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 June 30, 2003 Commission File Number 0-9424
FIRST M & F CORPORATION
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(Exact name of registrant as specified in its charter)
Mississippi 64-0636653
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
134 West Washington Street
Kosciusko, Mississippi 39090
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Address of Principal Executive Officers Zip Code
(662) 289-5121
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Registrant's telephone number
No Change
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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
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Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes X No
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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 July 31, 2003
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Common stock ($5.00 par value) 4,591,464 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 10-13
Independent Accountants' Review Report 14
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-21
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 22
Item 4 - Controls and Procedures 23
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities and Use of Proceeds 24
Item 3 - Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of Security
Holders 24
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27-28
EXHIBIT INDEX
EXHIBITS
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
(in thousands)
(Unaudited)
June, December 31,
Assets 2003 2002 (1)
------ ------------ ------------
Cash and due from banks $ 38,552 $ 43,329
Interest bearing bank balances 2,707 12,610
Federal funds sold 14,150 7,700
Securities available for sale (amortized
cost of $204,843 and $226,617) 213,846 236,110
Loans 733,113 678,746
Allowance for loan losses (10,422) (10,258)
------------ ------------
Net loans 722,691 668,488
------------ ------------
Bank premises and equipment 21,424 21,508
Accrued interest receivable 6,973 7,125
Other real estate 1,116 950
Goodwill 16,348 16,348
Other assets 24,175 22,966
------------ ------------
$ 1,061,982 $ 1,037,134
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 120,671 $ 101,915
Interest bearing 731,635 722,109
------------ ------------
Total deposits 852,306 824,024
------------ ------------
Federal funds and repurchase agreements 14,612 23,599
Other borrowings 73,420 71,142
Accrued interest payable 1,570 1,920
Other liabilities 8,440 7,583
------------ ------------
Total liabilities 950,348 928,268
------------ ------------
Noncontrolling joint venture interest 848 656
------------ ------------
Stockholders' equity:
Common stock of $5.00 par value. 15,000,000
shares authorized; 4,611,464 and 4,587,046
shares issued and outstanding 23,057 22,935
Additional paid-in capital 33,047 33,260
Retained earnings 50,560 47,585
Accumulated other comprehensive income 4,122 4,430
------------ ------------
Total stockholders' equity 110,786 108,210
------------ ------------
$ 1,061,982 $ 1,037,134
------------ ------------
------------ ------------
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 11,803 $ 11,976 $ 23,512 $ 24,312
Taxable investments 1,778 2,752 3,711 5,295
Tax exempt investments 595 644 1,191 1,326
Federal funds sold 77 38 183 114
Interest bearing bank
balances 37 33 79 75
-------- -------- -------- --------
Total interest income 14,290 15,443 28,676 31,122
-------- -------- -------- --------
Interest expense:
Deposits 3,620 5,192 7,547 10,826
Short-term borrowings 135 175 302 347
Other borrowings 758 807 1,526 1,620
-------- -------- -------- --------
Total interest expense 4,513 6,174 9,375 12,793
-------- -------- -------- --------
Net interest income 9,777 9,269 19,301 18,329
Provision for loan losses 962 1,280 1,882 2,480
-------- -------- -------- --------
Net interest income after
provision for loan
losses 8,815 7,989 17,419 15,849
-------- -------- -------- --------
Noninterest income:
Service charges on deposits 1,932 1,810 3,730 3,506
Mortgage banking income 300 225 472 477
Agency commission income 932 750 1,758 1,520
Other fee income 214 189 442 406
Gains (losses) on securities
available for sale (20) 25 (20) 26
Other income 261 316 613 653
-------- -------- -------- --------
Total noninterest
income 3,619 3,315 6,995 6,588
-------- -------- -------- --------
Noninterest expenses:
Salaries and employee benefits 4,614 4,491 8,934 8,846
Net occupancy expense 532 498 1,050 995
Equipment and data processing
expenses 951 854 1,921 1,756
Intangible asset amortization 34 32 68 65
Other expenses 2,550 2,203 4,964 4,344
-------- -------- -------- --------
Total noninterest
expenses 8,681 8,078 16,937 16,006
-------- -------- -------- --------
Income before income
taxes 3,753 3,226 7,477 6,431
Income taxes 1,115 897 2,185 1,793
-------- -------- -------- --------
Net income $ 2,638 $ 2,329 $ 5,292 $ 4,638
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Basic $ 0.57 $ 0.51 $ 1.14 $ 1.01
Diluted 0.57 0.51 1.14 1.01
-------- -------- -------- --------
-------- -------- -------- --------
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 2,638 $ 2,329 $ 5,292 $ 4,638
------- ------- ------- -------
Other comprehensive income (loss):
Unrealized holding gains
(losses) on securities,
net of taxes of $53
and $1,650 for the three
months ended June 30,
and $190 and $1,256 for
the six months ended
June 30 89 2,794 (319) 2,131
Plus (minus) reclassification
adjustments for (gains)
losses included in net
income, net of taxes of
$8 and $9 for the three
months ended June 30 and
$8 and $9 for the six
months ended June 30 12 (15) 12 (16)
------- ------- ------- -------
Other comprehensive
income (loss) 101 2,779 (307) 2,115
------- ------- ------- -------
Total comprehensive
income $ 2,739 $ 5,108 $ 4,985 $ 6,753
------- ------- ------- -------
------- ------- ------- -------
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, 2002 $ 23,074 $ 33,876 $ 41,960 $ 1,153 $ 100,063
Net income - - 4,638 - 4,638
Cash dividends ($.50
per share) - - (2,308) - (2,308)
Net change - - - 2,115 2,115
-------- -------- -------- ------- ---------
June 30, 2002 $ 23,074 $ 33,876 $ 44,290 $ 3,268 $ 104,508
-------- -------- -------- ------- ---------
-------- -------- -------- ------- ---------
January 1, 2003 $ 22,935 $ 33,260 $ 47,585 $ 4,430 $ 108,210
Net income - - 5,292 - 5,292
Cash dividends ($.50
per share) - - (2,317) - (2,317)
Exercise of options
for 146,772 common
shares 734 3,229 - - 3,963
122,354 common shares
repurchased (612) (3,442) - - (4,054)
Net change - - - (308) (308)
-------- -------- -------- ------- ---------
June 30, 2003 $ 23,057 $ 33,047 $ 50,560 $ 4,122 $ 110,786
-------- -------- -------- ------- ---------
-------- -------- -------- ------- ---------
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)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 5,292 $ 4,638
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 1,882 2,480
Depreciation and amortization 987 1,015
Net investment amortization 541 321
(Gain) loss on securities available for sale 20 (26)
Deferred income taxes (220) (1,034)
(Increase) decrease in:
Accrued interest receivable 152 407
Cash surrender value of bank owned life
insurance (291) (354)
Increase (decrease) in:
Accrued interest payable (350) (624)
Income taxes payable 42 (3,274)
Other, net 209 890
-------- --------
Net cash provided by operating activities 8,264 4,439
-------- --------
Cash flows from investing activities:
Purchases of securities available for sale (26,573) (45,120)
Sales of securities available for sale 2,063 1,537
Maturities of securities available for sale 45,963 34,045
Net (increase) decrease in:
Interest bearing bank balances 9,903 (2,266)
Federal funds sold (6,450) (9,650)
Loans (56,990) 3,416
Bank premises and equipment (818) (497)
Other, net 804 916
-------- --------
Net cash used in investing activities (32,098) (17,619)
-------- --------
(Continued)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ 18,756 $ (3,843)
Interest bearing deposits 9,526 10,772
Securities sold under agreements to
repurchase and other short-term borrowings (8,987) 3,138
Proceeds from other borrowings 18,800 12,000
Repayments of other borrowings (16,630) (16,886)
Distribution to noncontrolling joint venture
interest - (500)
Common shares issued 3,963 -
Common shares repurchased (4,054) -
Cash dividends (2,317) (2,308)
--------- ---------
Net cash provided by financing
activities 19,057 2,373
--------- ---------
Net decrease in cash and due from banks (4,777) (10,807)
Cash and due from banks at January 1 43,329 40,945
--------- ---------
Cash and due from banks at June 30 $ 38,552 $ 30,138
--------- ---------
--------- ---------
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., M & F Business Credit, 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, 2002.
Note 2: Statements of Cash Flows
During the six months ended June 30, 2003 and 2002, the Company had the following
payments:
2003 2002
---- ----
Interest $ 9,725 $ 13,417
Income taxes 2,363 5,067
------- --------
------- --------
Note 3: Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans based on the
"intrinsic value method" provided in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
Because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized on option plans.
(Continued)
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 3: (Continued)
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation", as amended by SFAS No. 148, requires pro forma disclosures
for net income and earnings per share for companies not adopting its fair value
accounting method for stock-based employee compensation. The pro forma
disclosures below use the fair value method of SFAS No. 123 to measure
compensation expense for stock-based employee compensation plans.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 2,638 $ 2,329 $ 5,292 $ 4,638
Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 11 16 19 32
------- ------- ------- -------
Pro forma net income $ 2,627 $ 2,313 $ 5,273 $ 4,606
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic - as reported $ .57 $ .51 $ 1.14 $ 1.01
Basic - pro forma .57 .50 1.14 1.00
Diluted - as reported .57 .51 1.14 1.01
Diluted - pro forma .56 .50 1.13 1.00
------- ------- ------- -------
------- ------- ------- -------
The fair value of stock options granted was estimated at the date of grant using
the Black-Scholes option-pricing model.
The following is a summary of outstanding options and weighted average exercise
price for the six months ended June 30, 2003 and 2002:
2003 2002
-------------------- --------------------
Number Price Number Price
------ ----- ------ -----
January 1 319,752 $ 28.30 347,802 $ 28.22
Granted 2,500 38.00 3,000 25.25
Exercised (146,772) 27.00 - -
Forfeited - - (1,500) 32.50
-------- ------- ------- -------
June 30 175,480 $ 29.53 349,302 $ 28.18
-------- ------- ------- -------
-------- ------- ------- -------
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
June 30,
-------------------------
2003 2002
---- ----
Net income $ 2,638 $ 2,329
--------- ---------
Weighted average shares outstanding 4,639,631 4,614,784
Add dilutive effective of outstanding options 30,763 -
--------- ---------
Adjusted dilutive shares outstanding 4,670,394 4,614,784
--------- ---------
--------- ---------
Earnings per share:
Basic $ .57 $ .51
Diluted .57 .51
--------- ---------
--------- ---------
Six Months Ended
June 30,
-------------------------
2003 2002
---- ----
Net income $ 5,292 $ 4,638
--------- ---------
--------- ---------
Weighted average shares outstanding 4,632,908 4,614,784
Add dilutive effective of outstanding options 21,353 -
--------- ---------
Adjusted dilutive shares outstanding 4,654,261 4,614,784
--------- ---------
--------- ---------
Earnings per share:
Basic $ 1.14 $ 1.01
Diluted 1.14 1.01
--------- ---------
--------- ---------
Note 5: Common Stock Repurchase Program
As discussed in Note 16 to the December 31, 2002, financial statements, the
Company's Board of Directors approved a common stock repurchase program on
August 14, 2002, authorizing the repurchase of up to 184,590 shares of the
Company's outstanding common stock. The Company's Board of Directors terminated
the August 14, 2002, repurchase program and approved a common stock repurchase
program on March 12, 2003, authorizing the repurchase of up to 240,000 shares
of the Company's outstanding common stock beginning in March, 2003. The
authorization specifies that the shares will be repurchased within twelve
months. The timing and extent of any repurchases are subject to management's
discretion and will depend on market considerations. The reaquired shares will
be held as authorized but unissued shares to be used for general corporate
purposes.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 6: Intangible Assets
Following is a summary of intangible assets, net of accumulated amortization
included in the Consolidated Statements of Condition.
Customer
Core Renewal Noncompete
Goodwill Deposits Lists Agreements
-------- -------- --------- ----------
December 31,2001 $ 16,348 $ 162 $ 256 $ 234
Amortization expense - (40) (11) (14)
--------- ------- ----- -----
June 30, 2002 $ 16,348 $ 122 $ 245 $ 220
--------- ------- ----- -----
--------- ------- ----- -----
December 31,2002 $ 16,348 $ 81 $ 316 $ 206
Amortization expense - (40) (14) (14)
--------- ------- ----- -----
June 30, 2003 $ 16,348 $ 41 $ 302 $ 192
--------- ------- ----- -----
--------- ------- ----- -----
Intangible assets, other than goodwill, are carried in Other Assets in the
Consolidated Statements of Condition.
Independent Accountants' Review Report
The Board of Directors
First M & F Corporation
Kosciusko, Mississippi
We have reviewed the accompanying consolidated statement of condition of First M & F Corporation and subsidiary as of June 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2003 and 2002 and the related consolidated statements of stockholders’ equity and cash flows for the six-month periods ended June 30, 2003 and 2002. 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, 2002, 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 14, 2003, 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, 2002 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Shearer, Taylor & Co. Ridgeland, Mississippi July 31, 2003
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.
Certain of the information included in this discussion contains forward looking financial data and information that is based upon management’s belief as well as certain assumptions made by, and information currently available to management. Specifically, this discussion includes statements with respect to the adequacy of 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.
Financial SummaryNet income for the second quarter of 2003 was $2.638 million, or $.57 per basic and diluted share as compared to $2.329 million, or $.51 per basic and diluted share for the same period in 2002. The increase in earnings per share was due primarily to a higher net interest margin in 2003 than in 2002, as well as net loan growth of $32.912 million in the second quarter of 2003 as compared to a net decrease in loans of $1.569 million in the second quarter of 2002. The net interest margin for the second quarter of 2003 was 4.26% as compared to 4.20% for the second quarter of 2002. The second quarter efficiency ratio for 2003 increased to 63.02% from 62.16% in the second quarter of 2002. Annualized non-interest revenues were at 1.37% of average assets for the second quarter of 2003 as compared to 1.31% for the same period in 2002. Annualized non-interest expenses were 3.29% of average assets for the second quarter of 2003 as compared to 3.19% for the same period in 2002. Return on assets for the second quarter of 2003 was 1.00%, while the return on equity was 9.45%. Return on assets for the second quarter of 2002 was ..92%, while the return on equity was 9.12%.
The following table shows performance ratios for the first and second quarters of 2003 as compared to the first and second quarters of 2002:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2003 2003 2002 2002
----------- ----------- ----------- -----------
EPS, diluted $ .57 $ .57 $ .51 $ .50
Net interest margin 4.26% 4.12% 4.20% 4.02%
Efficiency ratio 63.02% 62.17% 62.16% 62.08%
Return on assets 1.00% 1.00% .92% .89%
Return on equity 9.45% 9.63% 9.12% 8.96%
Net income for the first six months of 2003 was $5.292 million, or $1.14 per basic and diluted share as compared to $4.638 million, or $1.01 per basic and diluted share for the same period in 2002. The increase in earnings per share was due primarily to higher net interest margins, stronger loan growth and a 6.18% improvement in non-interest revenues for 2003 over 2002. The net interest margin for the first six months of 2003 was 4.19% as compared to 4.11% for the same period in 2002. The first half efficiency ratio for 2003 increased to 62.60% from 62.12% in the first half of 2002. Annualized non-interest revenues were at 1.33% of average assets for the first six months of 2003 as compared to 1.28% for the same period in 2002. Annualized non-interest expenses were 3.21% of average assets for the first six months of 2003 as compared to 3.12% for the same period in 2002. Return on assets for the first six months of 2003 was 1.00%, while the return on equity was 9.54%. Return on assets for the fist six months of 2002 was .90%, while the return on equity was 9.04%.
Net Interest IncomeNet interest income for the second quarter of 2003 was $9.777 million as compared to $9.269 million for the same period in 2002. Earning asset yields were 6.15% in the second quarter of 2003 as compared to 6.88% in 2002. However, funding costs decreased to 2.18% for the second quarter of 2003 from 3.06% for the second quarter of 2002. Average earning assets were $967.460 million during the second quarter of 2003 as compared to $926.950 million in the same period in 2002. Average loans as a percentage of earning assets were 73.01% for the second quarter of 2003 as compared to 70.86% for the same period in 2002. Average interest bearing liabilities were $829.305 million during the second quarter of 2003 as compared to $807.668 million during the same period in 2002. Average non-interest bearing deposits were $104.840 million during the second quarter of 2003 as compared to $96.208 million for the same period in 2002.
The following table shows margin-related ratios for the first and second quarters of 2003 as compared to the first and second quarters of 2002:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2003 2003 2002 2002
----------- ----------- ----------- -----------
Net interest income $ 9,777 $ 9,524 $ 9,269 $ 9,060
Earning asset yield 6.15% 6.14% 6.88% 6.82%
Funding cost 2.18% 2.32% 3.06% 3.23%
Average loans as
percentage of
earning assets 73.01% 70.48% 70.86% 68.51%
Average non-interest
deposits to total
funding 11.22% 10.52% 10.64% 11.59%
Net interest income for the first half of 2003 was $19.301 million as compared to $18.329 million for the same period in 2002. Earning assets yields were 6.15% for the first half of 2003 as compared to 6.85% for the same period in 2002. However, funding costs decreased to 2.25% for the first six months of 2003 from 3.15% for the same period in 2002. Average earning assets were $969.855 million during the first half of 2003 as compared to $952.662 million during the same period in 2002. Average loans as a percentage of earning assets were 71.75% during the first half of 2003 as compared to 68.79% for the same period in 2002. Average interest bearing liabilities were $834.164 million during the first half of 2003 as compared to $813.251 million during the same period in 2002. Average non-interest bearing deposits were $101.736 million during the first half of 2003 as compared to $101.765 million during the same period in 2002.
Provision for Loan LossesThe provision for loan losses for the second quarter of 2003 was $962 thousand as compared to $1.280 million for the second quarter of 2002. This reserve for loan losses as a percentage of loans was 1.42% at June 30, 2003, 1.51% at December 31, 2002 and 1.50% at June 30, 2002. Nonaccrual loans and 90 days past due accruing loans as a percentage of loans outstanding were .61% at June 30, 2003, .55% at December 31, 2002 and .52% at June 30, 2002. Annualized net charge-offs as a percentage of average loans were .53% for the second quarter of 2003 and .49% for the first half of 2003 as compared to .40% for the year ended December 31, 2002.
Non Interest IncomeNon-interest income, excluding securities transactions, for the second quarter of 2003 was $3.639 million as compared to $3.290 million for the same period in 2002. Deposit income was up by 6.74% due to a restructuring of deposit accounts and charges in the summer of 2002. Agency commissions were up by 24.27% compared to the second quarter of 2002 due to generally higher pricing in the market for insurance products. Mortgage revenues were up by 33.33% due to higher volumes for new home loans and refinanced loans in 2003 than in the second quarter of 2002.
The following table shows non-interest income components for the first and second quarters of 2003 as compared to the first and second quarters of 2002:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2003 2003 2002 2002
----------- ----------- ----------- -----------
Service charges on
deposits $ 1,932 $ 1,798 $ 1,810 $ 1,696
Mortgage income 300 172 225 252
Agency commissions 932 826 750 770
Other non-interest
income 475 580 505 554
Securities gains
(losses) (20) - 25 1
----------- ----------- ----------- -----------
Total $ 3,619 $ 3,376 $ 3,315 $ 3,273
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Non interest income, excluding securities transactions for the first half of 2003 was $7.015 million as compared to $6.562 million for the same period in 2002. Deposit income was up by 6.39% due to the July, 2002 changes in service charges as well as higher transaction volumes in 2003 than in 2002. Agency commissions were up by 15.66% in the first half of 2003 as compared to 2002 due to the higher premiums that are prevalent in the market. Mortgage revenues were flat for the first half of 2003 as compared to 2002 due to a slow first quarter in 2003, followed by a strong second quarter.
Non Interest ExpenseNon-interest expenses increased by 7.46% in the second quarter of 2003 as compared to the same period in 2002. Salary and benefit expenses were up by 2.74% in the second quarter of 2003 as compared to 2002. The number of full-time equivalent employees in the Company was 428 at June 30, 2003 as compared to 416 at December 31, 2002 and 400 at June 30, 2002. Three employees were added in April, 2003 for a new branch location in Olive Branch and a new asset-based lending subsidiary with a staff of three was formed in Memphis in the second quarter. Other staffing increases in 2003 were due to the addition of new commercial lenders. Annualized non-interest expenses as a percentage of average assets were 3.29% for the second quarter of 2003 as compared to 3.19% for the same period in 2002. The Company’s efficiency ratio was 63.02% for the second quarter of 2003 as compared to 62.16% for the second quarter of 2002.
The following table reflects the components of other non-interest expenses (in
thousands) for the first two quarters of 2003 and 2002:
June, March, June, March,
2003 2003 2002 2002
----- ------ ----- ------
Telecommunications $ 228 $ 219 $ 193 $ 188
Postage and shipping 162 174 132 153
Supplies 167 185 152 159
Marketing and advertising 258 153 217 147
Foreclosed property 127 60 59 64
Intangible asset amortization 34 34 32 33
Other expenses 1,608 1,623 1,450 1,430
------- ------- ------- -------
$ 2,584 $ 2,448 $ 2,235 $ 2,174
------- ------- ------- -------
------- ------- ------- -------
The following table shows non-interest expense ratios for the first and second
quarters of 2003 as compared to the first and second quarters of 2002:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2003 2003 2002 2002
----------- ----------- ----------- -----------
Efficiency ratio 63.02% 62.17% 62.16% 62.08%
Non-interest expense
to average assets 3.29% 3.12% 3.19% 3.05%
Salaries and benefits
to total non-interest
expense 53.15% 52.33% 55.60% 54.93%
Non-interest expenses increased by 5.82% in the first half of 2003 as compared to the same period in 2002. Salary and benefit expenses were up by 0.99% in the first half of 2003 as compared to 2002. Equipment expenses for the first half of 2003 were up by 9.40% over the same period in 2002 due to additional technology that was added during 2003. This enhancement was related to the automation of customer service applications as well as enhancements to the imaging technologies of the Company. Annualized non-interest expenses as a percentage of average assets were 3.21% for the first half of 2003 as compared to 3.12% for the same period in 2002. The Company's efficiency ratio was 62.60% for the first half of 2003 as compared to 62.12% for the first half of 2002.
Income TaxesIncome taxes for the second quarter of 2003 were 21.21% higher than in the same period in 2002. The effective tax rate for the second quarter of 2003 was 29.70% as compared to 27.81% in the second quarter of 2002. Income taxes for the first half of 2003 were 21.84% higher than in the first half of 2002. The effective tax rate for the first half of 2003 was 29.22% as compared to 27.88% in the first half of 2002. The increase in taxes was primarily due to an increase in taxable income and a decrease in tax-exempt income from 2002 to 2003.
Assets and LiabilitiesAssets were up by 2.40% from December 31, 2002 and up by 3.49% from June 30, 2002. Loans grew by 8.01% in the first six months of 2003 and grew by 11.76% from June 30, 2002. Investments declined by 9.61% in the first six months of 2003, providing funds for loan growth. Loan demand was strong during the first half of 2003 with loans growing by $21.454 million in the first quarter and by $32.912 million in the second quarter. In comparison, loans decreased by $3.733 million in the first quarter of 2002 and decreased by $1.569 million in the second quarter. Loans as a percentage of assets were 69.03% at June 30, 2003 as compared to 65.44% at December 31, 2002 and 63.93% at June 30, 2002.
Deposits increased by 3.43% in the first six months of 2003 and by 3.49% from June 30, 2002. NOW and money market deposits grew by $13.567 million in the first six months of 2003, with $20.421 million of the growth occurring in municipal deposit accounts, while individual and business deposits decreased by $6.854 million. Certificates of deposit decreased by approximately $1.230 million in the first six months of 2003. Certificates of deposit of municipalities were up by $15.523 million in 2003, while consumer and business certificates of deposit were down by $16.753 million. The municipality deposit growth was driven mainly by tax receipts, while the consumer and business time deposit decreases were due primarily to the low interest rate environment. Other NOW and money market deposits will probably remain at current levels under higher interest rates make reinvestment more attractive.
Total borrowings were down by $6.709 million in the first six months of 2003, mainly due to the liquidity provided by deposit growth and investment portfolio decreases. Debt is expected to remain stable or increase over the course of the year as the Company looks to the debt market as an alternative funding source to time deposits. The Company is also using debt to finance the repurchase of stock.
The Company’s regulatory capital ratios at June 30, 2003, as shown below are in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.
($ in thousands)
----------------
Tier 1 capital $ 89,101
Tier 2 capital 9,377
-------
Total risk-based capital $ 98,478
-------
-------
Risk weighted assets $ 746,545
-------
-------
Total risk-based capital ratio 13.19%
-------
-------
Leverage ratio 8.59%
-------
-------
The total risk-based capital ratio for the Bank was 14.08% with a leverage ratio of 9.20%. The dividend payout ratio for the first six months of 2003 was 43.86% based upon a quarterly dividend of $.25 per share. The book value of the stock at June 30, 2003 was $24.02, with a traded market value of $32.71 per share.
During the first half of 2003, 146,772 shares of common stock were issued through stock options exercises. The average issue price was $27.00 per share. The stock options exercised were from a plan that was assumed in the 1999 Community Federal Bancorp acquisition. The Company repurchased 77,354 shares in the open market during the first quarter at an average cost of $32.14 per share and repurchased 45,000 shares in the second quarter at an average cost of $34.85 per share. The Company received Board approval to accelerate its repurchase program to allow for the repurchase of 240,000 shares during the period of March, 2003 through February, 2004. As of June 30, 2003, 122,354 shares had been repurchased at an average cost of $33.14 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 June 30, 2003, 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 positive gap position for assets and liabilities repricing within the next year. This generally means that for assets and liabilities maturing and repricing with the next 12 months, the Company is positioned for more assets to mature and reprice than it has in liabilities maturing and repricing.
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 reserve for loan losses is monitored quarterly with provision accruals approved by the Board. Reserve 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 reserve as a percentage of loans at June 30, 2003 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company.
June 30, December 31, June 30,
2003 2002 2002
-------- ------------ --------
(Amounts in Thousands)
Nonaccrual loans $ 2,663 $ 1,583 $ 2,016
90 Day past due loans 1,808 2,170 1,376
------- ------- -------
Total non-performing loans 4,471 3,753 3,392
Other real estate 1,116 950 1,095
------- ------- -------
Total non-performing assets $ 5,587 $ 4,703 $ 4,487
------- ------- -------
------- ------- -------
Non-performing loans to loans .61% .55% .52%
Non-performing assets to assets .53% .45% .44%
------- ------- -------
------- ------- -------
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 June 30, 2003 the institution was in a positive repricing gap position of approximately 12.53% of assets.
Interest rate shock analysis shows that the Company will experience a 6 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 5 basis point increase in the net 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 30 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 30 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 June 30, 2003, were $106.059 million with $37.146 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 June 30, 2003 (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 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 Securities and Use of ProceedsThe annual stockholders’ meeting was held on April 9, 2003. The stockholders elected five directors to serve a term of three years as summarized below:
Directors Elected Votes For Votes Withheld ----------------- --------- -------------- Fred A. Bell, Jr. 3,310,342 313 Charles T. England 3,310,342 313 Susan P. McCaffery 3,310,341 314 James I. Tims 3,310,342 313 Edward G. Woodard 3,310,342 313
There were 4,631,778 shares entitled to vote on the proposals, with 3,310,655 shares, or 71.48% actually being voted.
Item 5 - Other Information None
Item 6 - Exhibits and Reports on Form 8-K
Item 6(a) - Exhibits
Exhibit 3(i) - Articles of Incorporation, as amended. Filed as Exhibit 3 to the
Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein
by reference.
Exhibit 3(ii) - By-Laws, as amended. Filed as Exhibit 3-b to the Company's Form
S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
Exhibit 11 - Computation of Earnings Per Share - See note 4 to the consolidated
financial statements included in this report.
Exhibit 99.1 - Chief Executive Officer Certification Under Section 906 of
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Chief Financial Officer Certification Under Section 906 of
Sarbanes-Oxley Act of 2002.
Item 6(b) - Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended June 30,
2003:
(1) Current report on Form 8-K dated April 21, 2003 and filed April 21, 2003.
Item 5, press release related to earnings for quarter ended March 31, 2003.
(2) Current report on Form 8-K dated May 12, 2003 and filed May 13, 2003. Item
5, press release related to First M & F Corporation addressing investors
attending the Sterne Agee and Leach Bank Symposium on May 7, 2003.
FIRST M & F CORPORATION
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: August 12, 2003 ____________________________________
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
DATE: August 12, 2003 ____________________________________
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: August 12, 2003 ____________________________________
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:
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: August 12, 2003 /s/ Robert C. Thompson, III
---------------------- ---------------------------
Robert C. Thompson, III
Executive Vice President and Chief Financial
Officer
FIRST M & F CORPORATION
EXHIBIT INDEX
Exhibit 99.1 - Chief Executive Officer Certification Under Section 906 of Sarbanes-
Oxley Act of 2002.
Exhibit 99.2 - Chief Financial Officer Certification Under Section 906 of Sarbanes-
Oxley Act of 2002.