SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 001-14417
BANKFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 58-1790903
(State or other jurisdiction of (IRS 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:
(865) 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 July 31, 2000:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 11,050,669
<PAGE>
BANKFIRST CORPORATION
INDEX
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS ........................................ 3
---------------------------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................................... 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 16
Signatures........................................................ 16
FORWARD-LOOKING STATEMENTS
================================================================================
The information disclosed in this Quarterly Report on Form 10-Q of BankFirst
Corporation (the "Company") includes various forward- looking statements that
are made in reliance upon the safe harbor provisions of 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 the
Company and its vendors to adequately address post-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 events may occur that could 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 is not obligated to update and does not undertake to
update any of its forward-looking statements made herein.
--------------------------------------------------------------------------------
<PAGE>
BankFirst Corporation
For the Quarter Ended June 30, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
BankFirst Corporation
Knoxville, Tennessee
We have reviewed the consolidated balance sheet of BankFirst Corporation as of
June 30, 2000, and the related consolidated statements of income for the quarter
and year-to-date periods ended June 30, 2000 and 1999, and the consolidated
statements of changes in stockholders' equity and cash flows for the
year-to-date periods ended June 30, 2000 and 1999. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
August 7, 2000
BankFirst Corporation | 3
<PAGE>
Part I.-Financial Information
Item 1.- Financial Statements
Consolidated Balance Sheets
BankFirst Corporation
(Dollar amounts in thousands except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
2000 1999
===========================================================================================================
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ....................................................... $ 32,922 $ 36,039
Federal Funds Sold ............................................................ 0 0
--------- ---------
Total cash and cash equivalents .......................................... 32,922 36,039
Securities available for sale ................................................. 152,074 133,596
Mortgage loans held for sale .................................................. 12,027 12,205
Loans, net of allowance for credit losses of $7,638 and $7,400 ............... 596,211 578,216
Premises and equipment, net ................................................... 28,059 26,814
Mortgage servicing rights ..................................................... 8,927 8,896
Federal Home Loan Bank Stock, at cost ......................................... 3,543 3,420
Intangible assets ............................................................. 1,766 1,845
Accrued interest receivable and other assets .................................. 13,278 11,868
--------- ---------
Total assets ............................................................... $ 848,807 $ 812,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits .................................................. $ 111,095 $ 105,079
Interest-bearing deposits ..................................................... 547,600 525,300
--------- ---------
Total deposits ........................................................... 658,695 630,379
Securities sold under agreements to repurchase ................................ 24,074 32,103
Federal funds purchased and other borrowings .................................. 23,830 27,500
Advances from the Federal Home Loan Bank ...................................... 46,091 29,159
Accrued interest payable and other liabilities ................................ 8,184 7,232
--------- ---------
Total liabilities ........................................................ 760,874 726,373
Stockholders' equity
Common stock: $2.50 par value, 30,000,000 shares authorized,
11,047,950 and 11,275,600 shares outstanding, respectively ................. 27,620 28,189
Noncumulative convertible preferred stock: $5 par value,
1,000,000 shares authorized, 181,050 shares outstanding .................... 905 905
Additional paid-in capital .................................................... 32,150 33,448
Retained earnings ............................................................. 29,457 25,914
Accumulated other comprehensive income (loss) ................................. (2,199) (1,930)
--------- ---------
Total stockholders' equity ................................................. 87,933 86,526
--------- ---------
Total liabilities and stockholders' equity ................................. $ 848,807 $ 812,899
========= =========
</TABLE>
================================================================================
See accompanying notes.
BankFirst Corporation | 4
<PAGE>
Consolidated Statements of Income
BankFirst Corporation
(Dollar amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
===================================================================================================
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans ...................... $ 13,987 $ 12,498 $ 27,567 $ 24,394
Taxable securities .............................. 1,787 1,513 3,405 2,892
Nontaxable securities ........................... 484 410 961 823
Other ........................................... 153 140 247 359
-------- -------- -------- --------
16,411 14,561 32,180 28,468
Interest expense
Deposits ........................................ 6,521 5,378 12,641 10,691
Federal funds purchased and repurchase agreements 563 444 1,113 1,009
Federal Home Loan Bank advances and other debt .. 685 386 1,225 463
-------- -------- -------- --------
7,769 6,208 14,979 12,163
-------- -------- -------- --------
Net interest income ................................. 8,642 8,353 17,201 16,305
Provision for credit losses ......................... 572 461 1,145 880
-------- -------- -------- --------
Net interest income after provision for credit losses 8,070 7,892 16,056 15,425
Noninterest income
Service charges and fees ........................ 1,185 1,184 2,302 2,286
Net securities gains (losses) ................... 6 (26) 6 10
Net gain (loss) on loan sales ................... 727 1,019 1,251 1,909
Loan servicing income, net of amortization ...... 317 33 596 153
Trust fee income ................................ 334 261 749 525
Other ........................................... 268 474 476 662
-------- -------- -------- --------
2,837 2,945 5,380 5,545
Noninterest expense
Salaries and employee benefits .................. 4,071 4,092 8,016 8,077
Occupancy expense ............................... 593 537 1,094 1,052
Equipment expense ............................... 631 707 1,264 1,366
Office expense .................................. 515 479 978 935
Data processing ................................. 471 441 919 834
Advertising ..................................... 227 210 348 342
Other ........................................... 1,111 1,017 2,218 1,894
-------- -------- -------- --------
7,619 7,483 14,837 14,500
-------- -------- -------- --------
Income before income taxes .......................... 3,288 3,354 6,599 6,470
Provision for income taxes .......................... 1,026 1,152 2,102 2,199
-------- -------- -------- --------
Net Income .......................................... $ 2,262 $ 2,202 $ 4,497 $ 4,271
======== ======== ======== ========
Comprehensive income ................................ $ 2,197 $ 373 $ 4,228 $ 1,492
Earnings per share:
Basic ........................................... $ 0.20 $ 0.19 $ 0.40 $ 0.37
Diluted ......................................... $ 0.19 $ 0.17 $ 0.38 $ 0.34
</TABLE>
================================================================================
See accompanying notes.
BankFirst Corporation | 5
<PAGE>
Consolidated Statements of Changes in 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 JUNE 30, 1999
Balance, January 1, 1999 $ 28,439 $ 905 $ 34,093 $ 17,160 $ 2,244 $ 82,841
Cash dividend on preferred stock -- -- -- (65) -- (65)
Comprehensive income (loss):
Net income -- -- -- 4,271 -- 4,271
Change in unrealized gains (losses),
net of reclassification -- -- -- -- (2,779) (2,779)
--------
Total comprehensive income 1,492
-------- ------ -------- -------- -------- --------
Balance, June 30, 1999 $ 28,439 $ 905 $ 34,093 $ 21,366 $ (535) $ 84,268
======== ====== ======== ======== ======== ========
</TABLE>
<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 JUNE 30, 2000
Balance, January 1, 2000 $ 28,189 $ 905 $ 33,448 $ 25,914 $ (1,930) $ 86,526
Cash dividend on preferred stock -- -- -- (66) -- (66)
Cash dividend on common stock -- -- -- (888) -- (888)
Repurchase of common stock,
227,650 shares (569) -- (1,298) -- -- (1,867)
Comprehensive income:
Net income -- -- -- 4,497 -- 4,497
Change in unrealized gains
(losses), net of reclassification -- -- -- -- (269) (269)
--------
Total comprehensive income 4,228
-------- ------ -------- -------- -------- --------
Balance, June 30, 2000 $ 27,620 $ 905 $ 32,150 $ 29,457 $ (2,199) $ 87,933
======== ====== ======== ======== ======== ========
</TABLE>
================================================================================
See accompanying notes.
BankFirst Corporation | 6
<PAGE>
Consolidated Statements of Cash Flows
BankFirst Corporation
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
======================================================================================================
<S> <C> <C>
Cash flows from Operating Activities
Net income ............................................................... $ 4,497 $ 4,271
Adjustments to reconcile net income to net cash from operating activities:
Provision for credit losses ............................................ 1,145 880
Depreciation ........................................................... 1,174 909
Amortization of mortgage servicing rights .............................. 580 870
Amortization and accretion of securities, net .......................... 2 56
Net (gains) losses on securities sales ................................. (6) (10)
Net (gains) losses on sales of mortgage loans .......................... (1,251) (1,909)
Proceeds from sales of mortgage loans held for sale .................... 54,402 111,004
Purchases of mortgage loans held for sale .............................. (6,443) (19,286)
Originations of mortgage loans held for sale ........................... (47,781) (79,439)
Changes in assets and liabilities
Accrued interest receivable and other assets ......................... (1,410) (580)
Accrued interest payable and other liabilities ....................... 952 (1,432)
--------- ---------
Net cash flows from operating activities .................................... 5,861 15,334
Cash flows from investing activities
Purchase of securities ................................................... (32,881) (39,150)
Proceeds from maturities of securities ................................... 13,712 17,338
Proceeds from sales of securities ........................................ -- 12,760
Net increase in loans .................................................... (17,995) (43,394)
Purchase of FHLB stock ................................................... (123) (112)
Premises and equipment expenditures, net ................................. (2,419) (1,896)
--------- ---------
Net cash flows from investing activities .................................... (39,706) (54,454)
Cash flows from financing activities
Net change in deposits ................................................... 28,316 (859)
Net change in repurchase agreements and other borrowings ................. (11,699) 10,043
Advances from the FHLB ................................................... 17,000 27,339
Repayments of advances to the FHLB ....................................... (68) (10,000)
Dividends paid .............................................................. (954) (65)
Repurchase of common stock .................................................. (1,867) --
--------- ---------
Net cash flows from financing activities .................................... 30,728 26,458
Net change in cash and cash equivalents ..................................... (3,117) (12,662)
Cash and cash equivalents, beginning of period .............................. 36,039 44,986
--------- ---------
Cash and cash equivalents, end of period .................................... $ 32,922 $ 32,324
========= =========
Supplemental disclosures:
Interest paid ............................................................ $ 14,299 $ 11,777
Income taxes paid ........................................................ 2,591 1,665
Loans converted to other real estate ..................................... -- --
</TABLE>
================================================================================
See accompanying notes.
BankFirst Corporation | 7
<PAGE>
Notes to Consolidated Financial Statements
BankFirst Corporation
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"), 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 six month
periods ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings. Federal Home Loan Bank ("FHLB") advances consist of
variable rate advances that mature within one year, and fixed rate long-term
advances with maturity dates that exceed one year.
Reclassifications: Certain items in the 1999 financial statements have been
reclassified to conform to the 2000 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 Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income ............................................... $ 2,262 $ 2,202 $ 4,497 $ 4,271
Less: dividends declared on preferred stock ............. (33) (33) (66) (65)
------------ ------------ ------------ ------------
Net income available to common stockholders .............. $ 2,229 $ 2,169 $ 4,431 $ 4,206
============ ============ ============ ============
Average common shares outstanding ........................ 11,095,498 11,375,600 11,162,104 11,375,600
Earnings per share ....................................... $ 0.20 $ 0.19 $ 0.40 $ 0.37
DILUTED
Net income available to common stockholders .............. $ 2,229 $ 2,169 $ 4,431 $ 4,206
Add: dividends upon assumed conversion of preferred stock 33 33 66 65
------------ ------------ ------------ ------------
Net income available to common
stockholders assuming conversion ...................... $ 2,262 $ 2,202 $ 4,497 $ 4,271
============ ============ ============ ============
Weighted average common shares outstanding ............... 11,095,498 11,375,600 11,162,104 11,375,600
Weighted average dilutive convertible preferred stock .... 558,992 558,992 558,992 558,992
Dilutive common stock options at average market price .... 227,144 372,422 231,691 389,380
------------ ------------ ------------ ------------
Weighted average diluted shares outstanding .............. 11,881,634 12,307,014 11,952,787 12,323,972
============ ============ ============ ============
Earnings per share assuming dilution ..................... $ 0.19 $ 0.17 $ 0.38 $ 0.34
</TABLE>
BankFirst Corporation | 8
<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"), as well as the Company's BankFirst Trust Company subsidiary and
BankFirst's mortgage subsidiary, Curtis Mortgage Company. 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 six months ended June 30, 2000 and June 30,
1999.
BankFirst 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 26
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 card services and brokerage
services.
Financial Condition
Total assets grew from $813 million at year-end 1999 to $849 million at June 30,
2000, a $36 million increase. This asset growth occurred primarily in loans of
$18 million and securities of $18 million. The Company's June 30, 2000 balance
sheet reflects a growth of $28 million in deposits achieved through competitive
product pricing. The Company used this deposit increase by funding the growth in
loans and the purchases of securities. The Company also restructured its overall
short-term borrowing position by increasing Federal Home Loan Bank advances by
$17 million and reducing repurchase agreements and federal funds by a total of
$12 million.
The Company's deposit base and, to a lesser degree its loan demand, are both
influenced by seasonal demands from its commercial customers. Accordingly, the
Company maintains a short-term liquidity strategy to accommodate seasonal needs.
On a year-to-date ("YTD") average basis, total deposits grew by $25 million from
year-end 1999. This deposit growth was used to fund a YTD growth in loans of $16
million and to reduce over-all short-term borrowings by $8 million from year-end
1999. As customer loan and deposit needs fluctuate, short-term borrowings are
appropriately adjusted.
From year-end 1999 to June 30, 2000, total stockholders' equity increased by $1
million, consisting of net earnings of over $4 million, less preferred and
common stock cash dividends of nearly $1 million, and less approximately $2
million for the repurchase of 227,650 shares of the Company's common stock, as
described in the next paragraph.
On January 11, 2000 the Company approved a stock repurchase plan to acquire up
to 500 thousand shares of its common stock. The recently approved stock
repurchase plan follows a previous 100 thousand share stock repurchase plan
completed during the second half of 1999. Management repurchased 113,950 shares
of the approved 500 thousand share buyback by the end of the first quarter 2000,
purchased another 113,700 shares during the second quarter, and is authorized to
repurchase the remaining 272,350 shares of common stock on the open market. The
Company will continue to monitor market conditions of its common stock to assess
the most logical deployment of its capital.
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, although no mergers
or acquisitions are currently pending. Although the Company's growth rate in
total assets during the last twelve months was approximately 10%, this growth
trend has slowed during the second quarter of 2000, and will very likely
continue to slow over the remainder of 2000 due to the effects of the recent
short-term interest rate increases announced by the Federal Reserve Bank.
BankFirst Corporation | 9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Results of Operations
Net income increased 5% to $4.5 million for the first six months of 2000 as
compared to $4.3 million for the same period last year. Net interest income on a
tax equivalent basis was $17.5 million, representing an approximate $800
thousand or 5% increase for the first six months of 2000 from the comparable
1999 period. The year-over-year increase in net interest income 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 first six
months of 2000 were 3.80% and 4.51%, respectively, as compared to 3.94% and
4.85%, respectively, for the same period last year. 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.
Although the Company's net interest spread and net interest margin have
declined, actual dollars of net interest income have increased from a higher
volume of earning assets. The growth in earning assets (which are mostly
comprised of loans) have slowed from historical growth patterns due to the
delayed effects of recent short-term Federal Reserve Bank interest rate hikes.
In addition, during the first quarter of 2000 the Company maintained an
aggressive loan pricing strategy to combat intense competition. This strategy
was successful in retaining existing relationships and attracting new customers,
although the yields on the respective loans were below historical levels. The
Company changed its pricing structure during the second quarter of 2000 and is
currently pricing its loans in order to maintain a higher net interest spread
than during the previous quarter. This strategy may very likely slow the growth
rate of its loan portfolio, but should increase net interest income as a
percentage of total assets.
Noninterest Income
Noninterest income of $5.4 million for the first six months of 2000 compared
almost evenly with $5.5 million for the same period last year. Some select
components of noninterest income include service charges and fees generated by
the two bank affiliates, income from sales of mortgage loans and loan servicing
through Curtis Mortgage Company, and trust fee income produced through BankFirst
Trust Company. YTD comparisons of these select components of noninterest income
are described in more detail below.
An analysis of noninterest income reflects virtually no change in earnings on
service charges and related fees, which were $2.3 million for each of the
six-month periods ending June 30, 1999 and 2000. Intense market competition from
other financial institutions, as well as nonbank competition such as brokerage
firms, are causing pressure on this component of noninterest income.
Gains on loan sales decreased from $1.9 million for the six months ending June
30, 1999 to $1.3 million for the six months ending June 30, 2000. The interest
rate increases initiated by the Federal Reserve Board during 1999 and 2000 have
attributed to a reduction in the volume of originations of secondary market
loans. However, gains on loan sales during the first six months of 2000 were
positively impacted by the Company's short-term strategy to sell approximately
$24 million of originated loans servicing-released. The sale of loans
servicing-released generally results in higher gains at the time of sale, but
will have a negative impact on future loan servicing income streams. After
accounting for this $24 million sale, the Company's loan servicing portfolio
balance at June 30, 2000 was approximately $610 million compared to
approximately $612 million at December 31, 1999. The Company will continue to
sell a portion of loans servicing-released as needed, while continuing to build
the loan servicing portfolio.
Loan servicing income (net of amortization) during the first six months of 2000
was $600 thousand, compared to $200 thousand for the same period in 1999. This
change was mainly attributable to the effect of recognizing amortization expense
over a longer period of time from slower loan prepayments. Given the expected
continued increase in interest rates, management believes the secondary market
loan volumes and prepayments over the next several months will further decline
from existing levels.
BankFirst Corporation | 10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Noninterest income from trust fees increased 40% from $500 thousand to $700
thousand when comparing the six months ending June 30, 1999 to the same period
in 2000. The BankFirst Trust Company is managing $354 million of trust assets as
of June 30, 2000 as compared to $322 million for the same period last year.
Noninterest Expense
Noninterest expense increased $300 thousand to $14.8 million for the first six
months of 2000 over the comparable 1999 period. The primary components of
noninterest expense are salaries and benefits, occupancy and equipment, data
processing, and an "other" noninterest expense category that captures various
expenses not normally itemized on financial statements.
Salaries and benefits represent the Company's largest noninterest expense
component. The cost to hire, train, and maintain a workforce of over 400
full-time and part-time employees is substantial. The Company's personnel costs
through the first six months of 2000 were $8.0 million, unchanged from $8.0
million for the same period last year. Although this expense category did not
increase based upon a year-over-year comparison, the Company expects to hire
additional personnel to staff four new branch locations currently under
development. This branch expansion strategy, coupled with a tight labor market,
inflationary pressures, and competitive pressures, will most likely cause an
upward trend in this noninterest expense category throughout the remainder of
the year.
Occupancy expense, office and equipment expense, and data processing fees
collectively accounted for $4.3 million of noninterest expense for the first six
months of 2000, compared to $4.2 million for the same period last year. Again,
it is anticipated that inflationary pressures and an expansion into new markets
will put upward pressure on these expenses.
The "Other Noninterest Expense" category reflects year-to-date expense of $2.2
million, an increase of $300 thousand for the first six months of 2000 over the
same period in 1999. This category includes expenses for loan and deposit
processing fees, travel, professional fees, charitable contributions, check
losses, and other miscellaneous expenses. The increase in other noninterest
expense from year to year was due to normal, recurring expense activity.
Provision for Credit Losses and Asset Quality
The provision for credit losses was $1.1 million for the first six months of
this year, compared to $900 thousand for the same period in 1999. The higher
provision expense on a period-over-period comparative basis was mainly due to
providing allowance for loan losses on the growing loan portfolio. The Company
experienced net charge-offs (i.e., gross charge-offs less recoveries) of $906
thousand during the first six months of 2000, compared to $379 thousand for the
same period last year. The ratio of net charge-offs to average loans for the
first six months of both 1999 and 2000 is less than 0.3%.
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 | 11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
With the escalation of concern about credit quality throughout the industry, the
Company has taken a proactive stance regarding its loan quality. Total
nonperforming loans (consisting of nonaccruals and loans 90 days or more past
due) as of June 30, 2000 were $5.5 million compared to $6.2 million as of
December 31, 1999. Other real estate owned (including non-real estate
repossessions) at June 30, 2000 was $1.2 million as compared to $1.9 million as
of December 31, 1999. Included in nonperforming loans is one credit for $2.5
million that was foreclosed in July 2000 and subsequently reflected in the
"other real estate owned" category.
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.
Management will continue to monitor its markets and take a conservative position
regarding credit quality. Refer to the Company's 1999 Annual Report on Form 10-K
under the "Nonperforming Assets" section of Management's Discussion and Analysis
of Financial Condition and Results of Operations, for further analysis.
The
provision
<TABLE>
<CAPTION>
Nonperforming Assets
(in thousands)
June 30 Mar. 31 Dec. 31 Sept. 30 June 30
2000 2000 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Principal balance
Nonaccrual ................................ $4,014 3,946 $3,981 $3,017 $ 534
90 days or more past due and still accruing 1,483 2,800 2,261 1,173 2,535
------ ----- ------ ------ ------
Total nonperforming loans ............. $5,497 $6,746 $6,242 $4,190 $3,069
====== ====== ====== ====== ======
Nonperforming loans as a percent of loans . 0.91% 1.14% 1.07% 0.73% 0.56%
Other real estate owned ("OREO") .......... $1,196 $1,963 $1,893 $ 814 $1,039
OREO as a percent of loans ................ 0.20% 0.33% 0.32% 0.14% 0.19%
Allowance as a percent of
nonperforming loans ....................... 138.96% 112.56% 118.55% 176.13% 231.44%
</TABLE>
BankFirst Corporation | 12
<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 that often
include 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. During the
first six months of 2000, the Company had net earnings of $4.5 million, paid
cash dividends of $66 thousand to shareholders of noncumulative convertible
preferred stock, paid initial annual cash dividends of $888 thousand to
shareholders of common stock, and repurchased 227,650 shares of the Company's
common stock (as described previously in the "Financial Condition" section of
this Management's Discussion and Analysis of Financial Condition and Results of
Operations) at an approximate cost of $1.9 million. The Company retained the
remaining $1.7 million of earnings as an increase to its capital base.
The Company and its 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, asset growth
and expansion are limited, 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 13.37% and
14.48%, respectively, as of June 30, 2000. Both bank subsidiaries also
individually met the definition of "well capitalized" as of June 30, 2000.
BankFirst Corporation | 13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Market Risk
The Company uses an earnings simulation model (summarized below) to analyze net
interest income sensitivity. Potential changes in market interest rates and
their subsequent effects on interest income are then evaluated. The model
projects the effects of instantaneous movements in interest rates of 100 and 200
basis points.
The assumptions used in the market risk simulation model 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. See the previous discussion concerning interest rate margin and
interest rate spread in the "Results of Operations" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 $629 thousand (a
1.79% increase from a flat rate scenario) and $1.3 million (a 3.58% 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 $626 thousand (a 1.78% decrease from flat rates) and $1.2
million (a 3.41% decrease from flat rates), respectively.
The Company's cumulative gap at one year as of December 31, 1999 indicated that
an increase in interest rates of 100 and 200 basis points would result in
increased net interest income of $306 thousand (a 0.85% increase from a flat
rate scenario) and $594 thousand (a 1.66% increase from flat rates),
respectively. A decrease in interest rates of 100 and 200 basis points as of
December 31, 1999 would result in decreased net interest income of $251 thousand
(a 0.70% decrease from flat rates) and $439 thousand (a 1.22% decrease from flat
rates), respectively.
Market Risk Analysis
at June 30, 2000
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
---------------------- --------------------
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
<S> <C> <C> <C> <C> <C>
Projected Interest Income
Loans $53,698 $56,516 $59,333 $62,151 $64,969
Investments 9,886 10,024 10,163 10,300 10,440
Federal Funds Sold 1,464 1,665 1,867 2,071 2,276
----------------------------------------------------------------
Total Interest Income 65,048 68,205 71,363 74,522 77,685
Projected Interest Expense
Deposits $26,048 $28,042 $29,987 $31,931 $33,876
FHLB Term Advances 2,484 2,778 3,074 3,369 3,665
Fed Funds Purchased & Other Borrowings 2,523 2,817 3,108 3,399 3,690
----------------------------------------------------------------
Total Interest Expense 31,055 33,637 36,169 38,699 41,231
Net Interest Income $33,993 $34,568 $35,194 $35,823 $36,454
$ Change from Level Rates (1,201) (626) -- 629 1,260
% Change from Level Rates (3.41)% (1.78)% 1.79% 3.58%
</TABLE>
BankFirst Corporation | 14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Summarized Market Risk Analysis
At December 31, 1999
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
-------------------- ---------------------
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
<S> <C> <C> <C> <C> <C>
Projected Total Interest Income $60,986 $62,468 $64,713 $66,959 $68,438
Projected Total Interest Expense 25,539 26,833 28,827 30,767 31,958
Net Interest Income 35,447 35,635 35,886 36,192 36,480
$ Change from Level Rates (439) (251) 306 594
% Change from Level Rates (1.22)% (0.70)% 0.85% 1.66%
</TABLE>
Year 2000
The Company undertook a project (the "Year 2000 Project") to identify and assess
the readiness of its computer systems, programs and other infrastructure that
could be affected by the Year 2000 issue and to remedy the problems identified.
The Year 2000 Project also included an assessment of Year 2000 readiness of key
third parties on whom the Company's operations depended. The Company also
developed contingency plans to permit it to continue operations, consistent with
the highest quality standards, in the event Year 2000 problems arose. If
problems are encountered in the future related to in-house systems or to those
of key third parties, it is possible that costs could be incurred that might
adversely affect the Company's financial condition.
During 1999, the Company incurred costs of approximately $250,000 attributable
to Year 2000 remediation. Although management has not incurred any additional
related expenses during the first six months of 2000 and anticipates no further
expenses for the remainder of this year, unforeseen circumstances may arise;
therefore, monitoring will continue at least through the third quarter of 2000.
Corrective action will be taken if management encounters any previously
unidentified Year 2000 problems internally or in interfacing with third parties,
and the Company's contingency plans remain available. Management has determined
that if a business interruption as a result of the Year 2000 issue occurred,
such an interruption could be material to the Company's overall financial
performance.
BankFirst Corporation | 15
<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. The Company is
required to adopt the new standard as of January 1, 2001. Management has not yet
determined the impact of this new standard.
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- Liquidity and Capital
Adequacy".
Part II.- Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(a) Exhibits
27 Financial Data Schedule (filed electronically with the SEC) is reflected
on page 17 of this Quarterly Report on Form 10-Q.
99.1 Awareness Letter from Crowe, Chizek and Company LLP is reflected on page
18 of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K:
During the period covered by this Quarterly Report on Form 10-Q, the Company
filed one Current Report on Form 8-K, dated April 17, 2000 and filed with the
SEC on April 24, 2000, reporting the results of the Company's annual meeting of
shareholders on April 17, 2000 (no financial information required to be filed
with the SEC).
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
August 9, 2000 /s/ C. David Allen
-----------------------------------------
C. David Allen
Chief Financial Officer and Secretary
BankFirst Corporation | 16
