FIRST M&F CORPORATION
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(Name of Small Business Issuer in Its Charter)
MISSISSIPPI 64-0636653
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
221 East Washington Street, Kosciusko, Mississippi 39090
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 662-289-5121
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Name of Each Exchange on
Title of Each Class Which Registered
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None None
Securities registered pursuant to section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $5 par value None
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 periods 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 [ ]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. [ ]
based on bid price for shares on February 25, 2000, the aggregate market value of the voting stock held by nonaffiliates of the Registrant was $74,881,312.00.
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date.
Class Outstanding at February 25, 2000
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Common stock ($5.00 par value) 4,665,984 Shares
Portions of the following documents are incorporated by reference to Parts III of the Form 10-K report: Proxy Statement dated March 15, 2000.
CROSS REFERENCE INDEX
Page
PART I
Item 1 Business...........................................................................................II-3
Item 2 Properties........................................................................................II-12
Item 3 Legal Proceedings.................................................................................II-12
Item 4 Submission of Matters to a Vote of Security Holders...............................................II-12
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters.........................II-13
Item 6 Selected Financial Data...........................................................................II-14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................II-15
Item 8 Financial Statements and Supplementary Data.......................................................II-21
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................................................II-52
PART III
Item 10 Directors and Executive Officers of the Registrant................................................II-52
Item 11 Executive Compensation............................................................................II-52
Item 12 Security Ownership of Certain Beneficial Owners and Management....................................II-52
Item 13 Certain Relationships and Related Transactions....................................................II-52
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................II-52
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* Information called for by Part III (Items 10 through 13) is incorporated by reference to the Registrant's
Proxy Statement dated March 15, 2000.
First M & F Corporation (the Company) is a one-bank holding company chartered and organized under Mississippi laws in 1979. The Company engages exclusively in the banking business through its wholly-owned subsidiary, Merchants and Farmers Bank of Kosciusko (the Bank).
The Bank was chartered and organized under the laws of the State of Mississippi in 1890, and accounts for substantially all of the total assets and revenues of the Company. The Bank is the fifth largest bank in the state, having total assets of approximately $1.02 billion at December 31, 1999. The Bank offers a complete range of commercial and consumer services its main office and two branches in Kosciusko and its branches within central Mississippi, including Ackerman, Bruce, Brandon, Canton, Cleveland, Clinton, Durant, Grenada, Lena, Madison, Oxford, Pearl, Philadelphia, Puckett, Ridgeland, Starkville, Tupelo, and Weir, Mississippi.
The Bank has seven wholly-owned subsidiaries, M & F Financial Services, Inc., which operates one finance company office, First M & F Insurance Company, Inc., a credit life insurance company, M & F Insurance Agency, Inc., a general insurance agency, Tyler, King & Ryder, Inc., a general insurance agency, Reynolds Insurance & Real Estate Agency, Inc., a general insurance agency, Insurance Services, Inc., a general insurance agency, and Merchants and Farmers Bank Securities Corporation, a real estate property management company.
The Company's primary means of growth over the past several years has been an aggressive lending program funded by exceptional deposit growth. Additionally, the Company acquired the deposits of several locations from the Resolution Trust Corporation from 1990 to 1994. Effective with the close of business on December 31, 1995, the Company merged with Farmers and Merchants Bank of Bruce, Mississippi. This merger involved the exchange of 450,000 shares of the Company's common stock for all of the issued and outstanding shares of Farmers and Merchant's Bank and has been accounted for as a pooling of interests. Farmers and Merchants had total assets of $32 million at December 31, 1995. Effective with the close of business on December 31, 1998, the Company merged with First Bolivar Corporation of Cleveland, Mississippi. This merger involved the exchange of 243,214 shares of the Company's common stock for all of the issued and outstanding shares of First Bolivar and has been accounted for as a pooling of interests. First Bolivar's banking subsidiary, First National Bank of Bolivar County, was also merged with the Bank. First Bolivar and subsidiary had total consolidated assets of $46 million at December 31, 1998. Effective with the close of business on November 19, 1999, the Company merged with Community Federal Bancorp, Inc. of Tupelo, Mississippi. This merger involved the exchange of 1,217,567 shares of the Company's common stock and approximately $37,750,000 in cash for all of the issued and outstanding shares of Community Federal Bancorp and has been accounted for as a purchase transaction. Community Federal Bancorp's banking subsidiary, Community Federal Bank, was also merged with the Bank.
The banking system offers a variety of deposit, investment and credit products to customers. The Bank provides these services to middle market and professional businesses, ranging from payroll checking, business checking, corporate savings and secured and unsecured lines of credit. Additional services include direct deposit payroll, sweep accounts and letters of credit. The Bank also offers credit card services to its customers, to include check debit cards and automated teller machine cards through several networks. Trust services are also offered in the Kosciusko main office.
As of February 25, 2000, the Company and its subsidiary employed 402 full-time equivalent employees.
The Company competes generally with other banking institutions, savings associations, credit unions, mortgage banking firms, consumer finance companies, mutual funds, insurance companies, securities brokerage firms, and other finance related institutions; many of which have greater resources than those available to the Company. The competition is primarily related to areas of interest rates, the availability and quality of services and products, and the pricing of those services and products.
As a bank holding company, First M & F Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the "BHCA") and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or managing or controlling banks that an exception is allowed for those activities.
As a state-chartered commercial bank, Merchants and Farmers Bank, First M & F Corporation's banking subsidiary, is subject to regulation, supervision and examination by the Mississippi Department of Banking and Consumer Finance. Merchants and Farmers Bank ("M&F") is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"). State and Federal law also govern the activities in which the Bank engages, the investments it makes and the aggregate amount of loans that may be granted to one borrower. The insurance company subsidiary of M&F is also regulated and examined by the insurance Department of the State of Mississippi.
The earnings of First M & F Corporation's subsidiary bank and its subsidiaries are affected by general economic condition, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which First M & F Corp, M&F Bank and subsidiaries are subject.
First M & F Corp and M&F Bank are required to comply with the capital adequacy standards established by the Federal Reserve Board and the FDIC. There are two basic measures of capital adequacy for bank holding companies and their banking subsidiaries; a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among depository institutions and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The minimum guideline for the total capital to risk-weighted assets, including certain off-balance sheet items such as standby letters of credit ("total capital ratio") is 8.0 percent. At least half of total capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 capital"). The remainder may consist of subordinated debt, other preferred stock, a limited amount of loan loss reserves, and unrealized gains on equity securities subject to limitations ("Tier 2 capital"). At December 31, 1999, First M & F Corp and M&F
Bank were in compliance with the total capital ratio and the Tier 1 capital ratio requirements. Note 18 of the Notes to Consolidated Financial Statements presents First M & F Corp's and M&F Bank's capital ratios.
The deposits of M&F Bank are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of M&F Bank are subject to the deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC. However, a portion of the Bank's deposits, relating to a savings association acquisition, are subject to assessments imposed by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. Legislation was enacted in 1996 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"). The FDIC is currently assessing, effective for the first quarter of 2000, BIF-insured deposits totaling an additional 1.22 basis points per $100 of deposits, and SAIF-insured deposits an additional 6.10 basis points per $100 of deposits, to cover those obligations.
The statistical disclosures for the Company are contained in Tables 1 through 13.
The tables below shows the average balances for all assets and liabilities for the Company at each year-end for the past three years, the interest income or expense associated with these assets and liabilities and the computed yields or rates for each (in thousands of dollars):
1999 1998 1997
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Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
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Interest bearing bank balances 4,407 238 5.39% 6,727 403 5.99% 3,378 192 5.68%
Federal funds sold 5,969 297 4.98% 15,787 871 5.51% 11,245 627 5.57%
Taxable investments 167,945 10,197 6.07% 145,147 8,582 5.91% 135,230 8,419 6.23%
Tax-exempt investments 63,541 4,816 7.58% 59,968 4,650 7.75% 44,458 3,401 7.65%
Loans 457,023 40,337 8.83% 393,894 36,789 9.34% 365,252 35,163 9.63%
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Total earning assets 698,885 55,885 8.00% 621,523 51,295 8.25% 559,563 47,802 8.54%
Nonearning assets 60,699 50,528 43,570
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Total average assets 759,584 672,051 603,133
NOW, MMDA & Savings 293,491 9,299 3.17% 263,459 9,499 3.61% 218,428 7,897 3.62%
Certificates of deposit 283,821 14,391 5.07% 263,459 14,304 5.43% 254,820 13,764 5.40%
Short-term borrowings 3,606 165 4.57% 452 22 4.87% 264 17 6.44%
Other borrowings 25,109 1,355 5.40% 9,423 566 6.00% 7,302 507 6.94%
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Total interest bearing liabilities 606,027 25,210 4.16% 536,793 24,391 4.54% 480,814 22,185 4.61%
Noninterest bearing deposits 78,335 69,577 60,688
Noninterest bearing liabilities 8,219 5,041 6,623
Capital 67,003 60,640 55,008
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Total average liabilities and equity 759,584 672,051 603,133
Net interest margin 30,675 4.39% 26,904 4.33% 25,617 4.58%
Less tax equivalent adjustment
Investments 1,796 1,735 1,157
Loans 224 261 195
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Reported net interest margin 28,655 4.10% 24,908 4.01% 24,265 4.34%
Tax equivalent adjustments for 1999 and 1998 were made using a blended Federal/State rate of 37.3%. Tax equivalent adjustment for 1997 was made using a 34% Federal rate.
The volume and yield/rate tables shown below reflects the change from year to year for each component of the net interest margin classified into those occurring as a result of changes in volume and those resulting from yield/rate changes on a tax equivalent basis (in thousands):
1999 Compared To 1998 1998 Compared To 1997
Increase (Decrease) Due To Increase (Decrease) Due To
Yield/ Yield/
Volume Cost Net Volume Cost Net
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Interest earned on:
Interest bearing bank balances (128) (37) (165) 200 11 211
Federal funds sold (497) (77) (574) 250 (6) 244
Taxable investments 1,379 236 1,615 519 (356) 163
Tax-exempt investments 267 (101) 166 1,202 47 1,249
Loans 5,403 (1,855) 3,548 2,624 (998) 1,626
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Total earning assets 6,424 (1,834) 4,590 4,795 (1,302) 3,493
Interest paid on:
NOW, MMDA & Savings 3,149 (3,349) (200) 1,623 (21) 1,602
Certificates of deposit 600 (513) 87 468 72 540
Short-term borrowings 144 (1) 143 8 (3) 5
Other borrowings 840 (51) 789 110 (51) 59
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Total interest bearing liabilities 4,733 (3,914) 819 2,209 (3) 2,206
Change in net interest income _____ ______ _____ ______ _____ _____
on a tax-equivalent basis 1,691 2,080 3,771 2,586 (1,299) 1,287
The table below indicates amortized cost of securities available for sale and securities held to maturity by type at year-end for each of the last three years (in thousands):
Amortized Cost of Securities
December 31
1999 1998 1997
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Securities Available For Sale
U.S. Treasury 9,037 17,541 23,575
Government agencies 27,541 25,412 26,085
Mortgage-backed securities 176,211 91,154 55,060
Obligations of states and political subdivisions 63,746 68,665 17,165
Other securities 30,182 5,022 4,922
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Total securities available for sale 306,717 207,794 126,807
Securities Held To Maturity
U.S. Treasury 0 0 1,050
Government agencies 0 0 11,018
Mortgage backed securities 0 0 13,094
Obligations of states and political subdivisions 0 0 33,623
Other securities 0 0 0
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Total securities available for sale 0 0 58,785
The following table details the maturities and weighted average tax equivalent yield for each range of maturities of securities available for sale at December 31, 1999 (in thousands of dollars):
After One
Within But Within After Five
One Five But Within Over
Year Yield Years Yield Ten Years Yield Ten Years Yield Total
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Securities Available For Sale
U.S. Treasury 6,007 6.05% 3,030 5.58% 0 0.00% 0 0.00% 9,037
Government agencies 18,932 5.84% 6,070 6.01% 2.541 5.91% 0 0.00% 27,543
Mortgage-backed securities 26,504 6.24% 71,394 6.34% 34,613 6.34% 43,700 6.38% 176,211
Obligations of states and political subdivisions 5,605 7.75% 30,829 7.85% 26,936 7.30% 375 6.29% 63,745
Other debt securities 460 6.81% 909 6.33% 1,596 6.68% 0 0.00% 2,965
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Total securities available for sale 57,508 6.24% 112,232 6.71% 65,686 6.73% 44,075 6.38% 279,501
Equity securities 27,216
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306,717
Tax equivalent adjustments for 1999 and 1998 were made using a blended Federal/State rate of 37.3%. Tax equivalent adjustments for 1997 were made using a 34% Federal rate.
Non mortgage backed securities are categorized in the earlier of their maturity dates or their call dates. Mortgage backed securities are distributed based upon their estimated average lives.
The table below shows the carrying value of the loan portfolio at the end of each year for the last five years (in thousands):
1999 1998 1997 1996 1995
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Commercial, financial and agricultural 68,521 55,177 54,044 47,861 41,050
Residential real estate 250,875 121,885 106,439 94,187 81,704
Non-residential real estate 172,982 142,027 124,369 116,337 100,204
Consumer loans 116,543 95,040 91,035 100,117 84,907
Lease financing 29 55 19 137 271
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Total loans 608,950 414,184 375,906 358,639 308,136
The table below shows the amounts of loans in several categories at December 31, 1999, along with the schedule of repayments of principal in the periods indicated (in thousands):
Maturity distribution of loans at December 31, 1999.
Within One to Five After Five
One Year Years Years Total
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Commercial and real estate loans 136,386 229,959 126,062 492,407
Consumer loans 53,041 58,356 5,146 116,543
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Total loans 189,427 288,315 131,208 608,950
Rate sensitivity of loans at December 31, 1999.
One to Five After Five
Years Years Total
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Fixed rate loans 248,773 73,442 322,215
Floating rate loans 39,542 57,766 97,308
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288,315 131,208 419,523
The table below shows the Company's nonperforming assets and past due loans at the end of each of the last five years (in thousands):
1999 1998 1997 1996 1995
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Nonaccrual loans 2,072 852 328 206 84
Restructured loans 0 0 0 0 0
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Total nonperforming loans 2,072 852 328 206 84
Other real estate owned 1,150 1,123 843 724 148
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Total nonperforming assets 3,222 1,975 1,171 930 232
Accruing loans past due 90 days or more 1,069 1,155 1,149 968 707
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Total nonperforming assets and loans 4,291 3,130 2,320 1,898 939
Interest which would have been accrued on nonaccrual loans had they been in compliance with their original terms and conditions is immaterial.
At December 31, 1999, the Company did not have any concentration of loans greater than ten percent of total loans except those shown in Table 5.
It is the Company's policy that interest not be accrued on any loan for which payment in full of interest and principal is not expected, on any loan which is seriously delinquent unless the obligation is both well secured and in the process of collection, or on any loan that is maintained on a cash basis. At December 31, 1999, the Company had no loans about which Management had serious doubts as to their collectibility other than those disclosed above.
The table below summarizes the Company's loan loss experience for each of the last five years (in thousands):
1999 1998 1997 1996 1995
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Balance at beginning of year 5,835 5,315 4,610 4,373 3,449
Adjustment for sale of finance company office 0 0 (77) 0 0
Adjustment for purchase acquisition 866
Charge offs
Commercial, financial and agricultural (134) (188) (365) (235) (117)
Real estate (347) (451) (185) (174) (53)
Consumer (1,612) (1,380) (914) (743) (709)
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Total (2,093) (2,019) (1,464) (1,152) (879)
Recoveries
Commercial, financial and agricultural 46 52 23 13 18
Real estate 51 93 23 14 106
Consumer 540 429 138 129 124
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Total 637 574 184 156 248
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Net charge offs (1,456) (1,445) (1,280) (996) (631)
Provision for loan losses 2,384 1,965 2,062 1,233 1,555
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Balance at end of year 7,629 5,835 5,315 4,610 4,373
The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when Management believes that the collection of the principal is unlikely. The allowance for loan losses is maintained at a level which Management and the Board of Directors believe to be adequate to absorb estimated losses inherent in the loan portfolio, and is reviewed quarterly using specific criteria required by regulatory authority as well as various analytical devices which incorporates historical loss experience, trends and current economic conditions.
The table below is a summary of the allocation categories used by the Company for its allowance for loan loss at December 31, 1999. These allocations are determined by internal formulas based upon an analysis of the various types of risk associated with the loan portfolio (in thousands):
General reserves for past due and other
classified loans 2,207
General reserves of finance
company portfolio 29
Other general reserves 4,518
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Total reserve for loan losses 6,754
The Company maintains the allowance at a level considered by Management and the Board of Directors to be sufficient to absorb potential losses. Loss percentages were uniformly applied to the various pools of risk that exist within the loan portfolio based upon accepted analysis procedures and current economic conditions. Additional allocations were made for particular areas based upon recommendations of lending and asset review personnel.
Allowances for consumer loans are determined through an analysis of past due status, legal efforts to establish repayment schedules for bankruptcies, charge-off trends, collateral value, and general economic conditions. Commercial and real estate loans are evaluated through a “watch loan” methodology which assigns risk ratings based upon a financial analysis of the borrower’s ability to provide sufficient cash flows, collateral value and liquidity, and past due status. Allowances are also provided based upon economic trends that may affect specific borrowers or industries, trends in past due statistics, and migration analysis of historical charge-offs.
The table below shows maturities of outstanding time deposits of $100,000 or more at December 31, 1999 (in thousands):
Three months or less $ 44,029
Over three months through twelve months 72,084
Over one year through three years 11,918
Over three years 2,212
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Total 130,243
The following table reflects ratios for the Company for the last three years:
1999 1998 1997
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Return on average assets 1.08% 1.17% 1.35%
Return on average equity 12.19% 12.93% 14.81%
Dividend payout ratio 46.30% 44.44% 39.29%
Equity to assets ratio 8.82% 9.02% 9.12%
The table below presents certain information regarding the Company's short-term borrowings for each of the last three years (in thousands of dollars):
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Outstanding at end of period 12,298 829 0
Maximum outstanding at any 21,096 2,384 0
month-end during the period
Average outstanding during the 3,606 452 264
period
Interest paid 165 22 17
Weighted average rate during each 4.57% 4.87% 6.44%
period
The Bank's main office, located at 221 East Jefferson Street, Kosciusko, Mississippi, is a two story, brick building with drive-up facilities. The Bank owns its main office building and 31 of its branch facilities. The remaining facilities are occupied under lease agreements, terms of which range from month to month to five years. It is anticipated that all leases will be renewed.
The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters are expected, in the opinion of Management, to have a material adverse effect on the financial position or results of operations of the Bank or the Company.
On October 15, 1999, a special meeting of shareholders was held to approve the proposed merger with Community Federal Bancorp with and into the Company. The merger was approved by a vote of 2,683,580 for the merger, 0 against, and 1,125 withheld (including 1,125 abstentions and 0 broker non- votes).
Effective September 1, 1996, the Company's common stock was listed with the National Association of Securities Dealers, Inc. Automated Quotation National Market System (NASDAQ) and became subject to trading and reporting over the counter with most securities dealers.
At February 25, 2000, there were 1,528 shareholders of record of the Company's common stock. On February 25, 2000, the Company's stock closed at $22.25 per share.
Stock and Dividend Performance
1999 1998 1997 1996 1995
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Price/earnings ratio 13.89x 16.67x 17.86x 13.81x 12.22x
Price/book value ratio 1.55x 2.06x 2.52x 2.02x 1.69x
Book value/share $19.41 $17.45 $15.85 $14.35 $13.05
Dividend payout ratio 46.3% 44.4% 39.3% 35.7% 34.4%
Historical dividend yield 2.8% 2.4% 2.4% 2.8% 3.3%
Quarterly Closing Common Stock
Price Ranges and Dividends Paid
First Second Third Fourth
1999:
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High $39.00 $33.50 $36.00 $32.31
Low 31.75 29.38 30.00 28.75
Close 32.00 30.25 31.69 30.00
Dividend .25 .25 .25 .25
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1998:
High $45.00 $48.00 $44.50 $37.00
Low 37.75 42.00 33.50 31.00
Close 44.00 43.00 35.50 36.00
Dividend .24 .24 .24 .24
During 1999, the Company completed two unregistered offerings of securities, each of which involved an exchange of the Company's common stock in return for common stock of the company which was being acquired. Each offering was exempt from registration with the Securities and Exchange Commission pursuant to Regulation D. On September 21, 1999, the Company issued 69,997 shares of common stock in return for all of the outstanding stock of Tyler, King & Ryder, Inc. to Wayne E. Heilbronner, James A. Tyler, Charles D. King, Daniel N. Ryder, and Calvin E. Robertson. On December 20, 1999, the Company issued 18,970 shares of common stock in return for all of the outstanding stock of Reynolds Insurance & Real Estate, Inc. to William L. Polk.
(Thousands, except per share data) 1999 1998 1997 1996 1995
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EARNINGS
Interest income $53,865 $49,299 $46,450 $44,037 $39,723
Interest expense 25,210 24,391 22,185 21,007 18,739
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Net interest income 28,655 24,908 24,265 23,030 20,984
Provision for loan losses 2,384 1,965 2,062 1,233 1,555
Noninterest income 8,243 6,212 5,651 4,765 4,513
Noninterest expense 23,343 18,718 16,416 16,063 15,557
Income taxes 3,005 2,595 3,292 2,876 2,006
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Net income $8,166 $7,842 $8,146 $7,623 $6,379
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Net interest income, taxable equivalent $30,675 $26,904 $25,616 $24,278 $22,273
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Cash dividends paid $3,920 $3,259 $2,987 $2,545 $2,031
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PER COMMON SHARE
Net income $2.16 $2.16 $2.24 $2.10 $1.80
Cash dividends paid 1.00 .96 .88 .75 .62
Book value 19.41 17.45 15.85 14.35 13.05
Closing stock price 30.00 36.00 40.00 29.00 22.00
SELECTED AVERAGE BALANCES
Assets $759,584 $672,051 $603,133 $566,276 $517,779
Earning assets 697,667 623,025 560,380 527,822 483,182
Loans 457,023 393,894 365,252 331,969 290,595
Investments 230,268 206,617 179,598 176,980 177,226
Total deposits 655,647 596,495 533,937 481,672 397,021
Equity 67,003 60,640 55,008 49,783 42,272
SELECTED YEAR-END BALANCES
Assets $1,023,037 $702,006 $621,458 $563,677 $544,190
Earning assets 925,995 650,165 576,715 525,067 509,073
Loans 608,950 414,184 375,906 358,639 308,136
Investments 299,534 210,646 186,507 165,778 195,423
Core deposits 659,698 561,003 484,159 440,963 387,749
Total deposits 789,941 625,398 543,006 496,793 437,270
Equity 90,677 63,512 57,646 52,211 47,429
SELECTED RATIOS
Return on average assets 1.08% 1.17% 1.35% 1.35% 1.23%
Return on average equity 12.19% 12.93% 14.81% 15.31% 15.09%
Average equity to average assets 8.82% 9.02% 9.12% 8.79% 8.16%
Dividend payout ratio 46.30% 44.44% 39.29% 35.71% 34.44%
Price to earnings (x) 13.89x 16.67x 17.86x 13.81x 12.22x
Price to book (x) 1.55x 2.06x 2.52x 2.02x 1.69x
The purpose of this discussion is to focus on significant changes in financial condition and results of operations of the Company and its banking subsidiary during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and selected financial data presented elsewhere in this report and in the enclosed Financial Summary - First M & F Corporation and Subsidiary.
SummaryNet income for 1998 was $8,165,767, or $2.16 per share as compared to $7,842,267, or $2.16 per share in 1998. Net income for 1998 was down by 3.7% from net income in 1997 of $8,146,481, or $2.24 per share. Income tax expense increased from 1998 to 1999 due to an increase in the effective tax rate to 26.9% in 1999 from 24.9% in 1998.
During 1999, the Company added a new office building in Madison. This building houses trust, brokerage, insurance agency, mortgage and commercial lending operations. The acquisition of Community Federal Bancorp in Tupelo added 3 locations in Tupelo and approximately $294 million in assets to the Company. This acquisition brought an increase of approximately $142 million in loans and deposits. The Tyler, King & Ryder insurance agency in Kosciusko was acquired in September, 1999. This brought 4 insurance agency locations into the First M&F operations. A de nova agency office was established in the new Madison building in November, 1999. In December, 1999, the Reynolds Insurance and Real Estate Agency and Starkville Insurance, Inc., both of Starkville, were acquired.
During 1998, the Company added 4 locations; 1 in Oxford, 1 in Grenada, 1 de nova expansion into a new market in Southaven and 1 by acquisition in Cleveland. The 1998 Cleveland acquisition added approximately $45 million in assets to the Company.
Total assets grew by 45.7% in 1999 to end the year at $1.023 billion. Total assets grew by 13.0% in 1998 and by 10.3% in 1997. The compounded annual growth rate for total assets for the last five (5) years was 16.3%, while the compounded growth rate for deposits was 15.2%. Net income grew at a compounded annual rate of 10.9% over the five (5) year period ending in 1999.
Earning AssetsThe average earning asset mix for 1999 was 65.4% in loans, 33.1% in investments, and 1.5% in short-term funds. The average earning asset mix for 1998 was 63.2% in loans, 33.2% in investments, and 3.6% in short-term funds. For 1997, the average earning asset mix was 65.2% in loans, 32.1% in investments, and 2.7% in short-term funds. For 1996, the average earning asset mix was 62.9% in loans, 33.5% in investments, and 3.6% in short-term funds. This mix has changed as deposit growth has exceeded loan growth in dollars until 1999. The following table shows the volume changes in loans and deposits over the last four years, excluding the effect of the Community Federal acquisition.
1999 1998 1997 1996
--------- --------- --------- --------
Net increase in loans $52,299 $38,278 $17,267 $50,503
Net increase in deposits 22,832 82,392 46,793 59,523
Ratio of loan growth to deposit growth 229.1% 46.5% 36.9% 84.8%
Deposit growth remained strong through 1998. The weak growth in 1999 was due to a much more competitive environment and to some disintermediation, as rates began to increase and deposits moved to annuity products and mutual funds. Loan growth strengthened in 1999, as market expansions and strong local economies improved loan demand. Loans grew by 47.0% (12.7% excluding the Community Federal acquisition) in 1999 and grew by 10.2% in 1998 while demand and competition for business and real estate loans became stronger. The Company's strategy for loan growth remains twofold: (1) continue steady growth at reasonable interest rates in current markets and (2) enter into new markets to provide for additional growth opportunities. Although the short-term effect of expansion on earnings is negative, management believes that this strategy creates the long-term shareholder value. The Company expects de nova expansions to provide positive net contributions to earnings within 3 to 5 years, and acquisitions to become accretive to earnings per share within 1 to 3 years.
Investment SecuritiesThe Company's investment portfolio grew by 42.2% in 1999 as compared to 12.9% in 1998 and 12.5% in 1997. The 1999 increase was attributable to the Community Federal acquisition, which brought an $88 million leverage portfolio of mortgage-backed securities, funded by Federal Home Loan Bank borrowings. The Company transferred all held-to-maturity securities into the available-for-sale category on October 1, 1998. This was done in order to provide more flexibility in managing the portfolio. Throughout 1999, the Company did not change its mix of Government, municipal, and mortgage-backed securities. However, the Community Federal acquisition did bring $88 million in mortgage-backed securities and $27 million in FNMA and FHLMC equity securities. The increase in mortgage-backed securities has lengthened the average life of the investment portfolio and will increase the amount of revenues subject to income taxes. As of December 31, 1999, municipal securities represented 20.9% of the investment portfolio as compared to 33.6% at December 31, 1998. In 1998, the Company reduced the U.S. Treasury and Agency portfolios in favor of mortgage-backed securities and municipal securities. During 1998, the interest rate environment favored municipal securities as tax-equivalent yields in the 5 to 15 year ranges exceeded other investment alternatives in those maturity terms. Mortgage-backed securities with 3 to 5 year average estimated maturities were purchased for their yields and liquidity.
The investment portfolio grew significantly during 1997 as loan demand lagged and deposit growth continued at a strong pace. The growth was distributed through the investment portfolio, with all major investment types increasing.
Deposits and BorrowingsDeposits grew at a healthy pace from 1996 through 1998, but experienced a 3.6% increase in 1999, excluding acquisitions. The largest increase in 1999 was in the certificate of deposit category where bonus-rate promotional programs were in place. Most of the 1998 increases were in savings accounts that were tied to Treasury rates. Interest rate decreases in 1998 made these types of savings accounts attractive. Rate increases during the latter half of 1999 caused a shift in funds flows toward certificates of deposit and other alternative liquid investments. The interest-bearing demand account increases in 1998 were primarily in public municipal funds that were contractually obligated. However, as these contracts have matured, the Company has not been an aggressive bidder to keep the more expensive contracts.
Borrowings in 1999 increased from 1998 levels due to the strong loan growth and slower than expected deposit growth. The Company will use wholesale funding sources such as the Federal Home Loan Bank to provide the liquidity needed for loan growth. However, the long-term strategy of the Company is to primarily fund loan growth through deposit growth and through deposit accounts obtained through new lending relationships. Borrowings also increased due to the leverage program that was in place at Community Federal Bancorp. This program was designed to use the borrowing power provided by excess equity capital to invest
in securities at a margin that would provide net interest earnings to enhance the Company's ROE. Borrowings decreased significantly in 1998 from 1997 after increasing significantly in 1997 from 1996. The changes were due to borrowings that were incurred at the end of 1997 to acquire approximately $10 million in GNMA securities. The Company used the borrowings to lock in a spread on the securities in an effort to leverage the equity of the Company and increase return on equity. As interest rates declined in 1998, and core deposit growth created excess liquidity, management decided to pay off the borrowings.
Liquidity and Interest Rate Sensitivity ManagementLiquidity is the ability of a bank to convert assets into cash and cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company's ability to meet day-to-day cash flow requirements of customers, whether they wish to withdraw funds or to borrow funds to meet their capital needs. The Company instituted a program in 1998 to create savings sub-accounts for NOW account customers in order to take advantage of the lower reserve requirements for savings deposits as compared to the reserve requirements for transaction accounts. This change in customer accounts reduced reserve requirements by an average of approximately $4 million in 1998, providing investable funds to the Company. The increases in core deposits for 1996 through 1999 also provided much liquidity to the Company. During 1999 the Company retained more cash than normal due to contingencies and uncertainties related to the Year 2000 computer issue. Therefore, at the end of 1999 the Company was in an extremely liquid position.
Cash to pay for the Community Federal acquisition was raised by selling securities rather than by borrowing funds. Therefore, the acquisition did not have any negative effect on liquidity.
The Company instituted a stock repurchase program for up to 482 thousand shares in the third quarter of 1999 related to the Community Federal acquisition. As of December 31, 1999, the Company had repurchased 274 thousand shares at an average price of $31.11 per share. The Company used borrowings of approximately $8.5 million against its lines of credit at other commercial banks. The resulting debt from the program is expected to be paid off through dividends received by the Company from Merchants and Farmers Bank. The repurchase program is not expected to have a negative effect on liquidity.
Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. Interest rate sensitivity management focuses on repricing relationships of these assets and liabilities during periods of changing market interest rates. Management seeks to minimize the effect of interest rate movements on net interest income. The asset-liability management committee monitors the interest-sensitivity gap on a monthly basis. In 1999, the interest-sensitivity gap was maintained at a neutral to slightly negative position. Due to the longer-term nature of assets acquired in the Community Federal transaction, management has increased its one year repricing gap target to between +7.5% and -7.5% from its historical targets of between +5% and -5% of total assets.
Capital ResourcesCapital adequacy is continuously monitored by the Company to promote depositor and investor confidence and provide a solid foundation for future growth of the organization. The Company has continued to increase its dividend payout ratio, and ended 1999 with a ratio of 46.3%. The ratio of capital to assets stood at 8.9% at December 31, 1999, with risk-based capital ratios well in excess of the regulatory requirements. The Company issued approximately 1.2 million shares along with the $37.7 million in cash for Community Federal Bancorp in November, 1999. The use of the equity securities allowed the Company to maintain a strong capital position even while recording $15 million in intangible assets from the acquisition. The Company also has sufficient lines of credit at commercial banks to raise additional funds if needed. The Company's stock is publicly traded on NASDAQ, also providing an avenue for additional capital if it is needed.
Net interest income is the largest component of the Company's net income and represents income from interest earning assets less the cost of interest bearing liabilities. Net interest income was $28.7 million in 1999 compared to $24.9 million in 1998 and $24.3 million in 1997. The 15.3% increase in 1999 was due primarily to solid loan growth, stable investment yields, and lower average deposit costs than in 1998. The 3.8% increase for 1998 and 7.1% increase for 1997 were attributable to increases in volumes of earning assets. Loan yields decreased in 1999 due to competitive pressures. During 1998 earning asset yields decreased more than liability costs, and in 1999, liability costs decreased more than earning asset yields.
During 1999 the Company experienced a change in earning asset mix with loans becoming a larger percentage of total earning assets. In 1998, loans as a percent of earning assets decreased from 1997. Management will continue to try to grow the loan component of earning assets as long as prudent opportunities are available.
Provision for Loan LossesDuring 1999 the Company's provision increased to $2.4 million from $2.0 million in 1998 and $2.0 million in 1997. The 1999 increase was due primarily to loan growth. Net charge-offs were $1.5 million in 1999 as compared to $1.4 million in 1998. Net charge-offs as a percentage of average loans were .32% in 1999 as compared to .37% in 1998. Nonaccrual loans as a percentage of total loans increased to .34% at the end of 1999 from .22% at the end of 1998. Management has a conservative approach to classifying loans internally for purposes of determining needed reserves. Due to the Community Federal acquisition, the percentage of reserves to total loans decreased to 1.25% at December 31, 1999 from 1.41% at December 31, 1998.
Noninterest IncomeNoninterest income for 1999 was $8.2 million as compared to $6.2 million in 1998 and $5.7 million in 1997. The increase for 1999 came primarily from insurance agency activities as the Company purchased three (3) independent insurance agencies during the year. The acquired agencies sell personal and commercial property, casualty, life and health insurance products. The Company believes that these new sources of revenues will strengthen the long-term earnings over different economic cycles. The agency earnings for 1999 also include $174 thousand in commissions on annuity sales through an agency that the Company started in 1998. In 1998 the Company began selling fixed annuities, and generated approximately $107 thousand in commission income. Included in other noninterest income for 1999 is approximately $456 thousand and for 1998 is approximately $402 thousand in increases in cash surrender value of insurance policies purchased by the Company in 1998. In 1998 the Company also had increased gains on the sale of investments as the interest rate environment provided certain opportunities to realize gains on Treasury and Agency securities and redeploy the proceeds into other investments.
Noninterest ExpenseNoninterest expense increased to $23.3 million in 1999 from $18.7 million in 1998 and $16.4 million in 1997.This increase was due to the Company's addition of an office building in Madison, the building of a new branch in Ackerman, expansion of the operations center in Kosciusko and acquisitions of Community Federal Bancorp and the three insurance agencies. The 1998 increases were due primarily to expansion efforts in Clinton, Grenada and Southaven. The addition of senior-level administrative positions, commercial lenders and business development personnel in the more urban markets and the expansion of technological and internet banking capabilities put pressure on noninterest expenses in 1999 and 1998. However, management expects these additions to be positive for the Company as it continues to grow and expand. The
Company also invested in additional mainframe computer equipment in 1998 as systems were evaluated and upgraded to allow for greater processing speed and capacity.
Noninterest expenses as a percentage of average assets were 3.1% in 1999 as compared to 2.8% in 1998. The Company's efficiency ratio was 60.0% in 1999 as compared to 56.5% for 1998 and 52.5% for 1997.
Income TaxesThe Company's effective tax rate was 26.9% in 1999, 24.9% in 1998, and 28.8% in 1997. The 1999 increase was due to the decrease in earnings from tax-exempt sources as a percentage of total revenues. The decrease in 1998 was due to increased investments in tax-exempt municipal securities as well as the increase in cash surrender value of insurance policies, which are not taxable.
Year 2000Monitoring and managing the Year 2000 project has resulted in additional direct and indirect costs. Direct costs include actual and potential charges by third party software vendors for product enhancements, costs involved in testing software products for Year 2000 compliance, and any resulting costs for developing and implementing contingency plans for critical software products that are not enhanced. Indirect costs consist primarily of employee time committed to testing Year 2000 compliance, determining the risks associated with customer and other third party computer systems, and the development and implementation of contingency plans. Part of this contingency planning relates to the assessment of risk to the Company's loan portfolio for the contingency of customer computer failures that would disrupt their operations and cause a failure to provide for timely collections of their receivables and payments of their debts. The Company went through two assessment cycles of its commercial customer base in 1999.
The Company incurred direct and indirect costs of approximately $50 thousand for software purchases and enhancements, planning, testing, loan quality assessments, and customer education.
We have audited the accompanying consolidated statements of condition of First M & F Corporation and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended 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 conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an 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 financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First M & F Corporation and subsidiary as of December 31, 1999 and 1998, the results of their consolidated operations and their consolidated cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Shearer, Taylor & Co., P.A.
Consolidated Statements of Condition
December 31, 1999 and 1998
(In Thousands, Except Share Data)
Assets 1999 1998
------ ---- ----
Cash and due from banks $ 42,497 $ 22,807
Interest bearing bank balances 13,611 6,486
Federal funds sold 3,900 18,850
Securities available for sale, amortized
cost of $306,717 and $207,794 299,534 210,646
Loans, net of unearned income 608,950 414,184
Allowance for possible loan losses (7,629) (5,835)
----------- ----------
Net loans 601,321 408,349
----------- ----------
Bank premises and equipment 18,781 11,372
Accrued interest receivable 7,855 6,489
Other assets 35,538 17,007
----------- ---------
$ 1,023,037 $ 702,006
=========== =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 789,941 $ 625,398
Short-term borrowings 12,298 829
Other borrowings 121,251 8,571
Accrued interest payable 3,956 2,706
Other liabilities 4,914 991
---------- ---------
Total liabilities 932,360 638,495
---------- ---------
Stockholders' equity:
Preferred stock:
Class A; 1,000,000 shares authorized - -
Class B; 1,000,000 shares authorized - -
Common stock of $5.00 par value. 15,000,000
shares authorized; 4,672,662 and 3,639,779
shares issued 23,363 18,199
Additional paid-in capital 34,845 10,800
Retained earnings 36,969 32,723
Accumulated other comprehensive income - net
unrealized gain (loss) on securities
available for sale (4,500) 1,789
---------- ---------
Net stockholders' equity 90,677 63,511
---------- ---------
$ 1,023,037 $ 702,006
=========== =========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORTION AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1999, 1998, and 1997
(In thousands, Except Share Data)
1999 1998 1997
---- ---- ----
Interest income:
Interest and fees on loans $ 40,113 $ 36,528 $ 34,968
Taxable investments 10,197 8,582 8,419
Tax-exempt investments 3,020 2,915 2,244
Federal funds sold 297 871 627
Interest bearing bank balances 238 403 192
-------- -------- --------
Total interest income 53,865 49,299 46,450
-------- -------- --------
Interest expense:
Deposits 23,690 23,803 21,661
Short-term borrowings 165 22 17
Other borrowings 1,355 566 507
-------- -------- --------
Total interest expense 25,210 24,391 22,185
-------- -------- --------
Net interest income 28,655 24,908 24,265
Provision for possible loan losses 2,384 1,965 2,062
-------- -------- --------
Net interest income after
provision for possible loan
losses 26,271 22,943 22,203
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 4,412 3,789 3,589
Mortgage banking income 601 746 412
Agency commission income 1,582 107 -
Credit insurance income 385 493 1,023
Other fee income 427 341 375
Gains on securities available for sale 26 135 42
Other income 810 601 210
-------- -------- --------
Total noninterest income 8,243 6,212 5,651
-------- -------- --------
Noninterest expenses:
Salaries and employee benefits 12,690 9,859 8,843
Net occupancy expenses 1,334 1,183 1,035
Equipment and data processing expenses 2,742 2,154 1,876
Other 6,577 5,522 4,662
-------- -------- --------
Total noninterest expenses 23,343 18,718 16,416
-------- -------- --------
Income before income taxes 11,171 10,437 11,438
Income taxes 3,005 2,595 3,292
-------- -------- --------
Net income $ 8,166 $ 7,842 $ 8,146
======== ======== ========
Earnings per share:
Basic $ 2.16 $ 2.16 $ 2.24
Diluted 2.15 2.16 2.24
======== ======== ========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORTION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1999, 1998, and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Net income $ 8,166 $ 7,842 $ 8,146
Other comprehensive income, net of
tax:
Change in unrealized gains (losses)
on securities available for sale (6,272) 1,298 303
Reclassification adjustment for
gains on securities available for
sale included in net income (17) (85) (27)
------- ------- -------
Other comprehensive income (6,289) 1,213 276
------- ------- -------
Total comprehensive income $ 1,877 $ 9,055 $ 8,422
======= ======= =======
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998, and 1997
(In Thousands, Except Share Data)
Additional
Common Paid-in Retained Unrealized
Stock Capital Earnings Gain (Loss) Net
---------- ---------- ---------- ---------- ----------
January 1, 1997 $ 18,189 $ 10,741 $ 22,981 $ 300 $ 52,211
Net income - - 8,146 - 8,146
Cash dividends ($0.88 per share) - - (2,987) - (2,987)
Net change in unrealized gain (loss) - - - 276 276
---------- ---------- ---------- ---------- ----------
December 31, 1997 18,189 10,741 28,140 576 57,646
---------- ---------- ---------- ---------- ----------
Net income - - 7,842 - 7,842
Cash dividends ($0.96 per share) - - (3,259) - (3,259)
1,909 common shares issued to acquire
minority interest of merged bank 10 59 - - 69
Net change in unrealized gain (loss) - - - 1,213 1,213
---------- ---------- ---------- ---------- ----------
December 31, 1998 18,199 10,800 32,723 1,789 63,511
---------- ---------- ---------- ---------- ----------
Net income - - 8,166 - 8,166
Cash dividends ($1.00 per share) - - (3,920) - (3,920)
1,306,535 common shares issued in
acquisitions 6,532 31,191 - - 37,723
273,651 common shares repurchased (1,368) (7,146) - - (8,514)
Net change in unrealized gain (loss) - - - (6,289) (6,289)
---------- ---------- ---------- ---------- ----------
December 31, 1999 $ 23,363 $ 34,845 $ 36,969 $ (4,500) $ 90,677
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31,1999, 1998 and 1997
(In Thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 8,166 $ 7,842 $ 8,146
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,736 1,548 1,357
Provision for possible loan losses 2,384 1,965 2,062
Net investment amortization 525 731 440
Gain on sales of investments (26) (135) (42)
Deferred income taxes (181) (293) (225)
Increase in:
Accrued interest receivable (79) (634) (460)
Cash surrender value of bank
owned life insurance (480) (402) -
Income taxes receivable (86) (31) -
Increase (decrease) in:
Accrued interest payable (80) (77) 159
Income taxes payable - (410) 440
Other, net (406) (273) (390)
-------- -------- --------
Net cash provided by operating
activities 11,473 9,831 11,487
-------- -------- --------
Cash flows from investing activities:
Purchases of securities available for
sale (62,049) (115,074) (62,606)
Sales of securities available for sale 46,544 25,975 13,576
Maturities of securities available
for sale 55,531 61,060 30,066
Purchases of investment securities - - (12,539)
Maturities of investment securities - 5,344 10,837
Net (increase) decrease in:
Interest bearing bank balances (7,125) 4,316 (10,652)
Federal funds sold 14,950 (15,350) (3,000)
Loans (56,824) (41,366) (20,434)
Bank premises and equipment (4,160) (2,829) (2,360)
Investment in bank owned life insurance - (10,000) -
Proceeds from sales of other real estate
and other repossessed assets 1,823 1,190 1,481
Net cash used in acquisitions (24,740) - -
-------- -------- --------
Net cash used in investing
activities (36,050) (86,734) (55,631)
-------- -------- --------
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended December 31, 1999, 1998 and 1997
(In Thousands)
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ 8,886 $ 12,886 $ 5,764
Money market, NOW and savings
deposits (16,960) 71,655 21,409
Certificates of deposit 27,847 (2,149) 19,039
Securities sold under agreements to
repurchase and other short-term
borrowings 11,469 829 (70)
Other borrowings 25,459 (7,847) 6,034
Cash dividends (3,920) (3,259) (2,987)
Common shares repurchased (8,514) - -
------- -------- -------
Net cash provided by financing
activities 44,267 72,115 49,189
------- -------- -------
Net increase (decrease) in cash
and due from banks 19,690 (4,788) 5,045
Cash and due from banks at January 1 22,807 27,595 22,550
-------- -------- --------
Cash and due from banks at December 31 $ 42,497 $ 22,807 $ 27,595
======== ========= ========
The accompanying notes are an integral part of these financial statements.
The accounting and reporting policies of First M & F Corporation (the Company) which materially affect
the determination of financial position and results of operations conform to generally accepted
accounting principles and general practices within the banking industry. A summary of these significant
accounting and reporting policies is presented below.
Organization and Operations
---------------------------
The Company is a one-bank holding company that owns 100% of the common stock of Merchants and
Farmers Bank (the Bank) of Kosciusko, Mississippi. The Bank is a commercial bank and provides a
full range of banking services through its offices in central Mississippi. As a state chartered commercial
bank, the Bank is subject to the regulations of certain Federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
Principles of Consolidation
---------------------------
The consolidated financial statements of First M & F Corporation include the accounts of the Company
and its wholly owned subsidiary, Merchants and Farmers Bank, and the accounts of the Bank's wholly
owned finance subsidiary, credit insurance subsidiary, general insurance agency subsidiaries and real
estate subsidiary. All significant intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Comprehensive Income
--------------------
Comprehensive income includes net income reported in the statements of income and changes in
unrealized gain (loss) on securities available for sale reported as a component of stockholders' equity.
Unrealized gain (loss) on securities available for sale, net of deferred income taxes, is the only
component of accumulated comprehensive income for the Company.
(Continued)
Investments
-----------
Securities, which are available to be sold prior to maturity are classified as securities available for sale and
are recorded at market value. Unrealized holding gains and losses are reported net of deferred income
taxes as a separate component of stockholders' equity. Investment securities (securities held to
maturity) are those securities which the Company has the ability and intent to hold until maturity and
are recorded at amortized cost.
Premiums and discounts are amortized or accreted over the life of the related security using the interest
method. Interest income is recognized when earned. Realized gains and losses on securities available
for sale are included in earnings and are determined using the specific amortized cost of the securities
sold.
Loans
-----
Loans are stated at the principal amount outstanding, net of unearned income and an allowance for
possible loan losses. Unearned income on installment loans is recognized as income principally using
the interest method. Interest on all other loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding.
The Bank discontinues the accrual of interest on loans and recognizes income only as received when, in
the judgment of management, the collection of interest, but not necessarily principal, is doubtful.
Nonaccrual loans, and the related effect on income, are not material.
A loan is considered impaired when, based on current information and events, it is probable that the Bank
will be unable to collect all amounts due according to the contractual terms of the loan agreement. The
Bank measures impaired and restructured loans at the present value of expected future cash flows,
discounted at the loan's effective interest rate, or the fair value of collateral if the loan is collateral
dependent. Impaired loans are not material.
Allowance for Possible Loan Losses
----------------------------------
The Bank provides for loan losses through an allowance for possible loan losses established through a
provision charged to expense. Accordingly, all loan losses are charged to the allowance for possible
loan losses and all recoveries are credited to it. The allowance for possible loan losses is based on the
evaluation of the collectibility of loans, past loan loss experience and other factors which, in
management's judgment, deserve consideration in estimating possible loan losses. Such other factors
considered by management include changes in the nature and volume of the loan portfolio, current
economic conditions that may affect a borrower's ability to pay, review of specific problem loans, and
the relationship of the allowance to outstanding loans.
(Continued)
Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation and amortization.
Provisions for depreciation and amortization are computed principally using the straight-line method
Note 1: Continued
and charged to operating expenses over the estimated useful lives of the assets. Costs of major
additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred.
Other Real Estate
-----------------
Other real estate acquired through partial or total satisfaction of loans is carried at the lower of market
value or the recorded loan balance at date of acquisition (foreclosure). Any loss incurred at the date
of acquisition is charged to the allowance for possible loan losses. Gains or losses incurred subsequent
to the date of acquisition are reported in current operations. Related operating income and expenses are
reported in current operations.
Intangible Assets
-----------------
The Company's costs in excess of net bank assets acquired are being amortized on a straight-line basis
over forty years. Other intangible assets, consisting of premiums paid on purchased deposits and
goodwill, are being amortized on a straight-line basis over periods ranging from 5 to 15 years.
Income Taxes
------------
The Company, the Bank and the Bank's finance, general insurance agency and real estate subsidiaries file
consolidated Federal and state income tax returns. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. Deferred income tax expense (benefit) is the result of changes in deferred tax
assets and liabilities between reporting periods.
Statements of Cash Flows
------------------------
In the accompanying consolidated statements of cash flows, the Company and subsidiary have defined
cash equivalents as those amounts included in the statement of condition caption "Cash and Due from
Banks." The following supplemental disclosures are made related to the consolidated statements of
cash flows:
1999 1998 1997
---- ---- ----
Interest paid $ 25,291 $ 24,468 $ 22,025
Federal and state income
taxes paid 3,272 3,346 3,078
Other real estate and
repossessions acquired in
noncash foreclosures 1,890 932 1,812
Common stock used in
acquisitions 37,723 - -
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 and 1997 financial statements to be consistent with
1999 presentation.
Note 2: Acquisitions
The Company acquired Community Federal Bancorp, Inc. (Community) of Tupelo, Mississippi, on
November 19, 1999, for 1,217,568 shares of the Company's common stock and $37,750 cash. At the
time of this acquisition, Community's subsidiary, Community Federal Bank, was merged with the Bank.
The Company acquired consolidated assets of $299,176 and assumed consolidated liabilities of
$238,230 in this transaction which was accounted for using the purchase method of accounting.
The Company acquired two general insurance agencies in 1999. Tyler, King & Ryder, Inc. of Kosciusko,
Mississippi, was acquired for 69,997 shares of the Company's common stock in a transaction accounted
for using the pooling of interests method of accounting. Reynolds Insurance and Real Estate Agency,
Inc. of Starkville, Mississippi, was acquired for 18,970 shares of the Company's common stock and
cash of $84 in a transaction accounted for using the purchase method of accounting. Both of these
transactions were immaterial to the Company.
December 31, 1998, First Bolivar Corporation (Bolivar) of Cleveland, Mississippi was merged with
the Company and Bolivar’s banking subsidiary was merged with the Bank. The stockholders of
Bolivar received 243,214 shares of the Company’s common stock in exchange for all of the issued
and outstanding common shares of Bolivar. All financial data of the Company was restated to reflect the
business combination using the pooling of interests method of accounting.
The acquisition of Community has been included in the 1999 consolidated financial statements from the
date of acquisition. The following presents, on an unaudited proforma basis, certain financial data
pertaining to the Community transaction as if it had been acquired at the beginning of the years
presented. The proforma results presented are not necessarily indicative of the results of operations that
would have actually occurred had the transaction been in effect for the periods presented.
1999 1998 1997
---- ---- ----
Interest income:
As originally reported $ 53,865 $ 49,299 $ 46,450
Proforma 72,605 64,025 59,077
======== ======== ========
Other operating income:
As originally reported $ 8,208 $ 6,212 $ 5,651
Proforma 9,835 8,141 5,878
======== ======== ========
Net income:
As originally reported $ 8,166 $ 7,842 $ 8,146
Proforma 10,974 8,650 $ 8,737
======== ======== ========
Basic earnings per share:
As originally reported $ 2.16 $ 2.16 $ 2.24
Proforma 1.78 1.78 1.80
======== ======== ========
Diluted earnings per share:
As originally reported $ 2.15 $ 2.16 $ 2.24
Proforma 1.78 1.78 1.80
======== ======== ========
Gross Unrealized
Amortized ------------------ Market
Cost Gain Loss Value
--------- ---- ---- ------
December 31, 1999:
U. S. Treasury securities $ 9,037 $ 12 $ 44 $ 9,005
U. S. Government agencies
and corporations 27,541 104 747 26,898
Mortgage-backed investments 176,211 263 4,089 172,385
Obligations of states and
political subdivisions 63,746 394 1,502 62,638
Other 2,966 - 50 2,916
Equity securities 27,216 105 1,629 25,692
--------- ----- ------ ---------
$ 306,717 $ 878 $ 8,061 $ 299,534
========= ===== ======= =========
December 31, 1998:
U. S. Treasury securities $ 17,541 $ 225 $ - $ 17,766
U. S. Government agencies
and corporations 25,412 214 50 25,576
Mortgage-backed investments 91,154 541 194 91,501
Obligations of states and
political subdivisions 68,665 2,059 53 70,671
Other 2,955 110 - 3,065
Equity securities 2,067 - - 2,067
--------- ----- ------ ---------
$ 207,794 $ 3,149 $ 297 $ 210,646
========= ===== ======= =========
The amortized cost and market values of debt securities available for sale at December 31, 1999, by
contractual maturity, are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay certain obligations with, or without, call or
prepayment penalties.
Amortized Market
Cost Value
---------- ---------
One year or less $ 30,502 $ 30,017
After one through five years 41,340 41,222
After five through ten years 31,073 29,891
After ten years 375 327
--------- --------- 103,290 101,457
103,290 101,457
Mortgage-backed investments 176,211 172,385
--------- ---------
$ 279,501 $ 273,842
========= =========
The following is a summary of the amortized cost and market value of securities available for sale which
were pledged to secure public deposits, short-term borrowings and for other purposes required or
permitted by law.
Amortized Market
Cost Value
--------- ---------
December 31, 1999 $ 147,729 $ 143,504
========= =========
December 31, 1998 $ 123,242 $ 125,107
========= =========
The following is a summary of gross realized gains and losses on sales of securities available for sale:
1999 1998 1997
---- ---- ----
Gross realized gains $ 62 $ 165 $ 69
Gross realized losses (36) (30) (27)
---- ----- ----
$ 26 $ 135 $ 42
==== ===== ====
The Bank's loan portfolio includes commercial, consumer, agribusiness and residential loans throughout
the State of Mississippi, but primarily in its market area in Central Mississippi. The following is a
summary of the Bank's loan portfolio, net of unearned income of $6,419 and $11,671 at December
31, 1999 and 1998:
1999 1998
---- ----
Commercial, financial and
agricultural $ 68,550 $ 55,232
Residential real estate 250,875 121,885
Non-residential real estate 172,982 142,027
Consumer loans 116,543 95,040
--------- ---------
$ 608,950 $ 414,184
========= =========
The Bank's finance company subsidiary sold $709 in loans at one of its branches in 1998 and closed this
branch. The Bank's finance company subsidiary sold $2,300 in loans at two of its branches in 1997 and
closed these branches. The sales prices approximated net loan value for these transactions.
The Bank has made, and expects in the future to continue to make, in the ordinary course of business,
loans to directors and executive officers of the Company and the Bank and to affiliates of these directors
and officers. In the opinion of management, these transactions were made on substantially the same
terms as those prevailing at the time for comparable transactions with other persons and did not involve
more than normal risk of collectibility or contain any other unfavorable features.
A summary of such outstanding loans follows:
1999 1998
---- ----
Loans outstanding at January 1 $ 2,769 $ 2,833
New loans 1,451 2,056
Repayments and removals (1,719) (2,120)
------- -------
Loans outstanding at December 31 $ 2,501 $ 2,769
======= =======
Transactions in the allowance for possible loan losses are summarized as follows:
1999 1998 1997
---- ---- ----
Balance at January 1 $ 5,835 $ 5,315 $ 4,610
Loans charged-off (2,093) (2,019) (1,464)
Recoveries 637 574 184
------- ------- -------
Net charge-offs (1,456) (1,445) (1,280)
------- ------- -------
Provision for possible loan
losses 2,384 1,965 2,062
Allowance from acquisition 866 - -
Sales of finance company
branches - - (77)
------- ------- -------
Balance at December 31 $ 7,629