SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-14417
BANKFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 58-1790903
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Market Street
Knoxville, Tennessee 37902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 423.595.1100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of each of the registrant's classes of common
stock as of October 31, 1998:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 11,375,600
<PAGE>
BANKFIRST CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements ......................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .......................................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 16
Item 2. Changes in Securities ........................................ 16
Item 3. Defaults Upon Senior Securities .............................. 16
Item 4. Submission of Matters to a Vote of Security Holders .......... 16
Item 5. Other information ............................................ 16
Item 6. Exhibits and Reports on Form 8-K ............................. 16
SIGNATURES
Note: The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by generally accepted accounting principles.
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Sept. 30, Dec. 31,
1998 1997
-------- --------
ASSETS
Cash and due from banks $ 33,642 $ 24,290
Federal Funds Sold 3,900 7,000
Securities available for sale, at fair value 130,706 127,736
Mortgage loans held for sale 18,461 395
Loans, net 489,078 458,474
Premises and equipment, net 24,755 21,466
Mortgage servicing rights 7,379 0
Federal Home Loan Bank Stock, at cost 3,134 3,046
Intangible assets 2,099 289
Accrued interest receivable and other asset 9,753 8,021
-------- --------
Total assets $722,907 $650,717
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $112,065 $ 92,749
Interest-bearing deposits 491,771 457,020
-------- --------
Total deposits 603,836 549,769
Securities sold under agreements to repurchase 25,869 16,302
Federal funds purchased and other borrowings 594 1,959
Advances from the Federal Home Loan Bank 2,296 12,121
Accrued interest payable and other liabilities 9,162 9,134
-------- --------
Total liabilities 641,757 589,285
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares
authorized, 11,375,600 and 9,995,519 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 34,215 23,777
Retained earnings 15,252 10,612
Unrealized gain on securities available for sale 2,339 961
-------- --------
Total stockholders' equity 81,150 61,432
-------- --------
Total liabilities and stockholders' equity $722,907 $650,717
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
3
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Sept.30 Nine months ended Sept.30
(Unaudited) (Unaudited)
1998 1997 1998 1997
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 12,506 $ 10,932 $ 36,896 $ 31,550
Taxable securities 1,217 1,490 4,186 5,191
Nontaxable securities 471 294 1,388 883
Other 393 213 1,057 756
-------- -------- -------- --------
14,587 12,929 43,527 38,380
Interest expense
Deposits 5,879 5,395 16,985 15,813
Short-term borrowings 222 203 1,094 533
Long-term borrowings 255 220 733 584
-------- -------- -------- --------
6,356 5,818 18,812 16,930
-------- -------- -------- --------
Net interest income 8,231 7,111 24,715 21,450
Provision for credit losses 323 376 1,390 1,096
-------- -------- -------- --------
Net interest income after provision
for credit losses 7,908 6,735 23,325 20,354
Noninterest income
Service charges and fees 1,149 1,027 3,255 3,087
Loan servicing income, net of 682 45 1,736 185
amortization
Net gain (loss) on loan sales (182) 45 (597) 140
Trust department income 321 177 668 477
Other 158 243 663 50
-------- -------- -------- --------
2,128 1,537 5,725 3,939
Noninterest expenses
Salaries and employee benefits 3,879 2,718 11,024 8,382
Occupancy expense 575 393 1,686 1,066
Equipment expense 662 565 1,952 1,503
Office expense 462 559 1,366 1,142
Data processing fee 321 367 1,073 980
FDIC assessments 7 12 46 46
Merger expense 61 -- 337 --
Other 1,309 580 3,331 2,932
-------- -------- -------- --------
7,276 5,194 20,815 16,051
-------- -------- -------- --------
Income before income taxes 2,760 3,078 8,235 8,242
Provision for income taxes 1,081 1,196 3,370 2,974
-------- -------- -------- --------
Net Income $ 1,679 $ 1,882 $ 4,865 $ 5,268
======== ======== ======== ========
Other comprehensive income,
net of tax
Change in unrealized gain 1,158 407 1,378 370
on securities
Reclassification of realized
amount (44) (83) (47) (134)
-------- -------- -------- --------
Comprehensive income $ 2,793 $ 2,206 $ 6,198 $ 5,504
======== ======== ======== ========
Earnings per share:
Basic $ 0.16 $ 0.19 $ 0.47 $ 0.52
Diluted $ 0.14 $ 0.17 $ 0.43 $ 0.49
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
4
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months ended September 30, 1998
(Unaudited)
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized Total
Additional Gains Stock-
Common Preferred Paid-in Retained (Losses) holders'
Stock Stock Capital Earnings on Securities Equity
-------- --------- -------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $24,553 $1,093 $22,674 $10,612 $961 $59,893
Restatement for reclass-
ification of ESOP shares 436 -- 1,103 -- -- 1,539
------ ----- ------- ------ ----- ------
Balance January 1, 1998
as restated 24,989 1,093 23,777 10,612 961 61,432
Sales 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 -- -- -- (113) -- (113)
Cash dividend on common stock -- -- -- (114) -- (114)
Net income -- -- -- 4,865 -- 4,865
Change in unrealized gains -- -- -- -- 1,378 1,378
Proceeds from public offering
of 1,270,000 common shares, net
of related expenses 3,175 -- 10,481 -- -- 13,656
-------- -------- ------- -------- --------- --------
Balance, Sept. 30, 1998 $28,439 $ 905 $34,215 $15,250 $2,339 $81,150
======== ======== ======= ======== ========= ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
5
<PAGE>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended September 30,
(Unaudited)
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,865 $ 5,268
Adjustments to reconcile net income to net cash from
operating activities
Provision for credit losses 1,390 1,096
Depreciation 1,749 1,271
Security amortization and accretion, net 124 179
Gain on sale of mortgage loans (539) (95)
Gain on sale of securities 49 132
Proceeds from sales of mortgage loans held for sale 135,870 17,665
Purchases of mortgage loans held for sale (30,382) --
Originations of mortgage loans held for sale (84,801) (16,159)
Changes in assets and liabilities
Accrued interest receivable and other assets (1,782) (552)
Accrued interest payable and other liabilities 31 1,749
-------- --------
Net cash used in operating activities 26,574 10,554
Cash flows from investing activities
Net cash paid for mortgage company (7,449) --
Purchase of securities (22,658) (35,015)
Proceeds from maturities of securities 10,098 15,686
Proceeds from sale of securities 10,024 22,058
Net increase in loans (55,465) (47,105)
Purchase of FHLB stock (88) (365)
Premises and equipment expenditures, net (1,868) (1,224)
-------- --------
Net cash used in investing activities (67,406) (45,965)
Cash flows from financing activities
Net change in deposits 40,746 14,141
Net change in securities sold
under agreements to repurchase 9,567 4,070
Net change in federal funds purchased 262 0
Proceeds from public offering of common stock 13,392 0
Net change in other borrowed funds (1,627) (164)
Repayments from the FHLB (7,704) --
Advances from the FHLB 2,296 12,296
Repayment of notes payable (9,667) 91
Preferred stock dividends paid (113) (123)
Common stock dividends paid (114) (344)
Stock options exercised 30 --
Repurchase of common stock 16 (178)
Sale of common stock 0 25
-------- --------
Net cash provided by financing activities 47,084 29,814
Net change in cash and cash equivalents 6,252 (5,597)
Cash and cash equivalents, beginning of period 31,290 25,132
-------- --------
Cash and cash equivalents, end of period $ 37,542 $ 19,535
======== ========
Supplemental disclosures:
Interest paid $ 20,268 $ 15,814
Income taxes paid 2,763 2,177
Loans converted to other real estate 1,096 223
Preferred stock converted to common stock 188 --
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
6
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation (the "Company") and its wholly-owned
subsidiaries, BankFirst and First National Bank and Trust Company (the "Banks"),
and BankFirst's wholly-owned subsidiary, Curtis Mortgage Company. These
financial statements have been prepared to give retroactive effect to the merger
with First Franklin Bancshares, Inc. on July 2, 1998, which was accounted for as
a pooling of interests, and accordingly, this document presents the combined
financial information as if the entities were merged for all periods presented.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month periods
ended September 30, 1998 and 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998, or for the year ended
December 31, 1997.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated aggregate
market value. Mortgage loans are sold into the secondary market at market
prices, which includes consideration for normal servicing fees. The total cost
of mortgage loans purchased or originated with the intent to sell is allocated
between the loan servicing right and the mortgage loan without servicing, based
on their relative fair values. The capitalized cost of loan servicing rights is
amortized in proportion to, and over the period of, estimated net future
servicing revenue. Mortgage servicing rights are periodically evaluated for
impairment by stratifying them based on predominant risk characteristics of the
underlying serviced loans, such as loan type, term and note rate. Impairment
represents the excess of cost of an individual mortgage servicing rights stratum
over its fair value, and is recognized through a valuation allowance.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings.
Comprehensive Income: Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income", requires reporting of comprehensive income,
defined as changes in equity other than those resulting from investments by or
distributions to stockholders. Net income, plus or minus "other comprehensive
income" results in comprehensive income. The only item of other comprehensive
income applicable to the Company is the change in unrealized gain or loss on
securities available for sale. Comprehensive income is reported on the statement
of income. The period ended September 30, 1997 was restated to meet the current
reporting format.
7
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in
thousands, except share and per share data)
- --------------------------------------------------------------------------------
Purchase Transaction: On January 16, 1998, the Bank acquired Curtis Mortgage
Company, a mortgage loan origination and servicing company, for $7,500 in a
business combination accounted for as a purchase. The results of operations of
Curtis Mortgage Company is included in the accompanying financial statements
since the date of acquisition. The excess of the purchase price over the fair
value of net assets acquired resulted in $1,900 of goodwill, which is being
amortized on a straight-line basis over 15 years. Upon the transaction, $6,065
of the purchase price was allocated to mortgage servicing rights, which are
being amortized on a level-yield basis over the life of the underlying loans.
Assets and liabilities acquired were:
Cash $ 51
Loans held for sale 6,267
Mortgage servicing rights 7,000
Furniture and equipment 165
Accrued interest receivable and other assets 375
Notes payable (5,798)
Accrued and other liabilities (2,460)
Earnings Per Share: Basic earnings per share is based on weighted average common
shares outstanding. Diluted earnings per share further assumes issuance of any
dilutive potential common shares. Earnings per share are restated for all
subsequent stock dividends and splits.
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below:
Three Months Ended Nine months ended
September 30, September 30,
(Unaudited) (Unaudited)
1998 1997 1998 1997
------- ------- -------- --------
Earnings Per Share
Net income $ 1,679 $ 1,882 $ 4,865 $ 5,268
Less: Dividends declared
on preferred stock (36) (41) (113) (123)
------ ------- -------- --------
Net income available to common
stockholders $ 1,643 $ 1,841 $ 4,752 $ 5,145
======== ======= ======== =======
Weighted average common shares
outstanding 10,410,370 9,863,988 10,133,770 9,843,554
========== ======== ========= ==========
Earnings per share $ 0.16 $ 0.19 $ .47 $ .52
========= ======== ========= ==========
8
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in
thousands, except share and per share data)
- --------------------------------------------------------------------------------
Earnings Per Share (Continued):
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
(Unaudited) (Unaudited)
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings Per Share Assuming
Dilution
Net income available to common
stockholders $ 1,643 $ 1,841 $ 4,752 $ 5,145
Add back dividends upon assumed
Conversion of preferred stock 36 41 113 123
---------- ---------- ---------- ----------
Net income available to common
stockholders assuming conversion $ 1,679 $ 1,882 $ 4,865 $ 5,268
======= ======= ======== ========
Weighted average common shares
outstanding 10,410,370 9,863,988 10,133,770 9,843,554
Add: Dilutive effects of assumed
Conversions and exercises:
Convertible preferred stock 646,218 678,922 661,304 688,657
Stock options 474,735 320,259 474,735 320,259
---------- ---------- ---------- ----------
Weighted average common and
dilutive potential common
shares outstanding 11,531,322 10,863,168 11,269,808 10,852,470
---------- ---------- ---------- ----------
Earnings per share
assuming dilution $ 0.14 $ 0.17 $ 0.43 $ 0.49
========== ========== ========== ==========
</TABLE>
9
<PAGE>
Part I - Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation ("Company"). The consolidated financial information
discussed herein primarily reflects the activities of the Company's wholly-owned
community bank subsidiaries, BankFirst and The First National Bank and Trust
Company ("FNB") or collectively the "Banks". The discussion identifies trends
and material changes that occurred during the reported periods and should be
read in conjunction with the consolidated financial statements and accompanying
notes appearing elsewhere herein. The periods included within this document are
the nine months ending September 30, 1998 and 1997.
All statements other than statements of historical facts included in this
discussion regarding capital expenditures, the Company's financial position,
business strategies and other plans and objectives for future operations, are
forward-looking statements. The Company cautions readers that all
forward-looking statements are necessarily speculative and not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made, and to advise readers that various risks and uncertainties, including
without limitation, regional and national economic conditions, changes in levels
of market interest rates, credit risks of lending activities and competitive and
regulatory factors, could affect financial performance and could cause actual
results for future periods to differ materially from those anticipated or
projected.
Overview
The Company is a community banking organization, headquartered in Knoxville,
Tennessee, which generates loans and deposits through its 30 offices and 46 ATMs
throughout East Tennessee. The Company's operations principally involve
commercial and residential real estate lending, commercial business lending,
consumer lending, construction lending and other financial services, including
trust operations, credit card services and brokerage services. The Company
includes two wholly-owned bank subsidiaries: BankFirst, headquartered in
Knoxville, and First National Bank and Trust Company ("FNB"), headquartered in
Athens. Curtis Mortgage Company, Inc. ("Curtis Mortgage") a wholly-owned
subsidiary of BankFirst, was acquired in January 1998 and is accounted for as a
purchase transaction. FNB was a merger consummated on July 2, 1998 and is
accounted for as a pooling of interests, and accordingly, this document presents
the combined financial information as if the entities were merged for all
periods presented.
General
Total assets grew from $650.7 million at year-end 1997 to $722.9 million at
September 30, 1998, a $72.2 million increase. The primary changes in assets
included an $18.1 million increase in loans held for sale, a $30.6 million
increase in net loans, $7.4 million of mortgage servicing assets, and other
intangible assets which were each attributable to the purchase of the mortgage
company in January, 1998. For the period from January 16, 1998 purchase date to
September 30, 1998, Curtis Mortgage purchased and originated $115.2 million of
loans held for sale. Total intangible assets at September 30, 1998 included
goodwill from the purchase of Curtis Mortgage and approximately $305,000 of
intangibles from previous transactions.
10
<PAGE>
Total liabilities grew from $589.3 million at year-end 1997 to $641.7 million at
September 30, 1998, an increase of $52.4 million. Of this growth, deposits
accounted for $54.1 million and repurchase agreements accounted for $9.6
million. Federal funds purchased were reduced from $2.0 million to $0.6 million,
and advances from the Federal Home Loan Bank declined from $12.1 million to $2.3
million.
From year-end 1997 to September 30, 1998, equity grew $19.7 million primarily
from net income of $4.8 million and proceeds from a public offering of common
stock, which provided $14.2 million in additional capital. The leverage capital
ratio increased from 9.7% at year-end 1997 to 10.4% at September 30, 1998,
mainly as a result of the additional capital from the public offering. This
ratio maintains the Company in the "well capitalized" category. The individual
bank subsidiaries' leverage ratios at year-end 1997 were 8.3% for BankFirst and
11.2% for FNB.
Management expects growth to continue through expansion of retail locations,
through expansion of products and services, including mortgage servicing
opportunities by Curtis Mortgage and trust services through FNB, and through
possible future mergers or acquisitions. At the present time, the Company has no
present agreements, arrangements or commitments with respect to any other
acquisition.
Results of Operations
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
Net interest income increased $3.3 million, or 15.3%, to $24.7 million for the
nine months ended September 30, 1998, from $21.5 million for the nine months
ended September 30, 1997. The increase in net interest income was due primarily
to an increase in average earning assets and an increase in the percentage of
average earning assets invested in loans, the Company's highest yielding assets.
Average earning assets increased $48.5 million, or 8.1%, primarily as a result
of growth in loans.
The Company's net interest spread and net interest margin were 4.49% and 5.28%,
respectively, for the nine months ended September 30, 1998, as compared to 4.09%
and 4.75% for the nine months ended September 30, 1997. The increase in the net
interest spread and the net interest margin were primarily the result of an
increase in asset yields due to loan growth.
The provision for credit losses was $1.4 million for the nine months ended
September 30, 1998, compared to $1.1 million for the nine months ended September
30, 1997. The increase in the provision was attributable to general loan growth.
The Company experienced net charge-offs of $729,000 for the nine months ended
September 30, 1998 resulting in a ratio of net charge-offs to average loans of
0.19%.
Noninterest income increased $1.8 million, or 46.0%, to $5.7 million for the
nine months ended September 30, 1998 from $3.9 million for the nine months ended
September 30, 1997, primarily attributable to operations of the January 16, 1998
purchase of Curtis Mortgage.
11
<PAGE>
Loan servicing income increased to $1.7 million for the nine months ended
September 30, 1998, as compared to $185,000 for the nine months ended September
30, 1997. Net losses on the sale of mortgage loans increased to $597,000
compared to net gains of $140,000 for the same periods. The mortgage company
sells loans while retaining the servicing rights, which has the overall effect
of producing less immediate gains at time of sale, while providing long-term
income streams from the servicing rights of those loans sold on the secondary
market.
Noninterest expense increased $4.8 million, or 29.7%, to $20.8 million for the
nine months ended September 30, 1998, from $16.0 million for the nine months
ended September 30, 1997. The primary component of noninterest expense is
salaries and benefits, which increased $2.6 million, or 31.5%, to $11.0 million
for the nine months ended September 30, 1998, from $8.4 million for the nine
months ended September 30, 1997. Salaries and benefits as well as other
noninterest expense categories increased primarily due to additional employees
associated with Curtis Mortgage and the opening of three additional branches.
Merger expenses were $337,000 as of September 30, 1998. Other increases in
noninterest expense were due to a major computer system conversion in the second
quarter and Year 2000 costs. The Company's efficiency ratio for the nine months
ended September 30, 1998 was 73.24%, compared to 66.03% for the nine months
ended September 30, 1997.
Net income decreased $403,000, or 7.7%, to $4.9 million for the nine months
ended September 30, 1998 from $5.3 million for the nine months ended September
30, 1997. The decrease in net income was primarily due to increases in
noninterest expense associated with increases in salaries and benefits resulting
from both internal and external growth, merger costs, costs associated with the
integration of Curtis Mortgage, the opening of three branches, a computer system
conversion cost, and Year 2000 costs. This was partially offset by increases in
net interest income and noninterest income.
Liquidity and Capital Adequacy
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets and long and short term
borrowings, based upon management's consideration of expected loan demand,
expected deposit flows and securities sold under repurchase agreements. The
Company believes it has the ability to raise deposits quickly within its market
area by slightly raising interest rates, but has typically been able to achieve
deposit growth without paying above market interest rates. The current strategy
calls for the subsidiary banks to be no higher than second highest in their
pricing as compared to their primary competitors. Deposit growth has funded most
of the significant asset growth in the past several years, but has decreased
modestly as a percent of total funding.
The Company actively solicits customer cash management relationships which often
includes a securities repurchase agreement feature. Under these agreements,
commercial customers are able to generate earnings on otherwise idle funds on
deposits with the subsidiary banks. These accounts are considered volatile under
regulatory requirements, although the Company has found them to be a steady
source of funding. The Company has been able to increase customer relationships
because of its strong business lending program. While more costly than deposit
funding, these deposit-related accounts are typically the lowest cost borrowed
funds available to the Company.
12
<PAGE>
The Company maintains significant lines of credit with other financial
institutions, totaling more than $40 million under agreements with six
commercial banks. The subsidiary banks also have the capacity to borrow from the
FHLB without purchasing additional FHLB stock.
The primary source of capital for the Company is retained earnings. The Company
paid cash dividends of $227,000 for the first nine months of 1998. The Company
retained $4.6 million of earnings for the first nine months of 1998.
The Company and its bank subsidiaries are subject to regulatory capital
requirements administered by federal and state banking agencies. Capital
adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. The prompt corrective
action regulations provide five classifications, including well capitalized,
adequately capitalized, under capitalized, significantly under capitalized, and
critically under capitalized, although these terms are not used to represent
overall financial condition. If under capitalized, capital distributions are
limited, as is asset growth and expansion, and plans for capital restoration are
required.
Under guidelines issued by banking regulators, the Company and its bank
subsidiaries are required to maintain a minimum Tier 1 risk-based capital ratio
of 4% and a minimum total risk-based ratio of 8%. Risk-based capital ratios
weight the relative risk factors of all assets and consider the risk associated
with off-balance sheet items. The Company's Tier 1 risk-based and total
risk-based ratios were 10.44% and 15.17% respectively, as of September 30, 1998.
Both bank subsidiaries also individually met the definition of "well
capitalized" as of September 30, 1998.
Market Risk
The Company uses an earnings simulation model (see below) 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.
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.
13
<PAGE>
Decrease in Rates Increase in Rates
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
Projected Interest Income
Loans 45,603 47,699 49,651 51,692 54,109
Investments 7,541 7,611 7,698 7,755 7,859
Federal Funds Sold 261 309 322 388 403
Total Interest Income 53,405 55,619 57,671 59,835 62,371
Projected Interest Expense
Deposits 21,330 22,437 23,691 24,171 26,648
FHLB Term Advances - - - - -
Fed Funds Purchased 1,081 1,329 1,577 1,869 2,114
& Other Borrowings
Total Interest Expense 22,411 23,766 25,268 26,040 28,462
Net Interest Income 30,994 31,853 32,403 33,795 33,909
Change from Level Rates (1,409) (550) -- 1,392 1,506
% Change From Level Rates (4.35%) (1.70%) -- 4.30% 4.65%
Year 2000
The Company has implemented plans to address Year 2000 compliance. The issue
arises from the fact that many existing computer programs use only a two digit
field to identify the year. These programs were designed without considering the
impact once the calendar year rolls over to "00". If not corrected, computer
applications could fail or create inaccurate results by or at the Year 2000. The
Company must not only evaluate and test its own Year 2000 readiness, it must
also coordinate with other entities with which it routinely interacts such as
suppliers, creditors, borrowers, customers, and other financial service
organizations. Regulations require the Company and the affiliates to accomplish
specific Year 2000 actions by specific dates.
The Company has initiated an implementation plan providing for Year 2000
readiness by the end of 1998. Management believes the plan is on target with the
goals established by its regulators. The affiliates have completed the awareness
and assessment phases and have substantially completed the remediation phase of
the plan. BankFirst's data processing service bureau implemented new software,
which has been Year 2000 certified, and BankFirst completed its conversion to
this new software in April 1998. Conversion to the new host system necessitated
an upgrade of BankFirst's personal computer and their operating systems, which
have been tested for Year 2000 compliance. Prior to the merger, FNB implemented
its own Year 2000 Preparedness Plan. The Company has substantially completed the
testing phase of its implementation plan, which is scheduled to be completed by
year-end 1998. A contingency plan for Year 2000 has been developed to address
mission critical systems. This plan consists of utilizing an off-site data
processing system with a third-party data processor. This off-site system has
been Year 200 certified and has been tested by the Company with operating
systems using post-January, 2000 dates. Management believes that the Company and
the affiliates are currently in compliance with each applicable directive issued
by the Bank Regulation Authorities.
14
<PAGE>
The Company has determined that the Year 2000 issue may be critical to its
operations; however, management does not believe customer readiness is or will
be material to its overall performance. Management believes that the total costs
of becoming Year 2000 compliant will not be material. Through 1997, expenditures
for Year 2000 were immaterial, and Year 2000 related expenditures for 1998 are
projected to be $295,700.
New Accounting and Reporting Requirements
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 131 is effective for public companies' interim and
year-end financial statements for reporting period following the first required
full fiscal year disclosure. This Statement established new guidance for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable operating segments in interim financial reports
issued to shareholders. SFAS No. 131 supersedes the industry approach to segment
disclosures previously required by SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", replacing it with a method of segment
reporting which is based on the structure of an enterprise's internal
organization reporting. The Statement also established standard for related
disclosures about products and services, geographic areas and major customers.
The Company plans to include segment reporting in the year-end 1999 financial
statements.
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities". SFAS No. 133 requires companies to record derivative on the balance
sheet as assets or liabilities at fair value. Depending on the use of the
derivative and whether it qualifies for hedge accounting, gains or losses from
changes in the value of those derivative would either be recorded as a component
of net income or as a change in stockholders' equity. BankFirst is required to
adopt the new standard January 1, 2000. Management has not yet determined the
impact of this standard.
In October 1998, the Financial Accounting Standards Board issued SFAS No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". The standard is
effective for the first fiscal quarter beginning after December 15, 1998. This
statement amends SFAS No. 65 on mortgage banking, which required that after
securitization of mortgage loans held for sale, all retained mortgage backed
securities be classified as trading. This new standard allows after
securitization of mortgage loans held for sale, any retained mortgage backed
securities to be classified as described under SFAS No. 115. Current mortgage
banking activities for BankFirst do not include the securitization of any
mortgage loans held for sale.
FDIC Improvement Act (FDICIA) of 1991. The FDICIA stipulates many
responsibilities of financial institutions, its boards of directors and
accountants. Many of the provisions have already been effective for the Company;
however there are certain filing requirements which are only applicable to banks
with assets over $500 million. This threshold is measured on an individual bank
basis, not on consolidated assets. BankFirst, taken alone, has already exceeded
$500 million as of September, 1998. As a result, BankFirst will be required to
comply with the FDICIA reporting requirements during 1999. FNB had total
year-end 1997 assets of $182 million, and will not be subject of the FDICIA
reporting requirements for the foreseeable future.
15
<PAGE>
Part I - Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information is disclosed in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a vote None
of Security Holders
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
The Company filed no reports on Form 8-K for the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFIRST CORPORATION
by
Date: November 13, 1998 /s/ C. David Allen
-----------------------------
C. David Allen
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
These schedules contain summary financial information extracted from the
consolidated balance sheets, the consolidated statements of income, and Company
records, and are qualified in their entirety by reference to such financial
statements. All dollar amounts are in thousands, except per share data.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,642
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,706
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 489,078
<ALLOWANCE> 0
<TOTAL-ASSETS> 722,907
<DEPOSITS> 603,836
<SHORT-TERM> 26,463
<LIABILITIES-OTHER> 9,162
<LONG-TERM> 2,296
0
905
<COMMON> 28,439
<OTHER-SE> 51,806
<TOTAL-LIABILITIES-AND-EQUITY> 722,907
<INTEREST-LOAN> 36,896
<INTEREST-INVEST> 5,574
<INTEREST-OTHER> 1,057
<INTEREST-TOTAL> 43,527
<INTEREST-DEPOSIT> 16,985
<INTEREST-EXPENSE> 18,812
<INTEREST-INCOME-NET> 24,715
<LOAN-LOSSES> 1,390
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,668
<INCOME-PRETAX> 8,235
<INCOME-PRE-EXTRAORDINARY> 8,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,865
<EPS-PRIMARY> .47
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.49
<LOANS-NON> 1,963
<LOANS-PAST> 2,714
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 721
<ALLOWANCE-OPEN> 5,002
<CHARGE-OFFS> 764
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 6,795
<ALLOWANCE-DOMESTIC> 6,210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 585
</TABLE>
