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, 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 Offices 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
----- -----
Indicate by check mart whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
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) 4,574,464 shares
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
CONTENTS
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Page
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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 15-22
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4 - Controls and Procedures 24
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities and Use of Proceeds 25
Item 3 - Defaults upon Senior Securities 25
Item 4 - Submission of Matters to a Vote of Security
Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 26
SIGNATURE 27
CERTIFICATIONS 28-29
EXHIBIT INDEX
EXHIBITS
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
Assets 2003 2002 (1)
------ ---------- ------------
Cash and due from banks $ 29,836 $ 43,329
Interest bearing bank balances 3,201 12,610
Federal funds sold - 7,700
Securities available for sale (amortized
cost of $191,414 and $226,617) 198,476 236,110
Loans 776,667 678,746
Allowance for loan losses (11,009) (10,258)
--------- --------
Net loans 765,658 668,488
--------- --------
Bank premises and equipment 22,681 21,508
Accrued interest receivable 7,137 7,125
Other real estate 1,004 950
Goodwill 16,348 16,348
Other assets 27,662 22,966
--------- --------
$ 1,072,003 $ 1,037,134
--------- --------
--------- --------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 111,777 $ 101,915
Interest bearing 696,874 722,109
--------- --------
Total deposits 808,651 824,024
--------- --------
Federal funds and repurchase agreements 26,448 23,599
Other borrowings 116,154 71,142
Accrued interest payable 1,469 1,920
Other liabilities 7,994 7,583
--------- --------
Total liabilities 960,716 928,268
--------- --------
Noncontrolling joint venture interest 926 656
--------- --------
Stockholders' equity:
Common stock of $5.00 par value. 15,000,000
shares authorized; 4,586,964 and 4,587,046
shares issued and outstanding 22,935 22,935
Additional paid-in capital 32,320 33,260
Retained earnings 52,200 47,585
Accumulated other comprehensive income 2,906 4,430
--------- --------
Total stockholders' equity 110,361 108,210
--------- --------
$ 1,072,003 $ 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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 12,246 $ 12,550 $ 35,758 $ 36,862
Taxable investments 1,551 2,535 5,262 7,830
Tax exempt investments 600 629 1,791 1,955
Federal funds sold 5 15 188 129
Interest bearing bank
balances 14 23 93 98
------- ------- ------- -------
Total interest income 14,416 15,752 43,092 46,874
------- ------- ------- -------
Interest expense:
Deposits 3,034 4,686 10,581 15,512
Short-term borrowings 154 174 456 521
Other borrowings 889 760 2,415 2,380
------- ------- ------- -------
Total interest expense 4,077 5,620 13,452 18,413
------- ------- ------- -------
Net interest income 10,339 10,132 29,640 28,461
Provision for loan losses 960 1,004 2,842 3,484
------- ------- ------- -------
Net interest income after
provision for loan
losses 9,379 9,128 26,798 24,977
------- ------- ------- -------
Noninterest income:
Service charges on deposits 1,938 2,026 5,668 5,532
Mortgage banking income 479 310 951 787
Agency commission income 938 933 2,696 2,453
Other fee income 266 143 708 549
Gains (losses) on securities
available for sale 1 (4) (19) 22
Other income 187 383 800 1,036
------- ------- ------- -------
Total noninterest
income 3,809 3,791 10,804 10,379
------- ------- ------- -------
Noninterest expenses:
Salaries and employee benefits 4,957 4,514 13,891 13,360
Net occupancy expense 540 483 1,590 1,478
Equipment and data processing
expenses 784 942 2,705 2,698
Intangible asset amortization 34 24 102 89
Other expenses 2,899 2,883 7,863 7,227
------- ------- ------- -------
Total noninterest
expenses 9,214 8,846 26,151 24,852
------- ------- ------- -------
Income before income
taxes 3,974 4,073 11,451 10,504
Income taxes 1,183 1,206 3,368 2,999
------- ------- ------- -------
Net income $ 2,791 $ 2,867 $ 8,083 $ 7,505
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic $ 0.61 $ 0.62 $ 1.75 $ 1.63
Diluted 0.60 0.62 1.74 1.63
------- ------- ------- -------
------- ------- ------- -------
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,
------------------- -------------------
2003 2002 2003 2002
---- ---- ----- ----
Net income $ 2,791 $ 2,867 $ 8,083 $ 7,505
------- ------- ------ ------
Other comprehensive income (loss):
Unrealized holding gains
(losses) on securities,
net of taxes of $914 and
$1,207 for the three
months ended September 30,
and $725 and $2,474 for
the nine months ended
September 30 (1,216) 2,024 (1,536) 4,155
Plus (minus) reclassification
adjustments for (gains)
losses included in net
income, net of taxes of
$0 and $2 for the three
months ended September 30
and $7 and $145 for the nine
months ended September 30 -- 2 12 (14)
------- ------- ------ ------
Other comprehensive
income (loss) (1,216) 2,026 (1,524) 4,141
------- ------- ------ ------
Total comprehensive
income $ 1,575 $ 4,893 $ 6,559 $ 11,646
------- ------- ------ ------
------- ------- ------ ------
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 - - 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
------ ------ ------ ------ -------
------ ------ ------ ------ -------
January 1, 2003 $ 22,935 $ 33,260 $ 47,585 $ 4,430 $ 108,210
Net income - - 8,083 - 8,083
Cash dividends ($.75
per share) - - (3,468) - (3,468)
Exercise of options
for 147,272 common
shares 737 3,239 - - 3,976
147,354 common shares
repurchased (737) (4,179) - - (4,916)
Net change - - - (1,524) (1,524)
------ ------ ------ ------ -------
September 30, 2003 $ 22,935 $ 32,320 $ 52,200 $ 2,906 $ 110,361
------ ------ ------ ------ -------
------ ------ ------ ------ -------
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,
---------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 8,083 $ 7,505
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 2,842 3,484
Depreciation and amortization 1,461 1,518
Net investment amortization 758 472
(Gain) loss on securities available for sale 19 (22)
Deferred income taxes (944) (778)
(Increase) decrease in:
Accrued interest receivable (12) 536
Cash surrender value of bank owned life
insurance (411) (531)
Increase (decrease) in:
Accrued interest payable (451) (895)
Income taxes payable (50) (3,274)
Other, net (279) (221)
------- -------
Net cash provided by operating activities 11,016 7,794
Cash flows from investing activities:
Purchases of securities available for sale (29,980) (45,120)
Sales of securities available for sale 2,063 2,177
Maturities of securities available for sale 63,335 50,250
Net (increase) decrease in:
Interest bearing bank balances 9,409 (5,555)
Federal funds sold 7,700 (350)
Loans (101,180) (16,855)
Bank premises and equipment (2,515) (1,033)
Federal Home Loan Bank stock transactions (2,431) -
Other, net 1,172 849
------- -------
Net cash used in investing activities (52,427) (15,637)
------- -------
(Continued)
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FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Nine Months Ended
September 30,
----------------------
2003 2002
---- ----
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ 9,862 $(10,720)
Interest bearing deposits (25,235) 3,615
Securities sold under agreements to
repurchase and other short-term borrowings 2,849 6,760
Proceeds from other borrowings 67,300 22,000
Repayments of other borrowings (22,450) (21,908)
Distribution to noncontrolling joint venture
interest - (500)
Common shares issued 3,976 -
Common shares repurchased (4,916) -
Cash dividends (3,468) (3,461)
-------- -------
Net cash provided by (used in) financing
activities 27,918 (4,214)
-------- -------
Net decrease in cash and due from banks (13,493) (12,057)
Cash and due from banks at January 1 43,329 40,945
-------- -------
Cash and due from banks at September 30 $ 29,836 $ 28,888
-------- -------
-------- -------
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 nine months ended September 30, 2002 and 2001, the Company had the
following payments:
2003 2002
---- ----
Interest $ 13,903 $ 19,308
Income taxes 4,362 4,993
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------- -------
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)
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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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 2,791 $ 2,867 $ 8,083 $ 7,505
Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 9 16 28 48
------ ------ ------ ------
Pro forma net income $ 2,782 $ 2,851 $ 8,055 $ 7,457
------ ------ ------ ------
------ ------ ------ ------
Earnings per share:
Basic - as reported $ .61 $ .62 $ 1.75 $ 1.63
Basic - pro forma .61 .62 1.74 1.63
Diluted - as reported .60 .62 1.74 1.63
Diluted - pro forma .60 .62 1.74 1.63
------ ------ ------ ------
------ ------ ------ ------
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 nine months ended September 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 (147,272) 27.00 - -
Forfeited - - (2,500) 32.50
------- ------ ------- ------
September 30 174,980 $ 29.53 348,302 $ 28.16
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------- ------ ------- ------
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,
------------------------
2003 2002
---- ----
Net income $ 2,791 $ 2,867
========= =========
Weighted average shares outstanding 4,595,546 4,614,784
Add dilutive effective of outstanding options 27,066 -
--------- ---------
Adjusted dilutive shares outstanding 4,622,612 4,614,784
========= =========
Earnings per share:
Basic $ .61 $ .62
Diluted .60 .62
Nine Months Ended
September 30,
------------------------
2003 2002
Net income $ 8,083 $ 7,505
======= ======
Weighted average shares outstanding 4,620,317 4,614,784
Add dilutive effective of outstanding options 23,247 -
--------- ---------
Adjusted dilutive shares outstanding 4,643,564 4,614,784
========= =========
Earnings per share:
Basic $ 1.75 $ 1.63
Diluted 1.74 1.63
====== =======
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
-------- -------- -------- ----------
Balance on December 31, 2001 $ 16,348 $ 162 $ 256 $ 234
Amortization expense - (61) (7) (21)
------- ---- ---- ----
Balance at September 30, 2002 $ 16,348 $ 101 $ 249 $ 213
======= ==== ==== ====
Balance at December 31, 2002 $ 16,348 $ 81 $ 316 $ 206
Amortization expense - (61) (20) (21)
------- ---- ---- ----
Balance at September 30, 2003 $ 16,348 $ 20 $ 296 $ 185
======= ==== ==== ====
Intangible assets other than goodwill are carried in Other Assets in the
Consolidated Statements of Condition.
We have reviewed the accompanying consolidated statement of condition of First M & F Corporation and subsidiary as of September 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2003 and 2002 and the related consolidated statements of stockholders' equity and cash flows for the nine-month periods ended September 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.
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 third quarter of 2003 was $2.791 million, or $.61 per basic and $.60 per diluted share as compared to $2.867 million, or $.62 per basic and diluted share for the same period in 2002. The decrease in earnings per share was due primarily to a lower net interest margin in 2003 than in 2002 as well as higher salary and benefit costs in 2003. The addition of commercial lenders, combined with the effect of expanding into Olive Branch and Memphis, increased salaries and other expenses. The Company had net loan growth of $43.554 million in the third quarter of 2003 as compared to a net increase in loans of $19.765 million in the third quarter of 2002. The net interest margin for the third quarter of 2003 was 4.47% as compared to 4.55% for the third quarter of 2002. The third quarter efficiency ratio for 2003 increased to 63.41% from 61.76% in the third quarter of 2002. Annualized non-interest revenues were at 1.44% of average assets for the third quarter of 2003 as compared to 1.49% for the same period in 2002. Annualized non-interest expenses were 3.47% of average assets for the third quarter of 2003 as compared to 3.47% for the same period in 2002. Return on assets for the third quarter of 2003 was 1.05%, while the return on equity was 10.06%. Return on assets for the third quarter of 2002 was 1.12%, while the return on equity was 10.75%.
The following table shows performance ratios for the first three quarters of 2003 as compared to the first three quarters of 2002:
2003
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
EPS, diluted $ .60 $ .57 $ .57
Net interest margin 4.47% 4.26% 4.12%
Efficiency ratio 63.41% 63.02% 62.17%
Return on assets 1.05% 1.00% 1.00%
Return on equity 10.06% 9.45% 9.63%
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% 9.12% 8.96%
Net income for the first nine months of 2003 was $8.083 million, or $1.75 per basic and $1.74 diluted per share as compared to $7.505 million, or $1.63 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 and stronger loan growth. The net interest margin for the first nine months of 2003 was 4.28% as compared to 4.26% for the same period in 2002. The efficiency ratio for the first nine months of 2003 increased to 62.89% from 62.00% in the same period in 2002. Annualized non-interest revenues were at 1.36% of average assets for the first nine months of 2003 as compared to 1.35% for the same period in 2002. Annualized non-interest expenses were 3.30% of average assets for the first nine months of 2003 as compared to 3.23% for the same period in 2002. Return on assets for the first nine months of 2003 was 1.02%, while the return on equity was 9.71%. Return on assets for the first nine months of 2002 was ..98%, while the return on equity was 9.62%.
Net Interest IncomeNet interest income for the third quarter of 2003 was $10.339 million as compared to $10.132 million for the same period in 2002. Earning asset yields were 6.17% in the third quarter of 2003 as compared to 6.98% for the same period in 2002. However, funding costs decreased to 1.96% for the third quarter of 2003 from 2.78% for the third quarter of 2002. Average earning assets were $973.817 million during the third quarter of 2003 as compared to $935.508 million in the same period in 2002. Average loans as a percentage of earning assets were 78.10% for the third quarter of 2003 as compared to 71.50% for the same period in 2002. Average interest bearing liabilities were $831.326 million during the third quarter of 2003 as compared to $809.275 million during the same period in 2002. Average non-interest bearing deposits were $109.684 million during the third quarter of 2003 as compared to $95.986 million for the same period in 2002.
The following table shows margin-related ratios for the first three quarters of 2003 as compared to the first three quarters of 2002:
2003
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Net interest income $ 10,339 $ 9,777 $ 9,524
Earning asset yield 6.17% 6.15% 6.14%
Funding cost 1.96% 2.18% 2.32%
Average loans as percentage of
earning assets 78.10% 73.01% 70.48%
Average non-interest deposits
to total funding 11.66% 11.22% 10.52%
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Net interest income $ 10,132 $ 9,269 $ 9,060
Earning asset yield 6.98% 6.88% 6.82%
Funding cost 2.78% 3.06% 3.23%
Average loans as percentage of
earning assets 71.50% 70.86% 68.51%
Average non-interest deposits
to total funding 10.60% 10.64% 11.59%
Net interest income for the first nine months of 2003 was $29.640 million as compared to $28.461 million for the same period in 2002. Earning assets yields were 6.15% for the first nine months of 2003 as compared to 6.89% for the same period in 2002. However, funding costs decreased to 2.15% for the first nine months of 2003 from 3.02% for the same period in 2002. Average earning assets were $971.190 million during the first nine months of 2003 as compared to $938.897 million during the same period in 2002. Average loans as a percentage of earning assets were 73.89% during the first nine months of 2003 as compared to 70.29% for the same period in 2002. Average interest bearing liabilities were $833.208 million during the first nine months of 2003 as compared to $811.911 million during the same period in 2002. Average non-interest bearing deposits were $104.415 million during the first nine months of 2003 as compared to $99.817 million during the same period in 2002.
Provision for Loan LossesThe provision for loan losses for the third quarter of 2003 was $960 thousand as compared to $1.004 million for the third quarter of 2002. The allowance for loan losses as a percentage of loans was 1.42% at September 30, 2003, 1.51% at December 31, 2002 and 1.49% at September 30, 2002. Nonaccrual loans and 90 days past due accruing loans as a percentage of loans outstanding were .81% at September 30, 2003, .55% at December 31, 2002 and .38% at September 30, 2002. Annualized net charge-offs as a percentage of average loans were .20% for the third quarter of 2003 and .39% for the first nine months of 2003 as compared to .40% for the year ended December 31, 2002.
Non Interest IncomeNon-interest income, excluding securities transactions, for the third quarter of 2003 was $3.808 million as compared to $3.795 million for the same period in 2002. Deposit income was down by 4.34% due to a decrease of deposit item volumes from 2002. Agency commissions were flat for the third quarter of 2003 as compared to 2002 as production volumes leveled off and annuity sales decreased. Mortgage revenues were up by 54.52% due to higher volumes for new home loans and refinanced loans in 2003 than in the third quarter of 2002.
The following table shows non-interest income components for the first three quarters of 2003 as compared to the first three quarters of 2002:
2003
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Service charges on deposits $ 1,938 $ 1,932 $ 1,798
Mortgage income 479 300 172
Agency commissions 938 932 826
Other non-interest income 453 475 580
Securities gains (losses) 1 (20) -
------ ------ ------
Total $ 3,809 $ 3,619 $ 3,376
====== ====== ======
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
====== ====== ======
Non interest income, excluding securities transactions for the first nine months of 2003 was $10.823 million as compared to $10.357 million for the same period in 2002. Deposit income was up by 2.46% due to the service charge changes implemented in the second half of 2002, and flat transaction volumes in 2003 as compared to 2002. Agency commissions were up by 9.91% in the first nine of 2003 as compared to 2002 due to the higher premiums that are prevalent in the market. Mortgage revenues were up by 20.84% for the first nine months of 2003 as compared to 2002 due to a strong third quarter performance in 2003.
Non Interest ExpenseNon-interest expenses increased by 4.16% in the third quarter of 2003 as compared to the same period in 2002. Salary and benefit expenses were up by 9.81% in the third quarter of 2003 as compared to 2002. The number of full-time equivalent employees in the Company was 429 at September 30, 2003 as compared to 416 at December 31, 2002 and 404 at September 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 3.47% for the third quarter of 2003 as compared to 3.23% for the same period in 2002. The Company's efficiency ratio was 63.41% for the third quarter of 2003 as compared to 61.76% for the third quarter of 2002.
The following table reflects the components of other non-interest expenses (in thousands) for the first three quarters of 2003 and 2002:
2003
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Telecommunications $ 243 $ 228 $ 219
Postage and shipping 137 162 174
Supplies 178 167 185
Marketing and advertising 466 258 153
Foreclosed property 86 127 60
Intangible asset amortization 34 34 34
Other expenses 1,789 1,608 1,623
------ ------ ------
$ 2,933 $ 2,584 $ 2,448
====== ====== ======
2002
-------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Telecommunications $ 208 $ 193 $ 188
Postage and shipping 188 132 153
Supplies 186 152 159
Marketing and advertising 411 217 147
Foreclosed property 62 59 64
Intangible asset amortization 24 32 33
Other expenses 1,828 1,450 1,430
------ ------ ------
$ 2,907 $ 2,235 $ 2,174
====== ====== ======
The following table shows non-interest expense ratios for the first three quarters of 2003 as compared to the first three quarters of 2002:
2003
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Efficiency ratio 63.41% 63.02% 62.17%
Non-interest expense to
average assets 3.47% 3.29% 3.12%
Salaries and benefits
to total non-interest expense 53.80% 53.15% 52.33%
2002
------------------------------------------
3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- -----------
Efficiency ratio 61.76% 62.16% 62.08%
Non-interest expense to
average assets 3.47% 3.19% 3.05%
Salaries and benefits
to total non-interest expense 51.03% 55.60% 54.93%
Non-interest expenses increased by 5.23% in the first nine months of 2003 as compared to the same period in 2002. Salary and benefit expenses were up by 3.97% in the first nine months of 2003 as compared to 2002. Annualized non-interest expenses as a percentage of average assets were 3.30% for the first nine months of 2003 as compared to 3.23% for the same period in 2002. The Company's efficiency ratio was 62.89% for the first nine months of 2003 as compared to 62.00% for the first nine months of 2002.
Income TaxesIncome taxes for the third quarter of 2003 were 1.91% lower than in the same period in 2002. The effective tax rate for the third quarter of 2003 was 29.77% as compared to 29.61% in the third quarter of 2002. Income taxes for the first nine months of 2003 were 12.30% higher than in the same period for 2002. The effective tax rate for the first nine months of 2003 was 29.41% as compared to 28.55% in the first nine months 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 were up by 3.36% from December 31, 2002 and up by 4.80% from September 30, 2002. Loans grew by 14.43% in the first nine months of 2003 and grew by 14.93% from September 30, 2002. Investments declined by 15.94% in the first nine months of 2003, providing funds for loan growth. Loan demand was strong during the first nine months of 2003 with loans growing by $21.454 million in the first quarter and by $32.912 million in the second quarter and by $43.554 million in the third 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 and increased by $19,765 in the third quarter. Loans as a percentage of assets were 72.45% at September 30, 2003 as compared to 65.44% at December 31, 2002 and 66.06% at September 30, 2002.
Deposits decreased by 1.87% in the first nine months of 2003 and by .11% from September 30, 2002. NOW and money market deposits decreased by $25.394 million in the first nine months of 2003, with $11.231 million of the decrease occurring in municipal deposit accounts, due to municipality spending, with the remaining decrease being caused by commercial customers' cyclical use of liquidity. Certificates of deposit increased by approximately $4.669 million in the first nine months of 2003. Certificates of deposit of municipalities were up by $26.814 million in 2003, while consumer and business certificates of deposit were down by $22.145 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 until higher interest rates make reinvestment more attractive. The Company began offering longer-term, bonus-rate CD's in the third quarter in an effort to grow the consumer deposit portfolio at a low point in the interest rate cycle.
Total borrowings were up by $47.861 million in the first nine months of 2003, mainly due to the funding requirements for the second and third quarter loan growth. Debt is expected to remain stable or increase by a small percentage over the remainder of the year as the Company looks to the debt market as an alternative funding source to time deposits. The Company is also using debt to finance the repurchase of stock.
The Company's regulatory capital ratios at September 30, 2003, as shown below are in excess of the minimum requirements and qualify the institution as "well capitalized" under the risk-based capital regulations.
($ in thousands)
----------------
Tier 1 capital $ 90,005
Tier 2 capital 10,024
------
Total risk-based capital $100,029
======
Risk weighted assets $ 798,739
=======
Total risk-based capital ratio 12.52%
=====
Leverage ratio 8.61%
====
The total risk-based capital ratio for the Bank subsidiary was 13.05% with a leverage ratio of 9.04%. The dividend payout ratio for the first nine months of 2003 was 42.86% based upon a quarterly dividend of $.25 per share. The book value of the stock at September 30, 2003 was $24.06, with a closing market price of $35.65 per share.
During the first nine months of 2003, 147,272 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, repurchased 45,000 shares in the second quarter at an average cost of $34.85 per share and repurchased 25,000 shares in the third quarter at an average cost of $34.43 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 September 30, 2003, 147,354 shares had been repurchased at an average cost of $33.36 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, 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 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, 2003 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company (in thousands of dollars):
September 30, December 31, September 30,
2003 2002 2002
------------- ------------ -------------
Nonaccrual loans $ 3,905 $ 1,583 $ 1,175
Past due 90 days or more
and still accruing interest 2,351 2,170 1,403
------ ------ ------
Total non-performing loans 6,256 3,753 2,578
Other real estate 1,004 950 1,045
------ ------ ------
Total non-performing assets $ 7,260 $ 4,703 $ 3,623
====== ====== ======
Ratios:
Non-performing loans to
total loans .81% .55% .38%
Non-performing assets to
total assets .68% .45% .35%
====== ====== ======
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, 2003 the institution was in a positive repricing gap position of approximately 10.65% of assets.
Interest rate shock analysis shows that the Company will experience a 5 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 3 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 20 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, unused loan commitments were $103.626 million with $47.206 million of those commitments maturing in over one (1) year. The Company also has $9.936 million in commercial standby letters of credit outstanding. 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 September 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
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 31 - Rule 13a-14(a)/15d-14(a) Certifications.
Exhibit 32 - Section 1350 Certifications.
Item 6(b) - Reports on Form 8-K The following reports on Form 8-K were
filed during the quarter ended September 30, 2003:
(1) Current report on Form 8-K dated July 18, 2003 and filed July 21,
2003. Item 5, press release related to earnings for quarter ended June 30, 2003.
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 13, 2003 /s/ Hugh S. Potts, Jr.
------------------------------------
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
DATE: November 13, 2003 /s/ Robert C. Thompson, III
------------------------------------
Robert C. Thompson, III
Executive Vice President and
Chief Financial Officer