SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 001-14417
BANKFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Tennessee 58-1790903
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
625 Market Street
Knoxville, Tennessee 37902
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(865) 595-1100
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of common
stock as of October 31, 2000:
Title of Class Shares Outstanding
Common Stock, $2.50 par value 11,069,573
<PAGE>
BANKFIRST CORPORATION
INDEX
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS ..................................... 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements ...................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................................ 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signatures......................................................... 16
FORWARD-LOOKING STATEMENTS
================================================================================
The information disclosed in this Quarterly Report on Form 10-Q of BankFirst
Corporation (the "Company") includes various forward- looking statements that
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 with respect to credit quality (including
delinquency trends and the allowance for credit losses), the ability of the
Company and its vendors to adequately address post-Year 2000 issues, corporate
objectives, and other financial and business matters. The words "anticipates",
"projects", "intends", "estimates", "expects", "believes", "plans", "may",
"will", "should", "could", and other similar expressions are intended to
identify such forward-looking statements. The Company cautions that these
forward-looking statements are necessarily speculative and speak only as of the
date made, and are subject to numerous assumptions, risks and uncertainties, all
of which may change over time. Actual results could differ materially from such
forward-looking statements.
In addition to the factors disclosed by the Company elsewhere in this document,
the following factors, among others, could cause the Company's actual results to
differ materially and adversely from such forward-looking statements: pricing
pressures on loan and deposit products; competition; changes in economic
conditions nationally, regionally and in the Company's markets; the extent and
timing of actions of the Federal Reserve Board; changes in levels of market
interest rates; clients' acceptance of the Company's products and services;
credit risks of lending activities and competitive factors; and the extent and
timing of legislative and regulatory actions and reforms.
The above-listed risk factors are not necessarily exhaustive, particularly as to
possible future events, and new risk factors may emerge from time to time.
Certain events may occur that could cause the Company's actual results to be
materially different than those described in the Company's periodic filings with
the Securities and Exchange Commission ("SEC"). Any statements made by the
Company that are not historical facts should be considered to be forward-looking
statements. The Company is not obligated to update and does not undertake to
update any of its forward-looking statements made herein.
--------------------------------------------------------------------------------
BankFirst Corporation | 2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
BankFirst Corporation
Knoxville, Tennessee
We have reviewed the consolidated balance sheet of BankFirst Corporation as of
September 30, 2000, and the related consolidated statements of income for the
quarter and year-to-date periods ended September 30, 2000 and 1999, and the
consolidated statements of changes in stockholders' equity and cash flows for
the year-to-date periods ended September 30, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Louisville, Kentucky
October 31, 2000
BankFirst Corporation | 3
<PAGE>
Part I.- Financial Information
Item 1.- Financial Statements
Consolidated Balance Sheets
BankFirst Corporation
(Dollar amounts in thousands except share data)
Sept. 30, Dec. 31,
2000 1999
================================================================================
(Unaudited)
ASSETS
Cash and due from banks ............................ $ 31,229 $ 36,039
Federal Funds Sold ................................. 0 0
--------- ---------
Total cash and cash equivalents ............... 31,229 36,039
Securities available for sale ...................... 149,543 133,596
Mortgage loans held for sale ....................... 17,840 12,205
Loans, net of allowance for credit
losses of $7,264 and $7,400 ...................... 598,705 578,216
Premises and equipment, net ........................ 28,156 26,814
Mortgage servicing rights .......................... 8,786 8,896
Federal Home Loan Bank Stock, at cost .............. 3,610 3,420
Intangible assets .................................. 1,727 1,845
Accrued interest receivable and
other assets ..................................... 14,824 11,868
--------- ---------
Total assets .................................. $ 854,420 $ 812,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits ....................... $ 114,140 $ 105,079
Interest-bearing deposits .......................... 546,670 525,300
--------- ---------
Total deposits ................................ 660,810 630,379
Securities sold under agreements
to repurchase .................................... 30,086 32,103
Federal funds purchased and other
borrowings ....................................... 17,677 27,500
Advances from the Federal Home
Loan Bank ........................................ 46,057 29,159
Accrued interest payable and
other liabilities ................................ 8,088 7,232
--------- ---------
Total liabilities ............................. 762,718 726,373
Stockholders' equity
Common stock: $2.50 par value, 30,000,000
shares authorized, 11,052,964 and
11,275,600 shares outstanding,
respectively ..................................... 27,632 28,189
Noncumulative convertible preferred
stock: $5 par value, 1,000,000 shares
authorized, 181,050 shares outstanding ........... 905 905
Additional paid-in capital ......................... 32,171 33,448
Retained earnings .................................. 31,894 25,914
Accumulated other comprehensive
income (loss) .................................... (900) (1,930)
--------- ---------
Total stockholders' equity .................... 91,702 86,526
--------- ---------
Total liabilities and stockholders' equity .... $ 854,420 $ 812,899
========= =========
================================================================================
See accompanying notes.
BankFirst Corporation | 4
<PAGE>
Consolidated Statements of Income
BankFirst Corporation
(Dollar amounts in thousands except share data)
(Unaudited)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2000 1999 2000 1999
================================================================================
Interest income
Interest and fees on loans ...... $ 14,256 $ 13,092 $ 41,823 $ 37,486
Taxable securities .............. 1,803 1,510 5,208 4,402
Nontaxable securities ........... 483 410 1,444 1,233
Other ........................... 123 116 370 475
-------- -------- -------- --------
16,665 15,128 48,845 43,596
Interest expense
Deposits ........................ 6,791 5,535 19,432 16,226
Federal funds purchased and
repurchase agreements ......... 929 408 2,042 1,417
Federal Home Loan Bank
advances and other debt ....... 394 426 1,619 889
-------- -------- -------- --------
8,114 6,369 23,093 18,532
-------- -------- -------- --------
Net interest income ............... 8,551 8,759 25,752 25,064
Provision for credit losses ....... 572 522 1,717 1,402
-------- -------- -------- --------
Net interest income after
provision for credit losses ..... 7,979 8,237 24,035 23,662
Noninterest income
Service charges and fees ........ 1,286 1,186 3,588 3,472
Net securities gains (losses) ... 0 30 6 40
Net gain (loss) on loan sales ... 526 659 1,777 2,568
Loan servicing income, net
of amortization ............... 294 (5) 890 148
Trust fee income ................ 254 261 1,003 786
Other ........................... 222 327 698 989
-------- -------- -------- --------
2,582 2,458 7,962 8,003
Noninterest expense
Salaries and employee benefits .. 4,044 4,023 12,060 12,100
Occupancy expense ............... 565 474 1,659 1,526
Equipment expense ............... 618 579 1,882 1,945
Office expense .................. 428 423 1,406 1,358
Data processing ................. 400 451 1,319 1,285
Advertising ..................... 208 202 556 544
Other ........................... 1,025 1,080 3,243 2,974
-------- -------- -------- --------
7,288 7,232 22,125 21,732
-------- -------- -------- --------
Income before income taxes ........ 3,273 3,463 9,872 9,933
Provision for income taxes ........ 803 1,169 2,905 3,368
-------- -------- -------- --------
Net income ........................ $ 2,470 $ 2,294 $ 6,967 $ 6,565
======== ======== ======== ========
Comprehensive income .............. $ 3,769 $ 1,768 $ 7,997 $ 3,260
Earnings per share:
Basic ........................... $ 0.22 $ 0.20 $ 0.62 $ 0.57
Diluted ......................... $ 0.21 $ 0.19 $ 0.58 $ 0.53
================================================================================
See accompanying notes.
BankFirst Corporation | 5
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
BankFirst Corporation
(Dollar amounts in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Preferred Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Income Equity
-------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ENDED SEPT. 30, 1999
Balance, January 1, 1999 $ 28,439 $ 905 $ 34,093 $ 17,160 $ 2,244 $ 82,841
Cash dividend on preferred stock -- -- -- (99) -- (99)
Repurchase of common stock,
49,330 shares (123) -- (322) -- -- (445)
Comprehensive income (loss):
Net income -- -- -- 6,565 -- 6,565
Change in unrealized gains (losses),
net of reclassification -- -- -- -- (3,305) (3,305)
--------
Total comprehensive income 3,260
-------- -------- -------- -------- -------- --------
Balance, September 30, 1999 $ 28,316 $ 905 $ 33,771 $ 23,626 $ (1,061) $ 85,557
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Preferred Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Income Equity
-------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PERIOD ENDED SEPT. 30, 2000
Balance, January 1, 2000 $ 28,189 $ 905 $ 33,448 $ 25,914 $ (1,930) $ 86,526
Cash dividend on preferred stock -- -- -- (99) -- (99)
Cash dividend on common stock -- -- -- (888) -- (888)
Repurchase of common stock,
227,650 shares (569) -- (1,298) -- -- (1,867)
Stock options exercised, 5,014 shares 12 -- 21 -- -- 33
Comprehensive income:
Net income -- -- -- 6,967 -- 6,967
Change in unrealized gains
(losses), net of reclassification -- -- -- -- 1,030 1,030
--------
Total comprehensive income 7,997
-------- -------- -------- -------- -------- --------
Balance, September 30, 2000 $ 27,632 $ 905 $ 32,171 $ 31,894 $ (900) $ 91,702
======== ======== ======== ======== ======== ========
</TABLE>
================================================================================
See accompanying notes.
BankFirst Corporation | 6
<PAGE>
Consolidated Statements of Cash Flows
BankFirst Corporation
(Dollar amounts in thousands)
(Unaudited)
Nine months ended
Sept. 30,
2000 1999
================================================================================
Cash flows from operating activities
Net income .................................... $ 6,967 $ 6,565
Adjustments to reconcile net income
to net cash from operating activities:
Provision for credit losses ................... 1,717 1,402
Depreciation .................................. 1,736 1,701
Amortization of mortgage servicing
rights ...................................... 839 1,411
Amortization and accretion of
securities, net ............................. (10) (79)
Net (gains) losses on securities
sales ....................................... (6) (40)
Net (gains) losses on sales of
mortgage loans .............................. (1,777) (2,568)
Proceeds from sales of mortgage
loans held for sale ......................... 78,445 148,963
Purchases of mortgage loans held
for sale .................................... (10,732) (26,222)
Originations of mortgage loans
held for sale ............................... (73,348) (108,692)
Changes in assets and liabilities
Accrued interest receivable and
other assets ................................ (2,956) (1,279)
Accrued interest payable and
other liabilities ........................... 856 (1,145)
--------- ---------
Net cash flows from operating activities ......... 1,731 20,017
Cash flows from investing activities
Purchase of securities ........................ (31,224) (27,381)
Proceeds from maturities of
securities .................................. 15,743 4,155
Proceeds from sales of securities ............. -- 18,162
Net increase in loans ......................... (20,489) (67,590)
Purchase of FHLB stock ........................ (190) (172)
Premises and equipment
expenditures, net ........................... (3,078) (3,120)
--------- ---------
Net cash flows from investing activities ......... (39,238) (75,946)
Cash flows from financing activities
Net change in deposits ........................ 30,431 14,819
Net change in repurchase agreements
and other borrowings ........................ (11,840) 11,207
Advances from the FHLB ........................ 17,000 27,307
Repayments of advances to the FHLB ............ (101) (10,000)
Dividends paid ................................ (987) (99)
Sales of stock and stock options
exercised ................................... 61 --
Repurchase of common stock .................... (1,867) (445)
--------- ---------
Net cash flows from financing activities ......... 32,697 42,789
Net change in cash and cash equivalents .......... (4,810) (13,140)
Cash and cash equivalents, beginning
of period ...................................... 36,039 44,986
--------- ---------
Cash and cash equivalents, end
of period ...................................... $ 31,229 $ 31,846
========= =========
Supplemental disclosures:
Interest paid ................................. $ 22,098 $ 18,750
Income taxes paid ............................. 4,406 2,515
Loans converted to other real estate .......... 3,287 --
================================================================================
See accompanying notes.
BankFirst Corporation | 7
<PAGE>
Notes to Consolidated Financial Statements
BankFirst Corporation
Basis of Presentation of the Consolidated Financial Statements
================================================================================
Principles of Consolidation: The consolidated financial statements include the
accounts of BankFirst Corporation and its principal wholly-owned subsidiaries,
BankFirst, The First National Bank and Trust Company (together referred to as
the "Banks"), BankFirst Trust Company, and BankFirst's wholly-owned subsidiary,
Curtis Mortgage Company, collectively referred to as the "Company". All
significant inter-company balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information, and accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
Borrowings: Repurchase agreements and Federal Funds purchased are generally
overnight borrowings. Federal Home Loan Bank ("FHLB") advances consist of
variable rate advances that mature within one year, and fixed rate long-term
advances with maturity dates that exceed one year.
Reclassifications: Certain items in the 1999 financial statements have been
reclassified to conform to the 2000 presentation.
Computation of Earnings Per Share
================================================================================
Basic earnings per share is based on weighted average common shares outstanding.
Diluted earnings per share further assumes issuance of any dilutive potential
common shares. Earnings per share are restated for all subsequent stock
dividends and splits.
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations are presented
below (in thousands, except share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income .................... $ 2,469 $ 2,294 $ 6,967 $ 6,565
Less: dividends declared
on preferred stock .......... (33) (33) (99) (99)
------------ ------------ ------------ ------------
Net income available to
common stockholders ......... $ 2,436 $ 2,261 $ 6,868 $ 6,466
============ ============ ============ ============
Average common shares
outstanding ................. 11,050,694 11,359,843 11,124,697 11,370,290
Earnings per share ............ $ 0.22 $ 0.20 $ 0.62 $ 0.57
DILUTED
Net income available to
common stockholders ......... $ 2,436 $ 2,261 $ 6,868 $ 6,466
Add: dividends upon assumed
conversion of preferred
stock ....................... 33 33 99 99
------------ ------------ ------------ ------------
Net income available to
common stockholders
assuming conversion ......... $ 2,469 $ 2,294 $ 6,967 $ 6,565
============ ============ ============ ============
Weighted average common
shares outstanding .......... 11,050,694 11,359,843 11,124,697 11,370,290
Weighted average dilutive
convertible preferred
stock ....................... 558,992 558,992 558,992 558,992
Dilutive common stock
options at average market
price ....................... 407,480 318,061 296,430 367,411
------------ ------------ ------------ ------------
Weighted average diluted
shares outstanding .......... 12,017,166 12,236,896 11,980,119 12,296,693
============ ============ ============ ============
Earnings per share assuming
dilution .................... $ 0.21 $ 0.19 $ 0.58 $ 0.53
</TABLE>
BankFirst Corporation | 8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Overview
==========================================================================
The following discussion and analysis is presented to facilitate the
understanding of the consolidated financial position and results of
operations of BankFirst Corporation (the "Company"). The consolidated
financial information discussed herein primarily reflects the activities
of the Company's wholly-owned community bank subsidiaries, BankFirst
("BankFirst") and The First National Bank and Trust Company ("FNB"), as
well as the Company's BankFirst Trust Company subsidiary and BankFirst's
mortgage subsidiary, Curtis Mortgage Company. The discussion identifies
trends and material changes that occurred during the reported periods and
should be read in conjunction with the consolidated financial statements
and accompanying notes appearing elsewhere herein. The periods included
within this report are the three months and nine months ended September
30, 2000 and September 30, 1999.
The Company is a bank holding company headquartered in Knoxville,
Tennessee that focuses on meeting the banking needs of East Tennessee
businesses and residents through a relationship-oriented, community bank
business strategy. The Company conducts its banking business through
BankFirst, which has 26 offices in Knox, Sevier, Blount, Loudon and
Jefferson Counties, and through FNB, with six offices in McMinn County.
The Company's operations principally involve commercial and residential
real estate lending, commercial business lending, consumer lending,
mortgage servicing, construction lending and other financial services,
including trust operations, credit card services and brokerage services.
On August 22, 2000, the Company entered into an agreement with BB&T
Corporation, based in Winston-Salem, North Carolina ("BB&T"), whereby BB&T
will acquire 100% ownership of the Company in a $149.7 million stock swap.
While the directors of both companies have approved the transaction, it is
subject to approval by federal and state banking regulators and by the
shareholders of the Company. The transaction will be accounted for as a
purchase and has an exchange ratio fixed at .4554 per BB&T share of common
stock for each issued and outstanding share of the Company's common stock,
and 1.4060 shares of BB&T common stock for each issued and outstanding
share of the Company's preferred stock. As a condition of the merger
agreement, the Company also entered into an agreement granting BB&T the
right to purchase up to 2,199,000 of the Company's shares of common stock.
The terms of this acquisition are included in a Registration Statement on
Form S-4 filed by BB&T on October 20, 2000 with the Securities and
Exchange Commission. It is anticipated that this acquisition will be
consummated before December 31, 2000, contingent upon all required
approvals.
Financial Condition
==========================================================================
The Company's total assets grew from $813 million at year-end 1999 to $854
million at September 30, 2000, representing a $41 million increase. This
asset growth occurred primarily in loans of $21 million and securities of
$16 million. The Company's September 30, 2000 balance sheet reflects
growth of $31 million in deposits achieved through competitive product
pricing. The Company used this deposit increase by funding the growth in
loans and the purchases of securities. The Company also restructured its
overall short-term borrowing position by increasing Federal Home Loan Bank
("FHLB") advances by $17 million and reducing repurchase agreements and
federal funds by a total of $12 million.
The Company's deposit base and, to a lesser degree its loan demand, are
both influenced by seasonal demands from its commercial customers.
Accordingly, the Company maintains a short-term liquidity strategy to
accommodate seasonal needs. On a year-to-date ("YTD") average basis, total
deposits grew by $28 million from year-end 1999. This deposit growth was
used to fund YTD growth in loans of $20 million and to reduce over-all
short-term borrowings by $6 million from year-end 1999. As customer loan
and deposit needs fluctuate, short-term borrowings are appropriately
adjusted.
BankFirst Corporation | 9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
From year-end 1999 to September 30, 2000, total stockholders' equity
increased by $5 million. This increase consists of net earnings of nearly
$7 million, less preferred and common stock cash dividends of nearly $1
million, and less approximately $2 million for the repurchase of 227,650
shares of the Company's common stock, as described in the following
paragraph.
On January 11, 2000 the Company approved a stock repurchase plan to
acquire up to 500,000 shares of its common stock. This stock repurchase
plan follows a previous 100,000 share stock repurchase plan completed
during the second half of 1999. Management repurchased a total of 227,650
shares of the approved 500,000 share buyback during the first nine months
of this year and presently does not anticipate repurchasing any additional
shares.
Management expects the Company's growth to continue through expansion of
retail locations, expansion of products and services, including mortgage
servicing opportunities by Curtis Mortgage Company and trust services
through BankFirst Trust Company. Although the Company's growth rate in
total assets during the last twelve months was approximately 9%, this
growth trend has slowed during the third quarter of 2000, and will very
likely continue to slow over the remainder of 2000 due to the effects of
recent short-term interest rate increases announced by the Federal Reserve
Bank.
Results of Operations
==========================================================================
Noninterest Income
Net income increased 6% to $7.0 million for the first nine months of 2000,
as compared to $6.6 million for the same period last year. Net interest
income on a tax equivalent basis was $26.2 million, representing an
approximate $500,000 or 2% increase for the first nine months of 2000 from
the comparable 1999 period. The year-over-year increase in net interest
income was due primarily to an increase in total average earning assets
and a proportionate increase of earning assets invested in loans, which
represent the Company's highest yielding assets.
The Company's net interest spread and net interest margin for the first
nine months of 2000 were 3.71% and 4.45%, respectively, as compared to
4.10% and 4.80%, respectively, for the same period last year. The trend
over the last twelve months has been that the Company's margin and spread
have declined slightly due to competitive pressures on loan rates and
higher costs associated with borrowing costs of funds, such as
interest-bearing deposits, federal funds, and FHLB advances. This trend of
competitive pressures is expected to continue into the foreseeable future.
Although the Company's net interest spread and net interest margin have
declined, actual dollars of net interest income have increased from a
higher volume of earning assets. The growth in earning assets (which are
mostly comprised of loans) have slowed from historical growth patterns due
to the delayed effects of recent short-term Federal Reserve Bank interest
rate hikes. In addition, during the first quarter of 2000, the Company
maintained an aggressive loan pricing strategy to combat intense
competition. This strategy was successful in retaining existing
relationships and attracting new customers, although the yields on the
respective loans were below historical levels. The Company changed its
pricing structure during the second quarter of 2000 and is currently
pricing its loans in order to maintain a higher net interest spread than
during the previous quarters. This strategy may very likely slow the
growth rate of its loan portfolio, but should increase net interest income
as a percentage of total assets.
Noninterest income of $7.9 million for the first nine months of 2000
compared almost evenly with $8 million for the same period in 1999. Some
select components of noninterest income include service charges and fees
generated by the two bank affiliates, income from sales of mortgage loans
and loan servicing through Curtis Mortgage Company, and trust fee income
produced through BankFirst Trust Company. YTD comparisons of these select
components of noninterest income are described in more detail below.
An analysis of noninterest income reflects a small change in earnings on
service charges and related fees, which were $3.5 million and $3.6 million
for the nine-month periods ending September 30, 1999 and 2000,
respectively. Intense market competition from other financial
institutions, as well as nonbank competition such as brokerage firms, are
causing pressure on this component of noninterest income.
BankFirst Corporation | 10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Gains on loan sales decreased from $2.6 million for the nine months ending
September 30, 1999 to $1.8 million for the nine months ending September
30, 2000. The interest rate increases initiated by the Federal Reserve
Board during 1999 and 2000 have attributed to a reduction in the volume of
originations of secondary market loans. However, gains on loan sales
during the first nine months of 2000 were positively impacted by the
Company's short-term strategy to sell approximately $43 million of
originated loans servicing-released. The sale of loans servicing-released
generally results in higher gains at the time of sale, but will have a
negative impact on future loan servicing income streams. The Company's
loan servicing portfolio balance at September 30, 2000 was approximately
$604 million compared to approximately $612 million at December 31, 1999.
The Company will continue to consider selling a portion of loans
servicing-released, while continuing to build the loan servicing
portfolio.
Loan servicing income (net of amortization) during the first nine months
of 2000 was $890,000, compared to $148,000 for the same period in 1999.
This change was mainly attributable to the effect of recognizing
amortization expense over a longer period of time from slower loan
prepayments. Given the expected continued increase in interest rates,
management believes the secondary market loan volumes and prepayments over
the next several months will further decline from existing levels.
Noninterest income from trust fees increased 28% from $786 thousand to $1
million when comparing the nine months ending September 30, 1999 to the
same period in 2000. The BankFirst Trust Company is managing $393 million
of trust assets as of September 30, 2000 as compared to $314 million for
the same period last year.
Noninterest Expense
Noninterest expense increased $393,000 to $22.1 million for the first nine
months of 2000 over the comparable 1999 period. The primary components of
noninterest expense are salaries and benefits, occupancy and equipment,
data processing, and an "other" noninterest expense category that captures
various expenses not normally itemized on financial statements.
Salaries and benefits represent the Company's largest noninterest expense
component. The cost to hire, train, and maintain a workforce of over 400
full-time and part-time employees is substantial. The Company's personnel
costs through the first nine months of 2000 were $12.1 million, unchanged
from the same period last year. Although this expense category did not
increase based upon a year-over-year comparison, the Company expects to
hire additional personnel to staff four new branch locations currently
under development. This branch expansion strategy, coupled with a tight
labor market, inflationary pressures, and competitive pressures, will most
likely cause an upward trend in this noninterest expense category
throughout the remainder of the year.
Occupancy expense, office and equipment expense, and data processing fees
collectively accounted for $6.3 million of noninterest expense for the
first nine months of 2000, compared to $6.1 million for the same period
last year. Again, it is anticipated that inflationary pressures and an
expansion into new markets will put upward pressure on these expenses.
The "Other Noninterest Expense" category reflects year-to-date expense of
$3.2 million, an increase of $269,000 for the first nine months of 2000
over the same period in 1999. This category includes expenses for loan and
deposit processing fees, travel, professional fees, charitable
contributions, check losses, and other miscellaneous expenses. The
increase in other noninterest expense from year to year was due to normal,
recurring expense activity.
Provision for Federal Income Taxes
Third quarter 2000 federal income tax expense of $803,000 includes a
$275,000 reduction in estimated liability associated with prior tax years.
The Company reevaluated its estimated liability as a result of Internal
Revenue Service tax examinations of certain prior tax years that are now
nearing completion.
BankFirst Corporation | 11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Provision for Credit Losses and Asset Quality
The provision for credit losses was $1.7 million for the first nine months
of this year, compared to $1.4 million for the same period in 1999. The
higher provision expense on a period-over-period comparative basis was
mainly due to providing allowance for loan losses on the growing loan
portfolio. The Company experienced net charge-offs (i.e., gross
charge-offs less recoveries) of $1.9 million during the first nine months
of 2000, compared to $624,000 for the same period last year. The majority
of the increase was a $500,000 charge-off recorded in August, 2000 on a
single loan. The ratio of net charge-offs to average loans increased from
0.04% to 0.16% when comparing the nine months ending September 30, 1999 to
the same period in 2000.
The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out
recoveries on previously charged-off assets, become net charge-offs. The
Company's policy is to charge off loans when, in management's opinion, the
loan is deemed uncollectible, although concerted efforts are made to
maximize recovery.
With the escalation of concern about credit quality throughout the
industry, the Company has taken a proactive stance regarding its loan
quality. Total nonperforming loans (consisting of nonaccruals and loans 90
days or more past due) as of September 30, 2000 were $5.6 million compared
to $6.2 million as of December 31, 1999. Included in nonaccruing loans is
one credit of $2.5 million that is in bankruptcy and will most likely
remain in nonaccrual status through at least the remainder of 2000. Other
real estate owned ("OREO") and non-real estate repossessions at September
30, 2000 were collectively $4.1 million as compared to $1.9 million on
December 31, 1999. Included in other real estate owned are two parcels
valued at approximately $2 million and $1 million, respectively, that were
acquired during the current year. There are currently no pending sales on
either of these properties.
The provision for credit losses represents charges made to earnings to
maintain an adequate allowance for loan losses and other credit losses.
The allowance is maintained at an amount believed to be sufficient to
absorb losses in the loan portfolio. Factors considered in establishing an
appropriate allowance include a careful assessment of the financial
condition of the borrower; a realistic determination of the value and
adequacy of underlying collateral; the condition of the local economy and
the condition of the specific industry of the borrower; a comprehensive
analysis of the levels and trends of loan categories; and a review of
delinquent and classified loans. The Company applies a systematic process
for determining the adequacy of the allowance for loan losses including an
internal loan review function and a monthly analysis of the adequacy of
the allowance. The monthly analysis includes determination of specific
potential loss factors on individual classified loans, historical
potential loss factors derived from actual net charge-off experience and
trends in nonperforming loans, and potential loss factors for other loan
portfolio risks such as loan concentrations, local economy, and the nature
and volume of loans.
Management will continue to monitor its markets and take a conservative
position regarding credit quality. Refer to the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1999 under the
"Nonperforming Assets" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations, for further analysis.
BankFirst Corporation | 12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Nonperforming Assets
(in thousands)
Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30
2000 2000 2000 1999 1999
-------- ------- ------- ------- --------
Principal balance
Nonaccrual ................. $3,611 4,014 $3,946 $3,981 $3,017
90 days or more past due
and still accruing ......... 1,968 1,483 2,800 2,261 1,173
------ ------ ------ ------ ------
Total nonperforming
loans ................ $5,579 $5,497 $6,746 $6,242 $4,190
====== ====== ====== ====== ======
Nonperforming loans as a
percent of loans ........... 0.92% 0.91% 1.14% 1.07% 0.73%
Other real estate owned
("OREO") ................... $4,108 $1,196 $1,963 $1,893 $ 814
OREO as a percent of
loans ...................... 0.68% 0.20% 0.33% 0.32% 0.14%
Allowance as a percent of
nonperforming loans ........ 130.19% 138.96% 112.56% 118.55% 176.13%
Liquidity and Capital Adequacy
==========================================================================
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets and long
and short term borrowings, based upon management's consideration of
expected loan demand, expected deposit flows and securities sold under
repurchase agreements. The Company believes it has the ability to raise
deposits quickly within its market area by slightly raising interest
rates, but has typically been able to achieve deposit growth without
paying above market interest rates. The current strategy calls for the
subsidiary banks to be no higher than second highest in their pricing as
compared to their primary competitors. Deposit growth has funded most of
the significant asset growth in the past several years, but has decreased
modestly as a percent of total funding.
The Company actively solicits customer cash management relationships that
often include a securities repurchase agreement feature. Under these
agreements, commercial customers are able to generate earnings on
otherwise idle funds on deposits with the subsidiary banks. These accounts
are considered volatile under regulatory requirements, although the
Company has found them to be a steady source of funding. The Company has
been able to maintain customer relationships because of its strong
business lending program. While more costly than deposit funding, these
deposit-related accounts are typically the lowest cost borrowed funds
available to the Company.
The primary source of capital for the Company is retained earnings. During
the first nine months of 2000, the Company had net earnings of $7.0
million, paid cash dividends of $99 thousand to shareholders of
noncumulative convertible preferred stock, paid initial annual cash
dividends of $888 thousand to shareholders of common stock, and
repurchased 227,650 shares of the Company's common stock (as described
previously in the "Financial Condition" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations)
at an approximate cost of $1.9 million. The Company retained the remaining
$4.1 million of earnings as an increase to its capital base.
BankFirst Corporation | 13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
The Company and its subsidiaries are subject to regulatory capital
requirements administered by federal and state banking agencies. Capital
adequacy guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance
sheet items calculated under regulatory accounting practices. The prompt
corrective action regulations provide five classifications, including well
capitalized, adequately capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized, although these terms
are not used to represent overall financial condition. If
under-capitalized, capital distributions, asset growth and expansion are
limited, and plans for capital restoration are required.
Under guidelines issued by banking regulators, the Company and its bank
subsidiaries are required to maintain a minimum Tier 1 risk-based capital
ratio of 4% and a minimum total risk-based ratio of 8%. Risk-based capital
ratios weight the relative risk factors of all assets and consider the
risk associated with off-balance sheet items.
The Company's Tier 1 risk-based and total risk-based ratios were 13.70%
and 14.74%, respectively, as of September 30, 2000. Both bank subsidiaries
also individually met the definition of "well capitalized" as of September
30, 2000.
Market Risk
==========================================================================
The Company uses an earnings simulation model (summarized below) to
analyze net interest income sensitivity. Potential changes in market
interest rates and their subsequent effects on interest income are then
evaluated. The model projects the effects of instantaneous movements in
interest rates of 100 and 200 basis points.
The assumptions used in the market risk simulation model are inherently
uncertain and, as a result, the model cannot precisely measure net
interest income or precisely predict the impact of fluctuations in market
interest rates on net interest income. Actual results will differ from the
model's simulated results due to timing, magnitude and frequency of
interest rate changes, as well as changes in market conditions and the
application of various management strategies. See the previous discussion
concerning interest rate margin and interest rate spread in the "Results
of Operations" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Even though the Company's cumulative gap at one year is negative, the
earnings simulation model indicates that an increase in interest rates of
100 and 200 basis points would result in increased net interest income of
$642,000 (a 1.86% increase from a flat rate scenario) and $1.3 million (a
3.72% increase from flat rates), respectively. This occurs because
management believes that if overall market interest rates increase, the
market would not require an immediate, corresponding repricing of non-term
deposit liabilities. A decrease in interest rates of 100 and 200 basis
points would result in decreased net interest income of $639,000 (a 1.85%
decrease from flat rates) and $1.2 million (a 3.55% decrease from flat
rates), respectively.
The Company's cumulative gap at one year as of December 31, 1999 indicated
that an increase in interest rates of 100 and 200 basis points would
result in increased net interest income of $306,000 (a 0.85% increase from
a flat rate scenario) and $594,000 (a 1.66% increase from flat rates),
respectively. A decrease in interest rates of 100 and 200 basis points as
of December 31, 1999 would result in decreased net interest income of
$251,000 (a 0.70% decrease from flat rates) and $439,000 (a 1.22% decrease
from flat rates), respectively.
BankFirst Corporation | 14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
Market Risk Analysis
at September 30, 2000
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
------------------------- ------------------------
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
<S> <C> <C> <C> <C> <C>
Projected Interest Income
Loans ............................................ $ 52,850 $ 55,554 $ 58,255 $ 60,957 $ 63,660
Investments ...................................... 9,571 9,695 9,819 9,942 10,067
Federal Funds Sold ............................... 75 88 103 119 135
-------- -------- -------- -------- --------
Total Interest Income ....................... 62,496 65,337 68,177 71,018 73,862
Projected Interest Expense
Deposits ......................................... $ 25,107 $ 26,916 $ 28,674 $ 30,432 $ 32,191
FHLB Term Advances ............................... 2,477 2,772 3,068 3,363 3,657
Fed Funds Purchased & Other Borrowings ........... 1,561 1,710 1,857 2,003 2,149
-------- -------- -------- -------- --------
Total Interest Expense ...................... 29,145 31,398 33,599 35,798 37,997
Net Interest Income ................................ $ 33,351 $ 33,939 $ 34,578 $ 35,220 $ 35,865
$ Change from Level Rates .......................... (1,227) (639) -- 642 1,287
% Change from Level Rates .......................... (3.55)% (1.85)% -- 1.86% 3.72%
</TABLE>
Summarized Market Risk Analysis
At December 31, 1999
<TABLE>
<CAPTION>
Decrease in Rates Increase in Rates
------------------------- ------------------------
200 100 100 200
Basis Basis Level Basis Basis
Points Points Rates Points Points
<S> <C> <C> <C> <C> <C>
Projected Total Interest Income ............... $ 60,986 $ 62,468 $ 64,713 $ 66,959 $ 68,438
Projected Total Interest Expense .............. 25,539 26,833 28,827 30,767 31,958
Net Interest Income ........................... 35,447 35,635 35,886 36,192 36,480
$ Change from Level Rates ..................... (439) (251) -- 306 594
% Change from Level Rates ..................... (1.22)% (0.70)% -- 0.85% 1.66%
</TABLE>
BankFirst Corporation | 15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
BankFirst Corporation
New Accounting and Reporting Requirements
==========================================================================
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities". SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities at fair value. Depending on the use
of the derivatives and whether they qualify for hedge accounting, gains or
losses from changes in the value of such derivatives would either be
recorded as a component of net income or as a change in stockholders'
equity. The Company is required to adopt the new standard as of January 1,
2001. Management has determined that implementation of this standard will
not have a material impact on the Company's financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
==========================================================================
This information is disclosed in Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations- Liquidity and
Capital Adequacy".
Part II.- Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
==========================================================================
(a) Exhibits
10.1 Agreement and Plan of Reorganization between BankFirst Corporation
and BB&T Corporation, dated as of August 22, 2000
10.2 Stock Option Agreement between BankFirst Corporation and BB&T
Corporation, dated as of August 22, 2000
27 Financial Data Schedule (filed electronically with the SEC).
99.1 Awareness Letter from Crowe, Chizek and Company LLP.
(b) Reports on Form 8-K:
The Company filed no Current Reports on Form 8-K during the quarter ended
September 30, 2000.
SIGNATURES
==========================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKFIRST CORPORATION
November 13, 2000 /s/ C. David Allen
C. David Allen ------------------------------
Chief Financial Officer and Secretary
BankFirst Corporation | 16
