SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  -------------

                                    FORM 10-K

[x]      Annual Report Pursuant to Section 13 or 15(d) of
         The Securities Exchange Act of 1934 (No Fee Required)

[ ]      Transition report pursuant to Section 13 or 15(d) of the
         Securities Exchange Act of 1934 (No Fee Required)

         For the transition period from _____________ to _____________

For fiscal year ended                                     Commission file number
December 31, 1998                                                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 of organization)                            Identification Number)

625 Market Street                                                  37902
Knoxville, Tennessee                                             (Zip Code)
(Address of principal executive offices)

                                 ---------------

               Registrant's telephone number, including area code:
                                 (423) 595-1100

                                 ---------------

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

                                 ---------------

           Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
                                (Par Value $2.50)

                                 ---------------

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 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. [X]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant  was  $75,579,798 as of March 15, 1999. For purposes of the foregoing
calculation  only, all directors and executive  officers and the Registrant have
been deemed affiliates.

                                   11,375,600

(Number of shares of common stock outstanding as of March 15, 1999)

================================================================================

<PAGE>

                       DOCUMENT INCORPORATED BY REFERENCE

      Portions of the following  document are incorporated by reference into the
Form 10-K.

     Document                                                  Form 10-K
     --------                                                  ---------
(1)  Proxy statement for  the annual meeting                   Part III
       of shareholders to be held April 19, 1999


                                      -2-
<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

                                     PART I

ITEM 1.  Business .........................................................    4
ITEM 2.  Properties .......................................................    6
ITEM 3.  Legal Proceedings ................................................    9
ITEM 4.  Submission of Matters to a Vote of Security Holders ..............    9


                                     PART II

ITEM 5.  Market for the Registrant's Common Stock and Related
           Stockholder Matters ............................................   10
ITEM 6.  Selected Financial Data ..........................................   10
ITEM 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations ............................   12
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk .......   26
ITEM 8.  Financial Statements and Supplementary Data ......................   30
ITEM 9.  Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure .........................   53

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant ...............   54
ITEM 11. Executive Compensation ...........................................   54
ITEM 12. Security Ownership of Certain Beneficial Owners
           and Management .................................................   54
ITEM 13. Certain Relationships and Related Transactions ...................   54

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K ....................................................   55


                                      -3-
<PAGE>

                                     PART I

ITEM 1. BUSINESS

      BankFirst  Corporation,  a Tennessee corporation (the "Company") is a bank
holding company  headquartered  in Knoxville,  Tennessee that focuses on meeting
the  banking  needs  of  East  Tennessee  businesses  and  residents  through  a
relationship  oriented,  community bank business strategy.  The Company conducts
its  banking  business  through  BankFirst,   a  Tennessee  banking  corporation
("BankFirst"),  which  has 24  offices  in  Knox,  Sevier,  Blount,  Loudon  and
Jefferson  Counties,  and  through  The First  National  Bank and Trust  Company
("Athens"),  a national banking association acquired on July 2, 1998, with eight
offices  in  McMinn  County.  The  Company's   operations   principally  involve
commercial and residential  real estate lending,  commercial  business  lending,
consumer lending,  mortgage servicing,  construction lending and other financial
services,  including  trust  operations,  credit cards  services  and  brokerage
services.

      From 1992 to December 31, 1998, the  organization  has grown from a single
community bank with five offices and  approximately  $66 million in assets, to a
multi-bank  organization  with an  established  local  banking  presence  in six
counties with 32 offices and approximately  $748 million in assets.  The Company
has  broadened  its mix of products and  expanded  its  customer  base through a
combination of internal growth and the  consolidation of  well-established  East
Tennessee banks and financial service companies. The Company's Athens subsidiary
has been in business for over 125 years,  its  BankFirst  subsidiary  traces its
history to the 1920's and BankFirst's subsidiary, Curtis Mortgage Company, Inc.,
("Curtis  Mortgage")  was  established  in 1944.  The Company's  growth has been
directed by a senior  management team composed of individuals  with  established
networks of customers and an average of 25 years of experience in East Tennessee
banking.

      During 1998 management completed several steps in building the Company and
its product base. In January 1998,  BankFirst purchased 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 that
originates and purchases mortgage loans for sale and servicing. At year-end 1998
Curtis  Mortgage's  loan  portfolio,  which  consists of loans held for sale and
loans  serviced for others,  totaled $542  million.  At year-end  1997 this loan
portfolio totaled approximately $451 million. 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.

      On July 2, 1998, the Company acquired First Franklin in a statutory merger
accounted for as a pooling of interests and effected a five-for-one stock split.
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,  $2.50 par value per share (the
"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,  The
First  National Bank and Trust Company  located in McMinn County,  Tennessee,  a
subsidiary  of First  Franklin,  became a separate  subsidiary  of the  Company,
adding risk diversification and trust expertise to the combined entity.

      On August 27, 1998, the Company completed its initial public offering (the
"IPO") and began trading its shares of Common Stock on the NASDAQ Stock Market's
National Market under the symbol "BKFR".  In September 1998 the Company received
net proceeds of $13.5 million from its offering of 1,270,000 shares.

      The  BankFirst  Trust  Company was formed on December 21, 1998 as a wholly
owned  subsidiary of the Company and consolidated the Athens and BankFirst trust
departments.  It was  capitalized  at  $1.0  million.  BankFirst  Trust  Company
provides a full array of trust services  including  personal trusts and estates,
employee benefit programs and individual  retirement  accounts.  On December 31,
1998,  BankFirst  Trust Company had  approximately  $315 million in assets under
administration  in  approximately  500  accounts and also offers a full array of
brokerage products,  including stocks,  bonds, mutual funds, IRAs and annuities.
Licensed Bank employees  take orders  directly from customers and then place the
orders through a third party  discount  brokerage  firm. The Company  receives a
commission for each transaction.


                                      -4-
<PAGE>

                                   COMPETITION

      The  Company  and  its  subsidiaries   have  substantial   competition  in
attracting and retaining  deposits and in lending funds.  The primary factors in
competing for deposits are the range and quality of financial  services  offered
the ability to offer attractive rates and the availability of convenient  office
locations.  There is direct  competition  for  deposits  from credit  unions and
commercial  banks  and  other  savings  institutions.   Additional   significant
competition for savings deposits comes from other investment alternatives,  such
as money market  mutual  funds and  corporate  and  government  securities.  The
primary  factors  in  competing  for loans are the range and  quality of lending
services offered,  interest rates and loan origination fees. Competition for the
origination   of  loans   normally   comes  from  other  savings  and  financial
institutions,  commercial banks,  credit unions,  insurance  companies and other
financial  service  companies.   The  Company  believes  that  its  strategy  of
relationship  banking and local  autonomy in the  communities  it serves  allows
flexibility  in rates and  products  offered in  response  to local  needs.  The
Company  believes this is its most  effective  method of competing with both the
larger regional bank holding companies and with smaller community banks.

                                    EMPLOYEES

      As of December 31,  1998,  the Company and its  subsidiaries  employed 368
full-time equivalent employees.  Management believes that its relations with its
employees are good. The Company does not have any collective agreement.

                           SUPERVISION AND REGULATION

      The Company is a registered  bank holding  company  under the Bank Holding
Company  Act of 1956 (the  "BHCA").  Under the BHCA,  the  Company is subject to
periodic  examination  by the Federal  Reserve and is required to file  periodic
reports of its operations and such additional information as the Federal Reserve
may require.  The Company's  activities  are limited to managing or  controlling
banks,  furnishing services to or performing services for its subsidiaries,  and
engaging  in other  activities  that the  Federal  Reserve  determines  to be so
closely  related to banking or managing or  controlling  banks as to be a proper
incident thereto.

      BankFirst and BankFirst Trust Company are  incorporated  under the banking
laws of the State of  Tennessee  and,  as such,  are  subject to the  applicable
provisions of those laws.  BankFirst and BankFirst  Trust Company are subject to
the  supervision of the Tennessee  Department of Financial  Institutions  and to
regular  examination  by that  department.  Athens  is  incorporated  under  the
National Bank Act, as amended,  and is subject to the  applicable  provisions of
that  law.  Athens  is also  subject  to the  supervision  of the  Office of the
Comptroller  of the Currency  and to regular  examination  by that agency.  Both
BankFirst's  and  Athens'  deposits  are  insured by the FDIC  through  the Bank
Insurance Fund ("BIF"),  and they are therefore subject to the provisions of the
Federal  Deposit  Insurance  Act  and  to  examination  by the  Federal  Deposit
Insurance Corporation.

      The  Tennessee  Department  of Financial  Institutions,  the Office of the
Comptroller of the Currency,  and the Federal Deposit Insurance Corporation (the
"Bank Regulatory  Authorities")  will regulate or monitor virtually all areas of
the Banks' operations,  including  security devices and procedures,  adequacy of
capitalization  and loss reserves,  loans,  investments,  borrowings,  deposits,
mergers, issuance of securities, payment of dividends, interest rates payable on
deposits, interest rates or fees chargeable on loans, establishment of branches,
corporate  reorganizations,  maintenance  of books and records,  and adequacy of
staff  training to carry on safe lending and deposit  gathering  practices.  The
federal Bank Regulatory  Authorities have established  regulatory  standards for
all insured depository institutions and depository institution holding companies
relating,  among other things, to: (i) internal controls,  information  systems,
and audit systems;  (ii) loan  documentation;  (iii) credit  underwriting;  (iv)
interest  rate  risk  exposure;  and (v)  asset  quality.  The  Bank  Regulatory
Authorities also require the Banks to maintain certain capital ratios. The Banks
are required to prepare  periodic  reports on their  financial  condition and to
conduct an annual audit of their  financial  affairs in compliance  with minimum
standards and  procedures  prescribed by the Bank  Regulatory  Authorities.  The
Banks undergo  regular on-site  examinations  by each Bank Regulatory  Authority
having jurisdiction over them.


                                      -5-
<PAGE>

ITEM 2. PROPERTIES

                                                            Owned/Leased
BankFirst Locations         Address                         Lease Expiration
-------------------         -------                         ----------------

Lenoir City Branch          391 Highway 321/95 North        Owned
                            Lenoir City, TN 37771

Loudon Branch               406 Grove Street                Owned
                            Loudon, TN 37774

Philadelphia Branch         22730 West Lee Highway          Owned
                            Philadelphia, TN 37846

Tellico Village Branch      302 Village Square              Owned
                            Loudon, TN 37774

Main Office Branch          625 Market Street               Owned
                            Knoxville, TN 37902

Farragut Branch             11140 Kingston Pike             Owned
                            Knoxville, TN 37922

Knoxville Center Branch     3013-A Mall Road N              Leased
                            Knoxville, TN 37924             November 2006

Bearden Branch              4611 Kingston Pike              Owned
                            Knoxville, TN 37919

Halls Branch                7108 Maynardville Hwy           Leased
                            Knoxville TN 37918              May 2015

Cedar Bluff Branch          330 N Cedar Bluff Road          Leased
                            Knoxville, TN 37923             January 2016

Rocky Hill Branch           7709 Northshore Drive           Leased
                            Knoxville, TN 37919             September 2016

Weisgarber Branch           1235 Weisgarber Road            Owned
                            Knoxville, TN 37909

Maryville Branch            710 South Foothills Plaza Drive Owned
                            Maryville, TN 37801

Alcoa Branch                109 Associates Boulevard        Owned
                            Alcoa, TN 37701

Seymour Branch              10232 Chapman Highway           Owned
                            Seymour, TN 37865


                                      -6-
<PAGE>

                                                            Owned/Leased
                                                            Lease Expiration
BankFirst Locations         Address                         Date
-------------------         -------                         ----------------
Gatlinburg Branch           811 parkway                     Owned
                            Gatlinburg, TN 37738

Dudley Creek Branch         912 E. Parkway                  Owned
                            Gatlinburg, TN 37738

Pigeon Forge Branch         3416 South River Road           Owned
                            Pigeon Forge, TN 37863
                            Adjacent parking lot            Leased December 2040

Sevierville Branch          430 Forks of the River Parkway  Leased
                            Sevierville TN 37862            December 1999

Sevierville Branch          East Main                       Owned
                            Sevierville TN 37862            Under Construction

Dolly Parton Branch         710 Dolly Parton Parkway        Owned
                            Sevierville, TN 37862

Kodak Branch                2950 Winfield Dunn Parkway      Owned
                            Kodak, TN 37764

Governors Crossing          Governors Crossing              Owned
                            Sevierville, Tennessee 37862    Under Construction

Merchants Road Branch       310 Merchants Drive             Owned
                            Knoxville, TN  37912            Under Construction

Jefferson City Branch       263 East Broadway Blvd          Owned
                            Jefferson City, TN 37760

Dandridge Branch            858 S. Hwy 92                   Owned
                            Dandridge, TN 37725

Curtis Mortgage             249 Peters Road                 Leased
                            Knoxville, TN 37939             January 2003

The First National Bank and Trust Company Locations

Main Office                 204 Washington Ave.             Owned
                            Athens, TN  37303               
                                                            
Operations Center           3 South Hill Street             Leased
                            Athens, TN  37303               January 1999
                                                            
Plaza Branch                1604 Decatur Pike               Leased
                            Athens, TN  37303               November 2003


                                      -7-
<PAGE>

                                                            Owned/Leased
                                                            Lease Expiration
BankFirst Locations         Address                         Date
-------------------         -------                         ----------------
Etowah Branch               601 Tennessee Ave.              Owned
                            Etowah TN  37331                
                                                            
Riceville Branch            3809 Highway 11                 Owned
                            Riceville, TN  37370            
                                                            
Calhoun Branch              3099 Highway 11                 Owned
                            Calhoun, TN  37309              
                                                            
Englewood Branch            111 S. Niota Road               Leased
                            Englewood, TN  37329            March 2001
                                                            
Friendly Finance Co., Inc.  620 Decatur Pike                Leased
                            Athens, TN  37303               July 1999


                                      -8-
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

      The  nature  of  the  banking  business  generates  a  certain  amount  of
litigation  against the Company and its  subsidiaries  involving  matters in the
ordinary course of business.  None of the legal proceedings currently pending or
threatened to which the Company or its  subsidiaries  is a party or to which any
of  their  properties  are  subject  will  have,  or  have,  in the  opinion  of
management,  a material  effect on the  business or  financial  condition of the
Company.

      On November 24, 1997,  BankFirst filed a lawsuit in the Chancery Court for
Sevier  County,  Tennessee,  (the  "Court")  against  Electronic  Communications
Corporation  ("ECC") and Steve Newland,  bearing Case No.  97-11-328,  which was
later amended to join Paymentech  Merchant  Services,  Inc.  ("Paymentech") as a
defendant.  The lawsuit alleges that Paymentech made unauthorized and unreported
deletions from wire transfers to BankFirst in the aggregate  amount of $544,393.
Paymentech  filed a counterclaim  and a cross-claim  against ECC in the lawsuit,
alleging  that  Paymentech  inadvertently  overpaid  BankFirst  the total sum of
$3,967,907. On March 18, 1998, the parties reached a partial settlement in which
Paymentech agreed to reduce its counterclaim to $544,393 and BankFirst agreed to
transfer  $3,423,514  to  Paymentech  which  had  been  retained  by  BankFirst.
BankFirst has filed with the Court a Motion for Partial Summary Judgement in the
amount of $521,827. This motion is scheduled to be heard in 1999. Management has
established  reserves  against  possible losses in amounts it deems adequate and
believes that the possibility of any additional exposure is remote.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      There were no matters  submitted  to a vote of security  holders,  through
solicitation of proxies or otherwise, during the fourth quarter of 1998.


                                      -9-
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Since the IPO,  the Common Stock has been traded on The NASDAQ  National  Market
System with the symbol BKFR. There were 605 holders of Common Stock of record on
March 15, 1999.  Prior to such offering,  there had been no  established  public
trading market for the Common Stock.

The high and low  sales  prices  of the  Company's  Common  Stock in the  fourth
quarter of 1998 were $11.875 and $8.125.

The Company  had paid no cash  dividends  on its Common  Stock since the initial
public  offering and has no present  intention  of paying cash  dividends in the
foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

      Information  on the use of proceeds from the Company's IPO was  previously
disclosed in Amendment No. 2 to the Registration Statement on Form S-1 (File No.
333-57147),  the  effective  date of which was August 24, 1998. In the IPO J. C.
Bradford & Co. and Morgan Keegan & Co., Inc. were the managing  underwriters and
the class of securities  registered were shares of Common Stock, $2.50 par value
per share.  The Company  registered and sold  1,270,000  shares of Common Stock,
with aggregate  proceeds to the Company amounting to $15,240,000.  In connection
with the issuance and distribution of the shares of Common Stock in the IPO, the
amount of expenses  incurred was $1,226,450 for the  underwriters'  discount and
$475,000 for other  expenses,  such that total  expenses for the issuance of the
shares of Common Stock were $1,701,450.  After deducting total expenses, the net
offering  proceeds to the Company were  approximately  $13.5 million.  These net
proceeds  were added to the  general  funds of the  Company and used for general
corporate  purposes.  The Company intends to use the funds it retains to support
future  expansion of operations or  diversification  into other  banking-related
businesses and for other business or investment  purposes,  although the Company
has yet to identify  any specific  acquisition,  expansion,  diversification  or
investment opportunity.  A portion of the net proceeds may be transferred to the
subsidiaries  of the  Company  and used for their  general  corporate  purposes,
including,  the  origination  of loans,  funding  the  construction  and/or  the
acquisition   costs  of  establishing  new  branch   locations,   enhancing  the
subsidiaries of the Company's  liquidity  ratios and enhancing  future access to
capital  markets.  It is expected that until needed for other  purposes,  all or
part of the net proceeds  retained by the Company  will be invested  through the
investment  program  of the  Company  or used to  reduce  borrowing  from  other
financial institutions and the Federal Home Loan Bank of Cincinnati.

<TABLE>
<CAPTION>
                                                                     For the years ended December 31, 
         (Dollars in thousands)                  1998             1997             1996             1995            1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C>             <C>     
         Summary of operations
Interest income - tax equivalent .........   $     56,745     $     51,893     $     47,311     $     42,677    $     34,317
Interest expense .........................         24,927           22,652           21,238           19,082          13,537
                                             -------------------------------------------------------------------------------
   Net interest income ...................         31,818           29,241           26,073           23,595          20,780
Tax equivalent adjustment (1) ............           (830)            (606)            (613)            (558)           (600)
                                             -------------------------------------------------------------------------------
  Net interest income ....................         30,988           28,635           25,460           23,037          20,180
Provision for credit losses
                                                   (1,706)          (2,935)            (667)            (553)           (703)
Noninterest income .......................          9,303            5,657            5,243            4,369           4,382
Noninterest expenses .....................        (28,218)         (21,323)         (20,799)         (19,157)        (17,203)
                                             -------------------------------------------------------------------------------

Income before income taxes ...............         10,367           10,034            9,237            7,696           6,656
Income tax expense .......................          3,558            3,406            3,188            2,517           1,727
                                             -------------------------------------------------------------------------------
Net income ...............................   $      6,809     $      6,628     $      6,049     $      5,179    $      4,929
                                             ===============================================================================
</TABLE>


                                      -10-
<PAGE>

<TABLE>
<S>                                          <C>              <C>              <C>              <C>             <C>     
Basic earnings per share .................   $       0.64     $       0.66     $       0.63     $       0.63    $       0.66
Diluted earnings per share ...............           0.59             0.61             0.59             0.59            0.61
Dividends per common share ...............           0.01             0.12             0.09             0.14            0.15

Cash dividends declared - common .........   $        115     $      1,214     $        876     $      1,152    $      1,133
Cash dividends declared - preferred ......            146              161              162               74              73
Average common shares outstanding ........     10,446,779        9,876,735        9,347,725        8,098,170       7,346,505

Average preferred shares outstanding
 "if converted" (2) ......................        635,516          685,830          696,415          397,610         396,009
Book value per common share (3) ..........           7.48             5.82             5.49             5.20            4.57

     Selected year-end balances
Total assets .............................   $    748,301     $    650,717     $    595,284     $    545,718    $    480,687
Earning assets ...........................        677,397          604,031          559,927          504,430         444,866
Total Securities .........................        127,862          127,736          134,781          135,127         121,390
Loans - net of unearned income ...........        508,552          464,572          412,793          350,652         306,905
Mortgage loans held for sale .............         25,642              395             --               --              --
Allowance for credit losses ..............          6,602            6,098            4,723            4,690           4,526
Total deposits ...........................        617,966          549,769          516,339          480,346         430,407
Repurchase agreements and other ..........         36,374           18,261            5,966            7,632           1,363
borrowed funds
Long-term debt ...........................          1,884           12,121           12,154            8,407           8,416
Stockholders' equity .....................         82,841           61,432           55,215           44,222          35,399

     Selected average balances
Total assets .............................   $    703,826     $    621,719     $    566,616     $    527,495    $    467,616
Earning assets ...........................        642,233          577,178          528,179          488,834         419,005
Total Securities .........................        128,833          128,796          136,600          135,509         121,352
Loans - net of unearned income ...........        487,490          442,098          379,930          339,989         282,812
Mortgage loans held for sale .............         14,179              198             --               --              --
Allowance for credit losses ..............          6,613            4,796            4,802            4,541           4,384
Total deposits ...........................        586,049          529,820          492,435          468,068         416,426
Stockholders' equity .....................         69,099           57,082           49,176           39,992          32,520

  Ratio based on average balances
Loans to deposits (4) ....................          83.18%           83.44%          77.15%            72.64%          67.91%
Allowance to year end loans ..............           1.30             1.31            1.14              1.34            1.47
Equity to assets .........................           9.82             9.18            8.68              7.58            6.95
Leverage capital ratio ...................          10.71             9.73            9.60              7.80            7.77
Return on assets .........................           0.97             1.07            1.07              0.98            1.05
Return on equity .........................           9.85            11.61           12.30             12.95           15.16
Dividends payout ratio (5) ...............           1.71            18.77           14.88             22.56           23.33
</TABLE>

(1)   Tax  equivalent  basis was  calculated  using 38%  for1998 and 34% for all
      other periods presented.
(2)   Additional indicates number of common shares outstanding if converted at a
      3.0875-to-1 ratio.
(3)   Total equity divided by sum : a) average common shares outstanding, and b)
      average preferred shares at 3.0875-to-1 ratio.
(4)   Mortgage loans held for sale are not included in this calculation.
(5)   Dividends  declared on common  shares  divided by net income  available to
      common shareholders.


                                      -11-
<PAGE>

ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF RESULTS OF  OPERATIONS  AND
FINANCIAL CONDITION

      The  consolidated   financial   information   discussed  herein  primarily
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.

      This discussion includes various  forward-looking  statements with respect
to credit  quality  (including  delinquency  trends and the allowance for credit
losses),  corporate  objectives and other financial and business  matters.  When
used in this discussion the words "anticipate,"  "project," "expect," "believe,"
and similar expressions are intended to identify forward-looking statements. The
Company cautions that these  forward-looking  statements are subject to numerous
assumptions, risks and uncertainties,  all of which may change over time. Actual
results could differ materially from forward-looking statements.

      In  addition  to  factors  disclosed  by the  Company  elsewhere  in  this
discussion,  the following factors,  among others, could cause actual results to
differ  materially from such  forward-looking  statements:  pricing pressures on
loan and deposit  products;  competition;  changes in economic  conditions  both
nationally and in the Company's markets; the extent and timing of actions of the
Federal  Reserve  Board;  clients'  acceptance  of the  Company's  products  and
services;  Year 2000 issues  experienced  by the Company or by  governmental  or
private  entities;  and the  extent  and timing of  legislative  and  regulatory
actions and reforms. 

                                    Overview

      The  Company  is  a  community  banking  organization,   headquartered  in
Knoxville,  Tennessee, which generates loans and deposits through its 32 offices
throughout  East  Tennessee.   The  Company's  operations   principally  involve
commercial and residential  real estate lending,  commercial  business  lending,
mortgage servicing,  consumer lending,  construction lending and other financial
services,  including  trust  operations,  credit  card  services  and  brokerage
services.

      In January 1998,  BankFirst purchased Curtis Mortgage Co. for $7.5 million
as an opportunity to increase  mortgage  originations,  and as an opportunity to
diversify  revenues  through loan  servicing.  Curtis  Mortgage is a 55-year-old
mortgage  company that  originates  and  purchases  mortgage  loans for sale and
servicing. 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. At the date of purchase  Curtis  Mortgage's  loan  servicing
portfolio  was  $451  million.   During  1998,  Curtis  Mortgage  purchased  and
originated  $225.1  million  of loans,  had  payoffs  and  repayments  of $127.6
million, and at year-end 1998, the servicing portfolio was $542 million.

      On July 2, 1998,  the Company  acquired First  Franklin  Bancshares,  Inc.
("First  Franklin")  in  a  statutory  merger  accounted  for  as a  pooling  of
interests, and subsequently effected a five for one stock split. 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,  The  First  National  Bank and Trust
Company, the subsidiary of First Franklin Bancshares, Inc. of Athens, Tennessee,
became a separate  subsidiary of the Company,  adding risk  diversification  and
trust expertise to the combined entity.

      On August 27, 1998,  BankFirst  Corporation  completed its initial  public
offering  and began  trading  its  common  shares on The Nasdaq  Stock  Market's
National Market under the symbol "BKFR".  In September 1998 the Company received
net proceeds of $13.5 million from its offering of 1,600,000 shares. The Company
sold 1,200,000 shares while the selling  shareholders sold the remaining 400,000
shares. The Company later sold 70,000 shares in the over-allotment.

      On December 21, 1998, the Company  consolidated  the trust  departments of
the two banks into  BankFirst  Trust Company,  a wholly owned  subsidiary of the
Corporation,  with an initial  capitalization  of $1.0 million.  On December 31,
1998,  BankFirst  Trust Company had  approximately  $315 million in assets under
administration in approximately 500 accounts.

      Total  assets  grew 15.0% from $650.7  million at year-end  1997 to $748.3
million at year-end  1998,  a $97.6  million  increase.  The primary  changes in
assets included a $25.2 million increase in loans held for sale, a $43.5 million
increase in net loans,  $7.4  million of mortgage  servicing  assets,  and other
intangible assets which were attributable to the purchase of Curtis Mortgage.

      Total  liabilities  grew from $589.3  million at  year-end  1997 to $665.5
million at December  31,  1998,  an increase of $76.2  million.  Of this growth,
deposits accounted for $68.2 million, federal funds purchased were $2.2 million,
and repurchase agreements accounted for $5.9 million.

      From year-end 1997 to December 31, 1998,  equity grew $21.4  million,  due
primarily to the initial public offering and earnings of $6.8 million.


                                      -12-
<PAGE>

                             Results of Operations

      Net income increased $181,000, or 2.7%, to $6.8 million for the year ended
December  31, 1998,  from $6.6 million for 1997.  The increase in net income was
primarily due to increases in net interest  income,  noninterest  income,  and a
reduction  in the  provision  for loan losses.  Noninterest  expense grew due to
increases  in salaries and benefits  resulting  from both  internal and external
growth,  merger costs, costs associated with the integration of Curtis Mortgage,
the opening of three branches,  computer system  conversion  costs and Year 2000
costs.

      Earnings per share have been restated to reflect the business  combination
accounted for as a pooling of interests  with First  Franklin  Bancshares,  Inc.
Basic  earnings per share for 1998 were $.64 compared to $.66 for 1997.  Diluted
earnings per share decreased from $.61 in 1997 to $.59 in 1998.

      Return on  average  assets  decreased  from 1.07% in 1997 to $.97 in 1998.
Return on average equity decreased from 11.61% in 1997 to 9.85% in 1998.

                               Net Interest Income

      Even though  fully tax  equivalent  net  interest  income  increased  $2.5
million,  or 8.8%, from 1997 to 1998, net interest margin  decreased  during the
period,  from 5.07% in 1997,  to 4.95% in 1998.  The  increase  in net  interest
income,  and decrease in net interest  margin,  is primarily  attributable to an
increase in loan volume at lower yields.  Changes  attributable  to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the change due to rate.

                              Volume/Rate Analysis

<TABLE>
<CAPTION>
                                               1998 change from 1997 due to    1997 change from 1996 due to
                                               ------------------------------------------------------------
           (Dollars in thousands)              Volume      Rate      Total      Volume      Rate      Total
                                               ------------------------------------------------------------
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>    
Interest  income
 Loans ....................................   $ 5,840    $  (874)   $ 4,966    $ 6,281    $  (989)   $ 5,292
 Securities
   Taxable ................................    (1,001)      (243)    (1,244)      (515)        85       (430)
    Tax-exempt ............................     1,168       (327)       841         (1)       (17)       (18)
       Total securities interest ..........       167       (570)      (403)      (516)        68       (448)
  Interest-bearing deposits with other bank       202       (121)        81        (33)       (13)       (46)
  Federal funds sold ......................       274       (155)       119       (194)       (22)      (216)
                                              --------------------------------------------------------------

        Total interest income .............     6,483     (1,720)     4,763      5,538       (956)     4,582

Interest expense
  Interest-bearing demand deposits ........       392       (425)       (33)       596       (774)      (178)
  Saving deposits .........................      (166)       207         41        (34)       (39)       (73)
  Time deposits ...........................     1,482        126      1,608        902        356      1,258
  Repurchase agreements ...................       670        (48)       622         85          6         91
  Other borrowings ........................        99        482        581        141         19        160
  Long-term borrowings ....................      (282)      (262)      (544)       251        (95)       156
                                              --------------------------------------------------------------
          Total interest expense ..........     2,195         80      2,275      1,941       (527)     1,414
                                              --------------------------------------------------------------

          Net interest income .............   $ 4,288    $(1,800)   $ 2,488    $ 3,597    $  (429)   $ 3,168
                                              ==============================================================
</TABLE>

      Average  earning assets  increased  from $577 million to $642 million,  or
11.3%, from 1997 to 1998. Loan growth,  which was 13.4% in 1998, 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.

      During 1997,  average loans  represented  76.6% of average earning assets.
During 1998 this ratio  increased  to 78.11%  while loan yields  decreased  from
9.70% in 1997 to 9.54% in 1998.  Yields on  securities  also fell from  6.66% in
1997 to 6.35% in 1998.  The decrease in loan and security  yields was consistent
with general market rate decreases,  and shortening of overall maturities in the
portfolio.


                                      -13-
<PAGE>

      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 7.3% from 1997 to 1998,  almost  keeping  pace with the  growth in  earning
assets.  The average rate paid on interest  bearing  deposits rose from 4.69% in
1997 to 4.71% in 1998. The Company is generally asset driven,  managing  funding
to support assets gathered.

      The portion of earning  assets funded by  non-interest  bearing  deposits,
other  liabilities and equity has increased from 24.9% in 1997 to 28.2% in 1998.
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 4.9% of average  earning  assets in 1997 to 6.3% in 1998.  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.


                                      -14-
<PAGE>

                   Average Balance Sheets and Interest Rates

<TABLE>
<CAPTION>
                                                                          Years ended December 31,
    (Dollars in thousands)                             1998                        1997                          1996
----------------------------------------------------------------------------------------------------------------------------------
                                        Average                Average  Average             Average  Average               Average
                                        Balance      Interest    Rate   Balance   Interest   Rate    Balance   Interest     Rate
                                       -------------------------------------------------------------------------------------------
<S>                                    <C>           <C>         <C>    <C>        <C>        <C>   <C>        <C>          <C>  
ASSETS
Interest earnings assets
  Securities
    Taxable ........................   $  88,941     $ 5,539     6.23%  $105,180   $ 6,783    6.45% $113,420   $ 7,213      6.36%
    Tax-exempt (1) .................      37,456       2,669     7.13     23,328     1,795    7.69    23,336     1,813      7.77
    Unrealized gain o A.F.S ........       2,436                             288                        (156)
                                       ---------     -------     ----   --------   -------    ----  --------   -------      ---- 
       Total securities ............     128,833       8,208     6.35    128,796     8,578    6.66   136,600     9,026      6.61
  Loans (2) ........................     501,669      47,846     9.54    442,296    42,880    9.70   379,930    37,589      9.89

  Interest bearing deposits                                                                                                
    with other banks ...............       2,524          96     3.80        236        15    6.36     1,180        61      5.17

  Federal funds sold and other .....       9,207         595     6.46      5,850       419    7.16    10,469       635      6.07
                                       ---------     -------     ----   --------   -------    ----  --------   -------      ---- 
  Total earnings assets ............     642,233      56,745     8.83    577,178    51,892    8.99   528,179    47,311      8.96

Noninterest earning assets                          
  Allowance for loans losses .......      (6,613)                         (4,796)                     (4,802)
  Premises and equipment ...........      23,022                          19,769                      16,961
  Cash and due from banks ..........      25,545                          20,876                      17,942
  Accrued interest and other                                                                      
    assets .........................      19,639                           8,692                       8,336
                                       ---------                        --------                    --------
  Total assets .....................   $ 703,826                        $621,719                    $566,616
                                       =========                        ========                    ========

LIABILITIES AND STOCKHOLDERS' EQUITY                
Interest-bearing liabilities                        
  Deposits                                          
    Interest-bearing demand ........   $ 152,645     $ 4,974     3.26%  $141,941   $ 5,007    3.53% $128,048   $ 5,185      4.05%
       deposits                                     
    Savings deposits ...............      32,430       1,075     3.31     36,803     1,034    2.81    37,855     1,107      2.92
    Time deposits ..................     297,210      16,685     5.61    270,782    15,063    5.56   254,448    13,805      5.43
                                       ---------     -------     ----   --------   -------    ----  --------   -------      ---- 
       Total interest-bearing                       
          deposits .................     482,285      22,734     4.71    449,526    21,104    4.69   420,351    20,097      4.78
  Borrowed funds                                    
    Repurchase agreements ..........      22,682       1,060     4.67      9,110       438    4.81     7,346       347      4.72
    Other borrowings ...............       8,634         490     5.68      7,173       414    5.77     4,710       254      5.39
    Long-term borrowings ...........       8,826         643     7.29     12,214       696    5.70     8,544       540      6.32
                                       ---------     -------     ----   --------   -------    ----  --------   -------      ---- 
       Total borrowed funds ........      40,142       2,193     5.46     28,497     1,548    5.43    20,600     1,141      5.54
                                       ---------     -------     ----   --------   -------    ----  --------   -------      ---- 
  Total interest-bearing                            
    liabilities ....................     522,427     $24,927     4.77    478,023    22,652    4.74   440,951    21,238      4.82
                                                    
Noninterest-bearing                                 
  liabilities                                       
  Noninterest-bearing demand                        
    deposit ........................     103,764                          80,294                      72,084
  Other liabilities ................       8,536                           6,320                       4,405
  Stockholders' equity .............      69,099                          57,082                      49,176
                                       ---------                        --------                    --------
                                                                                                   
Total liabilities and                                                                              
  stockholders' equity .............   $ 703,826                        $621,719                    $566,616
                                       =========                        ========                    ========

Interest margin recap                               
  Net interest income and                           
  interest rate spread .............                 $31,818     4.06%             $29,240    4.25%            $26,073      4.14%
                                                     =======                       =======                     =======        
                                                  
  Net interest income margin .......                             4.95%                        5.07%                         4.94%
</TABLE>

(1)   Interest  income  on  tax-exempt  securities  has been  adjusted  to a tax
      equivalent  basis using a marginal federal income tax rate of 38% for 1998
      and 34% for 1997 and 1996.  Tax  equivalent  adjustment was $830 for 1998,
      $606 for 1997, and $613 for 1996.

(2)   Nonaccrual  loans are included in average loan  balances and loan fees are
      included in interest  income.  Loan fees were $1,403 for 1998,  $1,113 for
      1997, and $1,327 for 1996.


                                      -15-
<PAGE>

                           Provision for Credit Losses

      The  provision for credit losses was $1.7 million in 1998 compared to $2.9
million in 1997.  The Company  experienced  net  charge-offs  of $1.2 million in
1998,  resulting in a ratio of net  charge-offs to average loans of 0.25%.  This
compares to net charge-offs in 1997 of $1.6 million, resulting in a ratio of net
charge-offs to average loans of 0.35%. The decrease in the provision in 1998 vs.
1997 is reflective of the decline in charge-offs and nonperforming  loans during
the year.  Provisions in 1999 are expected to be similar to 1998.  Factors which
gave rise to the 1997 provision  included a 36.6%  increase in commercial  loans
during the year and a 146.1% increase in net  charge-offs  during the year which
increased historical loss factors applied to the portfolio.  The Company charges
off any loan or portion of a loan,  when  management  determines  that a loss is
imminent  irrespective of its due date. All loans  recommended for charge off be
reviewed by the Senior Loan Officer and approved by the  President  before final
approval by the Board of Directors of the Banks.  Prior years' accrued  interest
is charged off and current years' accrued interest is reversed against income.

                     Analysis of Allowance for Credit Losses
                               

<TABLE>
<CAPTION>
                                                               As of December 31,
      (Dollars in thousands)              1998          1997          1996          1995           1994
---------------------------------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>           <C>           <C>      
Balance at beginning of year ........   $   6,098     $   4,723     $   4,690     $   4,526     $   4,054

Loans charged off
  Commercial, financial, and 
     agricultural....................        (353)       (1,079)         (182)         (203)         (234)
  Commercial real estate ............        (115)         (161)           (6)         --            --
  Real Estate-construction ..........        --            --            --            --             (45)
  Real Estate-residential ...........        (310)          (76)          (55)          (44)           (1)
  Installment .......................        (727)         (503)         (661)         (454)         (291)
  Lease financing ...................         (19)          (14)         --            --            --
                                        -----------------------------------------------------------------
         Total charge-offs...........      (1,524)       (1,833)         (904)         (701)         (571)
                                        -----------------------------------------------------------------

Charge-offs recovered
  Commercial, financial, and
     agricultural ...................          41            41            53           146           149
  Commercial real estate ............           1             2          --            --               7
  Real estate-construction ..........        --              33            12          --            --
  Real estate-residential ...........          60            39            21            13            42
  Installment .......................         217           158           184           153           141
  Lease financing ...................           3          --            --            --            --
                                        -----------------------------------------------------------------
         Total recoveries ...........         322           273           270           312           339

Net loans charged off ...............      (1,202)       (1,560)         (634)         (389)         (232)
Current year provision ..............       1,706         2,935           667           553           704
                                        -----------------------------------------------------------------

Balance at end of year ..............   $   6,602     $   6,098     $   4,723     $   4,690     $   4,526
                                        =================================================================
Loans, net at year end ..............   $ 508,552     $ 464,967     $ 412,793     $ 350,652     $ 306,905

Ratio of allowance to
  loans at year end .................        1.30%         1.31%         1.14%         1.34%         1.47%

Average loans .......................   $ 487,490     $ 442,296     $ 379,930     $ 339,989     $ 282,812

Ratio of net loans charged off to
average loans .......................        0.25%         0.35%         0.17%         0.11%         0.08%
</TABLE>

      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, 70.6% of commercial loans are
secured primarily by  income-producing  real estate,  and secondly,  BankFirst's
early growth was


                                      -16-
<PAGE>

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.  Nonperforming loans at December 31, 1998, were $2.5 million
as compared to $2.8 million at year-end 1997.  Nonperforming loans, as a percent
of loans was 0.49% at year-end  1998 and 0.61% at December 31, 1997.  Nonaccrual
loans amounted to $537,000 of the  nonperforming  total in 1998 and $1.1 million
in 1997.  The decline is  attributable  to the  foreclosure of one credit during
1998.  A loan is  reviewed  at least  when it  becomes  90 days  delinquent  for
placement on a nonaccrual  status.  If the prospects for collection are good and
the collateral is adequate to cover both  principal and interest,  then the loan
can continue to accrue interest. When any loan becomes 180 days delinquent it is
placed  on  nonaccrual.  Accrued  interest  for the  current  year  is  reversed
immediately against interest income and prior year's interest is charged off.

                             Non-Performing Assets

<TABLE>
<CAPTION>
                                                        as of December 31,
         (Dollars in thousands)            1998      1997      1996      1995      1994
----------------------------------------------------------------------------------------
<S>                                       <C>       <C>       <C>       <C>       <C>   
Principal balance
  Nonaccrual ..........................   $  537    $1,141    $  900    $  581    $  871
  90 days or more past due and still
     accruing .........................    1,971     1,705     1,518       461       264
                                          ----------------------------------------------

        Total nonperforming loans .....   $2,508    $2,846    $2,418    $1,042    $1,135
                                          ==============================================

Nonperforming as a percent of loans ...     0.49%     0.61%     0.59%     0.30%     0.37%

Other real estate owned ...............   $1,290    $  878    $  309    $  770    $  317

OREO as a percent of loans ............     0.25%     0.19%     0.07%     0.22%     0.10%

Allowance as a percent of 
  nonperforming loans .................   263.24%   214.27%   195.33%   450.10%   398.77%
</TABLE>

      Future provisions for credit losses will be dependent on loan growth, loan
mix, portfolio credit risk and actual losses incurred. Management has determined
that a total  allowance of $6.6  million,  or 1.30% of total loans  exclusive of
loans held for sale for 1998,  is  adequate  for credit  losses  inherent in the
total portfolio.

                              Allowance Allocation

                                                    at December 31,
        (Dollars in thousands)         1998     1997     1996     1995     1994
--------------------------------------------------------------------------------
Commercial, financial, ............   $1,312   $1,231   $  801   $  714   $  617
  and agricultural
Commercial real estate ............    2,442    1,874    1,366    1,263    1,187
Real Estate-construction ..........      268      244      338      276      273
Real Estate-residential ...........      821      839    1,126    1,227    1,063
Installment .......................      600      986      666      709      764
Unallocated .......................    1,159      924      426      501      622
                                      ------------------------------------------
Total .............................   $6,602   $6,098   $4,723   $4,690   $4,526
                                      ==========================================

                               Noninterest Income

      Noninterest  income  increased  63.2%  from $5.7  million  in 1997 to $9.3
million in 1998, primarily attributable to mortgage banking activities.  Service
charges on  deposit-related  products  generated  $4.3 million for the year,  an
increase of  $446,000  over the  previous  year.  Trust  income  increased  from
$704,000  in 1997 to  $903,000  in 1998 as the  trust  assets  under  management
increased  during the year. Loan servicing income increased $2.4 million in 1998
which  was  primarily   attributable  to  Curtis  Mortgage's   mortgage  banking
activities. Net gain (loss) on sale of residential mortgage loans increased from
$226,000 in 1997 to $1.0  million in 1998 also as a result of  mortgage  banking
activities. Securities gains were $124,000 in 1998 and $309,000 in 1997.


                                      -17-
<PAGE>

                               Noninterest Income

                                             % change          % change
   (Dollars in thousands)            1998    from `97    1997  from `96   1996
--------------------------------------------------------------------------------
Noninterest Income
Deposit service charges and fees   $ 4,257    11.70%   $ 3,811   0.40%  $ 3,796
Trust department income ........       903    28.27        704  13.55       620
Loan servicing income, net of                                           
amortization ...................     2,402       NM         --     NM        --
Other ..........................       605     (.33)       607  (0.98)      613
                                   --------------------------------------------
                                     8,167    59.45      5,122   1.85     5,029
                                                                        
Realized gain on sale of loans .     1,012   347.79        226  (3.42)      234
Security gains/(losses) ........       124   (59.87)       309  1,645       (20)
                                   --------------------------------------------
                                                                        
Total Noninterest income .......   $ 9,303    64.45%   $ 5,657   7.90%  $ 5,243
                                   ============================================
                                                                       
                               Noninterest Expense

Noninterest  expense increased $6.9 million,  or 32.3%, to $28.2 million in 1998
from $21.3  million in 1997.  The primary  component of  noninterest  expense is
salaries and benefits,  which increased $3.9 million, or 35.5%, to $15.0 million
in 1998 from $11.1  million in 1997.  The  increase in salaries  and benefits is
primarily attributable to the expenses of newly acquired Curtis Mortgage and the
overall growth of the Company.  Occupancy expense increased $775,000,  or 45.2%,
to $2.5 million in 1998 from $1.7 million in 1997.  Office  expenses rose 107.2%
to $1.6 million in 1998 from  $775,000 in 1997.  These  increases  are primarily
attributable to the addition of three new branches, year 2000 expenditures,  and
computer  conversion  costs.  The Company's  efficiency ratio in 1998 was 68.6%,
compared to 61.1% in 1997.

                              Noninterest Expense

                                             % change          % change
   (Dollars in thousands)            1998    from `97    1997  from `96   1996
--------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefit      $15,054    35.50%   $11,110   5.42%  $10,539
Occupancy expenses ..........        2,491    45.16      1,716 (19.40)    2,129
Equipment expenses ..........        2,285    (9.93)     2,537   6.51     2,382
Office Expenses .............        1,606   107.23        775 108.90       371
Data processing expenses ....        1,364     8.86      1,253  39.69       897
Advertising .................          411   (26.34)       558  (2.79)      574
Other .......................        5,007    48.40      3,374  (7.18)    3,907
                                   --------------------------------------------
                                                                        
Total noninterest expense ...      $28,218    32.34%   $21,323   2.52%  $20,799
                                   ============================================

                           Provision for Income Taxes

      The total  provision  for income  taxes  equaled  $3.6  million  for 1998,
reflecting an increase of $152,000  when compared to $3.4 million for 1997.  The
increase in 1998 was due to a higher level of pre-tax income.  The effective tax
rate was 34.3% in 1998 and 33.9% in 1997.

     Year Ended December 31, 1997, Compared to Year Ended December 31, 1996

      Net interest income increased $3.1 million,  or 12.2%, to $28.6 million in
1997 from $25.5  million in 1996.  The increase in net  interest  income was due
primarily  to an  increase  in average  earning  assets and an  increase  in the
percentage of average earning assets  invested in loans.  Average earning assets
increased  $49.0  million,  or  9.3%,  primarily  as a  result  of loan  growth,
particularly growth of commercial business loans.


                                      -18-
<PAGE>

      The Company's net interest  spread and net interest  margin were 4.25% and
5.07%,  respectively,  in 1997 as  compared  to 4.14%  and  4.94%  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 credit  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%, verses net charge-offs of $634,000 in 1996.

      Noninterest income increased  $414,000,  or 7.89%, 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.

      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 11.61% for 1997 compared to 12.30% for 1996.

                             Investment Securities

      BankFirst and The First National Bank and Trust Company,  subsidiaries  of
the Company, 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 $127.9 million at year-end 1998, which is slightly
higher than the $127.7 million balance in 1997. 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  60.12% of year-end 1998  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
                                                 as of December 31,
           (Dollars in thousands)           1998       1997       1996
       -----------------------------------------------------------------
       Available for sale
       U.S. Government & Agencies .....   $ 71,504   $ 77,969   $ 91,520
       State and municipal ............     39,008     38,999     22,971
       Mortgage-backed and asset-backed     17,350     10,768     20,290
                                          ------------------------------

       Total available for sale .......   $127,862   $127,736   $134,781
                                          ==============================

                          Securities Maturity Schedule

<TABLE>
<CAPTION>

(Dollars in thousands)            1 Year and Less     1 to 5 Years     5 to 10 Years     Over 10 Years        Total
-------------------------------------------------------------------------------------------------------------------------
                                 Balance    Rate    Balance   Rate    Balance    Rate    Balance   Rate   Balance    Rate
                                 -------    ----    -------   ----    -------    ----    -------   ----   -------    ----
<S>                              <C>        <C>     <C>        <C>    <C>        <C>     <C>       <C>    <C>        <C>  
Available for sale
U.S. Government & Agencies..     $13,562    6.13%   $39,132    6.08%  $ 18,810   6.61%   $  --     0.00%  $71,504    6.00%
State and municipal.........       2,688     5.04     6,941    5.16    18,361     4.99    11,018   5.80   39,008     5.63
Mortgage-backed and
  asset-backed .............                                                                              17,350     5.63
                                 -------            -------           -------            -------         --------    ---- 

Total available for sale ...     $16,250            $46,073           $37,171            $11,018         $127,862    5.84%
                                 =======            =======           =======            =======         ========    ==== 
</TABLE>


                                      -19-

<PAGE>

                                      Loans

      Total  loans,  exclusive  of loans held for sale,  were $508.6  million at
year-end  1998,  and $464.6  million at  year-end  1997.  Loan  growth was $43.6
million,  or 9.4%,  during  1998,  and $52.2  million,  or 12.6%,  during  1997.
Management  was able to achieve  growth from 1994  through  1997 because of long
term  relationships  developed by current  management  while at other  financial
institutions. Loans in all categories continued to grow during 1998 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 1999 to continue at a rate comparable to 1998. 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. Mortgage loans held for sale increased to $25.6 million
in  1998  due  to  the  acquisition  of  Curtis  Mortgage  and  an  increase  in
originations.  Included in loans held for sale at  December  31, 1998 were $20.3
million  of loans  either  committed  and not  delivered  or  delivered  but not
settled.

      Lending  activities  are under the  direct  supervision  of the  Boards of
Directors  and senior  management  of the Banks.  The Banks  operate  under loan
policies that state,  among other things,  guidelines for  underwriting,  credit
criteria, loan composition, concentrations and administration.

                               Loans Outstanding

<TABLE>
<CAPTION>
                                                    at December 31,
  (Dollars in thousands)       1998        1997          1996         1995        1994
------------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>          <C>          <C>      
Commercial, financing and
agricultural ............   $  87,793    $  95,143    $  69,614    $  53,430    $  57,680
Commercial real estate ..     211,114      164,102      155,389      116,372      103,312
Real estate-construction       36,779       24,977       26,379       22,021       19,431
Real estate-residential .     115,115      119,748      110,636      108,276       81,472
Installment .............      57,497       59,947       50,277       50,569       45,093
Other ...................       1,614        2,623        2,035        1,754        1,918
                            -------------------------------------------------------------

  Total loans ...........     509,912      466,540      414,330      352,422      308,906
Unearned income .........      (1,360)      (1,968)      (1,537)      (1,770)      (2,001)
                            -------------------------------------------------------------

     Total loans, net ...   $ 508,552    $ 464,572    $ 412,793    $ 350,652    $ 306,905
                            =============================================================

                      Composition of loan portfolio by type
<CAPTION>
                                                    at December 31,
                                1998        1997          1996         1995        1994
                            -------------------------------------------------------------
<S>                         <C>          <C>          <C>          <C>          <C>      
Commercial, financial, and
agricultural .............      17.22%       20.39%       16.80%       15.16%       18.67%
Commercial real estate ...      41.40        35.17        37.50        33.02        33.44
Real Estate-construction .       7.21         5.35         6.37         6.25         6.29
Real Estate-residential ..      22.58        25.67        26.70        30.72        26.37
Installment ..............      11.28        12.85        12.13        14.35        14.60
Other ....................       0.31         0.57         0.50         0.50         0.63

                            -------------------------------------------------------------
Total ....................     100.00%      100.00%      100.00%      100.00%      100.00%
                            =============================================================
</TABLE>


                                      -20-
<PAGE>

                             Deposits and Borrowings

      Deposits  have been the  Company's  primary  source of funding  for loans,
although the Company also utilizes borrowed funds, including customer repurchase
agreements.  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 12.4% during 1998 and 6.5% during 1997,
resulting  from an increase in deposit  taking  branch  locations  and effective
marketing  strategies.  Despite the  increase in deposit  growth,  loan  growth,
including loans held for sale, outpaced the growth of deposit sources, resulting
in an increase  in the loan to deposit  ratio to 86.4% at  year-end  1998,  from
84.6% at year-end 1997. To supply the needed  liquidity,  the Company  increased
its repurchase  agreements  from $16.3 million in 1997 to $22.2 million in 1998.
These accounts are considered volatile under regulatory  requirements,  although
the  Company has found them to be a steady  source of  funding.  The Company has
utilized  the  Federal  Home Loan Bank of  Cincinnati  ("FHLB")  as a  borrowing
source. FHLB borrowings were $11.9 million at year-end 1998 and $12.1 million at
year-end  1997. The FHLB will continue to be a source for funding loan growth in
the future,  as the Company intends to draw  additional  borrowings to fund loan
growth.

                               Deposit Information

                                                      at December 31,
   (Dollars in thousands)                   1998           1997           1996
--------------------------------------------------------------------------------
Noninterest bearing ...............       $117,823       $ 92,749       $ 74,161
Interest bearing demand ...........        159,890        150,761        139,152
Saving deposits ...................         33,862         37,270         36,576
Time ..............................        306,391        268,989        266,450
                                          --------------------------------------
Total deposits ....................       $617,966       $549,769       $516,339
                                          ======================================

                        Maturity Ranges of Time Deposits
                With Balances of $100,000 or More at December 31,

   (Dollars in thousands)             1998           1997           1996
--------------------------------------------------------------------------
3 months or less ............        $23,642        $25,686        $28,578
3 through 6 months ..........         22,623         14,324         11,182
6 through 12 months .........         24,231         21,167         19,619
Over 12 months ..............         10,906         17,083         10,089
                                     -------------------------------------
                                     $81,402        $78,260        $69,468
                                     =====================================

      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.  Certificates of deposit of this type rose $3.1 million
from  year-end  1997 to December  31,  1998.  This  compares  to a $8.8  million
increase in the previous year.


                                      -21-
<PAGE>

                          Equity and Capital Resources

      The Company was "well capitalized" for regulatory purposes during 1998 and
1997.  Please  refer to Note  12,  "Capital  Requirements  and  Restrictions  on
Retained Earnings",  in the Financial  Statements.  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. In September 1998 the Company  received net proceeds
from its initial public offering. The increase in capital from the offering will
be  utilized  to support  future  growth.  The cash  dividends  on common  stock
reflected in the Company's 1997 and 1996 Financial Statements, was 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 181,050 shares of 5%
preferred stock, $5.00 par value per share (the "Preferred Stock"),  and 977,185
common stock options  outstanding at year-end 1998.  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 1,947,285  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.

                            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

                    Liquidity and Interest Rate Sensitivity

<TABLE>
<CAPTION>
                                                                  at December 31, 1998
         (Dollars in thousands)              1-90 Days    91-365 Days   1-5 Years   Over 5 Years     Total
------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>          <C>           <C>          <C>      
Interest earning assets
  Loans, net .............................   $ 197,741     $  94,574    $ 175,289     $  66,590    $ 534,194
  Securities available for sale
    Taxable ..............................       2,965        10,700       42,217        36,251       92,133
    Tax-exempt ...........................         545         1,542        4,529        29,113       35,729
                                             ---------------------------------------------------------------
       Total securities ..................       3,510        12,242       46,746        65,364      127,862

  Federal funds sold and other ...........       8,926         2,600          500         3,315       15,341
                                             ---------------------------------------------------------------
Total interest earning assets ............   $ 210,177     $ 109,416    $ 222,535     $ 135,269    $ 677,397
                                             ===============================================================

Interest bearing liabilities
  Interest-bearing demand deposits .......   $ 152,789     $    --      $    --       $    --      $ 152,789
  Savings deposits .......................      40,964          --           --            --         40,964
  Time Deposits ..........................      58,853       156,540       86,455         4,543      306,391
  Repurchase agreements and other borrowed
    funds ................................      35,874           500         --            --         36,374
  Long-term borrowings ...................          27            81          499         1,277        1,884
                                             ---------------------------------------------------------------
Total interest bearing liabilities .......   $ 288,507     $ 157,121    $  86,954     $   5,820    $ 538,402
                                             ===============================================================

Rate sensitive gap .......................     (78,330)      (47,705)     135,581       129,449      138,995
Rate sensitive cumulative gap ............     (78,330)     (126,035)        9,546      138,995
                                                                                                     
Cumulative gap as a percentage of earning
assets ...................................      (11.56)%     (18.61)%        1.41%       20.52%
</TABLE>


                                      -22-
<PAGE>

      The Company has a cumulative negative GAP of approximately 11.6% and 18.6%
at the end of 90 days and one year,  respectively  as of December 31, 1998. This
compares with a cumulative negative GAP of 12.8% and 22.3% at the end of 90 days
and one year,  as of  year-end  1997.  Management  believes  that this  level of
negative GAP is appropriate since many of the liabilities that 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 Analysis
                              at December 31, 1998

<TABLE>
<CAPTION>
                                      Decrease in Rates                                   Increase in Rates
  (Dollars in thousands)    200 Basis Points    100 Basis Points   Level Rates   100 Basis Points   200 Basis Points
---------------------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>             <C>              <C>               <C>    
Projected Interest Income
Loans ....................       $41,937             $43,952         $45,953          $47,968           $49,969
Investments ..............         7,314               7,463           7,599            7,747             7,882
Federal funds sold .......           416                 473             533              618               695
                                                                                                       
Total interest income ....       $49,667             $51,888         $54,085          $56,333           $58,546
                                                                                                       
Projected Interest Expense                                                                             
Deposits .................       $19,312             $20,843         $21,593          $22,902           $24,054
FHLB term advances .......           367                 482             597              712               828
Fed funds purchased                                                                                    
& other borrowings .......         1,145               1,269           1,334            1,418             1,512
Total interest expense ...       $20,824             $22,594         $23,524          $25,032           $26,394
                                                                                                       
Net interest income ......       $28,843             $29,294         $30,561          $31,301           $32,152
Change from level rates           (1,738)             (1,287)                             720             1,571
% change from level 
rates ....................         (5.68)%             (4.21)%                           2.35%             5.14%

                         Summarized Market Risk Analysis
                              at December 31, 1997

<CAPTION>
                                      Decrease in Rates                                   Increase in Rates
  (Dollars in thousands)    200 Basis Points    100 Basis Points   Level Rates   100 Basis Points   200 Basis Points
---------------------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>             <C>              <C>               <C>    
Projected total interest
income ...................       $51,936             $54,602         $57,274          $59,944           $62,617
Projected 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>


                                      -23-
<PAGE>

      In the event of an immediate 100 bp upward shift in the yield curve, it is
estimated  that net interest  income would  increase by $720,000  compared to an
increase of $1.6 million in the event of a similar 200 bp rate  movement.  These
changes  represent  2.3% and 5.1% of net  interest  income,  respectively.  This
compares to December 31, 1997, when an immediate 100 bp upward shift resulted in
net  interest  income  increasing  $796,000 and an increase of $1.6 million when
there  was an upward  movement  of 200 bp.  Downward  rate  movements  result in
estimated  decreases in net interest  income of reasonably  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. 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.

      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.  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 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.  At December 31, 1998, total borrowing  capacity under those lines
amounted to  approximately  $30 million under  agreements  with five  commercial
banks  and an  additional  $16.7  million  with the  Federal  Home  Loan Bank of
Cincinnati and $2 million with the Federal Reserve Bank.

      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 $128.0  million in
securities  classified as "available  for sale" at year-end 1998. The ability to
sell  such  securities  is  another  potential  source  of  liquidity,  although
management  generally  does not use this  source of funding  frequently.  To the
extent such  securities  are  pledged to  outstanding  borrowings,  they are not
available for  liquidity  purposes.  Proceeds  from the  maturities of loans are
another  steady  source of funding,  although on a net basis the demands for new
loans and renewal have exceeded funds provided by maturing loans.

                                 Loan Liquidity
                             As of December 31, 1998

<TABLE>
<CAPTION>
        (Dollars in thousands)                               Loan Maturities
-------------------------------------------------------------------------------------------------
                                        1 year and less   1-5 years     Over 5 years       Total
                                        ---------------   ---------     ------------       -----
<S>                                        <C>            <C>            <C>             <C>     
Commercial, financial, and      
agricultural ...................           $ 35,701       $ 40,658       $ 11,434        $ 87,793
Commercial real estate..........             30,740        117,677         62,697         211,114
Real Estate - construction and                                                         
residential.....................             55,030         55,968         65,178         176,176
Installment & Other.............             13,081         40,999          5,031          59,111
                                           --------       --------       --------        --------
Total selected loans............           $134,552       $255,302       $144,340        $534,194
                                           ========       ========       ========        ========
</TABLE>
                                                        
                                                         
Loans maturing after 1 year with:                        
  Fixed interest rates................     $244,753      
  Floating interest rates.............      154,889      
                                           ========      
                                           $399,642      
                                           ========      


                                      -24-
<PAGE>

      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.  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.

                              Year 2000 Compliance

      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  initiated a  comprehensive  Year 2000  compliance  program in
mid-1997.  They completed an Awareness and Assessment phase, a Remediation phase
and began a comprehensive Testing phase during 1998. BankFirst's data processing
service bureau implemented new software, which has been Year 2000 certified, and
BankFirst  completed  its  conversion  to  this  new  software  in  April  1998.
Conversion  to the new  host  system  necessitated  an  upgrade  of  BankFirst's
personal computers and their operating systems,  which have been tested for Year
2000  compliance.  A new servicing  system for Curtis Mortgage that is Year 2000
compliant is scheduled for implementation by June 30, 1999.  Management believes
the plan is on target with the goals  established by its regulators,  in that it
is has 100% of its mission-critical testing complete in out-sourced , host-based
services  and 85% of its internal and  third-party  supported,  mission-critical
software testing  complete.  Facilities,  office equipment,  supplies,  security
equipment, HVAC and elevator systems have all been assessed and, where possible,
tested.  All testing of both  internal  and  external  systems is expected to be
completed by June 30, 1999.

      The Company has evaluated its Year 2000 compliance-related credit risk and
found that the overall risk is low due to the high  concentration of hotel/motel
and  real  estate  credit   relationships.   Larger  Commercial  Loan  customers
maintaining  total  credit   relationships  of  $500,000,   or  more  have  been
aggressively  evaluated by their  relationship  manager regarding their possible
Y2K credit risk.  Year 2000 credit risk  analysis is an ongoing  monitoring  and
evaluation  effort within the Company.  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. During 1998, The Company projected Year 2000 project costs
to be $295,700 and realized  approximately  $163,750 in both hard and soft costs
relative to the Year 2000 effort.  Several vendor charges  relating to Year 2000
compliance testing and software  modifications incurred during 1998 are expected
to be realized by the first half of 1999. The Company has attempted to calculate
internal  salary hours  applied to this  effort,  and this value is included the
1998 expense. Year 2000 project costs for 1999 are projected to be $150,000.

      Management understands the broad scope of the Year 2000 issue and thus has
developed a plan which includes monitoring of those other entities with which it
routinely interacts including  suppliers,  creditors,  borrowers,  customers and
other financial service organizations. While monitoring of these entities allows
the Company to assess its possible Year 2000-related risks, the Company also has
been developing a  broad-spectrum  contingency plan designed to minimize adverse
impact to mission  critical  systems.  The plan  includes  analysis  of customer
demand for currency and funds availability. The plan also consists of developing
and testing  alternative  methods and  locations  for core service  delivery and
operations  support.  Additionally,  the Company's  service  bureaus  maintain a
contingency  plan for data  processing.  The  service  bureaus  house a  second,
tested,  Year 2000 compliant system in the event of system failure.  The service
bureaus also maintain an off-site data processing system with a third-party data
processor in the event of critical power failure.  Both contingency systems have
been  certified  Year 2000  compliant  and have been tested by the Company using
post-January 2000 dates.

      Management  believes that the Company and its  affiliates are currently in
compliance with each applicable directive issued by Regulatory Authorities.


                                      -25-
<PAGE>

                              Effects of Inflation

      The accompanying  consolidated  financial statements have been prepared in
accordance  with generally  accepted  accounting  principles,  which require the
measurement of financial  position and operating  results in terms of historical
dollars without considering the change in the relative purchasing power of money
over  time due to  inflation.  The  impact  of  inflation  is  reflected  in the
increased  cost  of the  Company's  operations.  Nearly  all of the  assets  and
liabilities of the Company are financial, unlike most industrial companies. As a
result,  the Company's  performance is directly  impacted by changes in interest
rates,  which  are  indirectly  influenced  by  inflationary  expectations.  The
Company's  ability to match the interest  sensitivity of its financial assets to
the interest  sensitivity of its financial  liabilities  in its  asset/liability
management  may tend to minimize  the effect of change in interest  rates on the
Company's performance.  Changes in interest rates do not necessarily move to the
same extent as changes in the prices of goods and services.

                           New Reporting Requirements

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
basis, not on consolidated assets. BankFirst, taken alone, exceeded $500 million
during 1998 and as a result is  required  to comply  with the FIDICIA  reporting
requirements  during 1999.  The First  National Bank and Trust Company had total
year-end assets of $196 million, and will not be subject to the FDICIA reporting
requirements for the foreseeable future.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  information for this item is incorporated by reference to the Liquidity and
Interest  Rate  Sensitivity  section  of Item  7.  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.


                                      -26-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
BankFirst Corporation
Knoxville, Tennessee

We have  audited  the  accompanying  consolidated  balance  sheets of  BankFirst
Corporation  as of  December  31, 1998 and 1997,  and the  related  consolidated
statements of income,  changes in stockholders'  equity,  and cash flows for the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements  based on our audits.  We did not audit the 1997 financial
statement 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.
1997 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 consolidated  financial statements,  is based solely on
the report of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall  balance sheet  presentation.  We
believe our audits provide a reasonable basis for our opinion.

The financial statements for 1997 and 1996 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 interest  method,  as described in Note 2 to
the consolidated financial statements.

In our opinion,  based on our audits and the report of other auditors,  the 1998
and 1997 consolidated  financial statements referred to above present fairly, in
all material  respects,  the financial  position of BankFirst  Corporation as of
December 31, 1998 and 1997, and its results of operations and cash flows for the
years then ended in conformity with generally accepted accounting principles.

The 1996  financial  statements of BankFirst  Corporation  were audited by other
auditors whose report,  dated February 6, 1997, expressed an unqualified opinion
on those statements. The 1996 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 audited the combination
of the accompanying  consolidated statements of income, changes in stockholders'
equity and cash flows for the year ended  December  31, 1996 after  restatement,
for the July 2, 1998 pooling of interest between BankFirst Corporation and First
Franklin Bancshares,  Inc. as discussed above. In our opinion, such consolidated
statements for 1996 have been properly combined on the basis described in Note 2
of the notes to the consolidated financial statements.

                                               Crowe, Chizek and Company LLP

Louisville, Kentucky
January 15, 1999


                                      -27-
<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 consolidated  statements of income, changes in stockholders'
equity,  and  cash  flows  of  BankFirst  Corporation  (formerly  known as Smoky
Mountain Bancorp, Inc.) and Subsidiaries,  for the year ended December 31, 1996,
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.

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  results of operations and
cash flows of BankFirst  Corporation  (formerly known as Smoky Mountain Bancorp,
Inc.) and  Subsidiaries for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.

                                                COOPERS & LYBRAND L.L.P.

Knoxville, Tennessee
February 6, 1997


                                      -28-
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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 the years then ended. These consolidated  financial statements are the
responsibility of the Company'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 the years then ended in
conformity with generally accepted accounting principles.

                                            G. R. RUSH & COMPANY, P.C.

Chattanooga, Tennessee
January 22, 1998


                                      -29-
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS

                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

                                                               1998       1997
                                                               ----       ----
ASSETS
     Cash and due from banks                                 $ 36,136   $ 24,290
     Federal funds sold                                         8,850      7,000
                                                             --------   --------
         Total cash and cash equivalents                       44,986     31,290
     Securities available for sale                            127,862    127,736
     Mortgage loans held for sale                              25,642        395
     Loans, net                                               501,950    458,474
     Premises and equipment, net                               24,927     21,466
     Mortgage servicing rights                                  7,484       --
     Federal Home Loan Bank Stock, at cost                      3,189      3,046
     Intangible assets                                          2,002        289
     Accrued interest receivable and other assets              10,259      8,021
                                                             --------   --------

         Total assets                                        $748,301   $650,717
                                                             ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
     Noninterest-bearing deposits                            $117,823   $ 92,749
     Interest-bearing deposits                                500,143    457,020
                                                             --------   --------
         Total deposits                                       617,966    549,769

     Securities sold under agreements to repurchase            22,208     16,302
     Federal funds purchased and other borrowings               4,166      1,959
     Advances from the Federal Home Loan Bank                  11,884     12,121
     Accrued interest payable and other liabilities             9,236      9,134
                                                             --------   --------
         Total liabilities                                    665,460    589,285

Stockholders' equity
     Common stock:  $2.50 par value, 15,000,000 
       shares authorized, 11,375,600 and 9,995,091 
       shares outstanding                                      28,439     24,989
     Noncumulative convertible preferred stock:  
       $5 par value, 1,000,000 shares authorized, 
       181,050 and 218,508 shares outstanding                     905      1,093
     Additional paid-in capital                                34,093     23,777
     Retained earnings                                         17,160     10,612
     Accumulated other comprehensive income                     2,244        961
                                                             --------   --------
         Total stockholders' equity                            82,841     61,432
                                                             --------   --------

         Total liabilities and stockholders' 
           equity                                            $748,301   $650,717
                                                             ========   ========


--------------------------------------------------------------------------------
                                      -30-

                            See accompanying notes.

<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME
                  Years ended December 31, 1998, 1997 and 1996
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

                                                 1998        1997        1996
                                                 ----        ----        ----
Interest income
    Interest and fees on loans                 $47,846     $42,880     $ 37,589
    Taxable securities                           5,539       6,874        7,288
    Nontaxable securities                        1,839       1,173        1,188
    Other                                          691         360          633
                                               -------     -------     --------
                                                55,915      51,287       46,698

Interest expense
    Deposits                                    22,734      21,104       20,097
    Short-term borrowings                        1,550         744          562
    Long-term borrowings                           643         804          579
                                               -------     -------     --------
                                                24,927      22,652       21,238

Net interest income                             30,988      28,635       25,460

Provision for credit losses                      1,706       2,935          667
                                               -------     -------     --------

Net interest income after provision
  for credit losses                             29,282      25,700       24,793

Noninterest income
    Service charges and fees                     4,257       3,811        3,796
    Net securities gains                           124         309          (20)
    Net gain on loan sales                       1,012         226          234
    Loan servicing income, net
       of amortization                           2,402        --           --
    Trust department income                        903         704          620
    Other                                          605         607          613
                                               -------     -------     --------
                                                 9,303       5,657        5,243
Noninterest expense
    Salaries and employee benefits              15,054      11,110       10,539
    Occupancy expense                            2,491       1,716        2,129
    Equipment expense                            2,285       2,537        2,382
    Office expense                               1,606         775          371
    Data processing fees                         1,364       1,253          897
    Advertising                                    411         558          574
    Other                                        5,007       3,374        3,907
                                               -------     -------     --------
                                                28,218      21,323       20,799

Income before income taxes                      10,367      10,034        9,237

Provision for income taxes                       3,558       3,406        3,188
                                               -------     -------     --------

Net income                                     $ 6,809     $ 6,628     $  6,049
                                               =======     =======     ========

Earnings per share:
    Basic                                      $   .64     $   .66     $    .63
    Diluted                                    $   .59     $   .61     $    .59


--------------------------------------------------------------------------------
                                      -31-

                            See accompanying notes.

<PAGE>

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years ended December 31, 1998, 1997 and 1996
         (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, 1996                         $  3,374    $   641    $ 16,003    $ 21,552      $ 941      $ 42,511
                                                                                                            
Reclassification of ESOP shares                       475       --         1,235        --         --           1,710
                                                 --------    -------    --------    --------      -----      --------
                                                                                                            
Balance, January 1, 1996, as restated               3,849        641      17,238      21,552        941        44,221
                                                                                                            
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)
Comprehensive income:                                                                                       
    Net income                                       --         --          --         6,049       --           6,049
    Change in unrealized gains (losses),                                                                    
      net of reclassification                        --         --          --          --         (605)         (605)
                                                                                                             --------
      Total comprehensive income                                                                                5,444 
                                                 --------    -------    --------    --------      -----      --------
                                                                                                            
Balance, December 31, 1996                          4,328      1,128      23,431      25,992        336        55,215
                                                                                                            
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)
Common stock split, 7,988,436 shares               19,971       --            25     (19,996)      --            --
Comprehensive income:                                                                                       
    Net income                                       --         --          --         6,628       --           6,628
    Change in unrealized gains (losses),                                                                    
      net of reclassification                        --         --          --          --          625           625
                                                                                                             --------
        Total comprehensive income                                                                              7,253  
                                                 --------    -------    --------    --------      -----      --------
                                                                                                            
Balance, December 31, 1997                       $ 24,989    $ 1,093    $ 23,777    $ 10,612      $ 961      $ 61,432
</TABLE>


--------------------------------------------------------------------------------
                                      -32-

                            See accompanying notes.

<PAGE>

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years ended December 31, 1998, 1997 and 1996
         (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                    $24,989   $ 1,093    $ 23,777    $ 10,612      $  961     $ 61,432
                                                                                                     
Sale of common stock, 428 shares                 1      --            15        --          --             16
Stock options exercised, 1,107 shares            2      --            28        --          --             30
Conversion of 37,458 shares of                                                                       
  preferred stock into 108,974                                                                       
  shares of common stock                       272      (188)        (84)       --          --           --
Cash dividend on preferred stock              --        --          --          (146)       --           (146)
Cash dividend on common stock                 --        --          --          (115)       --           (115)
Proceeds from issuance of                                                                            
  1,270,000 common shares, net                                                                       
  of related costs                           3,175      --        10,357        --          --         13,532
Comprehensive income:                                                                                
    Net income                                --        --          --         6,809        --          6,809
    Change in unrealized gains (losses),                                                             
      net of reclassification                 --        --          --          --         1,283        1,283
                                                                                                     --------
        Total comprehensive income                                                                      8,092  
                                           -------   -------    --------    --------      ------     --------
                                                                                                     
Balance, December 31, 1998                 $28,439   $   905    $ 34,093    $ 17,160      $2,244     $ 82,841
                                           =======   =======    ========    ========      ======     ========
</TABLE>


--------------------------------------------------------------------------------
                                      -33-

                            See accompanying notes.

<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1998, 1997 and 1996
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

                                                1998        1997        1996
                                                ----        ----        ----
Cash flows from operating activities
    Net income                               $   6,809    $  6,628    $   6,049
    Adjustments to reconcile net
      income to net cash from
      operating activities
       Provision for credit losses               1,706       2,935          667
       Depreciation                              1,936       1,754        1,415
       Amortization of mortgage
         servicing rights                        1,787        --           --
       Security amortization and
         accretion, net                            (35)       (120)        (293)
       Net (gains) losses on securities
         sales                                    (124)       (309)          20
       Net gain on sale of
         mortgage loans                         (1,012)       (226)        (234)
       Proceeds from sales of
         mortgage loans                        207,119      15,491       12,297
       Originations of mortgage loans
         held for sale                        (225,087)    (15,562)     (12,267)
       Increase in mortgage
         servicing rights                         (484)       --           --
       Net (gains) losses on sales
         of assets                                --            77          620
       Changes in assets and liabilities:
          Accrued interest receivable
            and other assets                    (2,260)       (571)        (116)
          Accrued interest payable and
            other liabilities                   (2,358)      4,340          174
                                             ---------    --------    ---------
             Net cash flows from operating
               activities                      (12,003)     14,437        8,332

Cash flows from investing activities
    Purchase of securities                     (57,152)    (59,276)    (100,924)
    Proceeds from maturities of securities      41,906      32,224       87,269
    Proceeds from sales of securities           14,335      35,530       12,995
    Net increase in loans                      (43,583)    (53,437)     (62,737)
    Purchase of FHLB stock                        (219)       (494)        --
    Premises and equipment
       expenditures, net                        (5,731)     (6,255)      (2,242)
    Net cash paid for mortgage company          (7,449)       --           -- 
                                             ---------    --------    ---------
             Net cash from investing
               activities                      (57,893)    (51,708)     (65,639)

Cash flows from financing activities
    Net change in deposits                      68,197      33,430       35,993
    Net change in repurchase agreements
      and other borrowings                       8,113      11,068         (554)
    Advances from the Federal Home
      Loan Bank                                 10,000       2,000       10,000
    Repayments of advances from Federal
      Home Loan Bank                           (10,237)     (2,033)      (3,009)
    Repayments of notes payable                 (5,798)       --         (3,244)
    Preferred stock dividends paid                (146)       (161)        (162)
    Common stock dividends paid                   (115)     (1,214)        (876)
    Sales of stock and stock options
      exercised                                     46         564        6,273
    Proceeds from public offering
      of common stock                           13,532
    Repurchase of common stock                    --          (225)        (185)
                                             ---------    --------    ---------
             Net cash from financing
               activities                       83,592      43,429       44,236
                                             ---------    --------    ---------

Net change in cash and cash equivalents         13,696       6,158      (13,071)

Cash and cash equivalents, beginning
    of year                                     31,290      25,132       38,203
                                             ---------    --------    ---------

Cash and cash equivalents, end of year       $  44,986    $ 31,290    $  25,132
                                             =========    ========    =========

Supplemental disclosures - cash
  and noncash
    Interest paid                            $  25,334    $ 22,619    $  21,312
    Income taxes paid                            3,100       3,186        3,473
    Loans converted to other
      real estate                                1,096       1,082          373
    Debenture converted to
      common stock                                --          --            500
    Preferred stock converted
      to common stock                              272          35         --


--------------------------------------------------------------------------------
                                      -34-

                            See accompanying notes.

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The consolidated  financial statements include the
accounts of BankFirst Corporation and its wholly-owned subsidiaries,  BankFirst,
First National Bank and Trust Company (together  referred to as the "Banks") and
BankFirst  Trust  Company,  and  BankFirst's  wholly-owned  subsidiary,   Curtis
Mortgage  Company,  collectively  referred to as the "Company".  All significant
inter-company balances and transactions have been eliminated in consolidation.

Nature of  Operations:  The  Company  provides  financial  services  through its
offices in Eastern and Southeastern Tennessee.  Its primary deposit products are
checking,  savings,  and term  certificate  accounts,  and its  primary  lending
products  are  residential   mortgage,   commercial,   and  installment   loans.
Substantially  all loans are secured by specific  items of collateral  including
business assets, consumer assets and real estate.  Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans are
secured  by  both  residential  and  commercial  real  estate.  Other  financial
instruments  which potentially  represent  concentrations of credit risk include
deposit accounts in other financial institutions.

Use of Estimates:  To prepare financial  statements in conformity with generally
accepted accounting principles, management makes 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.  Mortgage  servicing rights,  allowance for credit losses,
and fair values of financial instruments are particularly subject to change.

Cash  Flows:  Cash and cash  equivalents  includes  cash,  deposits  with  other
financial institutions under 90 days, and federal funds sold. Net cash flows are
reported for loan, deposit and other borrowing transactions.

Securities:  Securities  are  classified  as held to  maturity  and  carried  at
amortized cost when  management has the positive intent and ability to hold them
to maturity.  Securities are classified as available for sale when they might be
sold before maturity.  Securities  available for sale are carried at fair value,
with  unrealized   holding  gains  and  losses  reported  in  accumulated  other
comprehensive  income. All securities are currently  classified as available for
sale.

Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. 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 unearned
interest,  deferred  loan fees and costs,  and an allowance  for credit  losses.
Loans held for sale are reported at the lower of cost or market, on an aggregate
basis.

The aggregate  cost of mortgage loans held for sale at year-end 1998 and 1997 is
less than their aggregate net realizable value.

Interest income is reported on the interest method and includes  amortization of
net  deferred  loan fees and costs  over the loan term.  Interest  income is not
reported  when  full loan  repayment  is in  doubt,  typically  when the loan is
impaired or payments are past due over 90 days.  Payments received on such loans
are reported as principal reductions.

Allowance  for Credit  Losses:  The  allowance  for credit losses is a valuation
allowance  for probable  credit  losses,  increased by the  provision for credit
losses and decreased by charge-offs  less recoveries.  Management  estimates the
allowance balance required using past credit loss experience, known and inherent
risks in the nature  and volume of 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.


--------------------------------------------------------------------------------
                                      -35-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

A loan is impaired when full payment  under the loan terms is not expected.  The
Company has defined its population of impaired  loans for individual  evaluation
of  impairment  to be those  commercial  real estate and  commercial  loans over
$250,000.  Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage,  consumer, and credit card loans, and on an
individual loan basis for other loans.  If a loan is impaired,  a portion of the
allowance is allocated so that the loan is reported,  net, at the present  value
of  estimated  future cash flows using the loan's  existing  rate or at the fair
value of collateral if repayment is expected solely from the collateral.

Foreclosed  Assets:  Assets acquired  through or instead of loan foreclosure are
initially  recorded at fair value when acquired,  establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated  depreciation.  Depreciation is computed over the asset useful lives
on an accelerated basis,  except for buildings for which the straight line basis
is used.

Servicing Rights: Servicing rights are recognized as assets for purchased rights
and for the allocated cost of retained servicing rights on loans sold. Servicing
rights are  expensed in  proportion  to, and over the period of,  estimated  net
servicing  revenues.  Impairment  is  evaluated  based on the fair  value of the
rights,  using groupings of the underlying  loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics.  Any impairment of
a grouping is reported as a valuation allowance.

Intangibles: Purchased intangibles, primarily goodwill, are recorded at cost and
amortized over the estimated life.  Goodwill  amortization is straight-line over
15 years.

Long-term Assets:  These assets are reviewed for impairment when events indicate
their  carrying  amount may not be  recoverable  from future  undiscounted  cash
flows. If impaired, the assets are recorded at discounted amounts.

Repurchase  Agreements:   Substantially  all  repurchase  agreement  liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.

Benefit Plans:  Pension expense is the net of service and interest cost,  return
on plan assets, and amortization of gains and losses not immediately recognized.
The 401k plan expense is the amount  contributed  to the plan as  determined  by
Board decision.  Deferred  compensation plan expense allocates the benefits over
years of service.

Stock  Compensation:  Pro forma disclosures of net income and earnings per share
are shown  using the fair value  method of SFAS No. 123 to measure  expense  for
options  granted  after 1995,  using an option  pricing  model to estimate  fair
value.

Income Taxes: Income tax expense is the total 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 amounts for the temporary
differences  between  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.


--------------------------------------------------------------------------------
                                      -36-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing  needs.  The face amount for these items  represents  the  exposure to
loss, before considering customer collateral or ability to repay.

Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares  outstanding  during the period.
Diluted  earnings per common share  includes the dilutive  effect of  additional
potential  common shares  issuable  under stock  options,  preferred  stock,  or
convertible  debentures.  Earnings and  dividends per share are restated for all
stock  splits  and  dividends  through  the  date  of  issue  of  the  financial
statements.

Comprehensive  Income:  Comprehensive  income  consists  of net income and other
comprehensive  income.  Other comprehensive income includes unrealized gains and
losses on securities  available  for sale which are also  recognized as separate
components  of  equity.   The  accounting   standard  that  requires   reporting
comprehensive  income first applies for 1998, with prior information restated to
be comparable.  Comprehensive income is presented in the consolidated statements
of changes in stockholders' equity.

New  Accounting  Pronouncements:  Beginning  January 1, 2000,  a new  accounting
standard  will  require all  derivatives  to be  recorded at fair value.  Unless
designated  as hedges,  changes in these fair  values  will be  recorded  in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting  gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not  otherwise  recorded.  Application  of this
statement is not  expected to have a material  effect but the effect will depend
on derivative holdings when this standard applies.

Loss  Contingencies:  Loss  contingencies,  including  claims and legal  actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood  of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are any such matters that will have
a material effect on the financial statements.

Preferred  Stock:  The preferred  stock earns  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.

Dividend  Restriction:  Banking  regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.

Segments:  The Company's primary segment is banking, which accounts for 98.5% of
revenues at year-end 1998. Other operating segments include mortgage banking and
trust services.

Fair Value of Financial  Instruments:  Fair values of financial  instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. 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.

Reclassifications:  Certain items in the 1997 and 1996 financial statements have
been reclassified to conform with the 1998 presentation.


--------------------------------------------------------------------------------
                                      -37-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 2 - BUSINESS COMBINATIONS

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 723,673 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 consolidated
financial statements give retroactive effect to the merger, and as a result, the
financial  statements  are  presented  as if the  combined  companies  had  been
consolidated for all periods presented.

Separate interest income and net income of the merged entities are as follows:

                                              1998         1997          1996
                                              ----         ----          ----
    Interest income
         BankFirst Corporation              $ 41,526     $ 37,625      $ 33,584
         First Franklin                       14,389       13,662        13,114
                                            --------     --------      --------

                                            $ 55,915     $ 51,287      $ 46,698
                                            ========     ========      ========
    Net income
         BankFirst Corporation              $  4,480     $  4,066      $  3,664
         First Franklin                        2,329        2,562         2,385
                                            --------     --------      --------

                                            $  6,809     $  6,628      $  6,049
                                            ========     ========      ========

On January 16, 1998, the Bank acquired Curtis Mortgage Company,  a mortgage loan
origination and servicing  company,  for $7.5 million 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 $1.9  million of goodwill,  which is being  amortized on a
straight-line basis over 15 years.

     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)


--------------------------------------------------------------------------------
                                      -38-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 3 - SECURITIES AVAILABLE FOR SALE

Securities are summarized as follows:

                                                 Gross        Gross
                                   Amortized   Unrealized  Unrealized     Fair
1998                                 Cost        Gains       Losses       Value
----                                 ----        -----       ------       -----
                                               
U.S. Treasury securities           $ 25,258     $   601    $            $ 25,859
Obligations of U.S.                            
  government agencies                44,197       1,448                   45,645
Obligations of states and                      
  political subdivisions             37,455       1,553                   39,008
Mortgage-backed securities           17,335          61          (46)     17,350
                                   --------     -------    ---------    --------
                                               
                                   $124,245     $ 3,663    $     (46)   $127,862
                                   ========     =======    =========    ========
                                               
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
                                   ========     =======    =========    ========
                                             
Contractual   maturities  of  securities  at  year-end  1998  are  shown  below.
Securities  not  due  at  a  single  maturity  date,  primarily  mortgage-backed
securities, are shown separately.

                                                         Amortized        Fair
                                                            Cost          Value
                                                            ----          -----
     Due in one year or less                             $ 16,621         16,250
     Due after one year through five years                 44,583         46,073
     Due after five years through ten years                34,919         37,171
     Due after ten years                                   10,787         11,018
     Mortgage-backed securities                            17,335         17,350
                                                         --------       --------
          Total maturities                               $124,245       $127,862
                                                         ========       ========


                                           1998            1997            1996
                                           ----            ----            ----
Sales of securities available 
for sale were as follows:

     Proceeds                            $14,335         $35,530         $12,995
     Realized gains                          125             343              33
     Realized losses                           1              34              53
                                
Securities  with a carrying  value of $74,691 and  $79,650 at year-end  1998 and
1997, were pledged for public  deposits and securities sold under  agreements to
repurchase.


--------------------------------------------------------------------------------
                                      -39-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 4 - LOANS

At year-end 1998 and 1997, loans consisted of the following:

                                                              1998       1997
                                                              ----       ----
                                                        
Commercial, industrial and agricultural                     $ 87,793   $ 95,143
Commercial real estate                                       211,114    164,102
Real estate construction                                      36,779     24,977
Residential real estate                                      115,115    120,143
Loans to individuals                                          57,497     59,947
Lease financing                                                1,492      1,845
Other                                                            122        383
                                                        
Total loans                                                 $509,912    466,540
                                                        
Less: Unearned interest income and fees                       (1,360)    (1,968)
      Allowance for credit losses                             (6,602)    (6,098)
                                                            --------   --------
                                                            $501,950   $458,474
                                                            ========   ========
                                                     
Activity in the allowance for credit losses is as follows:

                                                    1998       1997        1996
                                                    ----       ----        ----
Beginning balance                                 $ 6,098    $ 4,723    $ 4,690 
Provision                                           1,706      2,935        667
Loans charged off                                  (1,524)    (1,833)      (904)
Recoveries of loans charged off                       322        273        270
                                                  -------    -------    -------
Balance, end of year                              $ 6,602    $ 6,098    $ 4,723
                                                  =======    =======    =======
                                     
Impaired loans were as follows:

                                                               1998       1997
                                                               ----       ----
Loans with allowance allocated                               $  --      $   552
Amount of allowance for credit losses                                     
  allocated                                                     --           61
Loans with no allowance allocated                               --          615

                                                     1998      1997       1996
                                                     ----      ----       ----
Average balance during the year                   $   855    $ 1,312    $   941
Interest income recognized during impairment         --           30         50
Cash-basis interest income recognized                --           30         50
Loans past due 90 days still on accrual             1,971      1,705      1,518

The aggregate amount of loans to executive officers and directors of the Company
and their related  interests was  approximately  $17,772 and $18,443 at year-end
1998 and 1997. During 1998 and 1997, new loans aggregating  approximately $7,156
and  $9,761 and  amounts  collected  of  approximately  $7,827  and $2,139  were
transacted with such parties.


--------------------------------------------------------------------------------
                                      -40-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

Loans serviced for others,  which are not reported as assets,  total $516,835 at
year-end 1998.

Activity for capitalized mortgage servicing rights was as follows:

                                                                          1998
                                                                          ----
Servicing rights:
    Beginning of year                                                   $  --
    Acquired in purchase transaction                                      7,000
    Additions                                                             2,271
    Amortized to expense                                                 (1,787)
                                                                        -------

    End of year                                                         $ 7,484
                                                                        =======

NOTE 5 - PREMISES AND EQUIPMENT

A summary of premises and equipment as of year-end 1998 and 1997 is as follows:

                                                         1998            1997
                                                         ----            ----
Land                                                   $  6,798        $  5,246
Premises                                                 15,087          14,255
Furniture, fixtures and equipment                        11,721          10,390
Construction in progress                                  2,645             963
                                                       --------        --------

    Total cost                                           36,251          30,854

Accumulated depreciation                                (11,324)         (9,388)
                                                       --------        --------

                                                       $ 24,927        $ 21,466
                                                       ========        ========

NOTE 6 - DEPOSITS

Time deposits of $100 thousand or more were $81,402 and $78,260 at year-end 1998
and 1997.

At year-end 1998, maturities of total time deposits were as follows:

      One year or less                                $246,257
      Over one year through three years                 48,984
      Over three years                                  11,158

The  aggregate  amount of deposits to executive  officers  and  directors of the
Company  and their  related  interests  was  approximately  $3,114 and $2,477 at
year-end 1998 and 1997.


--------------------------------------------------------------------------------
                                      -41-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 7 - BORROWINGS

Federal funds  purchased,  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  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 fed
funds purchased as well as 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 1998 and 1997 is as follows:

                                                            1998         1997
                                                            ----         ----
   Average month-end balance during the year              $ 22,834     $  9,137
   Average interest rate during the year                      4.48%        4.76%
   Maximum month-end balance during the year              $ 27,407     $ 16,302

The aggregate  amount of  securities  sold under  agreements to repurchase  from
executive officers and directors of the Company and their related interests were
$1,786 and $4,014 at year-end 1998 and 1997.

Federal Home Loan Bank  advances  consist of the  following at year-end 1998 and
1997:

                                                             1998         1997
                                                             ----         ----
   Fixed rate advances, from 5.7% to 7.2%, maturities 
   from March 2008 to January 2013                         $ 1,884      $ 2,121

   Variable rate "overnight" note advances currently 
   at 5.02%                                                 10,000       10,000
                                                           -------      -------
                                                           $11,884      $12,121

These advances are  collateralized  by a blanket  pledge of qualifying  mortgage
loans totaling $17,826 and $18,182 at year-end 1998 and 1997.

At year-end 1998, the Company had  approximately  $30,000 of federal funds lines
of credit  available from  correspondent  institutions,  $16,716 unused lines of
credit with the Federal Home Loan Bank,  and $2,000  unused lines of credit with
the Federal Reserve Bank of Atlanta.


--------------------------------------------------------------------------------
                                      -42-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollar amounts in thousands, except share and per share data)

--------------------------------------------------------------------------------

NOTE 8 - RETIREMENT PLANS

BankFirst  Corporation  has  two  separate  401(k)  profit  sharing  plans.  The
BankFirst profit sharing plan covers employees of BankFirst and Curtis Mortgage,
and allows  employees to  contribute up to 15% of their  compensation,  which is
matched at a discretionary  rate established by the Corporate Board of Directors
annually.  The First  National Bank and Trust Company 401(k) profit sharing plan
covers  employees  of The First  National  Bank and  Trust  Company  and  allows
employees to contribute up to 10% of their compensation,  which is matched equal
to 50% of the first 6% of the compensation  contributed.  Expense for both Plans
was $275, $218, and $187 for 1998, 1997 and 1996.

The Company had an Employee Stock  Ownership Plan (ESOP) which was  discontinued
in 1998.  The ESOP  sold  all  Company  common  stock  owned in the 1998  public
offering.  The Company's  contribution to the ESOP was $30 in 1996. There was no
contribution  in 1998 or 1997.  All  shares  under  the plan were  allocated  at
year-end 1997.

Information  about the First  National  Bank and Trust Company  defined  benefit
pension plan was as follows:

                                                           1998           1997
                                                           ----           ----
Change in benefit obligation:
    Beginning benefit obligation                         $(5,239)       $(3,786)
    Service cost                                            (196)          (173)
    Interest cost                                           (361)          (318)
    Actuarial gain                                           (33)        (1,080)
    Benefits paid                                            151            118
                                                         -------        -------
    Ending benefit obligation                             (5,678)        (5,239)

Change in plan assets, at fair value:
    Beginning plan assets                                  4,927          4,178
    Actual return                                            527            629
    Employer contribution                                    242            238
    Benefits paid                                           (150)          (118)
                                                         -------        -------
    Ending plan assets                                     5,546          4,927
                                                         -------        -------

Funded status                                               (132)          (312)
Unrecognized net actuarial loss                              748            809
                                                         -------        -------

Prepaid (accrued) benefit cost                           $   616        $   497
                                                         =======        =======

Plan assets held include common stocks,  corporate bonds, government securities,
and other investments.

The  components of pension  expense and related  actuarial  assumptions  were as
follows:

                                                  1998        1997        1996
                                                  ----        ----        ----

Service cost                                     $ 196       $ 173       $ 159
Interest cost                                      361         318         287
Expected return on plan assets                    (420)       (358)       (323)
Recognized net actuarial (gain) loss               (13)        (22)         (3)
                                                 -----       -----       -----
    Net                                          $ 124       $ 111       $ 120
                                                 =====       =====       =====

Discount rate on benefit obligation                7.5%        7.5%        8.5%
Long-term expected rate of return
  on assets                                        8.5         8.5         8.5
Rate of compensation increase                      5.5         6.5         6.5

Contribution  expense was $242,  $238, and $229 for the years ending 1998, 1997,
and 1996.


--------------------------------------------------------------------------------
                                      -43-

                                  (Continued)

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES

Income tax expense is summarized as follows:

                                     1998             1997            1996
                                     ----             ----            ----
         Current                  $     3,699     $     3,612      $     3,134
         Deferred                        (141)           (206)              54
                                  -----------     -----------      -----------

                                  $     3,558     $     3,406      $     3,188
                                  ===========     ===========      ===========

         Federal                  $     2,914     $     2,817      $     2,643
         State                            644             589              545
                                  -----------     -----------      -----------

                                  $     3,558     $     3,406      $     3,188
                                  ===========     ===========      ===========

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 liabilities are as follows:

<TABLE>
<CAPTION>
                                              1 9 9 8                          1 9 9 7
                                              -------                          -------
                                       Assets       Liabilities        Assets       Liabilities
<S>                                <C>              <C>             <C>              <C>        
Allowance for credit losses        $     1,461      $         -     $     1,154      $         -
Mortgage Servicing Rights                    -           (2,841)              -                -
Depreciation                                 -             (763)              -             (832)
FHLB dividends                               -             (284)              -             (201)
Defined benefit plan                         -             (233)              -             (189)
Other real estate                           84                -              19                -
Unrealized gain on securities                -           (1,374)              -             (589)
Unearned loan income                        64                -              57                -
Other                                      260             (120)             86             (261)
                                   -----------      -----------     -----------      -----------
     Total deferred income taxes   $     1,869      $    (5,615)    $     1,316      $    (2,072)
                                   ===========      ===========     ===========      ===========
</TABLE>

Upon the  acquisition of Curtis  Mortgage  Company,  a deferred tax liability of
$2,231 was established  which was attributable to purchased  mortgage  servicing
rights.

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:

                                                      1998      1997       1996
                                                      ----      ----       ----

         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                            (5.1)     (3.7)      (4.6)
         Other                                         1.4      (0.4)       1.1
                                                    ------    ------     ------
                                                      34.3%     33.9%      34.5%
                                                    ======    ======     ======

--------------------------------------------------------------------------------
                                      -44-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------

NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH
  OFF-BALANCE-SHEET RISK

Some financial instruments,  such as loan commitments,  credit lines, letters of
credit, and overdraft  protection,  are issued to meet customer financing needs.
These are  agreements to provide  credit or to support the credit of others,  as
long as  conditions  established  in the  contract  are met,  and  usually  have
expiration dates.  Commitments may expire without being used.  Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments,  although
material losses are not  anticipated.  The same credit policies are used to make
such  commitments  as are used for  loans,  including  obtaining  collateral  at
exercise of the commitment.

Financial instruments with off-balance-sheet risk were as follows at year end.

                                                              1998         1997
                                                              ----         ----
     Commitments to make loans (at market rates)            $39,005      $ 9,016
     Unused lines of credit and letters of credit            72,417       71,427

The majority of  commitments  to make loans have a variable  interest  rate. The
fixed rate loan  commitments  have interest rates ranging from 6.0% to 12.7% and
maturities ranging from 1 year to 30 years.

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 occupied 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,  with BankFirst  remaining as a 100% owner and
tenants.  Total  payments  received  from  tenant of the  buildings  other  than
BankFirst  totaled $105 in 1997.  BankFirst's  contributions  to the partnership
expenses were approximately $169 and $313 in 1997 and 1996.

--------------------------------------------------------------------------------
                                      -45-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------

NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital  requirements
administered  by federal  banking  agencies.  Capital  adequacy  guidelines and,
additionally  for  banks,   prompt   corrective   action   regulations   involve
quantitative  measures of assets,  liabilities,  and  certain  off-balance-sheet
items  calculated  under regulatory  accounting  practices.  Capital amounts and
classifications  are also  subject  to  qualitative  judgements  by  regulators.
Failure to meet capital requirements can initiate regulatory action.

Prompt  corrective  action  regulations  provide  five   classifications:   well
capitalized,    adequately    capitalized,    undercapitalized,    significantly
undercapitalized, and critically undercapitalized,  although these terms are not
used to  represent  overall  financial  condition.  If  adequately  capitalized,
regulatory   approval   is   required   to   accept   brokered   deposits.    If
undercapitalized,  capital  distributions  are  limited,  as is asset growth and
expansion, and capital restoration plans are required.

At year-end,  the capital  requirements  were met, as the Company and banks were
considered well capitalized under regulations. Actual capital levels and minimum
required levels (in millions) were:

<TABLE>
<CAPTION>
                                                                                     Minimum Amounts to be
                                                                 Minimum Required   Well Capitalized Under
                                                                    for Capital        Prompt Corrective
                                                 Actual          Adequacy Purposes     Action Provisions
                                           -----------------     -----------------  ----------------------
                                           Actual      Ratio     Actual      Ratio      Actual     Ratio
                                           ------      -----     ------      -----      ------     -----
<S>                                        <C>         <C>       <C>         <C>        <C>        <C>  
1998
Total Capital (to Risk Weighted Assets)
     Consolidated                          $ 83.4      18.9%     $ 44.9      8.0%       $ 56.1     10.0%
     BankFirst                               45.4      10.2        35.4      8.0          44.3     10.0
     First National Bank and Trust Co.       24.1      20.1         9.6      8.0          12.0     10.0

Tier 1 Capital (to Risk Weighted Assets)
     Consolidated                          $ 77.8     17.6%      $ 22.5      4.0%       $ 33.8      6.0%
     BankFirst                               40.3      9.1         17.7      4.0          26.6      6.0   
     First National Bank and Trust Co.       22.6     18.9          4.8      4.0           7.2      6.0
                                                                                     
Tier 1 Capital  (to Average Assets)
     Consolidated                          $ 77.8     10.7%      $ 29.1      4.0%       $ 36.3      5.0%
     BankFirst                               40.3      7.5         21.4      4.0          26.7      5.0
     First National Bank and Trust Co.       22.6     11.8          7.7      4.0           9.6      5.0
                                                                                     
1997
Total Capital (to Risk Weighted Assets)
     Consolidated                          $ 61.4     12.8%      $ 38.4      8.0%       $ 48.0     10.0%
     BankFirst                               42.5     11.6         29.2      8.0          36.5     10.0
     First National Bank and Trust Co.       21.3     18.8          9.1      8.0          11.3     10.0

Tier 1 Capital (to Risk Weighted Assets)
     Consolidated                          $ 60.1     12.5%      $ 19.2      4.0%       $ 28.8      6.0%
     BankFirst                               37.9     10.4         14.6      4.0          21.9      6.0
     First National Bank and Trust Co.       20.2     17.8          4.5      4.0           6.8      6.0

Tier 1 Capital  (to Average Assets)
     Consolidated                          $ 60.1      9.7%      $ 24.9      4.0%       $ 31.1      5.0%
     BankFirst                               37.9      8.3         18.3      4.0          22.9      5.0
     First National Bank and Trust Co.       20.2     11.2          7.2      4.0           9.0      5.0
</TABLE>

--------------------------------------------------------------------------------
                                      -46-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------

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 1998, $17,260 of retained earnings was available for
dividends in future periods.

The Banks were required to have approximately  $9,659 and $4,569 of cash on hand
to meet regulatory reserve requirements at year-end 1998 and 1997.

NOTE 13 - STOCK OPTIONS

The Company maintains a stock option plan,  whereby 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%. At year-end 1998, 1,947,285 shares are authorized
for future grant.

A summary of the Company's  option  activity,  and related  information  for the
year-ended 1998, 1997, and 1996 is presented below:

<TABLE>
<CAPTION>
                                                1 9 9 8              1 9 9 7             1 9 9 6
                                                -------              -------              -------
                                               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                           862,000    $ 6.19      887,645     $ 5.21     547,020    $ 4.25
Granted                             142,000      8.80      164,380       7.68     340,625      6.96
Exercised                            (4,535)     6.59     (140,765)      3.72           -         -
Forfeited                           (22,280)     8.21      (49,260)      7.12           -         -
                                    -------      ----      -------       ----     -------    ------                  
Outstanding at end of year          977,185      6.19      862,000       6.19     887,645      5.21
                                                                     
Options exercisable at year-end     548,706      5.01      461,030       4.55     541,590      4.09
                                    -------                -------                ------- 
Weighted-average fair value of                                       
 options granted during the year   $   2.97               $   3.09               $   2.46
                                   ========               ========               ========
</TABLE>
                                                                    
Options outstanding at year-end 1998 were as follows:

                                        Outstanding             Exercisable
                                  ----------------------   ---------------------
                                        Weighted Average                Weighted
Range of                                   Remaining                     Average
Exercise                                   Contractual                  Exercise
Prices                             Number    Life           Number        Price
------                             ------    ----           ------        -----
                                                       
$3.50-$5.00                       329,055     5.0          329,055        $3.72
$6.00-$7.00                       372,690     7.7          190,763         6.79
$7.50-$9.00                       275,440     8.6           28,888         7.68
                                  -------     ---          -------    ---------
Outstanding at year end           977,185     7.0          548,706        $5.01
                                  =======     ===          =======     ========

--------------------------------------------------------------------------------
                                      -47-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
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 1998, 1997, and 1996:  risk-free interest rate of
5.76%, 6.75% and 7.03%, and expected lives of seven,  seven, and eight years and
estimated  volatility  of 10% for 1998.  No  assumption  was made for  estimated
volatility  for  1997 or  1996  since  it was not  feasible  to  determine  this
assumption  for a non-public  entity whose stock was not actively  traded.  With
estimated  volatility  excluded,  the option pricing model produces the option's
minimum value for 1997 and 1996.

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 pro forma effect
will increase in the future.

                            1 9 9 8              1 9 9 7            1 9 9 6
                      ------------------  ------------------ ------------------
                         As                  As                 As
                      Reported Pro forma  Reported Pro forma Reported Pro forma
                      -------- ---------  -------------------------------------
Net income             $6,809    $6,484    $6,628   $6,400    $6,049     $6,046
Basic earnings per 
  share                $  .64    $  .61    $  .66   $  .63    $  .63       $.63
Diluted earnings per 
  share                   .59       .55       .61      .58       .59   .     58

--------------------------------------------------------------------------------
                                      -48-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
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>
                                                         1998             1997            1996
                                                         ----             ----            ----
<S>                                                   <C>             <C>             <C>         
Basic Earnings Per Share
    Net income                                        $      6,809    $      6,628    $      6,049
    Less:  Dividends declared on preferred stock              (146)           (161)           (162)
                                                      ------------    ------------    ------------
       Net income available to common
         stockholders                                 $      6,663    $      6,467    $      5,887
                                                      ============    ============    ============
    Weighted average common shares outstanding          10,446,779       9,876,735       9,347,725
                                                      ============    ============    ============
Basic Earnings Per share                              $        .64    $        .66    $        .63
                                                      ============    ============    ============
Diluted Earnings Per Share
    Net income available to common stockholders       $      6,663    $      6,467    $      5,887
    Add back dividends upon assumed conversion
      of preferred stock                                       146             161             162
                                                      ------------    ------------    ------------
       Net income available to common
         stockholders assuming conversion             $      6,809    $      6,628    $      6,049
                                                      ============    ============    ============
    Weighted average common shares outstanding          10,446,779       9,876,735       9,347,725

      Add:  Dilutive effects of assumed conversions
      and exercises:
       Convertible preferred stock                         635,516         685,830         696,415
       Convertible debenture                                  --              --            39,065
       Stock options                                       383,819         313,025         158,165
                                                      ------------    ------------    ------------
    Weighted average common and dilutive
      potential common shares outstanding               11,466,114      10,875,590      10,241,370
                                                      ------------    ------------    ------------
    Diluted Earnings Per Share                        $        .59    $        .61    $        .59
                                                      ============    ============    ============
</TABLE>

--------------------------------------------------------------------------------
                                      -49-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
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 1998 and 1997.

                                            1 9 9 8                1 9 9 7
                                       ------------------   --------------------
                                       Carrying     Fair    Carrying      Fair
                                         Value      Value     Value      Value
Financial assets:
   Cash and cash equivalents           $ 44,986   $ 44,986   $ 31,290   $ 31,290
   Securities available for sale        127,862    127,862    127,736    127,736
   Mortgage loans held for sale          25,642     26,037        395        395
   Loans, net                           501,950    503,397    458,474    461,773
   Mortgage servicing rights              7,484      7,484       --         --
   Federal Home Loan Bank stock           3,189      3,189      3,046      3,046
   Accrued interest receivable            4,653      4,653      4,723      4,723

Financial liabilities:
   Demand, savings, and money
     market accounts                   $311,575   $311,568   $280,781   $280,781
   Certificate of deposits              306,391    307,060    268,988    268,347
   Advances from Federal Home Loan
     Bank                                11,884     11,993     12,121     12,005
   Repurchase agreement and other
     borrowings                          26,374     26,479     18,261     18,261
   Accrued interest payable               3,113      3,113      3,521      3,521

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,  variable rate loans or deposits that reprice  frequently and fully,  and
accrued  interest  receivable  and payable.  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.  Fair value of mortgage loans
held for sale is based on  current  quoted  secondary  interest  price  for such
loans.  For mortgage  servicing  rights the fair value of the allocated  cost of
retained servicing rights approximates cost.  Liabilities for borrowed money are
estimated using rates of debt with similar terms and remaining  maturities.  The
fair value of  off-balance  sheet  items is based on current  fees or costs that
would be charged to enter into or terminate such arrangements. The fair value of
commitments to sell loans is based on the difference  between the interest rates
committed to sell at and the quoted  secondary  market price for similar  loans,
which is not material.


--------------------------------------------------------------------------------
                                      -50-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
NOTE 16 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

                                 BALANCE SHEETS
                     Years ended December 31, 1998 and 1997

                                                              1998        1997
                                                              ----        ----
Assets
     Cash and cash equivalents                               $13,265     $ 2,019
     Interest bearing deposits                                   454        --
     Investment in subsidiary banks                           68,904      59,329
     Other                                                       359         516
                                                             -------     -------
         Total assets                                        $82,982     $61,864
                                                             =======     =======
Total liabilities                                                141         432

Stockholders' equity
     Common stock                                             28,439      24,989
     Preferred stock                                             905       1,093
     Additional paid-in capital                               34,093      23,777
     Retained earnings                                        17,160      10,612
     Accumulated other comprehensive income                    2,244         961
                                                             -------     -------
         Total stockholders' equity                           82,841      61,432
                                                             -------     -------
         Total liabilities and stockholders' equity          $82,982     $61,864
                                                             =======     =======

                              STATEMENTS OF INCOME
                  Years ended December 31, 1998, 1997, and 1996

                                                     1998       1997     1996
                                                     ----       ----     ----

Dividends from subsidiary banks                     $   215    $1,593   $ 1,470
Other income                                            201       220       178
                                                    -------    ------   -------
         Total income                                   416     1,813     1,648

Interest expense                                       --        --         120
Other expense                                           909       213       350
                                                    -------    ------   -------
         Total expenses                                 909       213       470
                                                    -------    ------   -------

(Loss)/Income before income taxes                      (493)    1,600     1,178
Income tax expense (benefit)                            (59)        2      (105)
                                                    -------    ------   -------

(Loss)/Income before equity in undistributed
  income of subsidiaries                               (434)    1,598     1,283

Equity in undistributed net income of subsidiaries    7,243     5,030     4,766
                                                    -------    ------   -------
Net income                                          $ 6,809    $6,628   $ 6,049
                                                    =======    ======   =======

--------------------------------------------------------------------------------
                                      -51-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1998, 1997, and 1996

                                                   1998        1997      1996
                                                   ----        ----      ----
Operating activities
     Net income                                  $  6,809    $ 6,628    $ 6,049
     Adjustments to reconcile net income to net
       cash provided by operating activities:
         Undistributed net income of subsidiaries  (7,243)    (5,030)    (4,766)
         Change in assets                             157       (160)         7
         Change in liabilities                       (291)       293        (10)
                                                 --------    -------    -------
              Net cash provided by (used in)
                operating activities                 (568)     1,731      1,280

Net cash used in investment activities
     Change in time deposit with other banks         (454)     1,200     (1,200)
                                                 --------    -------    -------
Financing activities
     Payments of notes payable                       --         --       (3,244)
     Preferred stock dividends paid                  (146)      (161)      (162)
     Common stock dividends paid                     (115)    (1,214)      (876)
     Effect of internal reorganization             (1,049)      --       (1,846)
     Sales of common stock and stock options
       exercised                                       46        567      6,273
     Proceeds from public offering of common
       stock                                       13,532       --         --
     Repurchase of common stock                      --         (225)      (185)
                                                 --------    -------    -------
               Net cash provided by (used in)
                    financing activities           12,268     (1,033)       (40)
                                                 --------    -------    -------

Net change in cash and cash equivalents            11,246      1,898         40

Cash and cash equivalents, beginning of year        2,019        121         81
                                                 --------    -------    -------
Cash and cash equivalents, end of year           $ 13,265    $ 2,019    $   121
                                                 ========    =======    =======

NOTE 17 - OTHER COMPREHENSIVE INCOME

Other comprehensive income components were as follows.

                                                     1998       1997      1996
                                                     ----       ----      ----
Unrealized holding gains and losses on
  securities available for sale                     $ 1,365     $ 829     $(618)
Less reclassification adjustments for gains
  and losses later recognized in income                 (82)     (204)       13
                                                    -------     -----     -----
Other comprehensive income                          $ 1,283     $ 625     $(605)
                                                    =======     =====     =====

--------------------------------------------------------------------------------
                                      -52-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
NOTE 18.  SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Presented below is a summary of the consolidated quarterly financial data:

<TABLE>
<CAPTION>
                                                  For the three months ended
                                      3/31/98       6/30/98         9/30/98        12/31/98
                                   -----------    -----------    ------------    ------------
<S>                                <C>            <C>            <C>             <C>         
Summary of operations
Interest income - tax equivalent   $    13,786    $    14,339    $     14,330    $     14,290
Net interest income                      7,784          7,885           7,978           8,171
Tax equivalent adjustment (1)             (236)          (236)           (217)           (141)
                                   -----------    -----------    ------------    ------------
Net interest income                      7,548          7,649           7,761           8,030
Provision for credit losses               (524)          (540)           (320)           (322)
Income before income taxes               2,583          2,343           2,675           2,765
Net income                               1,703          1,477           1,677           1,952
Basic earnings per share                  0.14           0.17            0.16            0.17
Diluted earning per share                 0.13           0.16            0.14            0.16
Dividends per common share (2)              --           0.01              --              --

Average common shares                9,988,427      9,998,012      10,410,370      11,375,600
outstanding

</TABLE>

<TABLE>
<CAPTION>
                                          For the three months ended
                                     3/31/97        6/30/97        9/30/97        12/31/97
                                   -----------    -----------    -----------    -----------
<S>                                <C>            <C>            <C>            <C>        
Summary of operations
Interest income - tax equivalent   $    12,042    $    13,919    $    13,243    $    13,329
 Net interest income                     6,900          7,309          7,452          7,580
Tax equivalent adjustment (1)
                                          (151)          (152)          (136)          (167)
                                   -----------    -----------    -----------    -----------
 Net interest income                     6,749          7,157          7,316          7,413
Provision for credit losses
                                          (360)          (360)          (376)        (1,839)
Income before income taxes               2,446          2,502          3,078          2,008
Net income                               1,588          1,798          1,882          1,360

Basic earnings per share                  0.16           0.18           0.19           0.13
Diluted earnings per share                0.15           0.16           0.17           0.13
Dividends per common share (2)            --             0.03           --             0.09

Average common shares                9,829,470      9,829,962      9,863,988      9,961,524
outstanding
</TABLE>

(1)   Tax equivalent  basis was calculated using a 38% tax rate for 1998 and 34%
      for 1997.
(2)   Dividends  declared on common  shares  divided by net income  available to
      common shareholders.

Note:  Certain  amounts  above  which  have been  presented  in prior  financial
information  have  been  reclassified,  causing  minor  differences  from  prior
presentations.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

None

--------------------------------------------------------------------------------
                                      -53-

                                  (Continued)
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (Dollar amounts in thousands, except share and per date)
--------------------------------------------------------------------------------
                                                    
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information  required by this item with respect to directors of the
Company is incorporated  herein by reference to the section entitled Election of
Directors  in the  Company's  definitive  proxy  statement  for its 1999  Annual
meeting of Shareholders (the 1999 Proxy Statement).  The information required by
this item with respect to executive  officers of the Company is set forth herein
below.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

Officer              Age   Position With Company

James L. Clayton     65    Chairman of the Board of Directors since 1996 and
                           Chairman of the Board of Directors of BankFirst
                           since 1992

Fred R. Lawson       62    Director, President and Chief Executive Officer since
                           1996; Director, President and Chief Executive Officer
                           of BankFirst since 1993.

L. A. Walker, Jr.    63    Director, Executive Vice President since 1998;
                           Chairman Of the Board of Directors and Chief
                           Executive Officer of The First National Bank and
                           Trust Company since 1980.

R. Stephen Hagood    48    Executive Vice President of BankFirst since 1993.

C. David Allen       48    Chief Financial Officer and Secretary since 1998;
                           Senior Vice President and Chief Financial Officer of
                           BankFirst since 1993.

The ages listed for the Company's executive officers are as of March 15, 1999.

ITEM 11. EXECUTIVE COMPENSATION

         The  information  required  by this  item  is  incorporated  herein  by
reference to the section entitled  Executive  Compensation in the Company's 1999
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required  by this  item  is  incorporated  herein  by
reference  to the section  entitled   Security  Ownership of  Management  in the
Company's 1999 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section   entitled    Interest  of   Management  in  Certain
Transactions in the Company's 1999 Proxy Statement.


                                      -54-
<PAGE>

                                     PART IV

    ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   The following documents are files as a part of this Report:

      1.    Financial  Statements:  The  Consolidated  Financial  Statements  of
            BankFirst  Corporation and Reports of Independent  Accountants  have
            been  included  as Part II,  ITEM 8 of this  filing  and are  hereby
            incorporated by reference. These financial statements consist of the
            following:

                                                                         Page(s)

Report of Independent Accountants                                        27-29

Consolidated Balance Sheets as of December 31, 1998 and 1997             30

Consolidated Statements of Income for the years ended December 31, 
  1998, 1997, and 1996                                                   31

Consolidated Statements of Changes in Stockholders' Equity for the
  years ended December 31, 1998, 1997, and 1996                          32,33

Consolidated Statements of Cash Flows for the years ended December 31,
  1998, 1997, and 1996                                                   34

Notes to Consolidated Financial Statements                               35-53

      2.    Financial  Statement  Schedules  and  Exhibits not listed above have
            been omitted because they are not applicable or are not required, or
            the information  required to be set forth therein is included in the
            Consolidated Financial Statements or Notes thereto, included in Part
            II, ITEM 8, and are hereby incorporated by reference.

(b)   No  Reports  on Form 8-K have been  filed by the  Company  during the last
      quarter of 1998.

(c)   Exhibits:  The list of exhibits in the Index To Exhibits appearing on page
      57 is incorporated herein by reference.


                                      -55-
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                              BANKFIRST CORPORATION
                                              (Registrant)

                                              BY:/s/ FRED R. LAWSON
                                                 ---------------------------
                                                     Fred R. Lawson
                                                     President and
                                                     Chief Executive Officer


Pursuant to the  requirements  of the  Securities  Exchange of 1934, as amended,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant in the capacities and on the dates indicated.

Date                 Signature                                  Capacity


March 24, 1999       /s/ James L. Clayton         Chairman of The
                     --------------------------   Board of
                         James L. Clayton         Directors

March 24, 1999       /s/ Fred R. Lawson           Director and
                     --------------------------   President &
                         Fred R. Lawson           CEO
                                                  (Principal Executive Officer)

March 24, 1999       /s/ C. David Allen           Vice President and
                     --------------------------   Chief Financial Officer
                         C. David Allen           (Principal Financial Officer)

March 24, 1999       /s/ Scot M. Braun            Corporate Controller
                     --------------------------   (Principal Accounting Officer)
                         Scot M. Braun            

March 24, 1999       /s/ C. Scott Mayfield, Jr.   Director
                     --------------------------
                         C. Scott Mayfield, Jr.

March 24, 1999       /s/ C. Warren Neel           Director
                     --------------------------
                         C. Warren Neel

March 24, 1999       /s/ Charles Earl Ogle, Jr.   Director
                     --------------------------
                         Charles Earl Ogle, Jr.

March 24, 1999       /s/ W. David Sullins, Jr.    Director
                     --------------------------
                         W. David Sullins, Jr.

March 24, 1999       /s/ L. A. Walker, Jr.        Director &
                     --------------------------   Executive Vice
                         L. A. Walker, Jr.        President of
                                                  BankFirst Corporation

March 24, 1999       /s/ Geoffrey A. Wolpert      Director
                     --------------------------
                         Geoffrey A. Wolpert


                                      -56-

<PAGE>

                               INDEX TO EXHIBITS

Exhibit
  No.        Description
-------      -----------
3.1          Amended and Restated Charter of BankFirst Corporation, as amended.

3.2*         Bylaws of BankFirst Corporation.

4*           Form of Common Stock Certificate of BankFirst Corporation.

10.1*        BankFirst Corporation Incentive Stock Option Plan.

10.2*        Agreement and Plan of Merger between Smoky Mountain Bancorp, Inc.
             and First Franklin Bancshares, Inc. dated March 19, 1998.

10.3*        BankFirst v. Electronic Communication Corporation, et.al., Partial
             Settlement Agreement, dated March 18, 1998, between BankFirst
             Corporation and Paymentech Merchant Services, Inc.

10.4*        Lease Agreement between BankFirst and Clayton Homes, Inc., dated
             July 1, 1997.

10.5*        First National Bank and Trust Company Pension Plan.

10.6*        Stock Purchase Agreement, dated January 13, 1998, by and between
             BankFirst, Curtis Mortgage Company, William H. Curtis and Gordon C.
             Curtis.

10.7         BankFirst 401(k) Profit Sharing Plan.

10.8         First National Bank & Trust Profit Sharing Plan

11           Statement re computation of per share earnings is incorporated by
             reference as ITEM 8, Financial Statement footnote #13

21           List of Subsidiaries is files as Exhibit 21 of this Form 10-K

23.1         Consent of Crowe, Chizek and Company LLP - see page 27 of this 
             Form 10-K.

23.2         Consent of Coopers & Lybrand LLP - see page 28 of this  Form 10-K.

23.3         Consent of G.R. Rush & Company P.C. - see page 29 of this 
             Form 10-K.

27           Financial Data Schedule is filed as Exhibit 27 of this Form 10-K.

--------------------------------------------------------------------------------

* Filed previously with S-4 Registration Statement (File No. 333-52051) dated
  May 7, 1998.


                                      -57-