SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 of organization) Identification Number)
625 Market Street 37902
Knoxville, Tennessee (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(865) 595-1100
----------
Securities registered pursuant to Section 12(b) of the Act:
None
----------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Par Value $2.50)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There were 11,220,100 shares of the registrant's Common Stock outstanding as of
February 29, 2000. The aggregate market value of voting stock held by
non-affiliates of the registrant was $53,265,280 as of February 29, 2000. For
purposes of the foregoing calculation only, all directors and executive officers
and the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held April 17, 2000 are incorporated by reference into
Part III of this Report.
<PAGE>
Table of Contents
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PAGE
----
PART I
ITEM 1. Business...................................................... 2
ITEM 2. Properties.................................................... 3
ITEM 3. Legal Proceedings............................................. 6
ITEM 4. Submission of Matters to a Vote of Security Holders........... 6
ITEM 4.A Executive Officers of the Company............................. 6
PART II
ITEM 5. Market for the Registrant's Common Stock and
Related Stockholder Matters................................. 7
ITEM 6. Selected Financial Data....................................... 7
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
ITEM 7.A Quantitative and Qualitative Disclosures about Market Risk.... 26
ITEM 8. Financial Statements and Supplementary Data................... 28
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 51
PART III
ITEM 10. Directors and Executive Officers of the Company............... 51
ITEM 11. Executive Compensation........................................ 51
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 51
ITEM 13. Certain Relationships and Related Transactions................ 51
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................................... 52
Forward-Looking Statements
================================================================================
Forward-looking statements in this Report 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 BankFirst Corporation (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 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 is not obligated to update and does not undertake to
update any of its forward-looking statements made herein.
BankFirst Corporation | 1
<PAGE>
PART I
ITEM 1. BUSINESS
================================================================================
BankFirst Corporation is a multi-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'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.
During the last five years, the organization has grown from a single community
bank with less than $150 million in assets, to a multi-bank organization with an
established local banking presence in six counties and over $800 million in
assets. The Company has broadened its mix of products and expanded its customer
base through a combination of internal growth and the consolidation of
well-established East Tennessee banks and financial service companies. The
Company completed an initial public offering of 1,270,000 shares of Common Stock
in 1998 and began trading its Common Stock on the NASDAQ Stock Market's National
Market under the symbol "BKFR".
The Company's most recent merger and acquisition activities occurred in 1998
with two separate business combinations. First, the Company's largest
subsidiary, BankFirst, purchased Knoxville-based Curtis Mortgage Company, Inc.
as an opportunity to increase mortgage originations, which had not been a
significant line of business, and as an opportunity to diversify revenues
through loan servicing. Second, the Company acquired First Franklin Bancshares,
Inc., a single-bank holding company based in Athens, Tennessee. First Franklin
Bancshares, Inc. was dissolved and its Athens-based subsidiary, The First
National Bank and Trust Company, became a separate subsidiary of the Company,
adding risk diversification and trust expertise to the combined entity. The
Company's long-term strategic plans include expanding through acquisitions that
will enhance its market presence and product lines.
Recent Developments
In June 1999 the Company initiated a stock repurchase plan, and over the second
half of 1999 acquired an aggregate of 100,000 shares of its Common Stock at an
average purchase price of $8.95. On January 11, 2000 the Company approved a
second stock repurchase plan to acquire up to 500,000 additional shares of its
Common Stock, which would reduce total Common Stock outstanding from 11,275,600
at December 31, 1999 to 10,775,600 shares, assuming the Company repurchased all
500,000 shares. As of February 29, 2000 the Company had acquired 55,500 shares
as part of its second stock repurchase plan.
Competition
================================================================================
The Company and its subsidiaries have substantial competition in attracting and
retaining deposits and in lending funds. The primary factors in competing for
deposits are the range and quality of financial services offered the ability to
offer attractive rates and the availability of convenient office locations.
There is direct competition for deposits from credit unions and commercial banks
and other savings institutions. Additional significant competition for savings
deposits comes from other investment alternatives, such as money market mutual
funds and corporate and government securities. The primary factors in competing
for loans are the range and quality of lending services offered, interest rates
and loan origination fees. Competition for the origination of loans normally
comes from other savings and financial institutions, commercial banks, credit
unions, insurance companies and other financial service companies. The Company
believes that its strategy of relationship banking in the communities it serves
allows flexibility in rates and products offered in response to local needs. The
Company believes this strategy is its most effective method of competing with
both the larger regional bank holding companies and with smaller community
banks.
Employees
================================================================================
As of December 31 1999, the Company and its subsidiaries employed 380 full-time
equivalent employees. Management believes that its relations with its employees
are good. The Company does not have any collective bargaining agreements.
BankFirst Corporation | 2
<PAGE>
Supervision and Regulation
================================================================================
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's activities are limited to managing or controlling banks,
furnishing services to or performing services for its subsidiaries, and engaging
in other activities that the Federal Reserve determines to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
The Company's BankFirst ("BankFirst") and BankFirst Trust Company ("BankFirst
Trust") subsidiaries are incorporated under the banking laws of the State of
Tennessee and, as such, are subject to the applicable provisions of those laws.
BankFirst and BankFirst Trust are subject to the supervision of the Tennessee
Department of Financial Institutions and to regular examination by that
department. The Company's First National Bank and Trust Company ("Athens")
subsidiary is incorporated under the National Bank Act, as amended, and is
subject to the applicable provisions of that law. Athens is also subject to the
supervision of the Office of the Comptroller of the Currency and to regular
examination by that agency. Both BankFirst's and Athens' deposits are insured by
the Federal Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund ("BIF"), and they are therefore subject to the provisions of the
Federal Deposit Insurance Act and to examination by the FDIC.
The Tennessee Department of Financial Institutions, the Office of the
Comptroller of the Currency, and the FDIC (the "Bank Regulatory Authorities")
will regulate or monitor virtually all areas of the Company's BankFirst and
Athens (collectively, the "Banks") operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuance of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The federal Bank Regulatory Authorities have established
regulatory standards for all insured depository institutions and depository
institution holding companies relating, among other things, to: (i) internal
controls, information systems, and audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.
The Bank Regulatory Authorities also require the Banks to maintain certain
capital ratios. The Banks are required to prepare periodic reports on their
financial condition and to conduct an annual audit of their financial affairs in
compliance with minimum standards and procedures prescribed by the Bank
Regulatory Authorities. The Banks undergo regular on-site examinations by each
Bank Regulatory Authority having jurisdiction over them.
ITEM 2. PROPERTIES
================================================================================
The following provides certain information as of December 31, 1999 with regard
to the Company's properties and facilities.
<TABLE>
<CAPTION>
Owned/Leased
BankFirst Locations Address Type of Facility
- ------------------- ------- ----------------
<S> <C> <C>
Lenoir City Branch 391 Highway 321/95 North Owned
Lenoir City, TN 37771 Bank Branch
Loudon Branch 406 Grove Street Owned
Loudon, TN 37774 Bank Branch
Philadelphia Branch 22730 West Lee Highway Owned
Philadelphia, TN 37846 Bank Branch
Tellico Village Branch 302 Village Square Owned
Loudon, TN 37774 Bank Branch
Main Office Branch 625 Market Street Owned
Knoxville, TN 37902 Bank Branch
</TABLE>
BankFirst Corporation | 3
<PAGE>
<TABLE>
<CAPTION>
Owned/Leased
BankFirst Locations, continued Address Type of Facility
- ------------------------------ ------- ----------------
<S> <C> <C>
Farragut Branch 11140 Kingston Pike Owned
Knoxville, TN 37922 Bank Branch
Knoxville Center Branch 3013-A Mall Road N Leased
Knoxville, TN 37924 Bank Branch
Bearden Branch 4611 Kingston Pike Owned
Knoxville, TN 37919 Bank Branch
Halls Branch 7108 Maynardville Hwy Leased
Knoxville TN 37918 Bank Branch
Cedar Bluff Branch 330 N Cedar Bluff Road Leased
Knoxville, TN 37923 Bank Branch
Rocky Hill Branch 7709 Northshore Drive Leased
Knoxville, TN 37919 Bank Branch
Weisgarber Branch 1235 Weisgarber Road Owned
Knoxville, TN 37909 Bank Branch
Maryville Branch 710 South Foothills Plaza Drive Owned
Maryville, TN 37801 Bank Branch
Alcoa Branch 109 Associates Boulevard Owned
Alcoa, TN 37701 Bank Branch
Seymour Branch 10232 Chapman Highway Owned
Seymour, TN 37865 Bank Branch
Gatlinburg Branch 811 Parkway Owned
Gatlinburg, TN 37738 Bank Branch
Dudley Creek Branch 912 E. Parkway Owned
Gatlinburg, TN 37738 Bank Branch
Pigeon Forge Branch 3416 South River Road Owned
Pigeon Forge, TN 37863 Bank Branch
Adjacent parking lot
Townsend Branch 7971 E. Lamar Alexander Parkway Owned
Townsend, TN 37882 Bank Branch
Sevierville Branch East Main Owned
Sevierville TN 37862 Bank Branch
Dolly Parton Branch 710 Dolly Parton Parkway Owned
Sevierville, TN 37862 Bank Branch
</TABLE>
BankFirst Corporation | 4
<PAGE>
<TABLE>
<CAPTION>
Owned/Leased
BankFirst Locations, continued Address Type of Facility
- ------------------------------ ------- ----------------
<S> <C> <C>
Kodak Branch 2950 Winfield Dunn Parkway Owned
Kodak, TN 37764 Bank Branch
Governors Crossing 186 Collier Drive Owned
Sevierville, TN 37862 Bank Branch
Merchants Road Branch 310 Merchants Drive Owned
Knoxville, TN 37912 Bank Branch
Jefferson City Branch 263 East Broadway Blvd Owned
Jefferson City, TN 37760 Bank Branch
Dandridge Branch 858 S. Hwy 92 Owned
Dandridge, TN 37725 Bank Branch
Curtis Mortgage 249 Peters Road Leased
Knoxville, TN 37939 Mortgage Company
The First National Bank and Trust Company Locations
- ---------------------------------------------------
Main Office 204 Washington Ave. Owned
Athens, TN 37303 Bank Branch
Operations Center 3 South Hill Street Leased
Athens, TN 37303 Operations Facility
Plaza Branch 1604 Decatur Pike Leased
Athens, TN 37303 Bank Branch
Etowah Branch 601 Tennessee Ave. Owned
Etowah TN 37331 Bank Branch
Riceville Branch 3809 Highway 11 Owned
Riceville, TN 37370 Bank Branch
Calhoun Branch 3099 Highway 11 Owned
Calhoun, TN 37309 Bank Branch
Englewood Branch 111 S. Niota Road Leased
Englewood, TN 37329 Bank Branch
Friendly Finance Co., Inc. 620 Decatur Pike Leased
Athens, TN 37303 Finance Company (a
wholly-owned
subsidiary of Athens)
</TABLE>
================================================================================
BankFirst Corporation | 5
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
================================================================================
The nature of the banking business generates a certain amount of litigation
against the Company and its subsidiaries involving matters in the ordinary
course of business. None of the legal proceedings currently pending or
threatened to which the Company or its subsidiaries is a party or to which any
of their properties are subject will have, or have, in the opinion of
management, a material effect on the business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
================================================================================
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
ITEM 4.A. EXECUTIVE OFFICERS OF THE COMPANY
================================================================================
Set forth below is information as of February 29, 2000 regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
Officer Age Position With Company
- ------- --- ---------------------
<S> <C> <C>
James L. Clayton 65 Chairman of the Board of Directors since 1996 and
Chairman of the Board of Directors of BankFirst
since 1992.
Fred R. Lawson 63 Director, President and Chief Executive Officer since
1996; Director, President and Chief Executive Officer of
BankFirst since 1993.
L. A. Walker, Jr. 64 Director, Executive Vice President since 1998; Chairman of
the Board of Directors and Chief Executive Officer of The
First National Bank and Trust Company since 1980.
R. Stephen Hagood 49 Executive Vice President since 1998;
Executive Vice President of BankFirst since 1993.
C. David Allen 49 Chief Financial Officer and Secretary since 1998; Senior Vice
President and Chief Financial Officer of BankFirst since 1993.
</TABLE>
BankFirst Corporation | 6
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
================================================================================
Since the initial public offering ("IPO") in August 1998, the Common Stock has
been traded on The NASDAQ National Market System ("NASDAQ") with the symbol
BKFR. There were 578 holders of Common Stock of record on February 29, 2000,
excluding ownership held by brokers and dealers. Prior to the IPO, there had
been no established public trading market for the Common Stock.
The following table sets forth for the indicated periods the high and low
closing prices of the Common Stock as traded on NASDAQ:
1999 1998
---- ----
High Low High Low
------------------------------------------------------------------------
Quarters:
First..................... $11.250 $ 8.625 $ N/A $ N/A
Second.................... 19.750 8.563 N/A N/A
Third..................... 9.750 8.250 N/A N/A
Fourth.................... 9.750 8.125 11.875 8.125
N/A = not applicable
The Company has paid no cash dividends on its Common Stock since the IPO and has
not announced or declared any dividends to be paid during the first quarter of
2000.
ITEM 6. SELECTED FINANCIAL DATA
================================================================================
The following selected financial data table presented below has been prepared in
part from, and should be read in conjunction with, the consolidated financial
statements and schedules included elsewhere in this Report. The information
contained in the financial data table has also been adjusted for the following
business combinations and stock activity:
1996
In December 1996, the Company acquired BankFirst through a share exchange
transaction. BankFirst had $213 million in assets and total capital of $20.6
million. The Company then merged BankFirst with the Company's other bank
subsidiary, First National Bank of Gatlinburg, during March 1997. The surviving
name of the two merged banks was BankFirst, with combined assets of $423 million
and total capital of $34.4 million.
1997
In December 1997, the Company issued a five-for-four stock split on its
1,014,230 shares of Common Stock outstanding.
1998
In January 1998, BankFirst purchased Curtis Mortgage Company, Inc. ("Curtis
Mortgage") for $7.5 million. Curtis Mortgage had total assets of $8.5 million as
of the purchase date. The transaction was accounted for as a purchase, and
therefore, it is not reflected in the historical financial statements of the
Company for periods prior to that time.
In July 1998, the Company acquired First Franklin Bancshares, Inc. ("First
Franklin") in a statutory merger accounted for as a pooling of interests
transaction and simultaneously effected a five-for-one stock split. At year-end
1997, First Franklin had total assets of $182 million, total equity of $21
million, and net income of $2.6 million. Shareholders of First Franklin received
22.05 shares of the Company's Common Stock for each share of First Franklin's
common stock, giving effect to the subsequent five-for-one stock split.
BankFirst Corporation | 7
<PAGE>
In August 1998, the Company completed its IPO and began trading its shares of
Common Stock on NASDAQ under the symbol "BKFR". The Company received net
proceeds of $13.5 million from its offering of 1,270,000 shares.
1999
In June 1999, the Company initiated a stock repurchase plan and during 1999
acquired a total of 100,000 shares of its Common Stock at an average purchase
price of $8.95.
<TABLE>
<CAPTION>
For the years ended December 31,
(Dollars in thousands except share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income - tax equivalent ................... $ 59,413 $ 56,745 $ 51,893 $ 47,311 $ 42,677
Interest expense ................................... 25,136 24,927 22,652 21,238 19,082
----------------------------------------------------------------------------
Net interest income ............................. 34,277 31,818 29,241 26,073 23,595
Tax equivalent adjustment (1) ...................... (805) (830) (606) (613) (558)
----------------------------------------------------------------------------
Net interest income .............................. 33,472 30,988 28,635 25,460 23,037
Provision for credit losses ........................ (1,996) (1,706) (2,935) (667) (553)
Noninterest income ................................. 10,737 9,303 5,657 5,243 4,369
Noninterest expense ................................ (28,821) (28,218) (21,323) (20,799) (19,157)
----------------------------------------------------------------------------
Income before income tax ........................... 13,392 10,367 10,034 9,237 7,696
Income tax expense ................................. 4,506 3,558 3,406 3,188 2,517
----------------------------------------------------------------------------
Net income ......................................... $ 8,886 $ 6,809 $ 6,628 $ 6,049 $ 5,179
----------------------------------------------------------------------------
Basic earnings per share ........................... $ 0.77 $ 0.64 $ 0.66 $ 0.63 $ 0.63
Diluted earnings per share ......................... 0.73 0.59 0.61 0.59 0.59
Dividends per common share ......................... -- 0.01 0.12 0.09 0.14
Cash dividends declared - common ................... $ -- $ 115 $ 1,214 $ 876 $ 1,152
Cash dividends declared - preferred ................ 132 146 161 162 74
Selected year-end balances
Total assets ....................................... $ 812,899 $ 748,301 $ 650,717 $ 595,284 $ 545,718
Earning assets ..................................... 737,283 677,397 604,031 559,927 504,430
Intangible assets .................................. 1,845 2,002 289 406 274
Total securities ................................... 133,596 127,862 127,736 134,781 135,127
Loans - net of unearned income ..................... 585,616 508,552 464,572 412,793 350,652
Mortgage loans held for sale ....................... 12,205 25,642 395 -- --
Allowance for credit losses ........................ 7,400 6,602 6,098 4,723 4,690
Total deposits ..................................... 630,379 617,966 549,769 516,339 480,346
Repurchase agreements and other borrowed funds ..... 59,603 36,374 18,261 5,966 7,632
Long-term debt ..................................... 29,159 1,884 12,121 12,154 8,407
Stockholders' equity ............................... 86,526 82,841 61,432 55,215 44,222
Common shares outstanding .......................... 11,275,600 11,375,600 9,985,415 9,848,034 8,641,914
Preferred shares outstanding "if converted" to
common shares at a 3.0875-to-1 ratio ............... 558,992 558,992 674,643 696,413 396,009
Tangible book value per common share (2) ........... 7.16 6.77 5.74 5.20 4.86
Book value per common share (3) .................... 7.31 6.94 5.76 5.24 4.89
</TABLE>
(This table is continued on the next page.)
BankFirst Corporation | 8
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
(Dollars in thousands except share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Selected average balances
<S> <C> <C> <C> <C> <C>
Total assets ....................................... $ 782,302 $ 703,826 $ 621,719 $ 566,616 $ 527,495
Earning assets ..................................... 712,384 642,233 577,178 528,179 488,834
Total securities ................................... 132,098 128,833 128,796 136,600 135,509
Loans - net of unearned income ..................... 554,997 487,490 442,098 379,930 339,989
Mortgage loans held for sale ....................... 15,182 14,179 198 -- --
Allowance for credit losses ........................ 7,197 6,613 4,796 4,802 4,541
Total deposits ..................................... 623,036 586,049 529,820 492,435 468,068
Stockholders' equity ............................... 85,249 69,099 57,082 49,176 39,992
Performance Ratios
Avg. loans to avg. deposits ........................ 89.08% 83.18% 83.44% 77.15% 72.64%
Allowance to year end loans (5) .................... 1.26 1.30 1.31 1.14 1.34
Avg. equity to avg. assets ......................... 10.90 9.82 9.18 8.68 7.58
Leverage capital ratio ............................. 10.75 10.71 9.73 9.60 7.80
Return on avg. assets .............................. 1.14 0.97 1.07 1.07 0.98
Return on avg. equity .............................. 10.42 9.85 11.61 12.30 12.95
Dividends payout ratio (4) ......................... -- 1.71 18.77 14.88 22.56
</TABLE>
(1) Tax equivalent basis was calculated using 38% for 1999 and 1998 and 34%
for all other periods presented.
(2) Total equity, excluding intangible assets, divided by sum of: a) common
shares outstanding, and b) preferred shares assuming 100% of these shares
were converted into common shares at a 3.0875-to-1 ratio.
(3) Total equity, including intangible assets, divided by sum of: a) common
shares outstanding, and b) preferred shares assuming 100% of these shares
were converted into common shares at a 3.0875-to-1 ratio.
(4) Dividends declared on common shares divided by net income available to
common shareholders.
(5) Mortgage loans held for sale are not included in this calculation.
================================================================================
BankFirst Corporation | 9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
================================================================================
The consolidated financial information discussed herein primarily identifies
trends and material changes that occurred during the reported periods and should
be read in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere herein.
Forward-looking statements in this Report 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 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.
Introduction
================================================================================
The Company is a community banking organization, headquartered in Knoxville,
Tennessee, which generates loans and deposits through its 31 branch offices
throughout East Tennessee. The Company's operations principally involve
commercial and residential real estate lending, commercial business lending,
mortgage servicing, consumer lending, construction lending and other financial
services, including trust operations, credit card services and brokerage
services.
The Company desires to enhance its market share in Eastern Tennessee through
branch expansion and acquisitions that would provide synergy to the franchise.
Management will pursue internal growth by introducing new products and services,
adding new customers, and cross-selling existing product lines to current
customers. Total asset growth has increased at an annualized rate of more than
13% over the past five years, while net income has increased at more than 14%
annually over the same period. The Company believes that its future success will
depend upon its ability to enter new markets, increase its market share in
existing markets, and become more efficient in its operations.
In January 1998, BankFirst purchased Curtis Mortgage as an opportunity to
increase mortgage originations, which had not been a significant line of
business, and to diversify revenues through loan servicing. Curtis Mortgage is a
56-year-old mortgage company that originates and purchases mortgage loans. At
the purchase date Curtis Mortgage's loan portfolio, which consisted of loans
held for sale and loans serviced for others, totaled $451 million. At year-end
1999 this loan portfolio totaled approximately $612 million.
On July 2, 1998 the Company acquired First Franklin in a statutory merger
accounted for as a pooling of interests and effected a five-for-one stock split.
At year-end 1997, First Franklin had total assets of $182 million, total equity
of $21 million, and net income of $2.6 million. Shareholders of First Franklin
received 22.05 shares of Common Stock for each share of First Franklin common
stock, giving effect to the subsequent five-for-one stock split. As a
consequence of the merger, The First National Bank and Trust Company located in
McMinn County, Tennessee, a subsidiary of First Franklin, became a separate
subsidiary of the Company, adding risk diversification and trust expertise to
the combined entity.
BankFirst Corporation | 10
<PAGE>
On August 27, 1998 the Company completed its initial public offering (the "IPO")
and began trading its shares of Common Stock on the NASDAQ Stock Market's
National Market under the symbol "BKFR". The Company received net proceeds of
$13.5 million from its offering of 1,270,000 shares.
The BankFirst Trust Company was formed on December 21, 1998 as a wholly owned
subsidiary of the Company and consolidated First National Bank and Trust Company
and BankFirst trust departments. It was capitalized at $1.0 million. BankFirst
Trust Company provides a full array of trust services including personal trusts
and estates, employee benefit programs and individual retirement accounts
On June 17, 1999 the Company initiated a stock repurchase plan and acquired
100,000 shares of its Common Stock at an average purchase price of $8.95. The
stock buyback was part of an overall capital utilization plan to leverage its
capital through the expansion of its business franchise. On January 11, 2000 the
Company approved a second stock repurchase plan to acquire up to 500,000
additional shares of its Common Stock, which would reduce total Common Stock
outstanding from 11,275,600 shares outstanding at December 31, 1999 to
10,775,600 shares outstanding, assuming the Company repurchased all 500,000
shares. As of February 29, 2000 the Company had acquired 55,500 shares as part
of its second stock repurchase plan.
Total assets grew from $748 million at year-end 1998 to $813 million at year-end
1999, a 9% increase. The primary changes in assets included a $77 million
increase in loans, offset by a $13 million decrease in mortgage loans held for
sale. Total assets grew 15.0% from $651 million at year-end 1997 to $748 million
at year-end 1998, a $97 million increase. The primary changes in assets from
1997 to 1998 included a $25 million increase in loans held for sale, a $44
million increase in net loans, and an addition of $7 million of mortgage
servicing assets.
Total liabilities grew from $665 million at year-end 1998 to $726 million at
year-end 1999, a 9% increase. Of this increase, deposits accounted for $12
million, repurchase agreements accounted for $10 million, federal funds
represented $24 million, and Federal Home Loan Bank advances represented $17
million. Total liabilities grew from $589 million at year-end 1997 to $665
million at December 31, 1998, an increase of $76 million. Of this growth,
deposits accounted for $68 million, federal funds purchased were $2 million, and
repurchase agreements accounted for $6 million.
Total stockholders' equity at December 31, 1999 was $87 million, up $4 million
from year-end 1998. This increase represents almost $9 million in earnings, less
the change in unrealized losses on securities held for sale of $4 million. From
year-end 1997 to December 31, 1998, equity grew $21 million, due primarily to
the IPO and earnings of almost $7 million.
Results of Operations
================================================================================
1999 vs. 1998
Net income for the year ended December 31, 1999 was $8.9 million, compared to
$6.8 million for 1998. The increase in net income was primarily due to increases
in net interest income and noninterest income. Noninterest expense increased by
less than $1 million, due to normal operating costs and personnel expense
resulting from both internal and external growth.
Basic earnings per share for 1999 were $0.77 compared to $0.64 for 1998. Diluted
earnings per share increased from $0.59 in 1998 to $0.73 in 1999.
Return on average assets increased from 0.97% in 1998 to 1.14% in 1999. Return
on average equity increased from 9.85% in 1998 to 10.42% in 1999, due primarily
to an increase in earnings.
1998 vs. 1997
Net income increased $181,000, or 2.7%, to $6.8 million for the year ended
December 31, 1998, as compared to $6.6 million for 1997. The increase in net
income was primarily due to increases in net interest income, noninterest
income, and a reduction in the provision for loan losses. Noninterest expense
grew due to increases in salaries and benefits resulting from both internal and
external growth, merger costs, costs associated with the integration of Curtis
Mortgage and the opening of three additional branches.
BankFirst Corporation | 11
<PAGE>
Basic earnings per share for 1998 were $0.64 compared to $0.66 for 1997. Diluted
earnings per share decreased from $0.61 in 1997 to $0.59 in 1998. Return on
average assets decreased from 1.07% in 1997 to 0.97% in 1998. Return on average
equity decreased from 11.61% in 1997 to 9.85% in 1998. These decreases were
largely a result of the additional shares issued and capital raised in the IPO.
Net Interest Income
================================================================================
1999 vs. 1998
Fully tax equivalent interest income increased from $56.7 million in 1998 to
$59.4 million in 1999, a 5% increase. However, the net interest margin dropped
from 4.95% to 4.81% during the same period, due to lower yields on loans and
securities held for sale. Borrowing costs increased from $24.9 million in 1998
to $25.1 million in 1999, an increase of $200,000.
1998 vs. 1997
Even though fully tax equivalent net interest income increased $2.5 million, or
8.8%, from 1997 to 1998, net interest margin decreased during the period, from
5.07% in 1997, to 4.95% in 1998. The increase in net interest income, and
decrease in net interest margin, is primarily attributable to an increase in
loan volume at lower yields. Changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to volume
and the change due to rate.
<TABLE>
<CAPTION>
Volume/Rate Analysis
----------------------------------------------------------------------------
1999 change from 1998 due to 1998 change from 1997 due to
----------------------------------------------------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
- ---------------
Loans ............................................... $ 6,839 $(4,171) $ 2,668 $ 5,840 $ (874) $ 4,966
Securities
Taxable ........................................... 583 (244) 339 (1,001) (243) (1,244)
Tax-exempt ........................................ (245) 32 (213) 1,168 (327) 841
Total securities interest ..................... 338 (212) 126 167 (570) (403)
Interest-bearing deposits with other bank ....... 20 33 53 202 (121) 81
Federal funds sold ................................. (112) (67) (179) 274 (155) 119
----------------------------------------------------------------------------
Total interest income ........................ 7,085 (4,417) 2,668 6,483 (1,720) 4,763
Interest expense
- ----------------
Interest-bearing demand deposits ................... 650 (444) 206 392 (425) (33)
Saving deposits .................................... 4 (312) (308) (166) 207 41
Time deposits ...................................... 678 (1,377) (699) 1,482 126 1,608
Repurchase agreements .............................. 143 (254) (111) 670 (48) 622
Other borrowings ................................... 419 (10) 409 99 482 581
Long-term borrowings ............................... 1,430 (718) 712 (282) (262) (544)
----------------------------------------------------------------------------
Total interest expense ..................... 3,324 (3,115) 209 2,195 80 2,275
----------------------------------------------------------------------------
Net interest income ........................ $ 3,761 $(1,302) $ 2,459 $ 4,288 $(1,800) $ 2,488
============================================================================
</TABLE>
================================================================================
BankFirst Corporation | 12
<PAGE>
Asset/Liability Management
================================================================================
1999 vs. 1998
Average earning assets increased from $642 million to $712 million, or 11%, from
1998 to 1999. Loan growth, which was 15% in 1999, was the primary cause of the
overall growth in earning assets. Management has been able to achieve this
growth in loans because of long term relationships developed by current
management while at other financial institutions and most recently, as a result
of strong economic conditions in the Banks' primary markets.
During 1998, average loans represented 78% of average earning assets. During
1999 this ratio increased to 80% while loan yields decreased from 9.54% in 1998
to 8.86% in 1999. Yields on securities also fell from 6.35% in 1998 to 6.31% in
1999. The decrease in loan and security yields was consistent with general
market rate pressures, and shortening of overall maturities in the portfolio.
Most of the Company's asset growth has been funded with deposits. Average
noninterest-bearing deposits grew from an average of $104 million in 1998 to an
average of $110 million in 1999. These sources of funding do not carry an
interest cost, and thus the amount of interest-earning assets supported by
noninterest-bearing liabilities has increased. This factor does not impact net
interest spread, but has a positive impact on net interest margin.
Interest-bearing deposits also increased from $482 million to $513 million
during this same period. The average rate paid on interest-bearing deposits
decreased from 4.71% in 1998 to 4.27% in 1999. The Company is generally asset
driven, managing funding to support assets gathered.
The increase in total deposits has been lower than the growth in earning assets.
As a result, borrowed funds have increased from $40 million in 1998 to $66
million in 1999. These funds are more costly than deposits and their increase
relative to total funding has put some downward pressure on net interest margin
and spread.
1998 vs. 1997
Average earning assets increased from $577 million to $642 million, or 11.3%,
from 1997 to 1998. Loan growth, which was 13.4% in 1998, was the primary cause
of the overall growth in earning assets.
During 1997, average loans represented 76.6% of average earning assets. During
1998 this ratio increased to 78.11% while loan yields decreased from 9.69% in
1997 to 9.54% in 1998. Yields on securities also fell from 6.66% in 1997 to
6.35% in 1998. Average interest-bearing deposits grew 7.3% from 1997 to 1998,
outpaced by an 11.3% growth in earning assets. The average rate paid on
interest-bearing deposits rose from 4.69% in 1997 to 4.71% in 1998.
The portion of earning assets funded by noninterest-bearing deposits, other
liabilities and equity increased from 24.9% in 1997 to 28.2% in 1998. Borrowed
funds increased from 4.9% of average earning assets in 1997 to 6.3% in 1998.
(Refer to the "Average Balance Sheets and Interest Rates" table
on the following page.)
BankFirst Corporation | 13
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheets and Interest Rates
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Securities
Taxable .............................. $ 98,054 $ 5,878 5.99% $ 88,941 $ 5,539 6.23% $105,180 $ 6,783 6.45%
Tax-exempt (1) ....................... 33,961 2,456 7.23 37,456 2,669 7.13 23,328 1,795 7.69
Unrealized gain on A.F.S ............ 83 -- -- 2,436 -- -- 288 -- --
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total securities .................. 132,098 8,334 6.31 128,833 8,208 6.35 128,796 8,578 6.66
Loans (2) .............................. 570,179 50,514 8.86 501,669 47,846 9.54 442,296 42,880 9.70
Interest-bearing deposits with
other banks ............................ 2,987 149 4.99 2,524 96 3.80 236 15 6.36
Federal funds sold and other ........... 7,120 416 5.84 9,207 595 6.46 5,850 419 7.16
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total earning assets ................... 712,384 $ 59,413 8.34% 642,233 $ 56,745 8.83% 577,178 $ 51,892 8.99%
Noninterest-earning assets
Allowance for loan losses............... (7,197) (6,613) (4,796)
Premises and equipment.................. 26,296 23,022 19,769
Cash and due from banks................. 30,484 25,545 20,876
Accrued interest and other assets....... 20,335 19,639 8,692
-------- -------- --------
Total assets............................ $782,302 $703,826 $621,719
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Deposits
Interest-bearing demand deposits ...... $171,708 $ 5,180 3.02% $ 152,645 $ 4,974 3.26% $141,941 $ 5,007 3.53%
Savings deposits....................... 32,556 767 2.36 32,430 1,075 3.31 36,803 1,034 2.81
Time deposits.......................... 308,902 15,986 5.18 297,210 16,685 5.61 270,782 15,063 5.56
-------- -------- ---- --------- -------- ---- --------- ------- ----
Total interest-bearing deposits 513,166 21,933 4.27 482,285 22,734 4.71 449,526 21,104 4.69
Borrowed funds
Repurchase agreements................. 25,514 949 3.72 22,682 1,060 4.67 9,110 438 4.81
Other borrowings...................... 15,964 899 5.63 8,634 490 5.68 7,173 414 5.77
Long-term borrowings.................. 24,885 1,355 5.45 8,826 643 7.29 12,214 696 5.70
-------- -------- ---- --------- -------- ---- --------- ------- ----
Total borrowed funds ............... 66,363 3,203 4.83 40,142 2,193 5.46 28,497 1,548 5.43
-------- -------- ---- --------- -------- ---- --------- ------- ----
Total interest-bearing liabilities 579,529 $ 25,136 4.34% 522,427 $ 24,927 4.77% 478,023 $22,652 4.74%
Noninterest-bearing liabilities
Noninterest-bearing demand deposits .... 109,870 103,764 80,294
Other liabilities....................... 7,654 8,536 6,320
Stockholders' equity .................. 85,249 69,099 57,082
-------- --------- --------
Total liabilities and stockholders'
equity ................................... $782,302 $ 703,826 $621,719
======== ========= ========
Interest margin recap
Net interest income and interest
rate spread............................... $ 34,277 4.00% $ 31,818 4.06% $29,240 4.25%
======== ======== =======
Net interest income margin.............. 4.81% 4.95% 5.07%
</TABLE>
(1) Interest income on tax-exempt securities has been adjusted to a tax
equivalent basis using a marginal federal income tax rate of approximately
38% for 1999 and 1998 and 34% for 1997. Tax equivalent adjustment was $805
for 1999, $830 for 1998, and $606 for 1997.
(2) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income. Loan fees were $1,644 for 1999, $1,403 for
1998, and $1,113 for 1997.
================================================================================
BankFirst Corporation | 14
<PAGE>
Provision for Credit Losses
================================================================================
1999 vs. 1998
The provision for credit losses was $2.0 million in 1999 compared to $1.7
million in 1998. The Company experienced net charge-offs of $1.2 million in both
1999 and 1998, resulting in a ratio of net charge-offs to average loans of 0.22%
and 0.25% respectively. The increase in the provision in 1999 vs. 1998 is
reflective of the increase in loans during the year. Management expects the
provision in 2000 to increase over 1999 due to loan growth and market conditions
impacted by higher interest rates. Commercial and commercial real estate loan
charge-offs increased from $468,000 in 1998 to $688,000 in 1999, while
charge-offs of residential real estate loans dropped from $310,000 to $19,000
during the same period. The Company charges off any loan or portion of a loan,
when management determines that a loss is imminent irrespective of its due date.
All loans recommended for charge off are reviewed by the Senior Loan Officer and
approved by the President before final approval by the Boards of Directors of
the Banks. Prior years' accrued interest is charged off and current years'
accrued interest is reversed against income.
1998 vs. 1997
The provision for credit losses was $1.7 million in 1998 compared to $2.9
million in 1997. The Company experienced net charge-offs of $1.2 million in 1998
and net charge-offs in 1997 of $1.6 million. The decrease in the provision in
1998 vs. 1997 is reflective of the decline in charge-offs and nonperforming
loans during the year. Factors that gave rise to the 1997 provision included a
36.6% increase in commercial loans during the year and a 146.1% increase in net
charge-offs during the year, which increased historical loss factors applied to
the portfolio.
<TABLE>
<CAPTION>
Analysis of Allowance for Credit Losses
As of December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ....................... $ 6,602 $ 6,098 $ 4,723 $ 4,690 $ 4,526
Loans charged off
- -----------------
Commercial, financial, and agricultural........... (618) (353) (1,079) (182) (203)
Commercial real estate ........................... (70) (115) (161) (6) --
Real estate-construction ......................... -- -- -- -- --
Real estate-residential .......................... (19) (310) (76) (55) (44)
Installment ...................................... (757) (727) (503) (661) (454)
Lease financing .................................. -- (19) (14) -- --
-------------------------------------------------------------------------
Total charge-offs .............. (1,464) (1,524) (1,833) (904) (701)
-------------------------------------------------------------------------
Charge-offs recovered
- ---------------------
Commercial, financial, and agricultural .......... 38 41 41 53 146
Commercial real estate ........................... 12 1 2 -- --
Real estate-construction ......................... -- -- 33 12 --
Real estate-residential .......................... 3 60 39 21 13
Installment ...................................... 213 217 158 184 153
Lease financing .................................. -- 3 -- -- --
-------------------------------------------------------------------------
Total recoveries ............... 266 322 273 270 312
Net loans charged off .............................. (1,198) (1,202) (1,560) (634) (389)
Current year provision ............................. 1,996 1,706 2,935 667 553
-------------------------------------------------------------------------
Balance at end of year ............................. $ 7,400 $ 6,602 $ 6,098 $ 4,723 $ 4,690
=========================================================================
Loans, net at year end ............................. $ 585,616 $ 508,552 $ 464,967 $ 412,793 $ 350,652
Ratio of allowance to loans at year end ............ 1.26% 1.30% 1.31% 1.14% 1.34%
Average loans (1) .................................. $ 554,997 $ 487,490 $ 442,296 $ 379,930 $ 339,989
Ratio of net loans charged off to
average loans ...................................... 0.22% 0.25% 0.35% 0.17% 0.11%
</TABLE>
(1) Excludes mortgage loans held for sale.
================================================================================
BankFirst Corporation | 15
<PAGE>
Nonperforming Assets
================================================================================
1999 vs. 1998
A banking company's credit risk profile is generally reflected in the level and
types of loans held, since loans are usually the highest risk assets owned. Even
though the majority of the Company's loans are commercial, which is typically
the highest risk loan type, management believes that two factors mitigate the
credit risk in this portfolio. First, 64% of commercial loans are secured
primarily by income-producing real estate, and secondly, BankFirst's early
growth was generated through seasoned loan relationships. The Company's
relatively low levels of historical charge-offs and non-performing loans reflect
the effect of these mitigating factors.
Nonperforming loans at December 31, 1999 were $6.2 million as compared to $2.5
million at year-end 1998. Nonperforming loans, as a percent of total loans was
1.07% at year-end 1999 compared to 0.49% at year-end 1998. Nonaccrual loans
amounted to $4.0 million of the nonperforming totals in 1999 and $537,000 in
1998. The increase is mainly attributable to one large credit representing $2.6
million. Management believes that it is adequately secured by real estate to
mitigate any losses that have not already been accounted for. A loan is reviewed
at least when it becomes 90 days delinquent for placement on a nonaccrual
status. If the prospects for collection are good and the collateral is adequate
to cover both principal and interest, then the loan can continue to accrue
interest; otherwise it is placed on nonaccrual. Should any loan become 180 days
delinquent, it is placed on nonaccrual. Accrued interest for the current year is
reversed immediately against interest income and prior year's interest is
charged off.
1998 vs. 1997
Nonperforming loans at December 31, 1998, were $2.5 million as compared to $2.8
million at year-end 1997. Nonperforming loans, as a percent of loans was 0.49%
at year-end 1998 and 0.61% at December 31, 1997. Nonaccrual loans amounted to
$537,000 of the nonperforming total in 1998 and $1.1 million in 1997.
<TABLE>
<CAPTION>
Nonperforming Assets
as of December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Principal balance
- -----------------
Nonaccrual .............................................. $3,981 $ 537 $1,141 $ 900 $ 581
90 days or more past due and still
accruing .............................................. 2,261 1,971 1,705 1,518 461
------------------------------------------------------------------
Total nonperforming loans ................... $6,242 $2,508 $2,846 $2,418 $1,042
==================================================================
Nonperforming as a percent of loans ..................... 1.07% 0.49% 0.61% 0.59% 0.30%
Other real estate owned ("OREO") ........................ $1,893 $1,290 $ 878 $ 309 $ 770
OREO as a percent of loans .............................. 0.32% 0.25% 0.19% 0.07% 0.22%
Allowance as a percent of nonperforming
loans ................................................... 118.55% 263.24% 214.27% 195.33% 450.10%
</TABLE>
================================================================================
BankFirst Corporation | 16
<PAGE>
Allocation of the Allowance for Credit Losses
================================================================================
Future provisions for credit losses will be dependent on loan growth, loan mix,
portfolio credit risk and actual losses incurred. Management has determined that
a total allowance of $7.4 million, or 1.26% of total loans exclusive of loans
held for sale for 1999, is adequate for credit losses inherent in the total
portfolio.
<TABLE>
<CAPTION>
Allowance Allocation
at December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural ..................... $ 1,574 $ 1,312 $ 1,231 $ 801 $ 714
Commercial real estate............ 2,789 2,442 1,874 1,366 1,263
Real estate-construction.......... 215 268 244 338 276
Real estate-residential........... 1,149 821 839 1,126 1,227
Installment....................... 592 600 986 666 709
Unallocated....................... 1,081 1,159 924 426 501
-----------------------------------------------------------------------------
Total............................. $ 7,400 $ 6,602 $ 6,098 $ 4,723 $ 4,690
=============================================================================
</TABLE>
Noninterest Income
================================================================================
1999 vs. 1998
Noninterest income increased 15% from $9.3 million in 1998 to $10.7 million in
1999, primarily attributable to origination fees and discount points earned on
mortgage loans held for sale. Service charges on deposit-related products
generated $4.7 million for the year, an increase of more than $400,000 over the
previous year. Trust income increased nearly $100,000 to $999,000 in 1999 as the
trust assets under management increased during the year. Loan servicing income
increased nearly $300,000 in 1999, which was primarily attributable to Curtis
Mortgage's mortgage banking activities. (See the section entitled "Mortgage
Banking" herein for additional information.) Other noninterest income increased
$625,000 due mainly to gains on the sale of other real estate.
1998 vs. 1997
Noninterest income increased from $5.7 million in 1997 to $9.3 million in 1998,
primarily attributable to mortgage banking activities. Service charges on
deposit-related products generated $4.3 million for the year, an increase of
$446,000 over the previous year. Trust income increased from $704,000 in 1997 to
$903,000 in 1998 as the trust assets under management increased during the year.
Loan servicing income increased $131,000 in 1998, which was primarily
attributable to the purchase of Curtis Mortgage in January 1998. Net gain on
sale of residential mortgage loans increased from $226,000 in 1997 to $3.3
million in 1998, also as a result of mortgage banking activities. Securities
gains were $124,000 in 1998 and $309,000 in 1997.
<TABLE>
<CAPTION>
Noninterest Income
- ------------------------------------------------------------------------------------------------------------------------
% change % change
(Dollars in thousands) 1999 from 1998 1998 from 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest Income
Deposit service charges and fees . $ 4,668 9.65% $ 4,257 11.70% $ 3,811
Trust department income .......... 999 10.63 903 28.27 704
Loan servicing income, net of
amortization ..................... 426 225.19 131 NM --
Other ............................ 1,230 103.31 605 (0.33) 607
---------------------------------------------------------------------------------
7,323 24.20 5,896 15.11 5,122
Realized gain on sale of loans ... 3,374 2.77 3,283 1,352.65 226
Security gains/(losses) .......... 40 (67.74) 124 (59.87) 309
---------------------------------------------------------------------------------
Total Noninterest Income ......... $ 10,737 15.41% $ 9,303 64.45% $ 5,657
=================================================================================
</TABLE>
NM = Not Measurable
BankFirst Corporation | 17
<PAGE>
Noninterest Expense
================================================================================
1999 vs. 1998
Noninterest expense increased approximately $600,000, or 2%, to $28.8 million in
1999 from $28.2 million in 1998. The primary component of noninterest expense is
salaries and benefits, which increased approximately $700,000, or 5%, to $15.7
million in 1999 from $15.1 million in 1998. Occupancy expense decreased
approximately $400,000 from the previous year, which included start-up costs
associated with the opening of three new branches. Other noninterest expense
decreased by approximately $900,000 in 1999 that was mainly attributable to
merger-related expenses incurred in 1998. The Company's efficiency ratio in 1999
was 64.1% compared to 68.8% in 1998.
1998 vs. 1997
Noninterest expense increased $6.9 million, or 32%, to $28.2 million in 1998
from $21.3 million in 1997. The primary component of noninterest expense is
salaries and benefits, which increased $3.9 million, or 35.5%, to $15.0 million
in 1998 from $11.1 million in 1997. The increase in salaries and benefits is
primarily attributable to the expenses of newly acquired Curtis Mortgage and the
overall growth of the Company. Occupancy expense increased $775,000, or 45%, to
$2.5 million in 1998 from $1.7 million in 1997. Office expense rose 107% to $1.6
million in 1998 from $775,000 in 1997.
<TABLE>
<CAPTION>
Noninterest Expense
- -------------------------------------------------------------------------------------------------------------------
% change % change
(Dollars in thousands) 1999 from 1998 1998 from 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest Expense
Salaries and employee benefits $15,731 4.50% $15,054 35.50% $11,110
Occupancy expense ............ 2,054 (17.54) 2,491 45.16 1,716
Equipment expense ............ 2,599 13.74 2,285 (9.93) 2,537
Office expense ............... 1,844 14.82 1,606 107.23 775
Data processing expense ...... 1,722 26.25 1,364 8.86 1,253
Advertising .................. 734 78.59 411 (26.34) 558
Other ........................ 4,137 (17.38) 5,007 48.40 3,374
--------------------------------------------------------------------------
Total Noninterest Expense .... $28,821 2.14% $28,218 32.34% $21,323
==========================================================================
</TABLE>
Provision for Income Taxes
================================================================================
The total provision for income taxes was $4.5 million for 1999, reflecting an
increase of $900,000 when compared to $3.6 million for 1998. The increase in
1999 was due to a higher level of pre-tax income. The effective tax rate was
33.6% in 1999 and 34.3% in 1998.
BankFirst Corporation | 18
<PAGE>
Investment Securities
================================================================================
BankFirst and The First National Bank and Trust Company, subsidiaries of the
Company, use their securities portfolios primarily as a source of liquidity and
a base from which to pledge assets for repurchase agreements and public
deposits. Generation of income from securities is not a primary focus of the
Banks. Total securities were $133.6 million at year-end 1999, which is slightly
higher than the $127.9 million balance in 1998. The Banks' policy guidelines are
designed to minimize credit, market, and liquidity risk, and securities
generally must be "investment grade" or higher to be purchased. All securities
are classified as "available for sale" to provide flexibility for asset
liability management. Approximately $95.5 million of year-end 1999 securities
were pledged for public deposits and repurchase agreements. The Banks do not
invest in off-balance sheet derivative financial instruments, such as interest
rate swaps.
Securities
at December 31,
(Dollars in thousands) 1999 1998 1997
------------------------------------------------------------------------------
Available For Sale
U.S. Government & Agencies....... $ 76,914 $ 71,504 $ 77,969
State and municipal.............. 39,891 39,008 38,999
Mortgage-backed and asset-backed 16,791 17,350 10,768
------------------------------------------
Total Available For Sale ........ $ 133,596 $ 127,862 $ 127,736
==========================================
<TABLE>
<CAPTION>
Securities Maturity Schedule
at December 31, 1999
(Dollars in thousands) 1 Year and Less 1 to 5 Years 5 to 10 Years Over 10 Years Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available For Sale
U.S. Government & Agencies...... $11,988 5.98% $42,904 6.06% $ 21,906 6.58% $ 116 5.55% $ 76,914 6.20%
State and municipal............. 1,137 6.82 8,227 6.09 21,565 6.47 8,962 6.64 39,891 6.44
Mortgage-backed and asset-backed 16,791 6.07
------- ------- -------- ------- ------- -----
Total Available For Sale ....... $13,125 $51,131 $ 43,471 $ 9,078 $133,596 6.26%
======= ======= ======== ======= ======== =====
</TABLE>
Loans
================================================================================
Total loans, exclusive of loans held for sale, were $585.6 million at year-end
1999, and $508.6 million at year-end 1998. Loan growth was $77 million during
1999 and $44 million during 1998. Loans in all categories continued to grow
during 1998 and 1999 primarily as a result of strong economic conditions in the
Banks' primary markets, with commercial lending experiencing the largest growth.
A significant percentage of commercial loans is represented by the hospitality
industry, which comprises approximately $132 million, or 22.6%, of the Company's
total loan portfolio.
Management expects loan growth in 2000 to continue at a slower rate than in 1999
due to rising interest rates initiated by the Federal Reserve Board. Commercial
lending will continue to be the primary focus, although management will work to
generate additional consumer loans, as well as additional residential mortgage
loans through Curtis Mortgage.
Lending activities are under the direct supervision of the Boards of Directors
and senior management of the Banks. The Banks operate under loan policies that
provide, among other things, guidelines for underwriting, credit criteria, loan
composition, concentrations and administration.
BankFirst Corporation | 19
<PAGE>
<TABLE>
<CAPTION>
Loans Outstanding
at December 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financing and
agricultural.............. $ 101,310 $ 87,793 $ 95,143 $ 69,614 $ 53,430
Commercial real estate.... 250,403 211,114 164,102 155,389 116,372
Real estate-construction . 27,585 36,779 24,977 26,379 22,021
Real estate-residential .. 138,001 115,115 119,748 110,636 108,276
Installment............... 68,968 57,497 59,947 50,277 50,569
Other..................... 203 1,614 2,623 2,035 1,754
----------------------------------------------------------------------------------------
Total loans............. 586,470 509,912 466,540 414,330 352,422
Unearned income........... (854) (1,360) (1,968) (1,537) (1,770)
----------------------------------------------------------------------------------------
Total loans, net ... $ 585,616 $ 508,552 $ 464,572 $ 412,793 $ 350,652
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Composition of Loan Portfolio by Type
at December 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural.......... 17.27% 17.22% 20.39% 16.80% 15.16%
Commercial real estate ... 42.70 41.40 35.17 37.50 33.02
Real estate-construction . 4.70 7.21 5.35 6.37 6.25
Real estate-residential .. 23.53 22.58 25.67 26.70 30.72
Installment............... 11.76 11.28 12.85 12.13 14.35
Other..................... 0.04 0.31 0.57 0.50 0.50
=========================================================================================
Total..................... 100.00% 100.00% 100.00% 100.00% 100.00%
=========================================================================================
</TABLE>
Mortgage Banking
================================================================================
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 costs 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 its expected life. Net gains and
losses on loans, coupled with loan servicing income and related amortization,
were $3.8 million for 1999, compared to $3.4 million for the same period last
year. The increase was attributed to slower refinancing of serviced loans, which
favorably impacted amortization expense.
The interest rate environment heavily influences secondary market residential
loan originations and consumer refinance activity. Loan origination and purchase
loan volumes decreased from 1998; however, the resulting gains realized on loan
sales were higher in 1999. Market interest rates for year 2000 are expected to
be higher than 1999 levels, which may cause gain on sale of loans to be lower
than 1998. Given this expected rise in interest rates, management believes that
the secondary market sales volume, comprised mainly of fixed rate products, will
continue to decline from current levels.
BankFirst Corporation | 20
<PAGE>
Deposits and Borrowings
================================================================================
Deposits have been the Company's primary source of funding for loans, although
the Company also utilizes borrowed funds, including customer repurchase
agreements. The Company believes it has the ability to raise deposits quickly
within its market areas by slightly raising interest rates. The Company's
deposit strategy, however, has been to remain competitive in its markets,
without paying the highest yield, because of the availability and attractiveness
of other sources of funding. Customer repurchase agreements and Federal Home
Loan Bank of Cincinnati ("FHLB") advances, while more costly than deposit
funding, are typically the lowest costing borrowed funds available in the
marketplace, and are utilized by management to raise identified amounts of funds
with more precision than deposit solicitations. Although management expects to
continue using repurchase agreements, short-term borrowings and FHLB advances,
deposits will continue to be the Company's primary funding source.
Total deposits grew at a rate of 2% during 1999 and 12% during 1998, resulting
from an increase in deposit-taking branch locations and effective marketing
strategies. Despite the increase in deposit growth, loan growth, including loans
held for sale, outpaced the growth of deposit sources, resulting in an increase
in the loan to deposit ratio to 89.1% at year-end 1999, from 86.4% at year-end
1998. To supply the needed liquidity, the Company increased its repurchase
agreements from $22.2 million in 1998 to $32.1 million in 1999. These accounts
are considered volatile under regulatory requirements, although the Company has
found them to be a steady source of funding. The Company has utilized the FHLB
as a borrowing source. FHLB borrowings were $11.9 million at year-end 1998 and
$29.2 million at year-end 1999. The FHLB will continue to be a source for
funding loan growth in the future, as the Company intends to draw additional
borrowings to fund loan growth.
<TABLE>
<CAPTION>
Deposit Information
at December 31,
--------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing........ $ 105,079 $ 117,823 $ 92,749
Interest-bearing demand.... 181,918 159,890 150,761
Saving deposits............ 31,007 33,862 37,270
Time....................... 312,375 306,391 268,989
---------------------------------------------------------------
Total Deposits............. $ 630,379 $ 617,966 $ 549,769
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Maturity Ranges of Time Deposits
With Balances of $100,000 or More at December 31,
-------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 months or less........... $ 24,905 $ 23,642 $ 25,686
3 through 6 months......... 27,611 22,623 14,324
6 through 12 months........ 25,815 24,231 21,167
Over 12 months............. 17,572 10,906 17,083
--------------------------------------------------------------
$ 95,903 $ 81,402 $ 78,260
==============================================================
</TABLE>
In general, large certificate of deposit customers tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. However, the
Company does not believe that its deposits of this type are materially more
sensitive to interest rate changes than its other certificates of deposits
because such certificates are principally held by long-term customers located in
the Banks' market areas. Certificates of deposit of this type rose $14.5 million
from year-end 1998 to December 31, 1999, representing a $3.1 million increase.
BankFirst Corporation | 21
<PAGE>
Interest Rate Sensitivity
================================================================================
A key element in the financial performance of financial institutions is the
level and type of interest rate risk assumed. The single most significant
measure of interest rate risk is the relationship of the repricing periods of
earning assets and interest-bearing liabilities. The more closely the repricing
periods are correlated, the less interest rate risk assumed by the Company. In
general, community bank customer preferences tend to push the average repricing
period for costing liabilities to a shorter time frame than the average
repricing period of earning assets, resulting in a net liability sensitive
position in time frames less than one year.
<TABLE>
<CAPTION>
Liquidity and Interest Rate Sensitivity
at December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1-90 Days 91-365 Days 1-5 Years Over 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans, net (1)........................... $ 203,781 $ 115,461 $ 236,936 $ 41,643 $ 597,821
Securities available for sale
Taxable................................ 1,776 19,868 48,641 25,881 96,166
Tax-exempt............................. 1,445 2,915 25,854 7,216 37,430
-------------------------------------------------------------------------
Total securities.................... 3,221 22,783 74,495 33,097 133,596
Federal funds sold and other............. 1,621 749 -- 3,496 5,866
-------------------------------------------------------------------------
Total Interest-Earning Assets.............. $ 208,623 $ 138,993 $ 311,431 $ 78,236 $ 737,283
=========================================================================
Interest-Bearing Liabilities
Interest-bearing demand deposits......... $ 181,918 $ -- $ -- $ -- $ 181,918
Savings deposits......................... 31,007 -- -- -- 31,007
Time Deposits............................ 86,319 156,633 69,423 -- 312,375
Repurchase agreements and other borrowed
Funds.................................. 59,603 -- -- -- 59,603
Long-term borrowings..................... 27,000 -- -- 2,159 29,159
-------------------------------------------------------------------------
Total Interest-Bearing Liabilities......... $ 385,847 $ 156,633 $ 69,423 $ 2,159 $ 614,062
=========================================================================
Rate sensitive gap......................... (177,224) (17,640) 242,008 76,077 123,221
Rate sensitive cumulative gap.............. (177,224) (194,864) 47,144 123,221
Cumulative gap as a percentage of earning
assets..................................... (24.04)% (26.43)% 6.39% 16.71%
</TABLE>
(1) Includes mortgage loans held for sale.
The Company has a cumulative negative GAP (defined as the dollar difference
between rate-sensitive assets and rate-sensitive liabilities with respect to a
given time frame) of approximately 24.0% and 26.4% at the end of 90 days and one
year, respectively as of December 31, 1999. This compares with a cumulative
negative GAP of 11.6% and 18.6% at the end of 90 days and one year, as of
year-end 1998. Management believes that this level of negative GAP is
appropriate since many of the liabilities that are contractually immediately
repricable can be effectively repriced more slowly than the assets, which are
contractually immediately repricable in a rising rate environment. Conversely,
those liabilities can often be repriced downward more rapidly than contractually
required assets repricing in a downward rate environment. The degree to which
management can control the rate of change in deposit liabilities, which are
contractually immediately repricable, is affected to a large extent by the speed
and amount of interest rate movements. Management's estimates regarding the
actual repricing of contractually immediately repricable liabilities is
incorporated into the Company's earnings simulation model.
BankFirst Corporation | 22
<PAGE>
The Company uses an earnings simulation model to analyze the net interest income
sensitivity. Potential changes in market interest rates and their subsequent
effect on interest income is then evaluated. The model projects the effect of
instantaneous movements in interest rates of 100 and 200 basis points ("bp").
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to interest rates are also incorporated in the model. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes, as well as changes in market conditions and
the application of various management strategies.
<TABLE>
<CAPTION>
Market Risk Analysis
at December 31, 1999
Decrease in Rates Increase in Rates
----------------- -----------------
(Dollars in thousands) 200 Basis Points 100 Basis Points Level Rates 100 Basis Points 200 Basis Points
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected Interest Income
Loans....................... $ 52,061 $ 53,410 $ 55,484 $ 57,559 $ 58,906
Investments................. 8,925 9,058 9,229 9,400 9,532
Federal funds sold.......... -- -- -- -- --
Total interest income....... $ 60,986 $ 62,468 $ 64,713 $ 66,959 $ 68,438
Projected Interest Expense
Deposits.................... $ 20,951 $ 21,924 $ 23,413 $ 24,846 $ 25,738
FHLB term advances.......... 1,444 1,555 1,727 1,900 2,010
Fed funds purchased
& other borrowings.......... 3,144 3,354 3,687 4,021 4,210
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>
<TABLE>
<CAPTION>
Summarized Market Risk Analysis
at December 31, 1998
Decrease in Rates Increase in Rates
----------------- -----------------
(Dollars in thousands) 200 Basis Points 100 Basis Points Level Rates 100 Basis Points 200 Basis Points
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Projected total interest
income...................... $49,667 $51,888 $54,085 $56,333 $58,546
Projected total interest
expense..................... 20,824 22,594 23,524 25,032 26,394
Net interest income......... 28,843 29,294 30,561 31,301 32,152
Change from level rates .... (1,738) (1,287) 720 1,571
% change from level rates .. (5.68)% (4.21)% 2.35% 5.14%
</TABLE>
In the event of an immediate 100 bp upward shift in the yield curve, it is
estimated that net interest income would increase by $306,000 compared to an
increase of $594,000 in the event of a similar 200 bp rate movement. These
changes represent 0.85% and 1.66% of net interest income, respectively. This
compares to December 31, 1998, when an immediate 100 bp upward shift resulted in
net interest income increasing $720,000 and an increase of $1.6 million when
there was an upward movement of 200 bp. Downward rate movements result in
estimated decreases in net interest income of reasonably similar amounts and
percentages.
BankFirst Corporation | 23
<PAGE>
Even though the Company's cumulative GAP at one year is negative, the earnings
simulation model indicates that an increase in interest rates of 100 bp and 200
bp would result in increased net interest income. This occurs because management
believes that if overall market interest rates increase modestly, the market
would not require an immediate, corresponding repricing of non-term deposit
liabilities.
Although the 1999 model shown above reflects a slight increase in net interest
income if interest rates rise, future fluctuations in noninterest-bearing
deposits, reductions in loan origination fees, higher borrowing costs, and
increasingly competitive loan pricing pressures may have a significant negative
impact on future earnings. The Company's net interest margin has declined from
5.07% at December 31, 1997 to 4.95% at December 31, 1998 to 4.81% at December
31, 1999, mainly due to the above-reflected situations. Refer to the section
entitled "Asset/Liability Management" herein for additional information.
Equity and Capital Resources
================================================================================
The Company was "well capitalized" for regulatory purposes during 1999 and 1998.
Please refer to Note 11, "Capital Requirements and Restrictions on Retained
Earnings", in the Financial Statements included herein. The Company has issued
stock upon the exercise of stock options, conversion of preferred stock to
common stock, and in connection with a five for four common stock split in 1997
and five for one split in 1998. In September 1998 the Company received net
proceeds from its initial public offering. The increase in capital from the
offering will be utilized to support long-term future growth. The Company has
not paid cash dividends on its Common Stock since becoming a publicly traded
Company in September 1998. The Company's current strategy is to support equity
growth by retaining net profits rather than distributing its net profits in the
form of cash dividends.
Items that represent common stock equivalents include 181,050 outstanding shares
of the Company's 5% preferred stock, $5.00 par value per share (the "Preferred
Stock"), and 987,810 common stock options outstanding at year-end 1999. Each
share of the Preferred Stock is convertible into 3.0875 shares of Common Stock,
adjustable for stock splits and future recapitalizations. There are 1,000,000
authorized shares of Preferred Stock; however, management currently has no plans
to issue additional shares. There are 1,936,660 additional shares of Common
Stock available for grant under the Company's Incentive Stock Option Plan. The
Company plans to continue granting stock options to selected officers, directors
and other key employees.
Liquidity
================================================================================
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets and long- and short-term
borrowings, based upon management's consideration of expected loan demand,
expected deposit flows and securities sold under repurchase agreements (which
are generally deposit equivalents arising from a corporate cash management
program offered by the Company). Management looks to deposits and other
borrowings as its primary sources of liquidity. The Banks' Asset/Liability
Committees evaluate funding sources on a quarterly basis, set funding policy,
and evaluate repricing and maturity of the Banks' assets and liabilities in
order to diminish the potential adverse impact that changes in interest rates
could have on the Banks' net interest income.
The Company believes it has the ability to raise deposits quickly within its
market area by slightly raising interest rates, but has typically been able to
achieve deposit growth without paying above market interest rates. Deposit
growth has funded most of the significant asset growth in the past several
years, but has decreased modestly as a percent of total funding. The Company
actively solicits customer cash management relationships, which often includes a
securities repurchase agreement feature. Under these agreements, commercial
customers are able to generate earnings on otherwise idle funds on deposits with
the Banks. These accounts are considered volatile under regulatory requirements,
although the Company has found them to be a steady source of funding. The
Company has been able to increase customer relationships because of its strong
business-lending program. While more costly than deposit funding, these
deposit-related accounts are typically the lowest cost borrowed funds available
to the Company.
BankFirst Corporation | 24
<PAGE>
The Company maintains significant lines of credit with other financial
institutions. At December 31, 1999, total borrowing capacity under those lines
amounted to approximately $55.5 million under agreements with five commercial
banks and an additional $7.6 million with the FHLB and $51.7 million with the
Federal Reserve Bank.
While management is currently extending the average maturity of its securities
for interest rate risk purposes, substantial liquidity is available from normal
maturities of securities. The Company also had $133.6 million in securities
classified as "available for sale" at year-end 1999. The ability to sell such
securities is another potential source of liquidity, although management
generally does not use this source of funding frequently. To the extent such
securities are pledged to outstanding borrowings, they are not available for
liquidity purposes. Proceeds from the maturities of loans are another steady
source of funding, although on a net basis the demands for new loans and
renewals have exceeded funds provided by maturing loans.
<TABLE>
<CAPTION>
Loan Liquidity
at December 31, 1999
(Dollars in thousands) Loan Maturities
- --------------------------------------------------------------------------------------------------------------------
1 year and less 1-5 years Over 5 years Total
--------------- --------- ------------ -----
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural ...................... $ 49,669 $ 44,958 $ 6,683 $ 101,310
Commercial real estate............. 5,846 179,313 64,546 249,705
Real estate - construction and
residential (1).................... 39,858 64,870 73,063 177,791
Installment & Other................ 18,382 43,646 6,987 69,015
----------- ------------ ------------- ------------
Total loans........................ $ 113,755 $ 332,787 $ 151,279 $ 597,821
=========== ============ ============= ============
Loans maturing after 1 year with:
Fixed interest rates............. $ 324,006
Floating interest rates.......... 160,060
===========
$ 484,066
===========
</TABLE>
(1) Includes $12,205 of mortgage loans held for sale, which are generally sold
within 60 days.
The liquidity discussion above has described the Company's liquidity needs on a
consolidated basis. In general, the deposit and borrowing capacity described
above is at the bank level. If necessary, additional funding sources are
available at the holding company level. Substantial liquidity can be moved
between the Banks and the holding company, although there are certain regulatory
restrictions on such flows, particularly from the Banks to the holding company.
Please refer to Note 11, "Capital Requirements and Restrictions on Retained
Earnings", to the Financial Statements. The holding company currently has no
borrowings, and management's previous history has been to not pay dividends on
common stock, but rather to retain net profits to support the Company's growth.
As a result, the holding company's independent liquidity needs result primarily
from holding company only expenses, which are quite small in relation to its
sources of liquidity.
BankFirst Corporation | 25
<PAGE>
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 does not expect to incur any
additional related expenses in 2000, unforeseen circumstances may arise;
therefore, monitoring will continue at least through the first 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 our contingency plans remain available. Management has determined that if a
business interruption as a result of the Year 2000 issue occurred, that such an
interruption could be material to the Company's overall financial performance.
Effects of Inflation
================================================================================
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Nearly all of the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The
Company's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Company's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the prices of goods and services.
New Reporting Requirements
================================================================================
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 extending
the implementation date of SFAS 133 until January 1, 2001. Management has not
yet determined the impact of this standard.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
The information for this item is hereby incorporated by reference to the
Liquidity and Interest Rate Sensitivity section of Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
BankFirst Corporation | 26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
BankFirst Corporation
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of BankFirst
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ending December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1997 financial statements of First Franklin
Bancshares, Inc. which statements reflect net income constituting 39% of the
related 1997 total. The First Franklin Bancshares, Inc. 1997 financial
statements were audited by other auditors, whose report dated January 22, 1998
thereon has been furnished to us and our opinion expressed herein, insofar as it
relates to the amounts included for First Franklin Bancshares, Inc. in the
consolidated financial statements, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BankFirst Corporation as of
December 31, 1999 and 1998, and its results of operations and cash flows for
each of the three years in the period ending December 31, 1999 in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 21, 2000
BankFirst Corporation | 27
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,039 $ 36,136
Federal funds sold 0 8,850
------------ ------------
Total cash and cash equivalents 36,039 44,986
Securities available for sale 133,596 127,862
Mortgage loans held for sale 12,205 25,642
Loans, net of allowance for credit losses of $7,400 and $6,602 578,216 501,950
Premises and equipment, net 26,814 24,927
Mortgage servicing rights 8,896 7,484
Federal Home Loan Bank Stock, at cost 3,420 3,189
Intangible assets 1,845 2,002
Accrued interest receivable and other assets 11,868 10,259
------------ ------------
Total assets $ 812,899 $ 748,301
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 105,079 $ 117,823
Interest-bearing deposits 525,300 500,143
------------ ------------
Total deposits 630,379 617,966
Securities sold under agreements to repurchase 32,103 22,208
Federal funds purchased and other borrowings 27,500 4,166
Advances from the Federal Home Loan Bank 29,159 11,884
Accrued interest payable and other liabilities 7,232 9,236
------------ ------------
Total liabilities 726,373 665,460
Stockholders' equity
Common stock: $2.50 par value, 15,000,000 shares
authorized, 11,275,600 and 11,375,600 shares outstanding 28,189 28,439
Noncumulative convertible preferred stock: $5 par value,
1,000,000 shares authorized, 181,050 shares outstanding 905 905
Additional paid-in capital 33,448 34,093
Retained earnings 25,914 17,160
Accumulated other comprehensive income (loss) (1,930) 2,244
------------ ------------
Total stockholders' equity 86,526 82,841
------------ ------------
Total liabilities and stockholders' equity $ 812,899 $ 748,301
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
BankFirst Corporation | 28
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 50,514 $ 47,846 $ 42,880
Taxable securities 5,878 5,539 6,874
Nontaxable securities 1,651 1,839 1,173
Other 565 691 360
---------- ---------- ----------
58,608 55,915 51,287
Interest expense
Deposits 21,933 22,734 21,104
Federal funds purchased and repurchase agreements 1,848 1,550 744
Federal Home Loan Bank advances and other debt 1,355 643 804
---------- ---------- ----------
25,136 24,927 22,652
Net interest income 33,472 30,988 28,635
Provision for credit losses 1,996 1,706 2,935
---------- ---------- ----------
Net interest income after provision
for credit losses 31,476 29,282 25,700
Noninterest income
Service charges and fees 4,668 4,257 3,811
Net securities gains 40 124 309
Net gain on loan sales 3,374 3,283 226
Loan servicing income, net of amortization 426 131 -
Trust department income 999 903 704
Other 1,230 605 607
---------- ---------- ----------
10,737 9,303 5,657
Noninterest expense
Salaries and employee benefits 15,731 15,054 11,110
Occupancy expense 2,054 2,491 1,716
Equipment expense 2,599 2,285 2,537
Office expense 1,844 1,606 775
Data processing fees 1,722 1,364 1,253
Advertising 734 411 558
Other 4,137 5,007 3,374
---------- ---------- ----------
28,821 28,218 21,323
Income before income taxes 13,392 10,367 10,034
Provision for income taxes 4,506 3,558 3,406
---------- ---------- ----------
Net income $ 8,886 $ 6,809 $ 6,628
========== ========== ==========
Earnings per share:
Basic $ .77 $ .64 $ .66
Diluted $ .73 $ .59 $ .61
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
BankFirst Corporation | 29
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Additional Compre- Stock-
Common Preferred Paid-in Retained hensive holders'
Stock Stock Capital Earnings Income (loss) Equity
----- ----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 4,303 $ 1,128 $ 23,456 $ 25,992 $ 336 $ 55,215
Sales of common stock, 1,177 shares 4 -- 39 -- -- 43
Stock options exercised, 23,659 shares 59 -- 465 -- -- 524
Conversion of 7,051 shares preferred
stock into 3,482 shares common stock 9 (35) 26 -- -- --
Cash dividends on preferred stock -- -- -- (161) -- (161)
Cash dividends on common stock -- -- -- (1,214) -- (1,214)
Common stock split, 253,727 shares 634 -- -- (634) -- --
Cash paid for fractional shares in
stock split -- -- -- (3) -- (3)
Repurchased common stock, 6,173
shares (16) -- (209) -- -- (225)
Comprehensive income (loss):
Net income -- -- -- 6,628 -- 6,628
Change in unrealized gains
(losses), net of reclassification -- -- -- -- 625 625
----------
Total comprehensive income (loss) 7,253
---------- ---------- ---------- --------- ---------- ----------
Balance, December 31, 1997 4,993 1,093 23,777 30,608 961 61,432
Sale of common stock, 428 shares 1 -- 15 -- -- 16
Stock options exercised, 1,107 shares 2 -- 28 -- -- 30
Conversion of 37,548 shares of preferred
stock into 108,974 shares of common
stock 272 (188) (84) -- -- --
Cash dividend on preferred stock -- -- -- (146) -- (146)
Cash dividend on common stock -- -- -- (115) -- (115)
Proceeds from issuance of 1,270,000 shares
of common stock, net of related costs 3,175 -- 10,357 -- -- 13,532
Common stock split, 7,998,436 shares 19,996 -- -- (19,996) -- --
Comprehensive income (loss):
Net income -- -- -- 6,809 -- 6,809
Change in unrealized gains (losses),
net of reclassification -- -- -- -- 1,283 1,283
----------
Total comprehensive income (loss) 8,092
---------- ---------- ---------- --------- ---------- ----------
Balance, December 31, 1998 $ 28,439 $ 905 $ 34,093 $ 17,160 $ 2,244 $ 82,841
========== ========== ========== ========= ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
BankFirst Corporation | 30
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
Accumulated
Other Total
Additional Compre- Stock-
Common Preferred Paid-in Retained hensive holders'
Stock Stock Capital Earnings Income (loss) Equity
----- ----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 28,439 $ 905 $ 34,093 $ 17,160 $ 2,244 $ 82,841
Cash dividends on preferred stock -- -- -- (132) -- (132)
Repurchased common stock, (250) -- (645) -- -- (895)
100,000 shares
Comprehensive income (loss):
Net income -- -- -- 8,886 -- 8,886
Change in unrealized gains
(losses), net of reclassification -- -- -- -- (4,174) (4,174)
----------
Total comprehensive income (loss) 4,712
---------- ---------- ---------- --------- ---------- ----------
Balance, December 31, 1999 $ 28,189 $ 905 $ 33,448 $ 25,914 $ (1,930) $ 86,526
========== ========== ========== ========= ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
BankFirst Corporation | 31
<PAGE>
<TABLE>
<CAPTION>
BANKFIRST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,886 $ 6,809 $ 6,628
Adjustments to reconcile net income to net cash from
operating activities
Provision for credit losses 1,996 1,706 2,935
Depreciation 2,278 1,936 1,754
Amortization of mortgage servicing rights 1,690 1,787 -
Security amortization and accretion, net 104 (35) (120)
Net (gains) losses on securities sales (40) (124) (309)
Net gain on sale of mortgage loans (3,374) (3,283) (226)
Proceeds from sales of mortgage loans 166,189 209,390 15,491
Purchases of mortgage loans held for sale (21,529) (39,283)
Originations of mortgage loans held for sale (131,223) (185,804) (15,562)
Increase in mortgage servicing rights (1,412) (484) --
Net (gains) losses on sales of assets -- -- 77
Changes in assets and liabilities:
Accrued interest receivable and other assets (1,828) (2,260) (571)
Accrued interest payable and other liabilities (2,004) (2,358) 4,340
---------- ---------- ----------
Net cash from operating activities 19,733 (12,003) 14,437
Cash flows from investing activities
Purchase of securities (51,134) (57,152) (59,276)
Proceeds from maturities of securities 25,438 41,906 32,224
Proceeds from sales of securities 15,788 14,335 35,530
Net increase in loans (76,266) (43,583) (53,437)
Purchase of FHLB stock (231) (219) (494)
Premises and equipment expenditures, net (4,165) (5,731) (6,255)
Net cash paid for mortgage company -- (7,449) --
---------- ---------- ----------
Net cash from investing activities (90,570) (57,893) (51,708)
Cash flows from financing activities
Net change in deposits 12,413 68,197 33,430
Net change in repurchase agreements
and other borrowings 33,229 8,113 11,068
Advances from the Federal Home Loan Bank 27,275 10,000 2,000
Repayments of advances from Federal Home Loan Bank (10,000) (10,237) (2,033)
Repayments of notes payable -- (5,798) --
Dividends paid (132) (261) (1,375)
Sales of stock and stock options exercised -- 46 564
Proceeds from public offering of common stock -- 13,532 --
Repurchase of common stock (895) -- (225)
---------- ---------- ----------
Net cash from financing activities 61,890 83,592 43,429
---------- ---------- ----------
Net change in cash and cash equivalents (8,947) 13,696 6,158
Cash and cash equivalents, beginning of year 44,986 31,290 25,132
---------- ---------- ----------
Cash and cash equivalents, end of year $ 36,039 $ 44,986 $ 31,290
========== ========== ==========
Supplemental disclosures - cash and noncash
Interest paid $ 25,221 $ 25,334 $ 22,619
Income taxes paid 3,960 3,100 3,186
Loans converted to other real estate 2,886 1,096 1,082
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
BankFirst Corporation | 32
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation and its wholly-owned subsidiaries, BankFirst,
First National Bank and Trust Company (together referred to as the "Banks") and
BankFirst Trust Company, and BankFirst's wholly-owned subsidiary, Curtis
Mortgage Company, Inc., collectively referred to as the "Company". All
significant inter-company balances and transactions have been eliminated in
consolidation.
Nature of Operations: The Company provides financial services through its
offices in Eastern and Southeastern Tennessee. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are residential mortgage, commercial, and installment loans.
Substantially all loans are secured by specific items of collateral including
business assets, consumer assets and real estate. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Real estate loans are
secured by both residential and commercial real estate. Other financial
instruments that potentially represent concentrations of credit risk include
deposit accounts in other financial institutions.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions based
on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. Mortgage servicing rights, allowance for credit losses,
and fair values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents includes cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows are
reported for loan, deposit and other borrowing transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in accumulated other
comprehensive income. All securities are currently classified as available for
sale.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for credit losses.
Loans held for sale are reported at the lower of cost or market, on an aggregate
basis. The aggregate cost of mortgage loans held for sale at year-end 1999 and
1998 is less than their aggregate net realizable value.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well secured and in process of collection. Other consumer
loans are typically charged off no later than 180 days past due. In all cases,
loans are placed on nonaccrual or charged off at an earlier date if collection
of principal and interest is doubtful. Interest accrued but not collected is
reversed against interest income. Interest received is recognized on the cash
basis or cost recovery method, until qualifying for return to accrual status.
Accrual is resumed when all contractually due payments are brought current and
future payments are reasonably assured.
Allowance for Credit Losses: The allowance for credit losses is a valuation
allowance for probable credit losses, increased by the provision for credit
losses and decreased by charge-offs less recoveries. Management estimates the
allowance balance required using past credit loss experience, known and inherent
risks in the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged off.
BankFirst Corporation | 33
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is impaired when full payment under the loan terms is not expected. The
Company has defined its population of impaired loans for individual evaluation
of impairment to be those commercial real estate and commercial loans over
$250,000. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at lower of cost or market when acquired, establishing a new
cost basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the asset useful lives
on an accelerated basis, except for buildings for which the straight line basis
is used.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market value.
The Company controls its interest rate risk with respect to mortgage loans held
for sale and loan commitments expected to close by entering into agreements to
sell loans. The aggregate market value of mortgage loans held for sale considers
the sales prices of such agreements. The Company also provides currently for any
losses on uncovered commitments to lend or sell.
Servicing rights are recognized as assets for purchased rights and for the
allocated cost of retained servicing rights on loans sold. Servicing rights are
expensed in proportion to and over the period of estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
Loan servicing income is recorded as principal payments are collected and
includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. Costs of loan servicing are charged to
expense as incurred.
Intangibles: Purchased intangibles, primarily goodwill, are recorded at cost and
amortized over the estimated life. Goodwill amortization is straight-line over
15 years.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Benefit Plans: Pension expense is the net of service and interest cost, return
on plan assets, and amortization of gains and losses not immediately recognized.
During 1999, the Company amended the Plan such that no additional service
benefits will accrue after December 31, 1999. See Note 8 for further
information. The 401(k) plan expense is the amount contributed to the plan as
determined by Board decision. The Company merged the two separate 401(k) plans
together on December 31, 1999. Deferred compensation plan expense allocates the
benefits over years of service.
Stock Compensation: Pro forma disclosures of net income and earnings per share
are shown using the fair value method of SFAS No. 123 to measure expense for
options granted after 1994, using an option pricing model to estimate fair
value.
BankFirst Corporation | 34
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options, and preferred stock.
Earnings and dividends per share are restated for all stock splits and dividends
through the date of issue of the financial statements.
Comprehensive Income (loss): Comprehensive income (loss) consists of net income
and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available for sale which are
also recognized as separate components of equity. Comprehensive income (loss) is
presented in the consolidated statements of changes in stockholders' equity.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Application of this
statement is not expected to have a material effect but the effect will depend
on derivative holdings when this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are any such matters that will have
a material effect on the financial statements.
Preferred Stock: The preferred stock earns dividends at a rate of 5%, and is
noncumulative, nonvoting, and each share is convertible into 3.0875 shares of
common stock at the option of the holder. The conversion ratio of preferred
stock into common stock is adjusted for common stock dividends and splits.
Preferred stock has equal liquidation rights to common stock.
Segments: The Company's primary segment is banking, which accounts for 89% of
gross revenues at year-end 1999. Other operating segments include mortgage
banking and trust services.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassifications: Certain items in prior year financial statements have been
reclassified to conform to the 1999 presentation.
BankFirst Corporation | 35
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS COMBINATIONS
On July 2, 1998, BankFirst Corporation acquired all of the outstanding common
stock of First Franklin Bancshares, Inc. ("First Franklin") in a business
combination accounted for as a pooling of interest. Stockholders of First
Franklin exchanged 164,125 shares of stock for 723,673 shares of the Company's
Common Stock. In the business combination, First Franklin was merged into
BankFirst Corporation, and its wholly-owned subsidiary, The First National Bank
and Trust Company, remains a subsidiary of BankFirst Corporation. These
consolidated financial statements give retroactive effect to the merger, and as
a result, the financial statements are presented as if the combined companies
had been consolidated for all periods presented.
Separate interest income and net income of the merged entities are as follows:
1998 1997
---- ----
Interest income
BankFirst Corporation $ 41,526 $ 37,625
First Franklin 14,389 13,662
---------- ----------
$ 55,915 $ 51,287
========== ==========
Net income
BankFirst Corporation $ 4,480 $ 4,066
First Franklin 2,329 2,562
---------- ----------
$ 6,809 $ 6,628
========== ==========
On January 16, 1998, the Bank acquired Curtis Mortgage Company, Inc., a mortgage
loan origination and servicing company, for $7.5 million in a business
combination accounted for as a purchase. The results of operations of Curtis
Mortgage Company, Inc. is included in the accompanying financial statements
since the date of acquisition. The excess of the purchase price over the fair
value of net assets acquired resulted in $1.9 million of goodwill, which is
being amortized on a straight-line basis over 15 years.
Assets and liabilities acquired were:
Cash $ 51
Loans held for sale 6,267
Mortgage servicing rights 7,000
Furniture and equipment 165
Accrued interest receivable and other assets 375
Notes payable (5,798)
Accrued and other liabilities (2,460)
BankFirst Corporation | 36
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 17,210 $ 5 $ (60) $ 17,155
Obligations of U.S. government agencies 61,585 8 (1,834) 59,759
Obligations of states and political subdivisions 40,570 117 (796) 39,891
Mortgage-backed securities 17,344 2 (555) 16,791
---------- --------- ---------- ----------
$ 136,709 $ 132 $ (3,245) $ 133,596
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 25,258 $ 601 $ -- $ 25,859
Obligations of U.S. government agencies 44,197 1,448 -- 45,645
Obligations of states and political subdivisions 37,455 1,553 -- 39,008
Mortgage-backed securities 17,335 61 (46) 17,350
---------- ---------- --------- ----------
$ 124,245 $ 3,663 $ (46) $ 127,862
=========== ========== ========= ==========
</TABLE>
Contractual maturities of securities at year-end 1999 are shown below.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 13,148 $ 13,125
Due after one year through five years 52,309 51,131
Due after five years through ten years 44,530 43,471
Due after ten years 9,378 9,078
Mortgage-backed securities 17,344 16,791
------------ ------------
Total maturities $ 136,709 $ 133,596
============ ============
1999 1998 1997
---- ---- ----
Sales of securities available for
sale were as follows:
Proceeds $ 15,788 $ 14,335 $ 35,530
Realized gains 71 125 343
Realized losses 31 1 34
Securities with a carrying value of $95,490 and $74,691 at year-end 1999 and
1998, were pledged for public deposits and securities sold under agreements to
repurchase.
BankFirst Corporation | 37
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
At year-end 1999 and 1998, loans consisted of the following:
1999 1998
------------ ------------
Commercial, industrial and agricultural $ 101,310 $ 87,793
Commercial real estate 250,403 211,114
Real estate construction 27,585 36,779
Residential real estate 138,001 115,115
Loans to individuals 68,968 57,497
Lease financing and other 203 1,614
------------ ------------
Total loans 586,470 509,912
Less: Unearned interest income and fees (854) (1,360)
Allowance for credit losses (7,400) (6,602)
------------ ------------
$ 578,216 $ 501,950
============ ============
Activity in the allowance for credit losses is as follows:
1999 1998 1997
---------- ---------- ----------
Beginning balance $ 6,602 $ 6,098 $ 4,723
Provision 1,996 1,706 2,935
Loans charged off (1,464) (1,524) (1,833)
Recoveries of loans charged off 266 322 273
---------- ---------- ----------
Balance, end of year $ 7,400 $ 6,602 $ 6,098
========== ========== ==========
Impaired loans were as follows:
1999 1998 1997
---- ---- ----
Loans with allowance allocated $ 3,559 $ -- $ 552
Amount of allowance for credit losses
allocated 878 -- 61
Loans with no allowance allocated -- -- 615
Average balance during the year 1,338 855 1,312
Interest income recognized during impairment -- -- 30
Cash-basis interest income recognized -- -- 30
Nonperforming loans were as follows:
1999 1998 1997
---- ---- ----
Loans past due 90 days still on accrual $ 2,261 $ 1,971 $ 1,705
Nonaccrual loans 3,981 537 1,141
BankFirst Corporation | 38
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
Nonperforming loans includes all (or almost all) impaired loans and smaller
balance homogeneous loans, such as residential mortgage and consumer loans, that
are collectively evaluated for impairment.
The aggregate amount of loans to executive officers and directors of the Company
and their related interests was approximately $12,537 and $7,731 at year-end
1999 and 1998. During 1999 and 1998, new loans aggregating approximately $5,551
and $7,156 and amounts collected of approximately $745 and $7,827 were
transacted with such parties.
Loans serviced for others, which are not reported as assets, total $603,870 and
$516,835 at year-end 1999 and 1998.
Activity for capitalized mortgage servicing rights was as follows:
1999 1998
--------- ----------
Servicing rights:
Beginning of year $ 7,484 $ --
Acquired in purchase transaction -- 7,000
Additions 3,102 2,271
Amortized to expense (1,690) (1,787)
--------- ----------
End of year $ 8,896 $ 7,484
========= ==========
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment as of year-end 1999 and 1998 is as follows:
1999 1998
---------- ----------
Land $ 7,050 $ 6,798
Premises 17,911 15,087
Furniture, fixtures and equipment 13,810 11,721
Construction in progress 1,327 2,645
---------- ----------
Total cost 40,098 36,251
Accumulated depreciation (13,284) (11,324)
---------- ----------
$ 26,814 $ 24,927
========== ==========
NOTE 6 - DEPOSITS
Time deposits of $100 thousand or more were $95,903 and $81,402 at year-end 1999
and 1998.
At year-end 1999, maturities of total time deposits were as follows:
One year or less $ 241,998
Over one year through three years 63,055
Over three years 8,130
The aggregate amount of deposits to executive officers and directors of the
Company and their related interests was approximately $2,435 and $3,114 at
year-end 1999 and 1998.
BankFirst Corporation | 39
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 7 - BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and
treasury tax and loan deposits are financing arrangements. Securities involved
with the agreements are recorded as assets and are held by a safekeeping agent
and the obligations to repurchase the securities are reflected as liabilities.
Securities sold under agreements to repurchase consist of short term excess
funds and overnight liabilities to deposit customers arising from a cash
management program. While effectively deposit equivalents, such arrangements are
in the form of repurchase agreements. Other borrowed funds were comprised of fed
funds purchased as well as treasury tax and loan deposits.
Information concerning securities sold under agreements to repurchase at
year-end 1999 and 1998 is as follows:
1999 1998
---------- ----------
Average month-end balance during the year $ 25,514 $ 22,834
Average interest rate during the year 4.32% 4.48%
Maximum month-end balance during the year $ 33,288 $ 27,407
The aggregate amount of securities sold under agreements to repurchase from
executive officers and directors of the Company and their related interests were
$-0- and $1,786 at year-end 1999 and 1998.
Federal Home Loan Bank ("FHLB") advances consist of the following at year-end
1999 and 1998:
1999 1998
------- -------
Fixed rate advances, from 5.7% to 7.2%,
maturities from March 2008 to January 2013 $ 2,159 $ 1,884
Variable rate advances, from 5.9% to 6.6%,
maturities from March 2001 to May 2001 27,000 --
Variable rate "overnight" note advances -- 10,000
------- -------
$29,159 $11,884
======= =======
Each advance is payable at its maturity date, with a prepayment penalty. The
advances are collateralized by FHLB stock and a blanket pledge of qualifying
mortgage loans totaling $43,739 and $17,826 at year-end 1999 and 1998.
Approximately $27,000 in FHLB advances will mature in 2001. $2,159 in FHLB
advances will mature beyond year 2004.
At year-end 1999, the Company had approximately $55,500 of federal funds lines
of credit available from correspondent institutions, $7,645 unused lines of
credit with the Federal Home Loan Bank, $2,000 unused unsecured lines of credit
with the Federal Reserve Bank of Atlanta, and $49,731 in unused collateralized
lines of credit with the Federal Reserve Bank of Atlanta.
BankFirst Corporation | 40
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLANS
On December 31, 1999 The First National Bank and Trust Company 401(k) Profit
Sharing Plan was merged into BankFirst's 401(k) Profit Sharing Plan covering all
employees of the Company and its subsidiaries. Prior to that, the Company had
two separate plans. The BankFirst profit sharing plan covered employees of
BankFirst and Curtis Mortgage Company, Inc. This plan allows employees to
contribute up to 15% of their compensation, which is matched at a discretionary
rate established by the Corporate Board of Directors annually. Prior to the plan
merger, The First National Bank and Trust Company 401(k) profit sharing plan
covered employees of The First National Bank and Trust Company and allowed
employees to contribute up to 10% of their compensation, which is matched equal
to 50% of the first 6% of the compensation contributed. Expense for both Plans
was $290, $275, and $218 for 1999, 1998, and 1997.
The First National Bank and Trust Company maintains a noncontributory defined
benefit plan covering substantially all full-time employees. During 1999, the
Company amended the plan such that no additional service benefits will accrue
after December 31, 1999. Upon curtailment, the unrecognized net loss was reduced
by $423. There was no gain or loss recorded as a result of the curtailment.
Information about the plan was as follows:
1999 1998
------- -------
Change in benefit obligation:
Beginning benefit obligation $(5,678) $(5,239)
Service cost (239) (196)
Interest cost (406) (361)
Actuarial gain 56 (33)
Curtailment 423 --
Benefits paid 116 151
------- -------
Ending benefit obligation (5,728) (5,678)
Change in plan assets, at fair value:
Beginning plan assets 5,546 4,927
Actual return 423 528
Employer contribution 109 242
Benefits paid (116) (151)
------- -------
Ending plan assets 5,962 5,546
------- -------
Funded status 234 (132)
Unrecognized net actuarial loss 300 748
------- -------
Prepaid benefit cost $ 534 $ 616
======= =======
Plan assets held include common stocks, corporate bonds, government securities,
and other investments.
BankFirst Corporation | 41
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 8 - RETIREMENT PLANS (Continued)
The components of pension expense and related actuarial assumptions were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $ 239 $ 196 $ 173
Interest cost 406 361 318
Expected return on plan assets (446) (420) (358)
Recognized net actuarial (gain) loss (8) (13) (22)
-------- -------- -------
Net $ 191 $ 124 $ 111
======== ======== =======
Discount rate on benefit obligation 7.0% 7.0% 7.5%
Long-term expected rate of return on assets 8.5 8.5 8.5
Rate of compensation increase 5.5 5.5 6.5
</TABLE>
The First National Bank and Trust Company contributed $109, $242, and $238
during 1999, 1998, and 1997.
NOTE 9 - INCOME TAXES
Income tax expense is summarized as follows:
1999 1998 1997
---- ---- ----
Current $ 4,546 $ 3,699 $ 3,612
Deferred (40) (141) (206)
--------- --------- ---------
$ 4,506 $ 3,558 $ 3,406
========= ========= =========
Federal $ 3,713 $ 2,914 $ 2,817
State 793 644 589
--------- --------- ---------
$ 4,506 $ 3,558 $ 3,406
========= ========= =========
Deferred income taxes reflect the effect of "temporary differences" between
values recorded for assets and liabilities for financial reporting purposes and
values utilized for measurement in accordance with tax laws. The tax effects of
the primary temporary differences giving rise to the Company's net deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Allowance for credit losses $ 1,996 $ -- $ 1,461 $ --
Mortgage Servicing Rights -- (3,377) -- (2,841)
Depreciation -- (636) -- (763)
FHLB dividends -- (372) -- (284)
Defined benefit plan -- (205) -- (233)
Unrealized (gain) loss on securities 1,182 -- -- (1,374)
Other 217 (35) 408 (120)
--------- --------- --------- --------
Total deferred income taxes $ 3,395 $ (4,625) $ 1,869 $ (5,615)
========= ========= ========= ========
</TABLE>
BankFirst Corporation | 42
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
A reconciliation of expected income tax expense at the statutory federal income
tax rate of 34% with the actual effective income tax rates, is as follows:
1999 1998 1997
---- ---- ----
Statutory federal tax rate 34.0% 34.0% 34.0%
State income tax, net of federal benefit 4.0 4.0 4.0
Tax exempt income (3.6) (5.1) (3.7)
Other (0.8) 1.4 (0.4)
---- ---- ----
33.6% 34.3% 33.9%
==== ==== ====
NOTE 10 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at year-end:
1999 1998
---- ----
Commitments to make loans (at market rates) $ 24,588 $ 39,005
Unused lines of credit and letters of credit 75,381 72,417
The majority of commitments to make loans have a variable interest rate. The
fixed rate loan commitments have interest rates ranging from 7.0% to 13.0% and
maturities ranging from 1 year to 13 years.
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
BankFirst Corporation | 43
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
At year-end, the capital requirements were met, as the Company and banks were
considered well capitalized under regulations. Actual capital levels and minimum
required levels (in millions) were:
<TABLE>
<CAPTION>
Minimum Amounts to
be Well Capitalized
Minimum Required Under Prompt
for Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Actual Ratio Actual Ratio Actual Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Total Capital (to Risk Weighted Assets)
Consolidated $93.1 14.8% $50.5 8.0% $63.1 10.0%
BankFirst 52.3 10.4 40.1 8.0 50.1 10.0
First National Bank and Trust Co. 26.6 20.8 10.2 8.0 12.8 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $85.7 13.6% $25.2 4.0% $37.9 6.0%
BankFirst 46.6 9.3 20.1 4.0 30.1 6.0
First National Bank and Trust Co. 25.0 19.6 5.1 4.0 7.7 6.0
Tier 1 Capital (to Average Assets)
Consolidated $85.7 10.8% $31.9 4.0% $39.9 5.0%
BankFirst 46.6 7.7 24.1 4.0 30.1 5.0
First National Bank and Trust Co. 25.0 12.8 7.8 4.0 9.8 5.0
1998
- -----
Total Capital (to Risk Weighted Assets)
Consolidated $83.4 18.9% $44.9 8.0% $56.1 10.0%
BankFirst 45.4 10.2 35.4 8.0 44.3 10.0
First National Bank and Trust Co. 24.1 20.1 9.6 8.0 12.0 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $77.8 17.6% $22.5 4.0% $33.8 6.0%
BankFirst 40.3 9.1 17.7 4.0 26.6 6.0
First National Bank and Trust Co. 22.6 18.9 4.8 4.0 7.2 6.0
Tier 1 Capital (to Average Assets)
Consolidated $77.8 10.7% $29.1 4.0% $36.3 5.0%
BankFirst 40.3 7.5 21.4 4.0 26.7 5.0
First National Bank and Trust Co. 22.6 11.8 7.7 4.0 9.6 5.0
</TABLE>
The Company's primary source of funds to pay dividends to stockholders is the
dividends it receives from the Banks. The Banks are subject to certain
regulations on the amount of dividends it may declare without prior regulatory
approval. Under these regulations, the amount of dividends that may be paid in
any year is limited to that year's net profits, as defined, combined with the
retained net profits of the preceding two years, less dividends declared during
those periods. At year-end 1999, $21,884 of retained earnings was available for
dividends in future periods.
The Banks were required to have approximately $12,080 and $9,659 of cash on hand
to meet regulatory reserve requirements at year-end 1999 and 1998.
BankFirst Corporation | 44
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS
The Company maintains a stock option plan, whereby a maximum of 3,125,000 stock
options may be issued to selected directors, officers, and other key employees.
The exercise price of each option is the fair market value of the Company's
common stock on the date of grant. The maximum term of the options is ten years.
Certain options may be exercised immediately upon grant, and certain options
vest at an annual rate of 20%. At year-end 1999, 1,936,660 shares are authorized
for future grant.
A summary of the Company's option activity and related information for the
year-ended 1999, 1998, and 1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 977,185 $ 6.19 862,000 $ 6.19 887,645 $ 5.21
Granted 25,000 9.00 142,000 8.80 164,380 7.68
Exercised -- -- (4,535) 6.59 (140,765) 3.72
Forfeited (14,375) 7.78 (22,280) 8.21 (49,260) 7.12
--------- -------- --------- ------- --------- -------
Outstanding at end of year 987,810 6.24 977,185 6.19 862,000 6.19
========= ========= =========
Options exercisable at year-end 661,019 5.44 548,706 5.01 461,030 4.55
========= ======== ========= ======= =========
Weighted-average fair value of
options granted during the year $ 3.78 $ 2.97 $ 3.09
========= ========= =========
</TABLE>
Options outstanding at year-end 1999 were as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Average Weighted
Range of Remaining Average
Exercise Contractual Exercise
Prices Number Life Number Price
- ------ ------ ---- ------ -----
<S> <C> <C> <C> <C>
$3.50-$5.00 329,055 5.00 329,055 $ 3.72
$6.00-$7.00 372,690 7.71 244,638 6.84
$7.50-$9.00 286,065 7.97 87,326 7.99
------- ---- ------- --------
Outstanding at year end 987,810 6.88 661,019 $ 5.44
======= ==== ======= ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998, and 1997: risk-free interest rate of
4.95%, 5.76%, and 6.75%, expected lives of eight, seven, and seven years, and
estimated volatility of 24%, 10%, and 10%. No assumption was made for estimated
volatility for 1997 since it was not feasible to determine this assumption for a
non-public entity whose stock was not actively traded. With estimated volatility
excluded, the option pricing model produces the option's minimum value for 1997.
There is no dividend yield assumption since the Company has not historically
paid dividends or indicated that dividends would be paid in the future.
No expense for stock options is recorded, as the grant price equals the market
price of the stock at grant date. The following disclosures show the effect on
income and earnings per share had the options' fair value been recorded using an
option pricing model. If additional options are granted, the pro forma effect
will increase in the future.
BankFirst Corporation | 45
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
As As As
Reported Pro forma Reported Pro forma Reported Pro forma
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 8,886 $ 8,555 $ 6,809 $ 6,484 $ 6,628 $ 6,400
Basic earnings per share $ .77 $ .74 $ .64 $ .61 $ .66 $ .63
Diluted earnings per share .73 .69 .59 .55 .61 .58
</TABLE>
NOTE 13 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic Earnings Per Share
- ------------------------
Net income $ 8,886 $ 6,809 $ 6,628
Less: Dividends declared on preferred stock (132) (146) (161)
------------ ------------ ------------
Net income available to common
stockholders $ 8,754 $ 6,663 $ 6,467
============ ============ ============
Weighted average common shares outstanding 11,352,739 10,446,779 9,876,735
============ ============ ============
Basic Earnings Per share $ .77 $ .64 $ .66
============ ============ ============
Diluted Earnings Per Share
- --------------------------
Net income available to common stockholders $ 8,754 $ 6,663 $ 6,467
Add back dividends upon assumed conversion
of preferred stock 132 146 161
------------ ------------ ------------
Net income available to common
stockholders assuming conversion $ 8,886 $ 6,809 $ 6,628
============ ============ ============
Weighted average common shares outstanding 11,352,739 10,446,779 9,876,735
Add: Dilutive effects of assumed conversions
and exercises:
Convertible preferred stock 558,992 635,516 685,830
Stock options 319,388 383,819 313,025
------------ ------------ ------------
Weighted average common and dilutive
potential common shares outstanding 12,231,119 11,466,114 10,875,590
------------ ------------ ----------
Diluted Earnings Per Share $ .73 $ .59 $ .61
============ ============ ============
</TABLE>
BankFirst Corporation | 46
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments are as follows at year-end 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 36,039 $ 36,039 $ 44,986 $ 44,986
Securities available for sale 133,596 133,596 127,862 127,862
Mortgage loans held for sale 12,205 12,247 25,642 26,037
Loans, net 585,616 575,735 501,950 503,397
Federal Home Loan Bank stock 3,420 3,420 3,189 3,189
Accrued interest receivable 5,643 5,643 4,653 4,653
Financial liabilities:
Demand, savings, and money
market accounts $ 318,004 $ 318,025 $ 311,575 $ 311,575
Certificate of deposits 312,375 312,002 306,391 307,060
Advances from Federal Home Loan Bank 29,159 29,168 11,884 11,993
Repurchase agreement and other borrowings 59,603 59,603 26,374 26,479
Accrued interest payable 3,029 3,029 3,113 3,113
</TABLE>
The following methods and assumptions were used to estimate the fair values for
financial instruments. The carrying amount is considered to estimate fair value
for cash and short-term instruments, demand deposits, liabilities for borrowed
money, variable rate loans or deposits that reprice frequently and fully, and
accrued interest receivable and payable. Securities available for sale fair
values are based on quoted market prices or, if no quotes are available, on the
rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, the fair value is estimated by discounted cash
flow analysis using current market rates for the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow analyses
or underlying collateral values, where applicable. Fair value of mortgage loans
held for sale is based on current market price for such loans. Liabilities for
borrowed money are estimated using rates of debt with similar terms and
remaining maturities. The fair value of off-balance sheet items is based on
current fees or costs that would be charged to enter into or terminate such
arrangements. The fair value of commitments to sell loans is based on the
difference between the interest rates committed to sell at and the quoted
secondary market price for similar loans, which is not material.
BankFirst Corporation | 47
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS
Years ended December 31, 1999 and 1998
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 13,039 $ 13,719
Investment in subsidiary banks 73,555 68,904
Other 504 359
--------- ---------
Total assets $ 87,098 $ 82,982
========= =========
Total liabilities $ 572 $ 141
Stockholders' equity 86,526 82,841
--------- ---------
Total liabilities and stockholders' equity $ 87,098 $ 82,982
========= =========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiaries $ 157 $ 215 $ 1,593
Other income 564 201 220
Interest expense -- -- --
Other expense 687 909 213
-------- --------- ---------
Income (loss) before income taxes 34 (493) 1,600
Income tax (benefit) expense (23) (59) 2
Equity in undistributed net income of subsidiaries 8,829 7,243 5,030
-------- --------- ---------
Net income $ 8,886 $ 6,809 $ 6,628
======== ========= =========
</TABLE>
BankFirst Corporation | 48
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 8,886 $ 6,809 $ 6,628
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed net income of subsidiaries (8,829) (7,243) (5,030)
Change in assets (141) 157 1,040
Change in liabilities 431 (291) 293
-------- -------- --------
Net cash provided by (used in) operating activities 347 (568) 2,931
Financing activities
Dividends paid (132) (261) (1,375)
Effect of internal reorganization -- (1,049) --
Sales of common stock and stock options exercised -- 46 567
Proceeds from public offering of common stock -- 13,532 --
Repurchase of common stock (895) -- (225)
-------- -------- --------
Net cash provided by (used in) financing activities (1,027) 12,268 (1,033)
-------- -------- --------
Net change in cash and cash equivalents (680) 11,700 1,898
Cash and cash equivalents, beginning of year 13,719 2,019 121
-------- -------- --------
Cash and cash equivalents, end of year $ 13,039 $ 13,719 $ 2,019
======== ======== ========
</TABLE>
NOTE 16 - OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) components were as follows.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses on
securities available for sale, net of tax $ (4,148) $ 1,365 $ 829
Less reclassification adjustments for gains and
losses later recognized in income, net of tax at 34% (26) (82) (204)
---------- ---------- ----------
Other comprehensive income (loss) $ (4,174) $ 1,283 $ 625
========== ========== ==========
</TABLE>
BankFirst Corporation | 49
<PAGE>
BANKFIRST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 17. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of the consolidated quarterly financial data:
<TABLE>
<CAPTION>
For the three months ended
3/31/99 6/30/99 9/30/99 12/31/99
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of operations
Interest income - tax $14,108 $14,748 $15,342 $15,215
equivalent
Net interest income 8,153 8,540 8,973 8,611
Tax equivalent adjustment (1) (201) (187) (214) (203)
---- ---- ---- ----
Net interest income 7,952 8,353 8,759 8,408
Provision for credit losses 419 461 522 594
Income before income taxes 3,116 3,354 3,463 3,459
Net income 2,069 2,202 2,294 2,321
Basic earnings per share .18 .19 .20 .20
Diluted earnings per share .17 .17 .19 .19
Average common shares 11,375,600 11,375,600 11,359,843 11,300,658
outstanding
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
3/31/98 6/30/98 9/30/98 12/31/98
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of operations
Interest income - tax $ 13,786 $ 14,339 $ 14,331 $ 14,289
equivalent
Net interest income 7,784 7,885 7,978 8,171
Tax equivalent adjustment (1) (236) (236) (217) (141)
--------- ---------- ----------- -----------
Net interest income 7,548 7,649 7,761 8,030
Provision for credit losses (524) (540) (320) (322)
Income before income taxes 2,584 2,343 2,675 2,765
Net income 1,704 1,477 1,677 1,952
Basic earnings per share 0.17 0.14 0.16 .17
Diluted earnings per share 0.16 0.13 0.15 .16
Dividends per common share (2) -- 0.01 -- --
Average common shares 9,988,427 9,998,012 10,410,370 11,375,600
outstanding
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Tax equivalent basis was calculated using 38% for 1999 and 1998.
(2) Dividends declared on common shares divided by net income available to
common shareholders.
Note: Certain amounts above that have been presented in prior financial
information have been reclassified, causing minor differences from prior
presentations.
BankFirst Corporation | 50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
During the fiscal year ended December 31, 1999 and through the date of this
Report, there has been no change in the Company's independent accountants, nor
have there been any disagreements with such accountants or reportable events.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
================================================================================
The information required by this item with respect to directors of the Company
is set forth in the section entitled "Election of Directors" in the Company's
definitive proxy statement for its 2000 Annual Meeting of Shareholders (the 2000
Proxy Statement). The information required by this item with respect to
executive officers of the Company is set forth at Item 4(A) of this Report under
the caption "Executive Officers of the Company". Information relating to
compliance with the reporting requirements of Section 16(a) of the Securities
Exchange Act of 1934, as amended, by the Company's executive officers and
directors, persons who own more than ten percent of the Company's Common Stock
and their affiliates who are required to comply with such reporting requirements
is set forth in the section entitled "Reports of Beneficial Ownership" of the
Company's 2000 Proxy Statement. All such information is hereby incorporated into
this Report by reference.
ITEM 11. EXECUTIVE COMPENSATION
================================================================================
The information required by this item is incorporated herein by reference to the
section entitled "Executive Compensation" in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
================================================================================
The information required by this item is incorporated herein by reference to the
section entitled "Security Ownership of Management" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
================================================================================
The information required by this item is incorporated herein by reference to the
section entitled "Interest of Management in Certain Transactions" in the 2000
Proxy Statement.
BankFirst Corporation | 51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
================================================================================
(a) The following documents are filed as a part of this Report:
1. Financial Statements: The Consolidated Financial Statements of
BankFirst Corporation and Reports of Independent Accountants have been
included as Part II, ITEM 8 of this filing and are hereby incorporated
by reference. These financial statements consist of the following:
PAGE
----
Report of Independent Accountants ........................................ 27
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............. 28
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 ..................................... 29
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998, and 1997 ................. 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 ..................................... 32
Notes to Consolidated Financial Statements ............................... 33
2. Financial Statement Schedules and Exhibits not listed above have been
omitted because they are not applicable or are not required, or the
information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto, included in Part
II, ITEM 8, and are hereby incorporated by reference.
(b) The Company has filed no Reports on Form 8-K during the last quarter of
1999.
(c) Exhibits: The list of exhibits in the INDEX TO EXHIBITS appearing on page
54 of this Report is incorporated herein by reference.
BankFirst Corporation | 52
<PAGE>
SIGNATURES
================================================================================
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BANKFIRST CORPORATION
(Registrant)
BY: /s/ FRED R. LAWSON
--------------------------
Fred R. Lawson
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date Signature Capacity
- ---- --------- --------
<S> <C> <C>
March 17, 2000 /s/ James L. Clayton Chairman of The
--------------------------------Board of Directors
James L. Clayton
March 17, 2000 /s/ Fred R. Lawson Director and
--------------------------------President & CEO
Fred R. Lawson (Principal Executive Officer)
March 17, 2000 /s/ C. David Allen Chief Financial Officer and
--------------------------------Secretary
C. David Allen (Principal Financial Officer)
March 17, 2000 /s/ Scot M. Braun Corporate Controller
--------------------------------(Principal Accounting Officer)
Scot M. Braun
March 17, 2000 /s/ C. Scott Mayfield, Jr. Director
--------------------------------
C. Scott Mayfield, Jr.
March 17, 2000 /s/ C. Warren Neel Director
--------------------------------
C. Warren Neel
March 17, 2000 /s/ Charles Earl Ogle, Jr. Director
--------------------------------
Charles Earl Ogle, Jr.
March 17, 2000 /s/ W. David Sullins, Jr. Director
--------------------------------
W. David Sullins, Jr.
March 17, 2000 /s/ L. A. Walker, Jr. Director &
--------------------------------Executive Vice President
L. A. Walker, Jr.
March 17, 2000 /s/ Geoffrey A. Wolpert Director
--------------------------------
Geoffrey A. Wolpert
</TABLE>
BankFirst Corporation | 53
<PAGE>
INDEX TO EXHIBITS
================================================================================
Exhibit
No. Description
- ------- -----------
2.1 Agreement and Plan of Merger between Smoky Mountain Bancorp,
Inc. and First Franklin Bancshares, Inc. dated March 19, 1998.
(Filed as Exhibit 2 to the Company's S-4 Registration
Statement dated May 7, 1998, Commission File No. 333-52051,
and incorporated herein by reference.)
2.2 Agreement to Purchase Stock between BankFirst and Curtis
Mortgage Company, Inc.; William H. Curtis and Gordon C.
Curtis, dated January 13, 1998. (Filed as Exhibit 10.5 to the
Company's S-4 Registration Statement dated May 7, 1998,
Commission File No. 333-52051, and incorporated herein by
reference.)
2.3 Agreement and Plan of Merger of BankFirst and First National
Bank of Gatlinburg, dated January 16, 1997. (Filed as Exhibit
10.6 to the Company's S-4 Registration Statement dated May 7,
1998, Commission File No. 333-52051, and incorporated herein
by reference.)
2.4 Acquisition Agreement between Smoky Mountain Bancorp, Inc. and
BankFirst, dated August 15, 1996. (Filed as Exhibit 10.7 to
the Company's S-4 Registration Statement dated May 7, 1998,
Commission File No. 333-52051, and incorporated herein by
reference.)
3.1 Amended and Restated Charter of BankFirst Corporation, as
amended. (Filed as Exhibit 3.1 to the Company's S-4
Registration Statement dated May 7, 1998, Commission File No.
333-52051, and incorporated herein by reference.)
3.2 Bylaws of BankFirst Corporation. (Filed as Exhibit 3.2 to the
Company's S-4 Registration Statement dated May 7, 1998,
Commission File No. 333-52051, and incorporated herein by
reference.)
4 Form of Common Stock Certificate of BankFirst Corporation.
(Filed as Exhibit 4 to the Company's S-4 Registration
Statement dated May 7, 1998, Commission File No. 333-52051,
and incorporated herein by reference.)
10.1 BankFirst Corporation Incentive Stock Option Plan. (Filed as
Exhibit 10.1 to the Company's S-4 Registration Statement dated
May 7, 1998, Commission File No. 333-52051, and incorporated
herein by reference.)
10.2 Smoky Mountain Bancorp, Inc. Employee Stock Ownership Plan, as
amended April 1, 1989. (Filed as Exhibit 10.2 to the Company's
S-4 Registration Statement dated May 7, 1998, Commission File
No. 333-52051, and incorporated herein by reference.)
10.3 Stock Option Plan of BankFirst dated March 14, 1995. (Filed as
Exhibit 10.3 to the Company's S-4 Registration Statement dated
May 7, 1998, Commission File No. 333-52051, and incorporated
herein by reference.)
10.4 BankFirst Incentive Stock Option Plan dated October 11, 1995.
(Filed as Exhibit 10.4 to the Company's S-4 Registration
Statement dated May 7, 1998, Commission File No. 333-52051,
and incorporated herein by reference.)
10.5 First National Bank and Trust Company Pension Plan. (Filed as
Exhibit 10.12 to the Company's S-1 Registration Statement
dated June 18, 1998, Commission File No. 333-57147, and
incorporated herein by reference.)
BankFirst Corporation | 54
<PAGE>
10.6 BankFirst 401(k) Profit Sharing Plan. (Filed as Exhibit 10.7
to the Company's 1998 Annual Report on Form 10-K, Commission
File No. 1-14417, and incorporated herein by reference.)
10.7 First National Bank & Trust Profit Sharing Plan. (Filed as
Exhibit 10.8 to the Company's 1998 Annual Report on Form 10-K,
Commission File No. 1-14417, and incorporated herein by
reference.)
10.8* Merger Agreement of BankFirst 401(k) Profit Sharing Plan and
First National Bank and Trust Company 401(k) Profit Sharing
Plan.
11 Statement re: computation of per share earnings (incorporated
by reference herein as ITEM 8, Financial Statements, Note 13,
included in this Annual Report on Form 10-K).
21 * List of Subsidiaries.
27 * Financial Data Schedule.
================================================================================
* Filed herewith.
BankFirst Corporation | 55
Exhibit 10.8
================================================================================
MERGER AGREEMENT OF BANKFIRST 401(K) PROFIT SHARING PLAN
AND
FIRST NATIONAL BANK AND TRUST COMPANY 401(K) PROFIT SHARING PLAN
BankFirst ("BankFirst") makes this Qualified Plan Merger Agreement ("Merger
Agreement") in its capacity as Plan Sponsor of the BankFirst 401(k) Profit
Sharing Plan ("BankFirst Plan"), with First National Bank and Trust Company
("First National") in its capacity as Plan Sponsor of the First National Bank
and Trust Company 401(k) Profit Sharing Plan ("First National Plan").
WITNESSETH:
WHEREAS, BankFirst Corporation, the holding company for BankFirst,
acquired First Franklin Bancshares Incorporated, the holding company for First
National and both BankFirst and First National are members of the same control
group of corporations for Internal Revenue Code employee benefit purposes; and
WHEREAS, BankFirst sponsors the BankFirst Plan and First National sponsors
the First National Plan; and
WHEREAS, effective January 1, 2000, BankFirst Corporation will become the
Plan Sponsor and Plan Administrator of the BankFirst Plan, and all employees of
BankFirst and First National will become employees of BankFirst Corporation by
transfer and will be covered by the BankFirst Plan which will then be sponsored
by BankFirst Corporation;
WHEREAS, the parties wish to merge the qualified plan assets and benefit
obligations of the First National Plan into the BankFirst Plan as of December
31, 1999;
WHEREAS, under the BankFirst Plan and the First National Plan, the Plan
Sponsor of each Plan has authority to enter into Merger Agreements and to accept
the transfer of Plan assets, or to transfer Plan assets, as a party to any such
agreement; and
WHEREAS, the Plan Sponsors deem it in the best interest of the
administration of the BankFirst Plan and the First National Plan to merge the
First National Plan into the BankFirst Plan; and
NOW THEREFORE, for and in consideration of the premises, BankFirst, acting
in its respective capacity on behalf of the BankFirst Plan, and First National,
acting in its respective capacity on behalf of the First National Plan, hereby
agree as follows:
(1) TRANSFER OF ASSETS. The First National Plan Trustee shall transfer and
assign directly to the BankFirst Plan Trustee all First National Plan assets and
associated benefit obligations under the First National Plan into the BankFirst
Plan as of the Effective Date.
(2) HOLDING AND INVESTMENT OF ASSETS. The BankFirst Plan Trustee shall
hold, invest, administer and distribute the First National Plan assets merged
into the BankFirst Plan in accordance with the terms of the BankFirst Plan and
its funding policy.
(3) SERVICE FOR PREDECESSOR EMPLOYER. For purposes of eligibility,
participation, vesting and benefit accrual under the BankFirst Plan, all First
National Employees, in accordance with Code ss.ss. 414(a)(1) and 414(1)(1),
shall receive credit for years of service with First National under the
BankFirst Plan.
(4) PARTICIPANTS' ACCOUNTS. With respect to the account balance of any
First National Plan Participant under the BankFirst Plan, the following
conditions shall apply:
(a) Immediately after the merger, First National Employees shall
have balances in the BankFirst Plan equal to the sum of the account balances the
Employees had in the First National Plan immediately prior to the transfer;
(b) The transfer of the Accounts shall not eliminate any
Code ss. 411(d)(6) protected benefit provided by the First National Plan; and
<PAGE>
(c) Unless and until the Employees' Accounts under the BankFirst
Plan are 100% nonforfeitable, the BankFirst Trustee shall maintain separate
accounts for the First National Employees to reflect properly the different
percentages of vesting the First National Employees may have in their Accounts
prior to the merger. All First National Plan Participants on the Effective Date
of the Merger shall continue to be subject to the 5-year step vesting schedule
existing under the First National Plan prior to the Effective Date. First
National Employees as of the Effective Date shall vest in their BankFirst Plan
accounts based on service with both BankFirst Corporation and First National.
(d) Beginning January 1, 2000, the matching contribution for all
Participants shall be a discretionary amount determined annually by BankFirst
Corporation, allocated $1 for $1 up to 4% of Compensation. BankFirst Plan
participants as of December 31, 1999, shall accrue benefits only in accordance
with the terms of the BankFirst Plan for Plan Year 1999. First National Plan
Participants as of December 31, 1999, shall accrue benefits only in accordance
with the First National Plan for Plan Year 1999.
(5) BINDING EFFECT. The terms and conditions of this Merger Agreement
shall bind the Trustees (and successors) of the BankFirst Plan and of the First
National Plan and shall operate as if fully set forth within the BankFirst Plan
and within the First National Plan.
(6) EFFECTIVE DATE. The merger of the account balances of the First
National Plan into the BankFirst Plan shall take place after the last payroll on
December 31, 1999.
IN WITNESS WHEREOF, BankFirst has signed the Agreement in its respective
fiduciary capacity on behalf of the BankFirst Plan and First National has signed
this Agreement in its respective fiduciary capacity on behalf of First National
Plan on this 30th day of December, 1999.
BankFirst
By: /s/ C. David Allen
-----------------------------------------
C. David Allen
Its: S.V.P.
First National Bank and Trust Company
By: /s/ John W. Perdue
-----------------------------------------
John W. Perdue
Its: President
Merger Agreement Approved as to Form and Purpose
BankFirst Trust Company, as Trustee of the
BankFirst 401(k) Profit Sharing Plan
By: /s/ Michael L. Bevins
--------------------------------
Michael L. Bevins
Its: President
BankFirst Trust Company, as Trustee of the
First National Bank and Trust Company 401(k)
Profit Sharing Plan
By: /s/ Michael L. Bevins
---------------------------------
Michael L. Bevins
Its: President
EXHIBIT 21
================================================================================
LIST OF SUBSIDIARIES
The Company owns the following subsidiaries as of December 31, 1999:
<TABLE>
<CAPTION>
PERCENT
VOTING JURISDICTION
NAME STOCK HELD OF INCORPORATION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BankFirst (1) 100% Tennessee
The First National Bank and Trust Company (2) 100% United States
BankFirst Trust Company 100% Tennessee
(1) BankFirst owns the following subsidiaries
as of December 31, 1999:
Curtis Mortgage Company, Inc. 100% Tennessee
Eastern Life Insurance Company, Inc. 100% Tennessee
(2) The First National Bank and Trust Company owns
the following subsidiary as of December 31, 1999:
Friendly Finance Company, Inc. 100% Tennessee
</TABLE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 36,039
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,596
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 578,216
<ALLOWANCE> 7,400
<TOTAL-ASSETS> 812,899
<DEPOSITS> 630,379
<SHORT-TERM> 59,603
<LIABILITIES-OTHER> 7,232
<LONG-TERM> 29,159
0
905
<COMMON> 28,189
<OTHER-SE> 57,432
<TOTAL-LIABILITIES-AND-EQUITY> 812,899
<INTEREST-LOAN> 50,514
<INTEREST-INVEST> 7,529
<INTEREST-OTHER> 565
<INTEREST-TOTAL> 58,608
<INTEREST-DEPOSIT> 21,933
<INTEREST-EXPENSE> 25,136
<INTEREST-INCOME-NET> 33,472
<LOAN-LOSSES> 1,996
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 4,137
<INCOME-PRETAX> 13,392
<INCOME-PRE-EXTRAORDINARY> 13,392
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,886
<EPS-BASIC> .77
<EPS-DILUTED> .73
<YIELD-ACTUAL> 8.34
<LOANS-NON> 3,981
<LOANS-PAST> 2,261
<LOANS-TROUBLED> 426
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,602
<CHARGE-OFFS> 1,464
<RECOVERIES> 266
<ALLOWANCE-CLOSE> 7,400
<ALLOWANCE-DOMESTIC> 7,400
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,081
</TABLE>
