensitive
position in time frames less than one year. A summary of the repricing schedule
of the Company's interest earning assets and interest bearing liabilities
("GAP") at year-end 1997 follows:
Liquidity and Interest Rate Sensitivity
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------
1 - 90 91 - 365 1 - 5 Over 5
Days Days Years Years Total
----- -------- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net ......................... $ 186,527 $ 68,914 $ 168,081 $ 41,445 $ 464,967
Securities available for sale
Taxable .......................... 2,425 12,202 49,476 26,837 90,940
Tax-exempt ....................... 50 613 4,330 31,826 36,819
--------- --------- --------- --------- ---------
Total securities ................... 2,475 12,815 53,806 58,663 127,759
Federal funds sold ................. 7,000 -- -- -- 7,000
--------- --------- --------- --------- ---------
Total interest earning assets .... $ 196,002 $ 81,729 $ 221,887 $ 100,108 $ 599,726
========= ========= ========= ========= =========
Interest bearing liabilities
Interest-bearing demand deposits ... $ 150,762 $ -- $ -- $ -- $ 150,762
Savings deposits ................... 37,269 -- -- -- 37,269
Time deposits ...................... 67,566 128,028 73,070 325 268,989
Repurchase agreements and other
borrowed funds ................... 17,303 458 500 -- 18,261
Long-term borrowings ............... 25 10,072 384 1,640 12,121
--------- --------- --------- --------- ---------
Total interest bearing liabilities $ 272,925 $ 138,558 $ 73,954 $ 1,965 $ 487,402
========= ========= ========= ========= =========
Rate sensitive gap ................... (76,923) (56,829) 147,933 98,143
Rate sensitive cumulative gap ........ (76,923) (133,752) 14,181 112,324 112,324
Cumulative gap as a percentage
of earning assets .................. (12.83)% (22.30)% 2.36% 18.73%
</TABLE>
52
<PAGE>
As shown in the table, the Company has a cumulative negative GAP of
approximately 13% and 22% at the end of 90 days and one year, respectively.
Management believes that this level of negative GAP is appropriate since many of
the liabilities which are contractually immediately repricable can be
effectively repriced more slowly than the assets which are contractually
immediately repricable in a rising rate environment. Conversely, those
liabilities can often be repriced downward more rapidly than contractually
required assets repricing in a downward rate environment. The degree to which
management can control the rate of change in deposit liabilities which are
contractually immediately repricable is affected to a large extent by the speed
and amount of interest rate movements. Management's estimates regarding the
actual repricing of contractually immediately repricable liabilities is
incorporated into the Company's earnings simulation model.
The Company uses an earnings simulation model to analyze the net interest
income sensitivity. Potential changes in market interest rates and their
subsequent effect on interest income is then evaluated. The model projects the
effect of instantaneous movements in interest rates of 100 and 200 bp.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to interest rates are also incorporated in the model. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes, as well as changes in market conditions and
the application of various management strategies.
Market Risk
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
--------------------------- -----------------------------
200 100 Level 100 200
Basis Points Basis Points Rates Basis Points Basis Points
----------- ----------- ------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Projected Interest Income
Loans ............................. $42,721 $45,240 $47,763 $50,286 $52,809
Investments ....................... 9,138 9,266 9,396 9,523 9,653
Federal funds sold ................ 77 96 115 135 155
------- ------- ------- ------- -------
Total interest income ............. 51,936 54,602 57,274 59,944 62,617
Projected Interest Expense
Deposits .......................... 19,420 20,999 22,463 24,041 25,609
FHLB term advances ................ 554 611 668 725 782
Federal funds purchased
and other ....................... 878 1,117 1,364 1,603 1,843
------- ------- ------- ------- -------
Total interest expense ............ 20,852 22,727 24,495 26,369 28,234
------- ------- ------- ------- -------
Net interest income ............... $31,084 $31,875 $32,779 $33,575 $34,383
Change from level rates ........... (1,695) (904) 796 1,604
% change from level rates ......... (5.17)% (2.76)% 2.43% 4.89%
</TABLE>
In the event of an immediate 100 bp upward shift in the yield curve, it is
estimated that net interest income would increase by $796,000 compared to an
increase of $1.6 million in the event of a similar 200 bp rate movement. These
changes represent 2.4% and 4.9% of net interest income, respectively. Downward
rate movements result in estimated decreases in net interest income of similar
amounts and percentages.
Even though the Company's cumulative GAP at one year is negative, the
earnings simulation model indicates that an increase in interest rates of 100 bp
and 200 bp would result in increased net interest income. This occurs because
management believes that if overall market interest rates increase modestly, the
market would not require an immediate, corresponding repricing of non-term
deposit liabilities.
Liquidity
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets and long and
short term borrowing, based upon management's consideration of expected loan
demand, expected deposit flows and securities sold under repurchase agreements
(which are generally deposit equivalents arising from a corporate cash
management program offered by the Company). Management looks to deposits and
other borrowings as its primary sources of liquidity. See " -- Deposits and
Borrowings." The Banks' Asset/Liability Committees evaluate funding sources on a
quarterly basis, set funding policy, and evaluate repricing and maturity of the
Banks' assets and liabilities in order to diminish the potential adverse impact
that changes in interest rates could have on the Banks' net interest income.
53
<PAGE>
Funding Uses and Sources
<TABLE>
<CAPTION>
1997 1996
--------------------------------- -----------------------------------
Average Increase/(decrease) Average Increase/(decrease)
Balance Amount Percent Balance Amount Percent
-------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Funding Uses
Loans, net of unearned income ... $442,296 $62,366 16.42% $379,930 $39,941 11.75%
Taxable securities .............. 105,180 (8,240) (7.27) 113,420 (2,422) (2.09)
Tax exempt securities ........... 23,328 (8) (0.03) 23,336 3,631 18.43
Federal funds sold .............. 5,850 (4,619) (44.12) 10,469 (1,713) (14.06)
-------- ------- ----- -------- ------- -----
Total uses .................. $576,654 $49,499 9.39% $527,155 $39,437 8.09%
======== ======= ===== ======== ======= =====
Funding Sources
Noninterest bearing deposits .... $ 80,294 $ 8,210 11.39% $ 72,084 $ 3,789 5.55%
Interest bearing demand ......... 141,941 13,893 10.85 128,048 2,582 2.06
Savings deposits ................ 36,803 (1,052) (2.78) 37,855 (3,812) (9.15)
Time deposits ................... 270,782 16,334 6.42 254,448 21,808 9.37
Repurchase agreements ........... 9,110 1,764 24.01 7,346 2,507 51.81
Other borrowings ................ 7,173 2,463 52.29 4,710 36 0.77
Long-term borrowings ............ 12,214 3,670 42.95 8,544 2,991 53.86
-------- ------- ----- -------- ------- -----
Total sources ............... $558,317 $45,282 8.83% $513,035 $29,901 6.19%
======== ======= ===== ======== ======= =====
</TABLE>
The Company believes it has the ability to raise deposits quickly within
its market area by slightly raising interest rates, but has typically been able
to achieve deposit growth without paying above market interest rates. The
current strategy calls for the Banks to be no higher than second highest in
their pricing as compared to their primary competitors. Deposit growth has
funded most of the significant asset growth in the past several years, but has
decreased modestly as a percent of total funding. The Company does not solicit
brokered deposits. Included in certificates of deposit over $100,000 at year-end
1997 are $9 million in deposits from the State of Tennessee. During 1998,
management intends to reduce this relationship by $1 million per month,
replacing these deposits with other sources of funds, because of the restrictive
nature of the pledging requirements associated with these deposits.
The Company actively solicits customer cash management relationships which
often includes a securities repurchase agreement feature. Under these
agreements, commercial customers are able to generate earnings on otherwise idle
funds on deposits with the Banks. These accounts are considered volatile under
regulatory requirements, although the Company has found them to be a steady
source of funding. The Company has been able to increase customer relationships
because of its strong business lending program. While more costly than deposit
funding, these deposit-related accounts are typically the lowest cost borrowed
funds available to the Company.
Although it had no borrowings of this type outstanding at year-end 1997,
the Company maintains significant lines of credit with other financial
institutions. At that date total borrowing capacity under those lines amounted
to approximately $36 million under agreements with six commercial banks. The
Banks also have the capacity to borrow an additional $49.0 million from the FHLB
without purchasing additional FHLB stock.
Sales and maturities of assets are another source of funds. Proceeds from
maturities of securities were $32.2 million, $87.3 million and $45.6 million in
1997, 1996 and 1995, respectively. While management is currently extending the
average maturity of its securities for interest rate risk purposes, substantial
liquidity is available from normal maturities of securities. The Company also
has $127.7 million in securities classified as "available for sale" at year-end
1997. The ability to sell such securities is another potential source of
liquidity, although management generally does not use this source of funding
frequently. To the extent such securities are pledged to outstanding borrowings,
they are not available for liquidity purposes. Proceeds from the maturities of
loans are another steady source of funding, although on a net basis the demands
for new loans and renewal have exceeded funds provided by maturing loans.
54
<PAGE>
Loan Liquidity
<TABLE>
<CAPTION>
Loan Maturities at December 31, 1997
---------------------------------------------------
1 year 1 - 5 Over 5
and less years years Total
----------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial business ............................... $ 43,546 $ 37,358 $ 14,239 $ 95,143
Commercial real estate ............................ 25,443 38,901 99,758 164,102
Real estate - construction and residential ........ 31,892 45,377 67,851 145,120
Installment and Other ............................. 13,854 43,377 5,339 62,570
-------- -------- -------- --------
Total selected loans .............................. $114,735 $165,013 $187,187 $466,935
======== ======== ======== ========
Loans maturing after 1 year with:
Fixed interest rates .............................. $177,774
Floating interest rates ........................... 174,426
--------
$352,200
========
</TABLE>
The liquidity discussion above has described the Company's liquidity needs
on a consolidated basis. In general, the deposit and borrowing capacity
described above is at the bank level, while the equity based sources of funding
are at the holding company level. Substantial liquidity can be moved between the
Banks and the holding company, although there are certain regulatory
restrictions on such flows, particularly from the Banks to the holding company,
as described in note 12 to the financial statements. At year-end 1997, the Banks
had the ability to transfer approximately $9.1 million in dividends to the
holding company without special regulatory approval. The holding company
currently has no borrowings, and management's current policy is to not pay
dividends on common stock; rather earnings are retained to provide capital to
support the Company's growth. As a result, the holding company's independent
liquidity needs result primarily from holding company only expenses, which are
quite small in relation to its sources of liquidity.
Effects of Inflation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Nearly all of the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Company's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the prices of goods and services.
55
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended June
30, 1998.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFIRST CORPORATION
by
Date: August 14, 1998 /s/ C. David Allen
-----------------------------
C. David Allen
Chief Financial Officer
57
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
These schedules contain summary financial information extracted from the
consolidated balance sheets, the consolidated statements of income, and Company
records, and are qualified in their entirety by reference to such financial
statements. All dollar amounts are in thousands, except per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 28,453
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,664
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 478,222
<ALLOWANCE> 0
<TOTAL-ASSETS> 706,599
<DEPOSITS> 588,735
<SHORT-TERM> 32,488
<LIABILITIES-OTHER> 8,379
<LONG-TERM> 12,314
0
1,079
<COMMON> 24,559
<OTHER-SE> 37,300
<TOTAL-LIABILITIES-AND-EQUITY> 706,599
<INTEREST-LOAN> 24,390
<INTEREST-INVEST> 3,886
<INTEREST-OTHER> 125
<INTEREST-TOTAL> 28,402
<INTEREST-DEPOSIT> 11,106
<INTEREST-EXPENSE> 12,457
<INTEREST-INCOME-NET> 15,945
<LOAN-LOSSES> 1,067
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,675
<INCOME-PRETAX> 4,925
<INCOME-PRE-EXTRAORDINARY> 4,925
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,179
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
<YIELD-ACTUAL> 4.62
<LOANS-NON> 2,458
<LOANS-PAST> 2,367
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 113
<ALLOWANCE-OPEN> 5,002
<CHARGE-OFFS> 128
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 6,805
<ALLOWANCE-DOMESTIC> 6,220
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 585
</TABLE>
