FIRST M&F CORPORATION
----------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
MISSISSIPPI 64-0636653
----------------------------------------------------------------- ---------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
221 East Washington Street, Kosciusko, Mississippi 39090
- ----------------------------------------------------------------- -----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 662-289-5121
------------------------------------------
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
None None
Securities registered pursuant to section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
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 January 31, 2001, the aggregate market value of the voting stock held by nonaffiliates of the Registrant was $66,653,440.00.
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 January 31, 2001
----- --------------------------------
Common stock ($5.00 par value) 4,614,784 Shares
Portions of the following documents are incorporated by reference to Parts III of the
Form 10-K report:
Proxy Statement dated March 9, 2001.
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 sixth largest bank in the state, having total assets of
approximately $1.02 billion at December 31, 2000. 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, Ridgeland, Southaven, Starkville, Tupelo, and Weir,
Mississippi. The Bank has eight 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 January 31, 2001, the Company and its subsidiary employed 412
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 (the “Bank”) 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 the Bank is
also regulated and examined by the Insurance Department of the State of
Mississippi. The
earnings of the 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 the Company, the Bank and subsidiaries are subject. The
Company and the 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, 2000, the Company and the 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
the Company’s and the Bank’s capital ratios. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. A majority of the deposits of the 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 2001, BIF- and
SAIF-insured deposits totaling an additional 1.96 basis points per $100 of
deposits. The statistical disclosures for the Company are contained in
Tables 1 through 12. 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
is constructing a new headquarters building in Kosciusko. Construction began in
late 2000 and completion is expected in the early fall of 2001. The building,
which will be located adjacent to the current operations center in downtown
Kosciusko, will have approximately 40,000 square feet of office and storage
space. The current main office building will continue to house the primary
Kosciusko banking facility on the first floor, with administrative departments
occupying the second floor. The
Bank owns its main office building and 28 of its branch facilities. The
remaining facilities are occupied under lease agreements, the 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. In the opinion of Management,
none of these matters are expected to have a material adverse effect on the
financial position or results of operations of the Bank or the Company. No
matters were submitted to a shareholder vote during the fourth quarter of 2000. 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
January 31, 2001, there were 1,381 shareholders of record of the Company’s
common stock. On January 31, 2001, the Company’s stock closed at $19.38 per
share. 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. During
2000, the Company completed one unregistered offering of securities which
involved an exchange of the Company’s common stock in return for common
stock of the company which was being acquired. The offering was exempt from
registration with the Securities and Exchange Commission pursuant to Regulation
D. On January 3, 2000, the Company issued 35,359 shares of common stock in
return for all of the outstanding stock of Insurance Services, Inc. to Richard
Porter. 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. Net
income for 2000 was $7,078,910, or $1.53 per share as compared to $8,165,767, or
$2.16 per share in 1999. Net income for 1999 was up by 4.1% from net income in
1998 of $7,842,267, with both years at $2.16 per share. Income tax expense
decreased by $1.5 million in 2000 due to lower earnings and a tax credit of $847
thousand related to prior year acquisitions. In
2000, two insurance agencies in Tupelo were acquired. Insurance Services, Inc.
was acquired in January, while House of Insurance was acquired at the end of the
first quarter. This was a continuation of a strategy to build a stream of
insurance product revenues. A much enhanced internet web site, designed to
provide corporate and individual services, was introduced in 2000. Construction
of a new headquarters building in Kosciusko was begun in late 2000, with
completion expected in the early fall of 2001. A wide area network was put into
place in 2000, providing the infrastructure for customer service enhancing
technologies. 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. Total
assets fell by .3% in 2000 to end the year at $1.020 billion. Total assets grew
by 45.7% in 1999 to end the year at $1.023 billion. Total assets grew by 45.7%
in 1999 and by 13.0% in 1998. The compounded annual growth rate for total assets
for the last five (5) years was 13.4%, while the compounded growth rate for
deposits was 12.5%. Net income was down in 2000 after growing at an annual
compounded rate of 10.9% over the five years ending in 1999. The
average earning asset mix for 2000 was 67.9% in loans, 30.2% in investments, and
1.9% in short-term funds. The 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. Loan growth exceeded deposit growth in 1999 and 2000, with
deposits actually decreasing in 2000. The following table shows the volume
changes in loans and deposits over the last four years, excluding the effect of
the Community Federal acquisition. Deposit
growth remained strong through 1998. The weak growth in 1999 and 2000 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 was weak in 2000, but was strong in 1999.
Loans grew by 3.8% in 2000 as compared to 47.0% (12.7% excluding the Community
Federal acquisition) in 1999 and 10.2% in 1998. 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 de novo
expansion on earnings is negative, management believes that this strategy
creates long-term shareholder value. The
Company’s investment portfolio decreased by 8.9% in 2000. The portfolio
grew by 42.2% in 1999 as compared to 12.9% in 1998. The decrease was primarily
used to pay out high costing deposits and company debt, as well as to increase
the loan portfolio. 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. In 1999 and 2000 the Company did not change its mix of Government,
municipal, and mortgage-backed securities. However, the 1999 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, 2000,
municipal securities represented 22.6% of the investment portfolio as compared
to 20.9% at December 31, 1999 and 33.6% at December 31, 1998. Deposits
decreased by .2% in 2000 after increasing by 3.6% in 1999, excluding
acquisitions. The largest increase in 2000 and 1999 was in the certificate of
deposit category where bonus-rate promotional programs were used to generate
funds. Higher certificate of deposit rates and an extremely competitive
environment made it difficult to maintain deposit growth in 2000. Rate increases
during the latter half of 1999 caused a shift in funds flows toward certificates
of deposit and other alternative liquid investments. Long
term debt decreased by $23.6 million from 1999 to 2000 as debt related to an
investment leverage program was reduced as investments matured. Funding for loan
growth was provided through investment maturities and short-term funds.
Borrowings in 1999 increased from 1998 levels due to the strong loan growth and
slower than expected deposit growth. The Company uses 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 first, with borrowings used when deposit funding
is uneconomical. Liquidity
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 was sufficiently liquid throughout the year to fund loan growth without
additional borrowings. 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. The Company has
sufficient lines available through the Federal Home Loan Bank and correspondent
banks to meet all anticipated liquidity needs. Cash
to pay for the 1999 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, 2000, the Company had repurchased 367 thousand shares at an average
price of $29.23 per share. The Company used borrowings of approximately $9.5
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 2000, the one year repricing gap was maintained at
approximately – 6%. 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 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
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 2000 with a ratio of 65.4%. The high payout percentage was due to the
lower earnings per share, as the Company maintained a $1.00 annual dividend rate
for 1999 and 2000. The ratio of capital to assets stood at 9.5% at December 31,
2000, with risk-based capital ratios well in excess of the regulatory
requirements. The lack of growth in 2000 was a contributing factor to the
improvement of the capital ratio from 8.9% at December 31, 1999. 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 $31.9 in 2000 compared to $28.7 million in
1999 and $24.9 million in 1998. The 11.5% growth in 2000 was due to the volumes brought
about by the late 1999 merger. 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 was attributable to increases in
volumes of earning assets. Loan yields decreased in 1999 and 2000 due to
competitive pressures. During 1998 earning asset yields decreased more than
liability costs, and 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. Due to the 1999 merger, mortgages became a
large component of the loan portfolio, as approximately $130 million of
mortgages were acquired. During 2000, these mortgages paid down at a rate of
approximately $1 million per month. Management will continue to try to grow the
commercial and consumer loan components of earning assets as long as prudent
opportunities are available. During
2000 the Company’s provision increased to $4.3 million from $2.4 million in
1999 and $2.0 million in 1998. The 2000 increase was due primarily to additional
accruals that were needed for a $1 million charge-off in September. The
remaining increase in reserves was due to the increased size of the portfolio.
The 1999 increase was due primarily to loan growth. Net charge-offs were $3.4
million in 2000 as compared to $1.5 million in 1999. Net charge-offs as a
percentage of average loans were .54% in 2000 as compared to .32% in 1999.
Nonaccrual loans as a percentage of total loans increased to .22% at the end of
2000 from .34% at the end of 1999. Management has a conservative approach to
classifying loans internally for purposes of determining needed reserves. The
percentage of reserves to total loans increased to 1.35% at December 31, 2000
from 1.25% at December 31, 1999. Noninterest
income for 2000 was $10.5 million as compared to $8.2 million in 1999 and $6.2
million in 1998. The increase in 2000 was due to increased deposit revenues and
increased insurance agency revenues. The increased deposit revenues were due
mainly to increased transactions. The agency revenue increases were due to
agency acquisitions in December, 1999 and January, 2000. The Company purchased
two (2) independent insurance agencies in 2000. 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 $107,000 in commission income. Included
in other noninterest income for 2000 is approximately $569 thousand and for 1999
was approximately $480 thousand in increases in cash surrender value of
insurance policies purchased by the Company in 1998. The Company recognized $1.4
million in losses in 2000 on equity securities that were marked to market at the
end of the year. 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
expense increased to $29.5 million in 2000 from $23.3 million in 1999 and $18.7
million in 1998.This increase was due mainly to the acquisition of Community
Federal in November, 1999. The 2000 expenses included an increase of $1 million
in goodwill amortization. The 1999 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 and again in 2000 as
systems were evaluated and upgraded to allow for greater processing speed and
capacity. Noninterest
expenses as a percentage of average assets were 2.9% in 2000 as compared to 3.1%
in 1999. The Company’s efficiency ratio was 64.7% in 2000 as compared to
60.0% for 1999 and 56.5% for 1998. The
Company’s effective tax rate was 17.7% in 2000, 26.9% in 1999, and 24.9% in
1998. The 2000 decrease was due to an $850 thousand tax refund resulting from
the filing of the final tax returns for Community Federal. 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. Management
of First M&F Corporation and its subsidiary has prepared the summary
consolidated financial statements and other information in the annual report in
accordance with generally accepted accounting principles and is responsible for
its accuracy. The financial statements necessarily include amounts that are
based on management’s best estimates and judgments. In
meeting its responsibility, management relies on internal accounting and related
control systems. The internal control systems are designed to ensure that
transactions are properly authorized and recorded in the corporation’s
financial records and to safeguard the corporation’s assets from material
loss or misuse. Such assurance cannot be absolute because of inherent
limitations in any internal control system. The corporation’s bank
subsidiary maintains an internal audit staff which monitors compliance with the
corporation’s and subsidiary’s systems of internal controls and
reports to management and to the Audit Committee of the Board of Directors. The Audit Committee of First M & F's Board of Directors consists
entirely of outside directors. The Audit Committee meets periodically with the internal auditor and the independent accountants to
discuss audit, internal control, financial reporting and related matters. Shearer, Taylor & Co., P.A. and
the internal audit staff have direct access to the Audit Committee. We have audited the accompanying consolidated statements of condition of First
M & F Corporation and subsidiary as of December 31, 2000 and 1999, 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, 2000. 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, 2000 and 1999, the results
of their consolidated operations and their consolidated cash flows for each of
the years in the three-year period ended December 31, 2000, in conformity with
generally accepted accounting principles.
CROSS REFERENCE INDEX
Page
PART I
Item 1 Business...................................................................................II-2
Item 2 Properties.................................................................................II-8
Item 3 Legal Proceedings..........................................................................II-9
Item 4 Submission of Matters to a Vote of Security Holders........................................II-9
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters..................II-9
Item 6 Selected Financial Data....................................................................II-11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................II-12
Item 8 Financial Statements and Supplementary Data................................................II-18
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................................II-51
PART III
Item 10 Directors and Executive Officers of the Registrant.........................................II-51
Item 11 Executive Compensation.....................................................................II-51
Item 12 Security Ownership of Certain Beneficial Owners and Management.............................II-51
Item 13 Certain Relationships and Related Transactions.............................................II-51
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................II-52
* Information called for by Part III (Items 10 through 13) is incorporated by reference to the Registrant's
Proxy Statement dated March 9, 2001.
BUSINESS
General
II-2
Competition
Supervision and Regulation
Capital
II-3
STATISTICAL DISCLOSURE
Table 1 - Comparative Average Balances/Yields
2000 1999 1998
------------------------------------ ------------------------------- -----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------------------------------ ------------------------------- -----------------------------
Interest bearing bank balances 6,609 476 7.20% 4,407 237 5.39% 3,378 192 5.68%
Federal funds sold 10,753 645 6.00% 5,969 297 4.98% 11,245 626 5.57%
Taxable investments 228,380 14,316 6.27% 167,945 10,197 6.07% 135,230 8,419 6.23%
Tax-exempt investments 59,187 4,519 7.64% 63,541 4,816 7.58% 44,458 3,401 7.65%
Loans 630,683 55,064 8.73% 457,023 40,337 8.83% 365,252 35,163 9.63%
--------------------------------- --------------------------------- ------------------------------
Total earning assets 935,614 75,020 8.02% 698,885 55,885 8.00% 559,562 47,801 8.54%
Nonearning assets 73,697 60,698 43,572
----------- ------------ --------
Total average assets 1,009,311 759,584 603,133
NOW, MMDA & Savings 275,496 9,044 3.28% 293,491 9,299 3.17% 218,428 7,897 3.62%
II-4
Certificates of deposit 432,036 24,809 5.74% 283,821 14,391 5.07% 254,820 13,764 5.40%
Short-term borrowings 13,590 1,063 7.82% 3,606 165 4.57% 264 17 6.44%
Other borrowings 102,621 6,315 6.15% 25,109 1,355 5.40% 7,302 507 6.94%
--------------------------- -------------------------- ---------------------------
Total interest bearing liabilities 823,742 41,230 5.01% 606,027 25,210 4.16% 480,814 22,185 4.61%
Noninterest bearing deposits 84,295 78,335 60,689
Noninterest bearing liabilities 9,283 8,219 6,623
Capital 91,991 67,003 55,008
-------- ---------- ----------
Total average liabilities and
equity 1,009,311 759,584 603,133
Net interest margin 33,790 3.61% 30,675 4.39% 25,616 4.58%
Less tax equivalent adjustment
Investments 1,686 1,796 1,156
Loans 168 224 195
-------- ------- --------
Reported net interest margin 31,937 3.41% 28,655 .10% 24,265 4.34%
Tax equivalent adjustments were made using a blended Federal/State rate of 37.3%.
Table 2 - Rate/Volume Variances
2000 Compared To 1999 1999 Compared To 1998
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------------------- -------------------------------------------
Yield/ Yield/
Volume Cost Net Volume Cost Net
----------------------------------------- ------------------------------ ------------
Interest earned on:
Interest bearing bank balances 143 96 239 55 (9) 46
Federal funds sold 277 70 348 (269) (60) (329)
Taxable investments 3,779 340 4,119 1,981 (202) 1,778
Tax-exempt investments (333) 36 (297) 1,446 (31) 1,415
Loans 15,157 (430) 14,727 7,736 (2,562) 5,174
----------------------------------------- -------------------------------------------
Total earning assets 19,023 113 19,135 10,949 (2,865) 8,084
Interest paid on:
NOW, MMDA & Savings (620) 366 (255) 2,190 (788) 1,402
Certificates of deposit 8,309 2,108 10,417 1,359 (731) 627
Short-term borrowings 714 183 898 151 (3) 148
Other borrowings 4,744 215 4,960 934 (85) 848
----------------------------------------- -------------------------------------------
Total interest bearing liabilities 13,148 2,872 16,020 4,633 (1,608) 3,025
Change in net interest income
on a tax-equivalent basis 5,875 (2,759) 3,115 6,316 (1,257) 5,059
Table 3 - Securities Available for Sale and Securities Held to Maturity
Amortized Cost of Securities
December 31
2000 1999 1998
-----------------------------------------------------
Securities Available For Sale
U.S. Treasury 3,018 9,037 17,541
Government agencies 32,058 27,541 25,412
Mortgage-backed securities 151,853 176,211 91,154
Obligations of states and political subdivisions 61,347 63,746 68,665
II-5
Other securities 23,530 30,182 5,022
-----------------------------------------------------
Total securities available for sale 271,806 306,717 207,794
Securities Held To Maturity
U.S. Treasury 0 0 0
Government agencies 0 0 0
Mortgage backed securities 0 0 0
Obligations of states and political subdivisions 0 0 0
Other securities 0 0 0
-----------------------------------------------------
Total securities available for sale 0 0 0
Table 4 - Maturity Distribution and Yields of Securities Available for Sale and Securities Held to
Maturity
After One
Within But Within After Five Over
One Five But Within Ten
Year Yield Years Yield Ten Years Yield Years Yield Total
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Available For Sale
- ------------------------------------
U.S. Treasury 1,000 5.58% 2,018 5.57% 0 0.00% 0 0.00% 3,018
Government agencies 23,016 6.48% 7,538 5.80% 1,503 6.21% 0 0.00% 32,058
Mortgage-backed securities 23,691 6.81% 72,488 6.69% 25,615 6.62% 30,058 7.30% 151,853
Obligations of states and political 8,096 7.97% 29,366 7.85% 23,540 7.26% 345 9.08% 61,347
subdivisions
Other debt securities 500 5.79% 1,436 6.53% 1,055 7.10% 0 0.00% 2,991
------------------------------------------------------------------------------------------------
Total securities available for
sale 56,304 6.81% 112,846 6.91% 51,714 6.91% 30,403 7.32% 251,266
Equity securities 20,539
-------------
271,805
Tax equivalent adjustments were made using a blended Federal/State rate of 37.3%. 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.
Table 5 - Composition of the Loan Portfolio
2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------
Commercial, financial and agricultural 75,942 68,521 55,177 54,044 47,861 41,050
Residential real estate 249,745 250,875 121,885 106,439 94,187 81,704
Non-residential real estate 202,619 172,982 142,027 124,369 116,337 100,204
Consumer loans 103,960 116,543 95,040 91,035 100,117 84,907
Lease financing 51 29 55 19 137 271
------------------------------------------------------------------------------------------
Total loans 632,317 608,950 414,184 375,906 358,639 308,136
Table 6 - Loan Maturities and Sensitivity to Changes in Interest Rates
Maturity distribution of loans at December 31, 2000
- ---------------------------------------------------
Within One to Five After Five
One Year Years Years Total
-------------------------------------------------------------------------
Commercial and real estate loans 158,919 261,481 106,573 526,972
Consumer loans 46,685 53,473 3,802 103,960
-------------------------------------------------------------------------
Total loans 205,604 314,953 110,375 630,932
II-6
Rate sensitivity of loans at December 31, 2000
- ----------------------------------------------
One to Five After Five
Years Years Total
-------------------------------------------------------
Fixed rate loans 280,681 59,169 339,850
Floating rate loans 34,272 51,206 85,479
-------------------------------------------------------
314,953 110,375 425,328
Table 7 - Nonperforming Assets and Past Due Loans
2000 1999 1998 1997 1996
-----------------------------------------------------------------------
Nonaccrual loans 1,385 2,072 852 328 206
Restructured loans 0 0 0 0 0
-----------------------------------------------------------------------
Total nonperforming loans 1,385 2,072 852 328 206
Other real estate owned 965 1,150 1,123 843 724
-----------------------------------------------------------------------
Total nonperforming assets 2,350 3,222 1,975 1,171 930
Accruing loans past due 90 days or more 1,806 1,069 1,155 1,149 968
-----------------------------------------------------------------------
Total nonperforming assets and loans 4,156 4,291 3,130 2,320 1,898
Table 8 - Analysis of the Allowance for Loan Losses
2000 1999 1998 1997 1996
-----------------------------------------------------------------------
Balance at beginning of year 7,629 5,835 5,315 4,610 4,373
Adjustment for sale of finance company office 0 0 0 (77) 0
Adjustment for purchase acquisition 0 866
Charge offs
Commercial, financial and agricultural (1,897) (134) (188) (365) (235)
Real estate (340) (347) (451) (185) (174)
Consumer (1,989) (1,612) (1,380) (914) (743)
-----------------------------------------------------------------------
Total (4,226) (2,093) (2,019) (1,464) (1,152)
Recoveries
Commercial, financial and agricultural 70 46 52 23 13
Real estate 83 51 93 23 14
Consumer 655 540 429 138 129
-----------------------------------------------------------------------
Total 808 637 574 184 156
-----------------------------------------------------------------------
Net charge offs (3,418) (1,456) (1,445) (1,280) (996)
Provision for loan losses 4,299 2,384 1,965 2,062 1,233
-----------------------------------------------------------------------
Balance at end of year 8,510 7,629 5,835 5,315 4,610
Table 9 - Allocation of the Allowance for Loan Losses
General reserves for past due and other classified loans 4,049
General reserves of finance company portfolio 0
Year 2000 risk reserve 0
Other general reserves 4,461
--------------------
Total reserve for loan losses 8,510
Table 10 - Time Deposits of $100,000 or More
II-7
The table below shows maturities of outstanding time deposits of $100,000 or more at December
31, 2000 (in thousands):
Three months or less $41,381
Over three months through twelve months 71,057
Over one year through three years 39,831
Over three years 3,037
--------------
Total 155,306
Table 11 - Selected Ratios
The following table reflects ratios for the Company for the last three years:
2000 1999 1998
--------------------------------------------
Return on average assets 0.70% 1.08% 1.17%
Return on average equity 7.70% 12.19% 12.93%
Dividend payout ratio 65.36% 46.30% 44.44%
Equity to assets ratio 9.11% 8.82% 9.02%
Table 12 - Short-Term Borrowings
The table below presents certain information regarding the Company's short-term borrowings for
each of the last three years (in thousands of dollars):
2000 1999 1998
---------------------------------------------------------
Outstanding at end of period 28,969 12,298 829
Maximum outstanding at any
month-end during the period
31,626 21,096 2,384
Average outstanding during
the period
3,941 3,306 534
Interest paid 250 165 22
Weighted average rate during
each period
6.34% 4.99% 4.12%
PROPERTIES
II-8
LEGAL PROCEEDING
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERSSTOCK AND DIVIDEND PERFORMANCE
Investment Data
December 31, 2000
- -------------------------------------------------------------------------------------------------------
52-Week range $16.00 - $29.13
Closing stock price $16.88
Earnings per share (basic) $1.53
Book value per share $21.01
Shares outstanding 4,614,784
Stock appreciation since 12/95 (5.2%)
Stock and Dividend Performance
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Price/earnings ratio 11.03x 13.89x 16.67x 17.86x 13.81x
Price/book value ratio .80x 1.55x 2.06x 2.52x 2.02x
Book value/share $21.01 $19.41 $17.45 $15.85 $14.35
Dividend payout ratio 65.4% 46.3% 44.4% 39.3% 35.7%
Historical dividend yield 3.3% 2.8% 2.4% 2.4% 2.8%
II-9
Value Added
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Invested capital $96,943 $90,677 $61,722 $57,070 $51,911
Market value of capital 77,874 140,180 131,032 145,515 105,498
-------------------------------------------------------------------------
Excess market value ($19,069) $49,503 $69,310 $88,445 $53,587
Increase (decrease) in value ($68,572) ($19,807) ($19,135) $34,858
Quarterly Closing Common Stock
Price Ranges and Dividends Paid
First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------
2000:
High $29.13 $23.00 $21.75 $18.13
Low 20.25 17.88 16.88 16.00
Close 23.00 20.63 18.00 16.88
Dividend .25 .25 .25 .25
- -----------------------------------------------------------------------------------------------------------
1999:
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
SELECTED FINANCIAL DATA
(Thousands, except per share data) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS
Interest income $73,164 $53,865 $49,299 $46,450 $44,037
Interest expense 41,227 25,210 24,391 22,185 21,007
--------------------------------------------------------------------------------------
II-10
Net interest income 31,937 28,655 24,908 24,265 23,030
Provision for loan losses 4,299 2,384 1,965 2,062 1,233
Noninterest income 10,480 8,243 6,212 5,651 4,765
Noninterest expense 29,517 23,343 18,718 16,416 16,063
Income taxes 1,522 3,005 2,595 3,292 2,876
------------------------------------------------------------------------------------
Net income $7,079 $8,166 $7,842 $8,146 $7,623
------------------------------------------------------------------------------------
Net interest income, taxable equivalent $33,790 $30,675 $26,904 $25,616 $24,278
------------------------------------------------------------------------------------
Cash dividends paid $4,626 $3,920 $3,259 $2,987 $2,545
PER COMMON SHARE
Net income $1.53 $2.16 $2.16 $2.24 $2.10
Cash dividends paid 1.00 1.00 .96 .88 .75
Book value 21.01 19.41 17.45 15.85 14.35
Closing stock price 16.88 30.00 36.00 40.00 29.00
SELECTED AVERAGE BALANCES
Assets $1,009,311 $759,584 $672,051 $603,133 $566,276
Earning assets 928,181 697,667 623,025 560,380 527,822
Loans 630,683 457,023 393,894 365,252 331,969
Investments 280,135 230,268 206,617 179,598 176,980
Total deposits 791,826 655,647 596,495 533,937 481,672
Equity 91,991 67,003 60,640 55,008 49,783
SELECTED YEAR-END BALANCES
Assets $1,019,851 $1,023,037 $702,006 $621,458 $563,677
Earning assets 933,953 925,995 650,165 576,715 525,067
Loans 632,317 608,950 414,184 375,906 358,639
Investments 272,711 299,534 210,646 186,507 165,778
Core deposits 632,848 659,178 561,003 484,159 440,963
Total deposits 788,359 789,941 625,398 543,006 496,793
Equity 96,943 90,677 63,512 57,646 52,211
SELECTED RATIOS
Return on average assets .70% 1.08% 1.17% 1.35% 1.35%
Return on average equity 7.70% 12.19% 12.93% 14.81% 15.31%
Average equity to average assets 9.11% 8.82% 9.02% 9.12% 8.79%
Dividend payout ratio 65.36% 46.30% 44.44% 39.29% 35.71%
Price to earnings (x) 11.03x 13.89x 16.67x 17.86x 13.81x
Price to book (x) .80x 1.55x 2.06x 2.52x 2.02x
II-11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFinancial Condition
2000 1999 1998 1997
-----------------------------------------------------
Net increase in loans $23,367 $52,299 $38,278 $17,267
Net increase in deposits (1,582) 22,832 82,392 46,793
Ratio of loan growth to deposit growth 3/4 229.1% 46.5% 36.9%
II-12
II-13
Results of Operations
Net Interest Income
II-14
II-15
Statement of Management Responsibility
Hugh S. Potts, Jr. Robert C. Thompson, III
Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
II-16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
First M & F Corporation
Kosciusko, Mississippi
February 9, 2001
II-17
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
December 31, 2000, 1999, and 1998
(In Thousands, Except Share Data)
Assets 2000 1999
------ ---- ----
Cash and due from banks $ 31,484 $ 42,497
Interest bearing bank balances 26,525 13,611
Federal funds sold 2,400 3,900
Securities available for sale, amortized
cost of $271,806 and $306,717 272,711 299,534
Loans, net of unearned income 632,317 608,950
Allowance for possible loan losses (8,510) (7,629)
----------- -----------
Net loans 623,807 601,321
----------- -----------
Bank premises and equipment 19,279 18,781
Accrued interest receivable 8,800 7,855
Other assets 34,845 35,538
$ 1,019,851 $ 1,023,037
=========== ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 788,359 $ 789,941
Short-term borrowings 28,969 12,298
Other borrowings 97,633 121,251
Accrued interest payable 3,990 3,956
Other liabilities 3,957 4,914
----------- -----------
Total liabilities 922,908 932,360
----------- -----------
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; 4,614,784 and 4,672,662
shares issued 23,074 23,363
Additional paid-in capital 33,876 34,845
Retained earnings 39,422 36,969
Accumulated other comprehensive income - net
unrealized gain (loss) on securities
available for sale 571 (4,500)
----------- -----------
Net stockholders' equity 96,943 90,677
----------- -----------
$ 1,019,851 $ 1,023,037
=========== ============
The accompanying notes are an integral part of these financial statements.
II-18
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2000, 1999, and 1998
(In Thousands, Except Share Data)
2000 1999 1998
Interest income:
Interest and fees on loans $ 54,897 $ 40,113 $ 36,528
Taxable investments 14,316 10,197 8,582
Tax-exempt investments 2,833 3,020 2,915
Federal funds sold 645 297 871
Interest bearing bank balances 473 238 403
-------- ------- ---------
Total interest income 73,164 53,865 49,299
-------- ------- ---------
Interest expense:
Deposits 33,849 23,690 23,803
Short-term borrowings 250 165 22
Other borrowings 7,128 1,355 566
-------- ------- ---------
Total interest expense 41,227 25,210 24,391
-------- ------- ---------
Net interest income 31,937 28,655 24,908
Provision for possible loan losses 4,299 2,384 1,965
-------- ------- ---------
Net interest income after
provision for possible loan
losses 27,638 26,271 22,943
-------- ------- ---------
Noninterest income:
Service charges on deposit accounts 6,530 4,412 3,789
Mortgage banking income 474 601 746
Agency commission income 2,974 1,582 107
Credit insurance income 281 385 493
Other fee income 629 427 341
Gain (loss) on securities available for
sale (1,381) 26 135
Other income 973 810 601
-------- ------- ---------
Total noninterest income 10,480 8,243 6,212
-------- ------- ---------
Noninterest expenses:
Salaries and employee benefits 15,530 12,690 9,859
Net occupancy expenses 1,747 1,334 1,183
Equipment and data processing expenses 3,350 2,742 2,154
Other 8,890 6,577 5,522
-------- ------- ---------
Total noninterest expenses 29,517 23,343 18,718
-------- ------- ---------
Income before income taxes 8,601 11,171 10,437
Income taxes 1,522 3,005 2,595
-------- ------- ---------
Net income $ 7,079 $ 8,166 $ 7,842
======== ======= =========
Earnings per share:
Basic $ 1.53 $ 2.16 $ 2.16
Diluted 1.53 2.15 2.16
======== ======= =========
The accompanying notes are an integral part of these financial statements.
II-19
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2000, 1999, and 1998
(In Thousands)
2000 1999 1998
Net income $ 7,079 $ 8,166 $ 7,842
Other comprehensive income, net of
tax:
Change in unrealized gains (losses)
on securities available for sale 4,205 (6,272) 1,298
Reclassification adjustment for
gains (losses) on securities
available for sale included in
net income 866 (17) (85)
------ ------ -----
Other comprehensive income 5,071 (6,289) 1,213
------ ------ -----
Total comprehensive income $12,150 $ 1,877 $ 9,055
====== ===== =====
The accompanying notes are an integral part of these financial statements.
II-20
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2000, 1999, and 1998
(In Thousands, Except Share Data)
Additional
Common Paid-in Retained Unrealized
Stock Capital Earnings Gain (Loss) Net
January 1, 1998 $ 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
------ ------ ------ ----- ------
Net income - - 7,079 - 7,079
Cash dividends ($1.00 per share) - - (4,626) - (4,626)
35,359 common shares issued in
acquisition 177 774 - - 951
93,237 common shares repurchased (466) (1,743) - - (2,209)
Net change in unrealized gain (loss) - - - 5,071 5,071
December 31, 2000 $ 23,074 $ 33,876 $ 39,422 $ 571 $ 96,943
====== ====== ====== ===== ======
The accompanying notes are an integral part of these financial statements.
II-21
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999, and 1998
(In Thousands)
2000 1999 1998
Cash flows from operating activities:
Net income 7,079 $ 8,166 $ 7,842
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,189 1,736 1,548
Provision for possible loan losses 4,299 2,384 1,965
Federal Home Loan Bank stock
dividends (591) (204) (104)
Net investment amortization 207 525 731
Gain (loss) on investments 1,381 (26) (135)
Deferred income taxes (530) (181) (293)
(Increase) decrease in:
Accrued interest receivable (945) (79) (634)
Cash surrender value of bank
owned life insurance (569) (480) (402)
Income taxes receivable 1,129 (86) (31)
Increase (decrease) in:
Accrued interest payable 34 (80) (77)
Income taxes payable - - (410)
Other, net (561) (202) (169)
------ ------- -------
Net cash provided by operating
activities 14,122 11,473 9,831
------ ------- -------
Cash flows from investing activities:
Purchases of securities available for
sale (10,212) (62,049) (115,074)
Sales of securities available for sale 8,111 46,544 25,975
Maturities of securities available
for sale 36,014 55,531 61,060
Maturities of investment securities - - 5,344
Net (increase) decrease in:
Interest bearing bank balances (12,914) (7,125) 4,316
Federal funds sold 1,500 14,950 (15,350)
Loans (28,716) (56,824) (41,366)
Bank premises and equipment (2,319) (4,160) (2,829)
Investment in bank owned life insurance - - (10,000)
Proceeds from sales of other real estate
and other repossessed assets 1,886 1,823 1,190
Investment in joint venture (260) - -
Net cash used for current and prior
year acquisitions (2,691) (24,740) -
------ ------- -------
Net cash used in investing
activities (9,601) (36,050) (86,734)
------ ------- -------
(Continued)
II-22
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999, and 1998
(In Thousands)
2000 1999 1998
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ 938 $ 8,886 $ 12,886
Money market, NOW and savings
deposits (23,979) (16,960) 71,655
Certificates of deposit 21,459 27,847 (2,149)
Short-term borrowings 16,671 11,469 829
Other borrowings (23,788) 25,459 (7,847)
Cash dividends (4,626) (3,920) (3,259)
Common shares repurchased (2,209) (8,514) -
------- ------ ---------
Net cash provided by (used in)
financing activities (15,534) 44,267 72,115
Net increase (decrease) in cash
and due from banks (11,013) 19,690 (4,788)
Cash and due from banks at January 1 42,497 22,807 27,595
------- ------ ---------
Cash and due from banks at December 31 $ 31,484 $ 42,497 $ 22,807
======= ====== =========
The accompanying notes are an integral part of these financial statements.
II-23
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 1: Summary of Significant Accounting and Reporting Policies
- -----------------------------------------------------------------
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)
-----------
(Continued)
II-24
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 1: (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. The balance of impaired
loans was not material at December 31, 2000 and 1999.
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)
(Continued)
-----------
II-25
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 1: (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 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.
Investment in Joint Venture
---------------------------
The Bank's 51% investment in The Merchants Financial Services Group, L.L.C.
(Merchants) is recorded using the equity method of accounting. Merchants
operates as a partnership for income tax purposes and was formed in 2000 to
provide accounts receivable financing to business customers.
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.
(Continued)
-----------
II-26
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 1: (Continued)
- --------------------
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:
2000 1999 1998
Interest paid $ 41,193 $ 25,291 $ 24,468
Federal and state income
taxes paid 3,466 3,272 3,346
Federal and state income
tax refunds 2,543 - -
Other real estate and
repossessions acquired in
noncash foreclosures 1,931 1,890 932
Common stock used in
acquisitions 951 37,723 -
====== ====== =====
Reclassifications
-----------------
Certain reclassifications have been made to the 1999 and 1998 financial
statements to be consistent with 2000 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 acquisition of Community was
included in the consolidated financial statements from the date of
acquisition.
On 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.
(Continued)
-----------
(Continued)
II-27
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 2: (Continued)
- --------------------
The Company has acquired various general insurance agencies in Mississippi in
transactions that were immaterial to the Company. The following table
provides information concerning these insurance agency acquisitions
completed during the three years ended December 31, 2000:
Common Method
Shares of
Acquisition Location Date Issued Accounting
Tyler, King & Ryder, Inc. Kosciusko 09/17/99 69,997 Pooling
Reynolds Insurance and
Real Estate Agency, Inc. Starkville 12/31/99 18,970 Purchase
Insurance Services, Inc. Tupelo 01/14/00 35,359 Purchase
House of Insurance, Inc. Tupelo 04/01/00 - Purchase
Note 3: Investments
- --------------------
The following is a summary of the amortized cost and market value (book value)
of securities available for sale at December 31, 2000 and 1999:
Amortized Gross Unrealized Market
----------------
Cost Gain Loss Value
--------- ---- ---- -----
December 31, 2000:
U. S. Treasury securities $ 3,018 $ 5 $ - $ 3,023
U. S. Government agencies
and corporations 32,058 190 169 32,079
Mortgage-backed investments 151,853 958 937 151,874
Obligations of states and
political subdivisions 61,347 843 149 62,041
Other 2,991 45 12 3,024
Equity securities 20,539 131 - 20,670
-------- ----- ----- -------
$ 271,806 $ 2,172 $ 1,267 $ 272,711
======== ===== ===== =======
(Continued)
-----------
(Continued)
II-28
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 3: (Continued)
- ------------------
Amortized Gross Unrealized 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
======= === ===== =======
The amortized cost and market values of debt securities available for sale at
December 31, 2000, 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 $ 32,570 $ 32,585
After one through five years 40,402 40,832
After five through ten years 26,097 26,429
After ten years 345 321
------- -------
99,414 100,167
Mortgage-backed investments 151,853 151,874
$ 251,267 $ 252,041
======= =======
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, 2000 $ 158,974 $ 158,933
======= =======
December 31, 1999 $ 147,729 $ 143,504
======= =======
(Continued)
-----------
II-29
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 3: (Continued)
- --------------------
The following is a summary of gains and losses on securities available for
sale:
2000 1999 1998
---- ---- ----
Gross realized gains $ 54 $ 62 $ 165
Gross realized losses (55) (36) (30)
----- -- ----
(1) 26 135
Writedowns (1,380) - -
----- -- ----
$ (1,381) $ 26 $ 135
The Bank entered into a hedge collar transaction related to FNMA stock and
FHLMC stock in 2000. This stock was written down to the collar value at
December 31, 2000.
Note 4: Loans
- --------------
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 $3,945 and $6,419 at
December 31, 2000 and 1999:
2000 1999
Commercial, financial and
agricultural $ 75,993 $ 68,550
Residential real estate 249,745 250,875
Non-residential real estate 202,619 172,982
Consumer loans 103,960 116,543
------- -------
$ 632,317 $ 608,950
======= =======
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:
2000 1999
---- ----
Loans outstanding at January 1 $ 2,501 $ 2,769
New loans 1,536 1,451
Repayments (1,782) (1,719)
---------- ----- -----
Loans outstanding at December 31 $ 2,255 $ 2,501
===== =====
(Continued)
-----------
II-30
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 5: Allowance for Possible Loan Losses
- -------------------------------------------
Transactions in the allowance for possible loan losses are summarized as
follows:
2000 1999 1998
---- ---- ----
Balance at January 1 $ 7,629 $ 5,835 $ 5,315
Loans charged-off (4,226) (2,093) (2,019)
Recoveries 808 637 574
----- ----- -----
Net charge-offs (3,418) (1,456) (1,445)
----- ----- -----
Provision for possible loan
losses 4,299 2,384 1,965
Allowance from acquisition -- 866 --
----- ----- -----
Balance at December 31 $ 8,510 $ 7,629 $ 5,835
===== ===== =====
Note 6: Bank Premises and Equipment
- ------------------------------------
The following is a summary of bank premises and equipment at December 31, 2000
and 1999:
2000 1999
Land $ 4,786 $ 4,654
Buildings 15,116 15,523
Furniture, fixtures and equipment 13,291 11,674
Leasehold improvements 396 396
Construction in progress 1,341 49
------ ------
34,930 32,296
Less accumulated depreciation and
amortization 15,651 13,515
------ ------
$19,279 $18,781
====== ======
Amounts charged to operating expenses for depreciation and amortization of bank
premises and equipment were $1,821 in 2000, $1,380 in 1999 and $1,311 in
1998. The es