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, 1999
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, 1999:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 11,314,170
<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 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
FORWARD-LOOKING STATEMENTS
================================================================================
The information disclosed in this Quarterly Report on Form 10-Q of BankFirst
Corporation includes various forward-looking statements, as covered under the
Private Securities Litigation Reform Act of 1995, with respect to credit quality
(including delinquency trends and the allowance for credit losses), the ability
of BankFirst Corporation (the "Company") and its vendors to adequately address
Year 2000 issues, corporate objectives, and other financial and business
matters. The words "anticipates", "projects", "intends", "estimates", "expects",
"believes", "plans", "may", "will", "should", "could", and other similar
expressions are intended to identify such forward-looking statements. The
Company cautions that these forward-looking statements are necessarily
speculative and speak only as of the date made, and are subject to numerous
assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from such forward-looking statements.
In addition to the factors disclosed by the Company elsewhere in this document,
the following factors, among others, could cause the Company's actual results to
differ materially and adversely from such forward-looking statements: pricing
pressures on loan and deposit products; competition; changes in economic
conditions nationally, regionally and in the Company's markets; the extent and
timing of actions of the Federal Reserve Board; changes in levels of market
interest rates; clients' acceptance of the Company's products and services;
credit risks of lending activities and competitive factors; and the extent and
timing of legislative and regulatory actions and reforms.
The above-listed risk factors are not necessarily exhaustive, particularly as to
possible future events, and new risk factors may emerge from time to time.
Certain occurrences may happen that can cause the Company's actual results to be
materially different than those described in the Company's periodic filings with
the Securities and Exchange Commission ("SEC"). Any statements made by the
Company that are not historical facts should be considered to be forward-looking
statements. The Company does not undertake to update any of its forward-looking
statements made herein.
BankFirst Corporation | 2
<PAGE>
PART I.-FINANCIAL INFORMATION
ITEM 1.- FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
BankFirst Corporation
(Dollar amounts in thousands except share data)
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31
1999 1998
====================================================================================================================================
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ......................................................................... $ 31,846 $ 36,136
Federal Funds Sold .............................................................................. -0- 8,850
Securities available for sale ................................................................... 129,621 127,862
Mortgage loans held for sale .................................................................... 11,593 25,642
Loans, net ...................................................................................... 568,762 501,950
Premises and equipment, net ..................................................................... 26,049 24,927
Mortgage servicing rights ....................................................................... 8,551 7,484
Federal Home Loan Bank Stock, at cost ........................................................... 3,361 3,189
Intangible assets ............................................................................... 1,884 2,002
Accrued interest receivable and other assets .................................................... 11,538 10,259
--------- ---------
Total assets ................................................................................. $ 793,205 $ 748,301
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits .................................................................... $ 116,901 $ 117,823
Interest-bearing deposits ....................................................................... 515,884 500,143
--------- ---------
Total deposits .................................................................................... 632,785 617,966
Securities sold under agreements to repurchase .................................................. 26,781 22,208
Federal funds purchased and other borrowings .................................................... 10,800 4,166
Advances from the Federal Home Loan Bank ........................................................ 29,191 11,884
Accrued interest payable and other liabilities .................................................. 8,091 9,236
--------- ---------
Total liabilities ................................................................................. 707,648 665,460
STOCKHOLDERS' EQUITY
Common stock: $2.50 par value, 30,000,000 and 15,000,000
shares authorized, 11,326,270 and 11,375,600 shares
outstanding, respectively .................................................................... 28,316 28,439
Noncumulative convertible preferred stock: $5 par
value, 1,000,000 shares authorized, 181,050
shares outstanding ........................................................................... 905 905
Additional paid-in capital ...................................................................... 33,771 34,093
Retained earnings ............................................................................... 23,626 17,160
Accumulated other comprehensive income .......................................................... (1,061) 2,244
--------- ---------
Total stockholders' equity ................................................................... 85,557 82,841
--------- ---------
Total liabilities and stockholders' equity ................................................... $ 793,205 $ 748,301
========= =========
====================================================================================================================================
See accompanying notes to the consolidated financial statements.
</TABLE>
BankFirst Corporation | 3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
BankFirst Corporation
(Dollar amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30 SEPT. 30
1999 1998 1999 1998
====================================================================================================================================
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans ........................................................ $ 13,092 $ 12,109 $ 37,486 $ 35,688
Taxable securities ................................................................ 1,510 1,331 4,402 4,185
Nontaxable securities ............................................................. 410 471 1,233 1,388
Other ............................................................................. 116 203 475 506
-------- -------- -------- --------
15,128 14,114 43,596 41,767
Interest expense
Deposits .......................................................................... 5,535 5,894 16,226 16,998
Short-term borrowings ............................................................. 408 307 1,417 1,243
Long-term borrowings .............................................................. 426 151 889 567
-------- -------- -------- --------
6,369 6,352 18,532 18,808
-------- -------- -------- --------
Net interest income ................................................................... 8,759 7,762 25,064 22,959
Provision for credit losses ........................................................... 522 320 1,402 1,384
-------- -------- -------- --------
Net interest income after provision
for credit losses ..................................................................... 8,237 7,442 23,662 21,575
Noninterest income
Service charges and fees .......................................................... 1,186 1,124 3,472 3,103
Net securities gains (losses) .................................................... 30 47 40 58
Net gain (loss) on loan sales ..................................................... 659 801 2,568 1,781
Loan servicing income, net of
amortization .................................................................... (5) 100 148 579
Trust department income ........................................................... 261 321 786 667
Other ............................................................................. 327 165 989 666
-------- -------- -------- --------
2,458 2,558 8,003 6,854
Noninterest expenses
Salaries and employee benefits .................................................... 4,023 3,882 12,100 11,035
Occupancy expense ................................................................. 474 571 1,526 1,928
Equipment expense ................................................................. 579 662 1,945 1,700
Office expense .................................................................... 423 435 1,358 1,128
Data processing ................................................................... 451 321 1,285 941
Advertising ....................................................................... 202 92 544 260
Other ............................................................................. 1,080 1,361 2,974 3,835
-------- -------- -------- --------
7,232 7,324 21,732 20,827
-------- -------- -------- --------
Income before income taxes ............................................................ 3,463 2,676 9,933 7,602
Provision for income taxes ............................................................ 1,169 999 3,368 2,745
-------- -------- -------- --------
Net Income ............................................................................ $ 2,294 $ 1,677 $ 6,565 $ 4,857
======== ======== ======== ========
Earnings per share:
Basic ............................................................................. $ 0.20 $ 0.16 $ 0.57 $ 0.47
Diluted ........................................................................... $ 0.19 $ 0.15 $ 0.53 $ 0.43
-------- -------- -------- --------
====================================================================================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
BankFirst Corporation | 4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BankFirst Corporation
(Dollar amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PREFERRED PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME EQUITY
-------- --------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ENDED SEPT. 30, 1998
Balance, January 1, 1998 $ 24,989 $ 1,093 $ 23,777 $ 10,612 $ 961 $ 61,432
Sale of common stock, 428 shares 1 -- 15 -- -- 16
Conversion of 37,458 shares of
preferred stock into 108,974
shares of common stock 272 (188) (84) -- -- 0
Stock options exercised, 1,107 shares 2 -- 28 -- -- 30
Cash dividend on preferred stock -- -- -- (113) -- (113)
Cash dividend on common stock -- -- -- (114) -- (114)
Proceeds from public offering of
1,270,000 common shares, net of
related expenses 3,175 -- 10,481 -- -- 13,656
Comprehensive income:
Net income -- -- -- 4,857 -- 4,857
Change in unrealized gains
(losses), net of reclassification -- -- -- -- 1,378 1,378
--------
Total comprehensive income 6,235
-------- -------- -------- -------- -------- --------
Balance, September 30, 1998 $ 28,439 $ 905 $ 34,217 $ 15,242 $ 2,339 $ 81,142
======== ======== ======== ======== ======== ========
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PREFERRED PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME EQUITY
-------- --------- -------- -------- ------------- ------------
PERIOD ENDED SEPT. 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 28,439 $ 905 $ 34,093 $ 17,160 $ 2,244 $ 82,841
Cash dividend on preferred stock -- -- -- (99) -- (99)
Repurchase of common stock,
49,330 shares (123) -- (322) -- -- (445)
Comprehensive income:
Net income -- -- -- 6,565 -- 6,565
Change in unrealized gains
(losses), net of reclassification -- -- -- -- (3,305) (3,305)
--------
Total comprehensive income 3,260
-------- -------- -------- -------- -------- --------
Balance, September 30, 1999 $ 28,316 $ 905 $ 33,771 $ 23,626 $ (1,061) $ 85,557
======== ======== ======== ======== ======== ========
===============================================================================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
BankFirst Corporation | 5
<PAGE>
Condensed Consolidated Statements of Cash Flows
BankFirst Corporation
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income ............................................................................. $ 6,565 $ 4,857
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM
OPERATING ACTIVITIES:
Provision for credit losses .......................................................... 1,402 1,384
Depreciation ......................................................................... 1,701 1,749
Amortization of mortgage servicing rights ............................................ 1,411 829
Amortization and accretion of securities, net ........................................ (79) (705)
Net (gains) losses on securities sales ............................................... (40) (58)
Net (gains) losses on sales of mortgage loans ........................................ (2,568) (1,781)
Proceeds from sales of mortgage loans held for sale .................................. 148,963 97,127
Purchases of mortgage loans held for sale ............................................ (26,222) (30,382)
Originations of mortgage loans held for sale ......................................... (108,692) (84,801)
Changes in assets and liabilities
Accrued interest receivable and other assets ....................................... (1,279) (2,208)
Accrued interest payable and other liabilities ..................................... (1,145) 53
--------- --------
Net cash flows from operating activities .................................................. 20,017 (13,936)
INVESTING ACTIVITIES
Net cash paid for mortgage company ..................................................... - (7,449)
Purchase of securities ................................................................. (27,381) (20,369)
Proceeds from maturities of securities ................................................. 4,155 10,098
Proceeds from sale of securities ....................................................... 18,162 10,024
Net increase in loans .................................................................. (67,590) (30,614)
Purchase of FHLB stock ................................................................. (172) (88)
Premises and equipment expenditures, net ............................................... (3,120) (1,868)
--------- --------
Net cash from investing activities ........................................................ (75,946) (40,266)
FINANCING ACTIVITIES
Net change in deposits ................................................................. 14,819 54,148
Net change in securities sold
under agreements to repurchase ....................................................... 4,573 9,567
Net change in federal funds purchased .................................................. 5,700 262
Increase in other borrowed funds ....................................................... 934 4,878
Repayment of other borrowed funds ...................................................... - (6,505)
Advances from the FHLB ................................................................. 27,307 22,296
Repayments to the FHLB ................................................................. (10,000) (27,704)
Repayment of notes payable ............................................................. - (9,667)
Cash dividends paid on preferred stock ................................................. (99) (113)
Cash dividends paid on common stock .................................................... - (114)
Sales of stock and stock options exercised ............................................. - 13,422
Repurchase of common stock ............................................................. (445) (16)
--------- --------
Net cash from financing activities ........................................................ 42,789 60,454
NET CHANGE IN CASH AND CASH EQUIVALENTS ................................................... (13,140) 6,252
Cash and cash equivalents, beginning of period ............................................ 44,986 31,290
--------- --------
Cash and cash equivalents, end of period .................................................. $ 31,846 $ 37,542
========= ========
Supplemental disclosures:
Interest paid .......................................................................... $ 18,750 $ 20,268
Income taxes paid ...................................................................... 2,515 2,763
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
BankFirst Corporation | 6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BankFirst Corporation
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
BASIS OF PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation and its principal wholly-owned subsidiaries,
BankFirst, The 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.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings. Federal Home Loan Bank ("FHLB") advances consist of
variable rate long-term advances, which exceed one year.
Reclassifications: Certain items in the 1998 financial statements have been
reclassified to conform to the 1999 presentation.
COMPUTATION OF 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 (in thousands, except share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
---------------------------- -----------------------------
BASIC
<S> <C> <C> <C> <C>
Net income .................................................... $ 2,294 $ 1,677 $ 6,565 $ 4,857
Less: Dividends declared on preferred stock .................. (33) (36) (99) (113)
Net income available to common stockholders ................... $ 2,261 $ 1,641 $ 6,466 $ 4,744
============ ============ ============ ============
Average common shares outstanding ............................. 11,359,843 10,410,370 11,370,290 10,133,770
Earnings per share ............................................ $ 0.20 $ 0.16 $ 0.57 $ 0.47
DILUTED
Net income available to common stockholders ................... $ 2,261 $ 1,641 $ 6,466 $ 4,744
Add: dividends upon assumed
conversion of preferred stock ............................... 33 36 99 113
------------ ------------ ------------ ------------
Net income available to common
stockholders assuming conversion ............................ $ 2,294 $ 1,677 $ 6,565 $ 4,857
============ ============ ============ ============
Weighted average common shares outstanding .................... 11,359,843 10,410,370 11,370,290 10,133,770
Weighted average dilutive convertible preferred stock ......... 558,992 646,218 558,992 661,304
Dilutive common stock options at average market price ......... 318,061 474,733 367,411 474,733
------------ ------------ ------------ ------------
Weighted average diluted shares outstanding ................... 12,236,896 11,531,321 12,296,693 11,269,807
============ ============ ============ ============
Earnings per share assuming dilution .......................... $ 0.19 $ 0.15 $ 0.53 $ 0.43
</TABLE>
BankFirst Corporation | 7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
OVERVIEW
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of operations
of BankFirst Corporation. The consolidated financial information discussed
herein primarily reflects the activities of the Company's wholly owned community
bank subsidiaries, BankFirst ("BankFirst") and The First National Bank and Trust
Company ("FNB"). 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 three months and nine
months ending September 30, 1999 and 1998.
BankFirst Corporation, a Tennessee corporation, 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, which has 24 offices in Knox, Sevier, Blount, Loudon and
Jefferson Counties, and through FNB, with six 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.
FINANCIAL
CONDITION
Total assets grew from $748 million at year-end 1998 to $793 million at
September 30, 1999, a $45 million increase. The primary growth in assets was due
to a $68 million increase in loans net of allowance, offset partially by a $14
million reduction in mortgage loans held for sale. This net loan growth was
driven from increases of commercial loans by $45 million and installment loans
by $9 million. For the nine months ended September 30, 1999, the
mortgage-banking subsidiary of BankFirst purchased and originated $135 million
of loans and sold $149 million to the secondary market.
During the nine months ended September 30, 1999, total liabilities grew by $42
million to $708 million, a 6.3% increase. Deposit growth represented nearly $15
million of this increase, almost all of which was interest bearing. Federal Home
Loan Bank ("FHLB") advances accounted for another $17 million and federal funds
purchased were increased by $7 million. The Company used these liabilities to
fund its loan demand, which has grown this year at an annualized rate of 18%.
From year-end 1998 to September 30, 1999, equity increased by a net of $3
million, consisting of net earnings of over $6 million, a preferred stock cash
dividend of $99 thousand, and less a $3 million reduction in the difference
between the fair value and amortized cost of securities held for sale, net of
their related tax effect.
During the third quarter of 1999, the Company repurchased a total of 49,330
shares of its common stock (the "Common Stock") at an average market price of
$9.01 for a total cost of $445 thousand. This repurchase was in accordance with
the Company's authorization by its Board of Directors on June 17, 1999 to
acquire up to 100,000 shares of the Common Stock, representing up to
approximately 0.9% of the total Common Stock outstanding. Management is
authorized to repurchase the remaining 50,670 shares of Common Stock on the open
market from time to time, and will continue to monitor market conditions of its
Common Stock to assess the most logical deployment of the Company's capital.
The Tier 1 leverage capital ratio remained consistent at 10.7% for both year-end
1998 and as of September 30, 1999 . This ratio maintains the Company in the
"well capitalized" category.
Management expects the Company's growth to continue through expansion of retail
locations, expansion of products and services, including mortgage servicing
opportunities by Curtis Mortgage Company and trust services through BankFirst
Trust Company, and possible future mergers or acquisitions. At the present time,
the Company has no present agreements, arrangements or commitments with respect
to any other acquisition.
BankFirst Corporation | 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
RESULTS OF
OPERATIONS
Net income increased $617 thousand, or 36.8%, to $2.3 million for the third
quarter of 1999. Year to date net income for the nine months ended September 30,
1999 rose to $6.6 million, up 35.2% from the $4.9 million earned during the same
period last year.
Net interest income on a tax equivalent basis rose $1.0 million, or 12.5%, for
the third quarter of 1999 from the comparable 1998 period and increased $2.0
million or 8.5% for the nine months ended September 30, 1999, compared to the
same period last year. The increase in net interest income for the comparative
quarter and for the year was due primarily to an increase in total average
earning assets and a proportionate increase of earning assets invested in loans,
which represent the Company's highest yielding assets.
The Company's net interest spread and net interest margin for the third quarter
of 1999 were 4.09% and 4.81%, respectively, as compared to 3.95% and 4.80% for
the same quarter last year. On a year-to-date basis, these ratios were 4.10% and
4.80% at September 30, 1999 as compared to 4.17% and 4.95% for the comparable
1998 period. The trend over the last twelve months has been that the Company's
margin and spread have declined slightly due to competitive pressures on loan
rates and higher costs associated with borrowing costs of funds, such as
interest-bearing deposits, federal funds, and FHLB advances. This trend of
competitive pressures is expected to continue into the foreseeable future.
NONINTEREST
INCOME
Noninterest income of $2.5 million for the third quarter of 1999 compared evenly
with $2.6 million for the same quarter last year. For the nine month period
ended September 30, 1999, total noninterest income of $8.0 million was up $1.1
million, or 16.8%, as compared to the same period in 1998.
Deposit account service charges and fees grew 5.5% to $1.2 million for the
quarter and grew 11.9% to $3.1 million for the year to date, as compared to the
previous year periods. Increases occurred mainly in service charges on checking
accounts and overdraft fees.
Mortgage banking revenues account for a significant portion of the Company's
operating noninterest income and include origination fees, points, gain or loss
on sales of loans, loan servicing income, and recognition of the value of loan
servicing. The value of servicing rights on mortgage loans sold
"servicing-retained" is recognized as an asset, with a corresponding amount
recorded as income; the asset is amortized over the expected life of the loan
since the amount of servicing income earned on each loan declines in proportion
to the loan balance. Net gains and losses on loans, coupled with loan servicing
income and related amortization, were $654 thousand for the third quarter of
1999, compared to $901 thousand for the same period last year, and were $2.7
million for the nine months ended September 30, 1999, compared to $2.4 million
for the same period in 1998.
The interest rate environment heavily influences secondary market residential
loan originations and consumer refinance activity. Market interest rates in the
third quarter of 1999 were above third quarter 1998 levels, which led to lower
secondary market originations and sales volumes. As a result, gains from sales
of loans decreased to $659 thousand for the three month period ended September
30, 1999 compared to $801 thousand during the same period last year. Given the
rise in interest rates, management believes that the secondary market sales
volume, comprised of fixed rate products, will continue to decline from current
levels if interest rates do not decline. Gains from sales of loans for the first
nine months of 1999 compared to the same period last year are up $787 thousand
primarily as a result of an increase in loan sales volumes during the entire
nine month period and selling loans at a higher margin than during the same
period in 1998.
BankFirst Corporation | 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
NONINTEREST
EXPENSE
Noninterest expense decreased $92 thousand, to $7.2 million for the third
quarter of 1999, and decreased $905 thousand to $21.7 million for the first nine
months of 1999 over the comparable 1998 period. The primary component of
noninterest expense is salaries and benefits, which increased $141 thousand for
the third quarter of 1999 from a year earlier, and increased to $12.1 million
for the nine months ended September 30, 1999, from $11.0 million for the same
period in 1998. Occupancy expense, office and equipment expense, and data
processing fees, collectively accounting for $6.1 million of the 1999 year to
date noninterest expense, increased $417 thousand or 7.3% when compared to the
same period last year, which was mainly attributable to branch expansion, new
customer growth, and new product offerings.
The "Other Noninterest Expense" category reflects a reduction in 1999 expenses
for both the quarter and the year to date, as compared to the same periods in
1998, largely due to merger related expenses occurring last year that did not
occur this year. For the third quarter of 1999, other noninterest expense was
$1.1 million compared to $1.4 million for the same period last year, and was
$3.0 million for the nine months ended September 30, 1999 compared to $3.8
million for the same period in 1998.
PROVISION FOR CREDIT LOSSES AND ASSET QUALITY
The provision for credit losses was $522 thousand for the third quarter of this
year, compared to $320 thousand for the same quarter in 1998. For the nine
months ended September 30, 1999, the provision was $1.4 million, a 1.3% increase
above the comparable period last year. The relatively minor fluctuation in the
provision was attributable to generally stable delinquency percentages on the
loan portfolio. The Company experienced net charge-offs of $245 thousand for the
third quarter of 1999 and $624 thousand on a year-to-date basis, compared to
$333 thousand and $729 thousand for the same periods last year. The year-to-date
1999 ratio of net charge-offs to average loans is 0.12%.
The provision for credit losses represents charges made to earnings to maintain
an adequate allowance for loan losses and other credit losses. The allowance is
maintained at an amount believed to be sufficient to absorb losses in the loan
portfolio. Factors considered in establishing an appropriate allowance include a
careful assessment of the financial condition of the borrower; a realistic
determination of the value and adequacy of underlying collateral; the condition
of the local economy and the condition of the specific industry of the borrower;
a comprehensive analysis of the levels and trends of loan categories; and a
review of delinquent and classified loans. The Company applies a systematic
process for determining the adequacy of the allowance for loan losses including
an internal loan review function and a monthly analysis of the adequacy of the
allowance. The monthly analysis includes determination of specific potential
loss factors on individual classified loans, historical potential loss factors
derived from actual net charge-off experience and trends in nonperforming loans,
and potential loss factors for other loan portfolio risks such as loan
concentrations, local economy, and the nature and volume of loans.
The recorded values of loans actually removed from the consolidated balance
sheets are referred to as charge-offs and, after netting out recoveries on
previously charged-off assets, become net charge-offs. The Company's policy is
to charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery.
BankFirst Corporation | 10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
With the escalation of concern about credit quality throughout the industry, the
Company has taken a proactive stance regarding its loan quality. During the
third quarter of 1999, the Company placed two larger credits totaling $2.5
million on a nonperforming status. As a result, total nonperforming loans as of
September 30, 1999 were $4.2 million compared to $2.9 million as of September
30, 1998. Management will continue to monitor its markets and will take a
conservative position regarding credit quality.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(IN THOUSANDS)
SEPT. 30 June 30 Mar. 31 Dec. 31 Sept. 30
1999 1999 1999 1998 1998
-------- ------- ------- ------- --------
PRINCIPAL BALANCE
- -----------------
<S> <C> <C> <C> <C> <C>
Nonaccrual .............................................. $ 3,017 $ 534 $ 888 $ 537 $1,963
90 days or more past due and still accruing ............. 1,173 2,535 2,308 1,971 917
-------- ------ ------ ------ ------
Total nonperforming loans ........................... $ 4,190 $3,069 $3,196 $2,508 $2,880
======== ====== ====== ====== ======
Nonperforming loans as a percent of loans ............... 0.73% 0.56% 0.61% 0.49% 0.58%
Other real estate owned ("OREO") ........................ $ 814 $1,039 $1,442 $1,290 $ 928
OREO as a percent of loans .............................. 0.14% 0.19% 0.28% 0.25% 0.19%
Allowance as a percent of
nonperforming loans ..................................... 176.13% 231.44% 217.77% 263.24% 235.94%
</TABLE>
BankFirst Corporation | 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
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 maintain 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 primary source of capital for the Company is retained earnings. The Company
paid cash dividends of $99 thousand with respect to its noncumulative
convertible preferred stock, for the first nine months of 1999. The Company
retained $6.5 million of earnings for the first nine months of 1999.
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 13.43% and
14.55%, respectively, as of September 30, 1999. Both bank subsidiaries also
individually met the definition of "well capitalized" as of September 30, 1999.
BankFirst Corporation | 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
Market Risk
The Company uses an earnings simulation model to analyze net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effect on interest income is then evaluated. The model projects the effects of
instantaneous movements in interest rates of 100 and 200 basis points. A limit
of 25 basis points movement per month was recently added to the model to
approximate historical interest rate movements by the Federal Reserve Bank,
which are traditionally made in 25 basis point increments. This is a more
realistic scenario, and reduces the effects of interest rate changes on the
model.
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 applications 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 and 200
basis points would result in increased net interest income of $501 thousand (a
1.77% increase from a flat rate scenario) and $740 thousand (a 2.62% increase
from flat rates), respectively. This occurs because management believes that if
overall market interest rates increase, the market would not require an
immediate, corresponding repricing of non-term deposit liabilities. A decrease
in interest rates of 100 and 200 basis points would result in decreased net
interest income of $281 thousand (a 0.99% decrease from flat rates) and $361
thousand (a 1.28% decrease from flat rates), respectively.
The Company's cumulative gap at one year as of December 31, 1998, indicated that
an increase in interest rates of 100 and 200 basis points would result in
increased net interest income of $720 thousand (a 2.35% increase from a flat
rate scenario) and $1.6 million (a 5.14% increase from flat rates),
respectively. A decrease in interest rates of 100 and 200 basis points as of
December 31, 1998, would result in decreased net interest income of $1.3 million
(a 4.21% decrease from flat rates) and $1.7 million (a 5.68% decrease from flat
rates), respectively.
The impact of interest rate changes was less severe as of September 30, 1999,
compared to December 31, 1998. This is a result of the improvements in the
modeling system, which more accurately reflect historical rate movements.
However, the model continues to show a projected decrease in net interest income
from a decrease in interest rates, and the opposite effect from an increase in
interest rates.
BankFirst Corporation | 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BankFirst Corporation
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 initiated a comprehensive Year 2000 compliance program in mid-1997.
This included an Awareness and Assessment phase and a Remediation phase, and the
Company began a comprehensive Testing phase during 1998. BankFirst affiliated
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. FNB's data processing service bureau is also
Year 2000 ready. Curtis Mortgage Company converted its existing servicing system
to a Year 2000-compliant new servicing system during July, 1999. Management
believes the Company's Year 2000 program is on target with the goals established
by its regulators, in that it has 100% of its mission-critical testing complete
in out-sourced, host-based services, as well as its internal and
third-party-supported, mission-critical systems. 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
was satisfactorily completed before September 30, 1999.
The Company has evaluated its Year 2000 compliance-related credit risk, and
Management believes 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 with the
Company 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 Banks.
Management believes that the total costs of becoming Year 2000 compliant have
not and will not be material. During 1998, BankFirst incurred approximately
$163,750 in both hard and soft costs regarding its Year 2000 efforts. The
Company has attempted to calculate internal salary hours applied to this effort,
and this value is included in the 1998 and 1999 expense, as appropriate. Year
2000 project costs for 1999 are anticipated to be approximately $250,000, and
most of this expense was incurred during the first six months of the year.
Management understands the broad scope of the Year 2000 issue and thus has
developed a Year 2000 program 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 business resumption
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. The
Company is currently in an aggressive testing schedule for this business
resumption contingency plan, and indications to date are that no major
modifications to the plan will be required. Additionally, each Bank's service
bureau maintains a contingency plan for data processing. The service bureaus
each 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 banks using post-January 2000 dates.
Management believes that the Company and its affiliates are currently in
compliance with each applicable directive issued by bank regulation authorities.
BankFirst Corporation | 14
<PAGE>
BANKFIRST CORPORATION
NEW ACCOUNTING AND REPORTING REQUIREMENTS
SFAS NO. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
ACTIVITIES". SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use of
the derivatives and whether they qualify for hedge accounting, gains or losses
from changes in the value of such derivatives would either be recorded as a
component of net income or as a change in stockholders' equity. Until recently,
BankFirst was required to adopt the new standard as of January 1, 2000. However,
in July, 1999 the Financial Accounting Standards Board issued SFAS 137 to extend
the implementation date of SFAS 133 until January 1, 2001. Management has not
yet determined the impact of this standard.
FDIC IMPROVEMENT ACT OF 1991 ("FDICIA"). The FDICIA stipulates many
responsibilities of financial institutions, their 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, is already
subject to this act. As a result, BankFirst is required to comply with the
FDICIA reporting requirements during 1999. FNB had total year-end 1998 assets of
$196 million, and is not anticipated to be subject to the FDICIA reporting
requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------
This information is disclosed in Item 2., Management's Discussion and Analysis
of Financial Condition and Results of Operations.
PART III.- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(A) EXHIBITS
27 Financial Data Schedule (filed electronically with the Securities and
Exchange Commission)
(B) REPORTS ON FORM 8-K:
None were filed during the quarter ended September 30, 1999.
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFIRST CORPORATION
November 12, 1999 C. DAVID ALLEN
C. David Allen
Chief Financial Officer
BankFirst Corporation | 15
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,222
<INT-BEARING-DEPOSITS> 1,624
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,621
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 576,142
<ALLOWANCE> 7,380
<TOTAL-ASSETS> 793,205
<DEPOSITS> 632,785
<SHORT-TERM> 26,781
<LIABILITIES-OTHER> 8,091
<LONG-TERM> 0
0
905
<COMMON> 28,316
<OTHER-SE> 56,336
<TOTAL-LIABILITIES-AND-EQUITY> 793,205
<INTEREST-LOAN> 37,486
<INTEREST-INVEST> 5,635
<INTEREST-OTHER> 475
<INTEREST-TOTAL> 43,596
<INTEREST-DEPOSIT> 16,226
<INTEREST-EXPENSE> 18,532
<INTEREST-INCOME-NET> 25,064
<LOAN-LOSSES> 1,402
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 2,974
<INCOME-PRETAX> 9,933
<INCOME-PRE-EXTRAORDINARY> 9,933
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,565
<EPS-BASIC> .57
<EPS-DILUTED> .53
<YIELD-ACTUAL> 8.44
<LOANS-NON> 517
<LOANS-PAST> 3,673
<LOANS-TROUBLED> 106
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,602
<CHARGE-OFFS> 816
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 7,380
<ALLOWANCE-DOMESTIC> 7,380
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,349
</TABLE>
