FIRST M & F CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 2002 Commission File Number 0-9424
FIRST M & F CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Mississippi 64-0636653
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
134 West Washington Street
Kosciusko, Mississippi 39090
-------------------------------------- -------------
Address of Principal Executive Offices Zip Code
(662) 289-5121
-------------------------------
Registrant's telephone number
No Change
------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
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 October 31, 2002
----- -------------------------------
Common stock ($5.00 par value) 4,612,246 shares
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
CONTENTS
--------
Page
----
PART I: FINANCIAL INFORMATION 3
Item 1 - Financial Statements (unaudited):
Consolidated Statements of Condition 4
Consolidated Statements of Income 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-12
Independent Accountants' Review Report 13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4 - Controls and Procedures 21
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities 22
Item 3 - Defaults upon Senior Securities 22
Item 4 - Submission of Matters to a Vote of Security
Holders 22
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURE 24
CERTIFICATIONS 25-28
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
Assets 2002 2001 (1)
------ ---------- ------------
Cash and due from banks $ 28,888 $ 40,945
Interest bearing bank balances 8,643 3,088
Federal funds sold 2,950 2,600
Securities available for sale (amortized
cost of $240,184 and $247,456) 249,761 250,436
Loans 675,746 661,282
Allowance for loan losses (10,064) (8,426)
--------- ---------
Net loans 665,682 652,856
--------- ---------
Bank premises and equipment 21,265 21,651
Accrued interest receivable 7,327 7,863
Other real estate 1,045 1,077
Intangible assets 16,985 17,000
Other assets 20,372 20,793
--------- ---------
$ 1,022,918 $ 1,018,309
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 98,025 $ 108,745
Interest bearing 711,487 707,872
Total deposits 809,512 816,617
Federal funds and repurchase agreements 23,218 16,458
Other borrowings 73,888 73,635
Accrued interest payable 2,065 2,960
Other liabilities 5,400 7,719
--------- ---------
Total liabilities 914,083 917,389
--------- ---------
Noncontrolling joint venture interest 587 857
--------- ---------
Stockholders' equity:
Common stock of $5.00 par value. 15,000,000
shares authorized; 4,614,784 shares issued
and outstanding 23,074 23,074
Additional paid-in capital 33,876 33,876
Retained earnings 46,004 41,960
Accumulated other comprehensive income 5,294 1,153
--------- ---------
Net stockholders' equity 108,248 100,063
--------- ---------
$ 1,022,918 $ 1,018,309
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
(1) Derived from audited financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 12,550 $ 13,832 $ 36,862 $ 41,800
Taxable investments 2,535 2,698 7,830 8,676
Tax exempt investments 629 700 1,955 2,090
Federal funds sold 15 146 129 646
Interest bearing bank
balances 23 108 98 373
------- ------- ------- -------
Total interest income 15,752 17,484 46,874 53,585
Interest expense:
Deposits 4,686 7,932 15,512 25,017
Short-term borrowings 174 193 521 572
Other borrowings 760 1,107 2,380 3,930
Total interest expense 5,620 9,232 18,413 29,519
------- ------- ------- -------
Net interest income 10,132 8,252 28,461 24,066
Provision for loan losses 1,004 1,200 3,484 3,215
------- ------- ------- -------
Net interest income after
provision for loan
losses 9,128 7,052 24,977 20,851
------- ------- ------- -------
Noninterest income:
Service charges on deposits 2,026 1,770 5,532 5,187
Mortgage banking income 310 337 787 770
Agency commission income 933 760 2,453 2,146
Other fee income 143 158 549 612
Gains (losses) on AFS
investments (4) 79 22 390
Other income 383 232 1,036 1,219
------- ------- ------- -------
Total noninterest
income 3,791 3,336 10,379 10,324
------- ------- ------- -------
Noninterest expenses:
Salaries and employee benefits 4,514 4,317 13,360 12,641
Net occupancy expense 483 480 1,478 1,372
Equipment and data processing
expenses 942 828 2,698 2,508
Intangible asset amortization 24 343 89 1,028
Other expenses 2,883 2,209 7,227 6,420
------- ------- ------- -------
Total noninterest
expenses 8,846 8,177 24,852 23,969
------- ------- ------- -------
Income before income
taxes 4,073 2,211 10,504 7,206
Income taxes 1,206 626 2,999 2,113
------- ------- ------- -------
Net income $ 2,867 $ 1,585 $ 7,505 $ 5,093
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic $ 0.62 $ 0.34 $ 1.63 $ 1.10
Diluted 0.62 0.34 1.63 1.10
------- ------- ------- -------
------- ------- ------- -------
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ----- ----
Net income $ 2,867 $ 1,585 $ 7,505 $ 5,093
------- ------- ------- -------
Other comprehensive income:
Unrealized holding gains
on securities, net of
taxes of $1,207 and
$1,338 for the three
months ended September 30,
and $2,474 and $2,067
for the nine months ended
September 30 2,024 2,249 4,155 3,474
Plus (minus) reclassification
adjustments for (gains)
losses included in net
income, net of taxes of
$2 and $29 for the three
months ended September 30
and $8 and $145 for the
nine months ended
September 30 2 (50) (14) (245)
------- ------- ------- -------
Other comprehensive
income 2,026 2,199 4,141 3,229
------- ------- ------- -------
Total comprehensive
income $ 4,893 $ 3,784 $ 11,646 $ 8,322
------- ------- ------- -------
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
------- ---------- -------- ------------- -----
January 1, 2001 $ 23,074 $ 33,876 $ 39,422 $ 571 $ 96,943
Net income - - 5,093 - 5,093
Cash dividends ($.75
per share) - - (3,461) - (3,461)
Net change - - - 3,229 3,229
-------- -------- -------- ------- ---------
September 30, 2001 $ 23,074 $ 33,876 $ 41,054 $ 3,800 $ 101,804
-------- -------- -------- ------- ---------
-------- -------- -------- ------- ---------
January 1, 2002 $ 23,074 $ 33,876 $ 41,960 $ 1,153 $ 100,063
Net income - - 7,505 - 7,505
Cash dividends ($.75
per share) - - (3,461) - (3,461)
Net change - - - 4,141 4,141
-------- -------- -------- ------- ---------
September 30, 2002 $ 23,074 $ 33,876 $ 46,004 $ 5,294 $ 108,248
-------- -------- -------- ------- ---------
-------- -------- -------- ------- ---------
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $7,505 $5,093
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,518 2,326
Provision for loan losses 3,484 3,215
Net investment amortization 472 251
Gain loss on sales of investments (22) (390)
Deferred income taxes (778) 2,129
(Increase) decrease in:
Accrued interest receivable 536 304
Cash surrender value of bank owned life
insurance (531) (494)
Increase (decrease) in:
Accrued interest payable (895) (70)
Income taxes payable (3,274) 507
Other, net (221) 96
-------- -------
Net cash provided by operating activities 7,794 12,967
-------- -------
Cash flows from investing activities:
Purchases of securities available for sale (45,120) (43,707)
Sales of securities available for sale 2,177 14,447
Maturities of securities available for sale 50,250 39,916
Net (increase) decrease in:
Interest bearing bank balances (5,555) 17,346
Federal funds sold (350) (6,100)
Loans (16,855) (35,108)
Bank premises and equipment (1,033) (2,952)
Federal Home Loan Bank stock transactions - 4,116
Proceeds from sales of other real estate
and other repossessed assets 923 1,182
Increase in intangible assets (74) (60)
Net cash paid related to prior year acquisitions - (54)
-------- -------
Net cash used in investing activities (15,637) (10,974)
-------- -------
(Continued)
-----------
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ (10,720) $ 12,435
Interest bearing deposits 3,615 8,394
Securities sold under agreements to
repurchase and other short-term borrowings 6,760 (8,407)
Other borrowings 92 (16,048)
Distribution to noncontrolling joint venture
interest (500) -
Cash dividends (3,461) (3,461)
---------- --------
Net cash used in financing activities (4,214) (7,087)
---------- --------
Net decrease in cash and due from
banks (12,057) (5,094)
Cash and due from banks at January 1 40,945 31,484
---------- --------
Cash and due from banks at September 30 $ 28,888 $ 26,390
---------- --------
---------- --------
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 1: Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The condensed consolidated financial statements of First M & F
Corporation include the financial statements of Merchants & Farmers Bank, a
wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First M & F
Insurance Co., M & F Financial Services, Inc., M & F Bank Securities
Corporation, M & F Insurance Group, Inc. and the Bank’s 51% owned accounts
receivable financing joint venture. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2001.
Note 2: Statements of Cash Flows
- ---------------------------------
During the nine months ended September 30, 2002 and 2001, the Company had the
following payments:
2002 2001
---- ----
Interest $ 19,308 $ 29,589
Income taxes 4,993 1,711
------- -------
------- -------
Note 3:Accounting Changes
- -------------------------
In July, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 141, “Business Combinations”, and SFAS
142, “Goodwill and Other Intangible Assets”. These statements make significant
changes to the accounting for business combinations, goodwill and other
intangible assets. SFAS 141, which replaces APB Opinion 16, eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. In addition, it establishes criteria for recognition of
indefinite lived intangible assets separately from goodwill. SFAS 141 is
effective for purchase-accounting business combinations completed after June 30,
2001, and will impact future acquisitions by the Company.
(Continued)
-----------
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 3:(Continued)
- ------------------
With the adoption of SFAS 142, goodwill and indefinite lived intangible assets are
no longer amortized. Instead they are reviewed for impairment at least annually
or when certain indicators are encountered to determine if they should be
written down with an accompanying charge to earnings. At June 30, 2002, the
Company had no indefinite lived intangible assets other than goodwill.
Intangible assets, such as core deposit intangibles and customer renewal lists,
with a determinable useful life will continue to be amortized over their
respective useful lives. The Company adopted SFAS 142 effective on January 1,
2002. The non-amortization provisions were effective immediately for goodwill.
The transition impairment test was performed on the goodwill that resides in two
components of the Company. Those two components were Community Banking and
Insurance Agency Operations. The net worth of both components was calculated
from the cash flows of the operations using no growth assumptions and market
discount rates prevalent for community banking and insurance agency entities.
The market values of both components were higher than their book values.
Therefore, no impairment charge was necessary. The full effect of adopting SFAS
142 is expected to result in an increase in net income of approximately $1.2
million or $.26 per share in 2002. The following table summarizes the effect
of the application of SFAS 142 on current earnings as compared to last year’s
earnings.
September 30, December 31, September 30,
2002 2001 2001
------------- ------------ -------------
Goodwill $ 16,348 $ 16,348 $ 16,648
Core deposit intangibles 101 162 192
Renewal list intangibles 536 490 503
------- ------- -------
Total intangible assets $ 16,985 $ 17,000 $ 17,343
------- ------- -------
------- ------- -------
Year to Date
--------------------------------------------
September 30, December 31, September 30,
2002 2001 2001
------------- ------------ -------------
Net income, as reported $ 7,505 $ 7,153 $ 5,093
Goodwill amortization - 1,199 899
------- ------- -------
Adjusted net income $ 7,505 $ 8,352 $ 5,992
------- ------- -------
------- ------- -------
Earnings per share as reported $ 1.63 $ 1.55 $ 1.10
Adjusted earnings per share 1.63 1.81 1.30
------- ------- -------
------- ------- -------
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 4:Earnings Per Share
- -------------------------
Three Months Ended
September 30,
------------------------
2002 2001
---- ----
Net income $ 2,867 $ 1,585
Weighted average shares outstanding 4,614,784 4,614,784
Add dilutive effective of outstanding options - -
--------- ---------
Adjusted dilutive shares outstanding 4,614,784 4,614,784
--------- ---------
--------- ---------
Earnings per share:
Basic $ .62 $ .34
Diluted .62 .34
--------- ---------
--------- ---------
Nine Months Ended
September 30,
-------------------------
2002 2001
---- ----
Net income $ 7,505 $ 5,093
--------- ---------
--------- ---------
Weighted average shares outstanding 4,614,784 4,614,784
Add dilutive effective of outstanding options - -
--------- ---------
Adjusted dilutive shares outstanding 4,614,784 4,614,784
--------- ---------
--------- ---------
Earnings per share:
Basic $ 1.63 $ 1.10
Diluted 1.63 1.10
--------- ---------
--------- ---------
We have reviewed the accompanying consolidated statement of condition of First M & F Corporation and subsidiary as of September 30, 2002, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2002 and 2001 and the related consolidated statements of stockholders’ equity and cash flows for the nine-month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of condition of First M & F Corporation and subsidiary as of December 31, 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated February 8, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
The following provides a narrative discussion and analyses of significant changes in the Company’s results of operations and financial condition. This discussion should be read in conjunction with the interim consolidated financial statements and supplemental financial data presented elsewhere in this report.
This Form 10-Q may contain, or incorporate by reference, statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that any such forward- looking statements are not guarantees for future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Specifically, this discussion includes statements with respect to the allowance for loan losses; the effect of legal proceedings against the Company’s financial condition, results of operations and liquidity; and market risk disclosures. Should one or more of these risks materialize or the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the Federal and state legal and regulatory environment, significant underperformance in our portfolio of outstanding loans and competition in our markets. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Financial SummaryNet income for the first nine months of 2002 was $7.505 million, or $1.63 per basic and diluted share as compared to $5.093 million, or $1.10 per basic and diluted share for the same period in 2001. The increase in earnings per share was due primarily to a higher net interest margin in the first nine months of 2002 than in 2001. The net interest margin for the first nine months of 2002 was 4.26% as compared to 3.68% for the same period in 2001. The efficiency ratio for 2002 improved to 62.00% from 67.06% in the first nine months of 2001. Annualized non-interest revenues were at 1.35% of average assets for 2002 as compared to 1.36% in 2001. Annualized non-interest expenses were 3.21% of average assets compared to 3.16% in 2001. Return on assets for the first nine months of 2002 was .98%, while the return on equity was 9.62%. Return on assets for the first nine months of 2001 was .67%, while the return on equity was 6.84%.
The following table shows performance ratios for the first three quarters of 2002 as compared to the first three quarters of 2001:
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
EPS, diluted $ .62 $ .51 $ .50
Net interest margin 4.55% 4.20% 4.02%
Efficiency ratio 61.76% 62.16% 62.08%
Return on assets 1.12% .92% .89%
Return on equity 10.75% 9.05% 8.90%
2001
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
EPS, diluted $ .34 $ .34 $ .42
Net interest margin 3.76% 3.72% 3.56%
Efficiency ratio 67.91% 68.16% 65.10%
Return on assets .63% .62% .77%
Return on equity 6.39% 6.33% 7.90%
Net Interest IncomeNet interest income for the first nine months of 2002 was $28.461 million as compared to $24.066 million for the same period in 2001. Earning asset yields were 6.89% in 2002 as compared to 7.96% in 2001. However, funding costs decreased to 3.02% in 2002 from 4.85% in 2001. Average earning assets were $930.677 million in the first nine months of 2002 as compared to $920.716 million in the same period of 2001. Average loans as a percentage of earning assets were 70.60% in 2002 as compared to 69.70% in 2001. Average interest bearing liabilities were $813.098 million in the first nine months of 2002 as compared to $811.999 million in the same period in 2001. Average non-interest bearing deposits were $98.630 million in the first nine months of 2002 as compared to $90.763 million for the same period in 2001.
The following table shows margin-related ratios for the first three quarters of 2002 as compared to the first three quarters of 2001:
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Net interest income $ 10,132 $ 9,269 $ 9,059
Earning asset yield 6.98% 6.88% 6.82%
Funding cost 2.77% 3.05% 3.23%
Average loans as
percentage of
earning assets 72.00% 70.97% 68.74%
Average non-interest
deposits to total
funding 10.47% 10.52% 11.46%
2001
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Net interest income $ 8,252 $ 8,083 $ 7,731
Earning asset yield 7.76% 7.98% 8.13%
Funding cost 4.57% 4.84% 5.14%
Average loans as
percentage of
earning assets 70.19% 69.87% 69.02%
Average non-interest
deposits to total
funding 10.65% 9.96% 9.54%
The provision for loan losses for the first nine months of 2002 was $3.484 million as compared to $3.215 million for the first nine months of 2001. The allowance for loan losses as a percentage of loans was 1.27% at December 31, 2001, 1.50% at June 30, 2002 and 1.49% at September 30, 2002. Nonaccrual loans and 90 days past due accruing loans as a percentage of loans outstanding were .38% at September 30, 2002, .52% at June 30, 2002 and .57% at December 31, 2001. Annualized net charge-offs as a percentage of average loans were .37% for the first nine months of 2002 as compared to .69% for the year ended December 31, 2001.
Non Interest IncomeNon-interest income, excluding securities transactions, for the first nine months of 2002 was $10.357 million as compared to $9.934 million in 2001. Gains on sales of securities were down by $368 thousand in 2002 due to restructuring gains generated in the first quarter of 2001. Profit-sharing revenues of the insurance agencies fell from $250 thousand in 2001 to $17 thousand in 2002. The decreased company profit sharing was due to claims from significant storm damage that occurred in 2001. However, commission revenues in the agencies were up by 14.32% in 2002 as compared to 2001. Mortgage banking revenues were up by 2.20% from 2001 to 2002, due primarily to the favorable interest rate environment.
The following table shows non-interest income components for the first three quarters of 2002 as compared to the first three quarters of 2001:
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Service charges on
deposits $ 2,026 $ 1,810 $ 1,696
Mortgage income 310 225 252
Agency commissions 933 750 770
Other non-interest
income 526 505 554
Securities gains
(losses) (4) 25 1
----- ----- -----
Total $ 3,791 $ 3,315 $ 3,273
===== ===== =====
2001
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Service charges on
deposits $ 1,770 $ 1,740 $ 1,677
Mortgage income 337 239 194
Agency commissions 760 656 730
Other non-interest
income 390 639 802
Securities gains
(losses) 79 (2) 313
----- ----- -----
Total $ 3,336 $ 3,272 $ 3,716
===== ===== =====
Non interest expenses increased by 3.68% in the first nine months of 2002 as compared to the same period in 2001. Salary and benefit expenses were up by 5.68% due primarily to increased benefit plan expenses. The number of full-time equivalent employees in the Company was 404 at September 30, 2002 as compared to 423 at December 31, 2001 and 424 at September 30, 2001. Intangible expense amortization was down by $939 thousand from September 30, 2001 due to the elimination of goodwill amortization. Annualized non-interest expenses as a percentage of average assets were 3.23% for the first nine months of 2002 as compared to 3.18% for the year 2001 and 3.16% for the first nine months of 2001. The Company’s efficiency ratio was 62.00% for the first nine months of 2002 as compared to 66.15% for the year 2001 and 67.06% for the first nine months of 2001.
The following table reflects the components of other non-interest expenses (in thousands) for the nine months ended September 30, 2002 and 2001:
2002 2001
---- ----
Telecommunications $ 589 $ 594
Postage and shipping 473 441
Supplies 497 542
Marketing and advertising 775 714
Foreclosed property 185 127
Goodwill amortization - 899
Other intangible amortization 89 129
Other expenses 4,708 4,002
----- -----
$ 7,316 $ 7,448
===== =====
The following table shows non-interest expense ratios for the first three quarters
of 2002 as compared to the first three quarters of 2001:
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Efficiency ratio 61.76% 62.16% 62.08%
Non-interest expense
to average assets 3.47% 3.18% 3.05%
Salaries and benefits
to total non-interest
expense 51.02% 55.60% 54.93%
2001
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Efficiency ratio 67.91% 68.16% 65.10%
Non-interest expense
to average assets 3.22% 3.20% 3.07%
Salaries and benefits
to total non-interest
expense 52.80% 53.88% 51.49%
Income taxes for the first nine months of 2002 were $41.97% higher than in the same period 2001. The effective tax rate for the first nine months of 2002 was 28.55% as compared to 29.31% in the first nine months of 2001. The primary difference in the effective rates is due to the higher amount of non-deductible interest in 2001 related to the funding of tax-exempt investments.
Assets and LiabilitiesAssets were up by .45% from December 31, 2001 and down by .17% from September 30, 2001. Loans grew by 2.19% in the first nine months of 2002 and grew by 1.73% from September 30, 2001. Investments declined by .27% in the first nine months of 2002, providing funds for third quarter loan growth. Loan demand was weak during 2001 and continued to remain soft through the first half of 2002. Loans grew by $19.765 million in the third quarter of 2002 after declining by $5.301 million in the first six months of 2002. Loans as a percentage of assets were 66.06% at September 30, 2002 as compared to 64.94% at December 31, 2001 and 64.83% at September 30, 2001.
Deposits decreased by ..87% in the first nine months of 2002 and increased by .24% from September 30, 2001. NOW and money market deposits grew by $41.634 million in the first nine months of 2002, with much of this growth occurring in municipal deposit accounts. Certificates of deposit decreased by approximately $35 million in the first nine months of 2002, due primarily to the low interest rate environment. Municipal deposits, up by $20 million in 2002, were dominated by tax receipts. Other NOW and money market deposits will probably remain at current levels until higher interest rates make reinvestment more attractive.
Total borrowings were up by $7.014 million in the first nine months of 2002, mainly to replace deposit decreases and help fund loan growth. Debt is expected to decrease over the course of the year as excess liquidity is used to reduce leverage.
EquityThe Company’s regulatory capital ratios at September 30, 2002, as shown below are in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.
($ in thousands)
----------------
Tier 1 capital $ 85,842
Tier 2 capital 8,637
------
Total risk-based capital $ 94,479
======
Risk weighted assets $ 686,691
=======
Total risk-based capital ratio 13.76%
=====
Leverage ratio 8.56%
====
The total risk-based capital ratio for the Bank was 14.84% with a leverage ratio of 9.26%. The dividend payout ratio for the first nine months of 2002 was 46.01% based upon a quarterly dividend of $.25 per share. The book value of the stock at September 30, 2002 was $23.46, with a traded market value of $26.20 per share.
Interest Rate Risk and Liquidity ManagementResponsibility for managing the Company’s program for controlling and monitoring interest rate and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. Cash flow analyses are also used to project short-term interest rate risks and liquidity risks. Management believes, at September 30, 2002, there is adequate flexibility to alter the current rate and maturity structures as necessary to minimize the exposure to changes in interest rates, should they occur. The Company is currently in a neutral gap position for assets and liabilities repricing within the next year.
The asset/liability committee further establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. These sources are primarily correspondent banks, the Federal Home Loan Bank and the Federal Reserve.
Credit Risk ManagementThe Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company strives to minimize risk through the diversification of the portfolio geographically within Mississippi as well as by loan purpose and collateral.
The adequacy of the allowance for loan losses is monitored quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by external examiners as well as by internal loan review personnel, past due loans, loan growth and loss history. The allowance as a percentage of loans at September 30, 2002 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company.
September 30, December 31, September 30,
2002 2001 2001
------------- ------------ -------------
(Amounts in Thousands)
Nonaccrual loans $ 1,405 $ 1,825 $ 1,337
90 Day past due loans 1,174 1,958 1,727
----- ----- -----
Total non-performing loans 2,579 3,783 3,064
Other real estate 1,045 1,077 947
----- ----- -----
Total non-performing assets $ 3,624 $ 4,860 $ 4,011
===== ===== =====
Non-performing loans to loans .38% .57% .46%
Non-performing assets to assets .35% .48% .39%
=== === ===
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. This risk of loss can be reflected in either reduced potential net interest income in future periods or diminished market values of financial assets.
The Company’s market risk arises primarily from interest rate risk, which the asset/liability management committee monitors and manages on a monthly basis. The committee manages the interest rate risks inherent in the loan, investment, deposit and borrowing portfolios of the Company. The asset/liability management committee determines the risk profile of the Company and determines strategies to maintain interest rate sensitivity at a low level. As of September 30, 2002 the institution was in a positive repricing gap position of approximately 3.88% of assets.
Interest rate shock analysis shows that the Company will experience a 3 basis point decrease over 12 months in its net interest margin with an immediate and sustained 100 basis point decrease in interest rates. An immediate and sustained increase in interest rates of 100 basis points will result in a 2 basis point increase in the interest margin. The sensitivity of loan prices and the lack of sustainable deposit cost decreases are the primary drivers behind these simulation results.
An analysis of the change in market value of equity shows how an interest rate shock will affect the difference between the market value of assets and the market value of liabilities. With all financial instruments being stated at market value, the ratio of the market value of equity to the market value of assets will fall by 70 basis points with an immediate and sustained increase in interest rates of 100 basis points. The ratio of the market value of equity to the market value of assets will increase by 40 basis points with an immediate and sustained decrease in interest rates of 100 basis points.
The Company has off balance sheet risks to the extent that it has made lending or investment purchase commitments. Total outstanding and unused loan commitments at September 30, 2002, were $78.187 million with $24.043 million of those commitments maturing in over one (1) year. The Company monitors these commitments with respect to credit quality as well as funding-related risks.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-14(c)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days before the filing of this quarterly report (the “Evaluation Date”), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective.
There were no significant changes to the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.
There has been a trend toward increased litigation against financial services companies arising out of consumer lending and other consumer financial transactions, especially in Mississippi. Some of these actions have resulted in large settlements or substantial damage awards.
Some of the Company’s subsidiaries are subject to similar cases that seek substantial damages for claims arising out of transactions that involve relative small amounts of money. While the allegations vary from case to case, in general they allege that loans were originated or renewed in a way that the borrowers were improperly sold insurance products, such as credit life insurance. The Company has denied these allegations and will vigorously defend the claims.
The number of these lawsuits filed against some of the Company’s subsidiaries increased during 2001 and the first nine months of 2002. Similarly, the number of plaintiffs participating in these lawsuits has increased significantly. Management has no reason to know whether these trends will continue. It is not possible to determine with any certainty at this point in time the potential exposure related to damages in connection with these suits. Future legislation and court decisions may limit the amount of damages that can be recovered in legal proceedings. However, management cannot predict at this time whether such legislation and court decisions will occur or the effect they may have on cases involving our subsidiaries.
Additionally, the Company and its subsidiaries are defendants in various other lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of this category of claims should not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 2 - Changes in SecuritiesExhibit 11 - Computation of Earnings Per Share - See note 4 to the consolidated financial statements included in this report.
No reports on Form 8-K were filed
by the Company during the period July 1, 2002
to September 30, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST M & F CORPORATION
- -----------------------
(Registrant)
DATE: November 12, 2002 /s/ Hugh S. Pitts, Jr.
------------------------------------
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
DATE: November 12, 2002 /s/ Robert C. Thompson, III
------------------------------------
Robert C. Thompson, III
Executive Vice President and
Chief Financial Officer
FIRST M & F CORPORATION
CERTIFICATIONS
- --------------
I, Hugh S. Potts, Jr., Chairman and Chief Executive Officer certify that:
1. I have reviewed this quarterly report on Form 10-Q of First M & F Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
A. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
B. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
C. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
A. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date:November 12, 2002 /s/ Hugh S. Potts, Jr.
----------------------------------------
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
FIRST M & F CORPORATION
CERTIFICATIONS
- --------------
I, Robert C. Thompson, III, Executive Vice President and Chief Financial Officer
certify that:
7. I have reviewed this quarterly report on Form 10-Q of First M & F Corporation;
8. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
9. Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
10. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
A. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
B. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
C. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
11. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
A. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
12. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date:November 12, 2002 /s/ Robert C. Thompson, III
-------------------------------------------
Robert C. Thompson, III
Executive Vice President and Chief Financial
Officer
FIRST M & F CORPORATION
CERTIFICATION UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First M & F Corporation (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with Securities and
Exchange Commission on the date hereof (the "Report"), I, Hugh S. Potts, Jr., Chief
Executive Officer of the Company, certify, to the best of my knowledge and belief,
pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley
Act of 2002, that:
A. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
B. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
DATE:November 12, 2002 BY: /s/ Hugh S. Potts, Jr.
----------------------------------
Hugh S. Potts, Jr.
Chairman and
Chief Executive Officer
FIRST M & F CORPORATION
CERTIFICATION UNDER
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First M & F Corporation (the "Company")
on Form 10-Q for the period ended September 30, 2002 as filed with Securities and
Exchange Commission on the date hereof (the "Report"), I, Robert C. Thompson, III,
Chief Financial Officer of the Company, certify, to the best of my knowledge and
belief, pursuant to 18 U.S.C.ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
C. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
D. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
DATE:November 12, 2002 BY: /s/ Robert C. Thompson, III
----------------------------------
Robert C. Thompson, III
Executive Vice President and
Chief Financial Officer