FIRST M & F CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 000-09424
FIRST M & F CORPORATION
(Exact name of registrant as specified in its charter)
Mississippi 64-0636653
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
134 West Washington Street
Kosciusko, Mississippi 39090
-------------------------------------- -------------
Address of Principal Executive Offices Zip Code
(662) 289-5121
-------------------------------
Registrant's telephone number
No Change
------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark 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 July 31, 2004
----- ----------------------------
Common stock ($5.00 par value) 4,537,859 shares
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited): 3
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
Notes to Consolidated Financial Statements 10
Independent Accountants' Review Report 14
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4 - Controls and Procedures 27
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 2 - Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 29
Item 3 - Defaults upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security
Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 30
SIGNATURES 31
EXHIBIT INDEX
CERTIFICATIONS
FIRST M & F CORPORATION
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
(In Thousands, Except Share Data)
June 30 December 31
-------- -----------
Assets 2004 2003 2003
- ------ ---- ---- ----
Cash and due from banks $ 33,464 $ 38,552 $ 39,849
Interest bearing bank balances 4,132 2,707 2,554
Federal funds sold 2,000 14,150 950
Securities available for sale, amortized cost
of $192,338, $204,843 and $181,375 194,608 213,846 187,577
Mortgage loans held for sale 1,262 6,724 2,141
Loans, net of unearned income 789,441 726,389 779,180
Allowance for loan losses (11,792) (10,422) (10,891)
-------------- -------------- ----------------
Net loans 777,649 715,967 768,289
-------------- -------------- ----------------
Bank premises and equipment 24,973 21,424 24,214
Accrued interest receivable 7,402 6,973 7,330
Other real estate 2,171 1,116 802
Goodwill 16,348 16,348 16,348
Other intangible assets 441 536 489
Bank owned life insurance 13,562 13,028 13,269
Other assets 15,951 10,611 14,486
-------------- -------------- ----------------
$1,093,963 $1,061,982 $1,078,298
============== ============== ================
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing deposits $ 127,156 $ 120,671 $ 123,191
Interest-bearing deposits 723,260 731,635 697,035
-------------- -------------- ----------------
Total deposits 850,416 852,306 820,226
-------------- -------------- ----------------
Short-term borrowings 17,639 14,612 15,205
Other borrowings 105,964 73,420 122,033
Accrued interest payable 1,452 1,570 1,379
Other liabilities 8,270 8,440 7,732
-------------- -------------- ----------------
Total liabilities 983,741 950,348 966,575
-------------- -------------- ----------------
Noncontrolling joint venture interest (2) 848 1,045
-------------- -------------- ----------------
Stockholders' equity:
Preferred stock:
Class A; 1,000,000 shares authorized - - -
Class B; 1,000,000 shares authorized - - -
Common stock of $5.00 par value; 15,000,000 shares
authorized: 4,542,859, 4,611,464 and
4,565,038 shares issued 22,714 23,057 22,825
Additional paid-in capital 30,668 33,047 31,624
Retained earnings 56,950 50,560 53,873
Accumulated other comprehensive income (108) 4,122 2,356
-------------- -------------- ----------------
Total stockholders' equity 110,224 110,786 110,678
-------------- -------------- ----------------
$1,093,963 $1,061,982 $1,078,298
============== ============== ================
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
(In Thousands, Except Share Data)
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
Interest income: 2004 2003 2004 2003
---- ---- ---- ----
Interest and fees on loans $ 12,108 $11,804 $24,334 $23,512
Taxable investments 1,366 1,778 2,758 3,711
Tax-exempt investments 559 595 1,120 1,191
Federal funds sold 29 76 98 183
Interest bearing bank balances 23 37 52 79
---------- ------- -------- ----------
Total interest income 14,085 14,290 28,362 28,676
---------- ------- -------- ----------
Interest expense:
Deposits 2,857 3,620 5,675 7,547
Short-term borrowings 135 135 282 302
Other borrowings 1,114 758 2,185 1,526
---------- ------- -------- ----------
Total interest expense 4,106 4,513 8,142 9,375
---------- ------- -------- ----------
Net interest income 9,979 9,777 20,220 19,301
Provision for loan losses 999 962 3,459 1,882
---------- ------- -------- ----------
Net interest income after
provision for loan losses 8,980 8,815 16,761 17,419
---------- ------- -------- ----------
Noninterest income:
Service charges on deposit accounts 1,932 1,893 3,753 3,653
Mortgage banking income 295 300 495 472
Agency commission income 932 943 1,797 1,780
Trust and brokerage income 125 75 235 120
Bank owned life insurance income 144 142 293 291
Securities gains (losses), net (17) (19) 53 (20)
Other income 310 285 1,101 699
---------- ------- -------- ----------
Total noninterest income 3,721 3,619 7,727 6,995
---------- ------- -------- ----------
Noninterest expenses:
Salaries and employee benefits 4,961 4,614 9,907 8,934
Net occupancy expenses 552 532 1,124 1,050
Equipment expenses 635 615 1,288 1,269
Software and processing expenses 309 336 647 652
Telecommunication expenses 199 228 411 447
Marketing and business development expenses 332 258 639 411
Intangible asset amortization 17 34 49 68
Noncontrolling interest in joint venture
earnings (loss) (155) 96 (1,048) 192
Other expenses 1,886 1,968 3,803 3,914
---------- ------- -------- ----------
Total noninterest expenses 8,736 8,681 16,820 16,937
---------- ------- -------- ----------
Income before income taxes 3,965 3,753 7,668 7,477
Income taxes 1,212 1,115 2,314 2,185
---------- ------- -------- ----------
Net income $ 2,753 $ 2,638 $ 5,354 $ 5,292
========== ======= ======== ==========
Earnings per share:
Basic $ .60 $ .57 $ 1.17 $ 1.14
Diluted $ .60 $ .57 $ 1.17 $ 1.14
========== ======= ======== ==========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands)
Three Months Ended June 30 Six Months Ended June 30
--------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 2,753 $ 2,638 $ 5,354 $ 5,292
Other comprehensive income:
Change in unrealized gains (losses) on securities
available for sale, net of tax of $1,447 and $53 for
the three months ended June 30, and $1,446 and $190
for the six months ended June 30 (2,434) 89 (2,431) (320)
Reclassification adjustment for (gains) losses on securities
available for sale included in net income, net of
tax of $6 and $8 for the three months ended June 30
and $20 and $8 for the six months ended June 30 11 12 (33) 12
Minimum pension liability adjustment, net of tax - - - -
-------------- --------------- ------------- ---------------
Other comprehensive income (2,423) 101 (2,464) (308)
-------------- --------------- ------------- ---------------
Total comprehensive income $ 330 $ 2,739 $ 2,890 $ 4,984
============== =============== ============= ===============
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 2004 and 2003
(Unaudited)
(In Thousands, Except Share Data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
------------- -------------- ------------- ----------------- ---------------
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)
146,772 common shares issued
in exercise of stock options 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
============= ============== ============= ================= ===============
January 1, 2004 $ 22,825 $ 31,624 $ 53,873 $ 2,356 $ 110,678
Net income - - 5,354 - 5,354
Cash dividends ($.50 per share) - - (2,277) - (2,277)
34,321 common shares issued
in exercise of stock options 172 741 - - 913
56,500 common shares
repurchased (283) (1,697) - - (1,980)
Net change - - - (2,464) (2,464)
------------- -------------- ------------- ----------------- ---------------
June 30, 2004 $ 22,714 $ 30,668 $ 56,950 $ (108) $ 110,224
============= ============== ============= ================= ===============
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Six Months Ended June 30
---------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 5,354 $ 5,292
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 960 987
Provision for loan losses 3,459 1,882
Net investment amortization 411 541
(Gain) loss on securities available for sale (53) 20
Other asset sale (gains)/losses (125) (32)
Earnings (loss) of noncontrolling joint venture interest (1,048) 192
Deferred income taxes (184) (220)
(Increase) decrease in:
Accrued interest receivable (73) 152
Cash surrender value of bank owned life insurance (293) (291)
Mortgages held for sale 878 (4,553)
Other assets (151) (741)
Increase (decrease) in:
Accrued interest payable 73 (350)
Other liabilities 864 899
-------------- ---------------
Net cash provided by operating activities 10,072 3,778
-------------- ---------------
Cash flows from investing activities:
Purchases of securities available for sale (37,550) (26,573)
Sales of securities available for sale 13,783 2,063
Maturities of securities available for sale 12,509 45,963
Net (increase) decrease in:
Interest bearing bank balances (1,579) 9,903
Federal funds sold (1,050) (6,450)
Loans (14,599) (52,437)
Bank premises and equipment (1,656) (818)
Proceeds from sales of other real estate and other repossessed assets 581 737
-------------- ---------------
Net cash used in investing activities (29,561) (27,612)
-------------- ---------------
(Continued)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Six Months Ended June 30
---------------------------
2004 2003
---- ----
Cash flows from financing activities:
Net increase in deposits $ 30,190 $ 28,282
Net increase (decrease) in short-term borrowings 2,434 (8,987)
Proceeds from other borrowings 13,400 18,800
Repayments of other borrowings (29,576) (16,630)
Cash dividends (2,277) (2,317)
Common shares issued 913 3,963
Common shares repurchased (1,980) (4,054)
------------ -------------
Net cash provided by financing activities 13,104 19,057
------------ -------------
Net decrease in cash and due from banks (6,385) (4,777)
Cash and due from banks at January 1 39,849 43,329
------------ -------------
Cash and due from banks at June 30 $ 33,464 $ 38,552
============ =============
Total interest paid $ 8,070 $ 9,725
Total income taxes paid 2,072 2,363
Transfers of loans to foreclosed property 1,794 754
============ =============
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)
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 and Farmers Bank, wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F Bank Securities Corporation, M & F Insurance Agency, Inc., M & F Insurance Group, Inc., M & F Business Credit, Inc., and the Bank’s 51% ownership in Merchants Financial Services, LLC, an 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, 2003.
Note 2: Stock-Based CompensationThe 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.
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 June 30 Six Months Ended June 30
-------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 2,753 $ 2,638 $ 5,354 $ 5,292
Less: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects 2 21 24 42
--------------- --------------- -------------- -----------------
Pro forma net income $ 2,751 $ 2,617 $ 5,330 $ 5,250
=============== =============== ============== =================
Earnings per share:
Basic - as reported $ .60 $ .57 $ 1.17 $ 1.14
Basic - pro forma .60 .56 1.17 1.13
Diluted - as reported .60 .57 1.17 1.14
Diluted - pro forma .60 .56 1.16 1.13
=============== =============== ============== =================
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 2 (Continued)
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option pricing model.
The following table is a summary of outstanding options and weighted average exercises.
Six Months Ended June 30
------------------------
2004 2003
---- ----
Number Price Number Price
------ ----- ------ -----
January 1 174,406 $ 29.55 319,752 $ 28.31
Exercised (34,321) 26.60 (146,772) 27.00
Expired (10,000) 35.75 - -
Granted 2,500 34.73 2,500 38.00
-------------- ------------ ------------ ------------
June 30 132,585 $ 29.97 175,480 $ 29.54
============== ============ ============ ============
Note 3: Allowance for Loan Losses
The following table is a summary of the activity in the Allowance for Loan Losses for the first six months of 2004 and 2003.
Six Months Ended June 30
------------------------
2004 2003
---- ----
Balance at January 1 $ 10,891 $ 10,258
Loans charged off (3,027) (1,992)
Recoveries 469 274
-------------- --------------
Net charge-offs (2,558) (1,718)
-------------- --------------
Provision for loan losses 3,459 1,882
-------------- --------------
Balance at June 30 $ 11,792 $ 10,422
============== ==============
Note 4: Earnings Per Share
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 2,753 $ 2,638 $ 5,354 $ 5,292
=========== ============ ============ ============
Weighted average shares outstanding 4,556,375 4,639,631 4,560,800 4,632,908
Add dilutive effect of outstanding options 14,345 31,069 17,034 22,005
----------- ------------ ------------ ------------
Adjusted dilutive shares outstanding 4,570,720 4,670,700 4,577,834 4,654,913
=========== ============ ============ ============
Earnings per share:
Basic $ .60 $ .57 $ 1.17 $ 1.14
Diluted .60 .57 1.17 1.14
=========== ============ ============ ============
Stock options not included in adjusted
shares due to anti-dilutive effect 403 153 302 326
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 5: Goodwill and Other 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 at December 31, 2002 $ 16,348 $ 81 $ 317 $ 206
Amortization expense - (40) (14) (14)
------------ ------------- ------------- -------------
Balance at June 30, 2003 $ 16,348 $ 41 $ 303 $ 192
============ ============= ============= =============
Balance at December 31, 2003 $ 16,348 $ 21 $ 289 $ 179
Amortization expense - (21) (14) (14)
------------ ------------- ------------- -------------
Balance at June 30, 2004 $ 16,348 $ - $ 275 $ 165
============ ============= ============= =============
Amortization expense related to intangible assets is expected to be $27 thousand for the remainder of 2004. Amortization expense is expected to be $55 thousand per year for the years 2005 through 2009.
Note 6: Defined Benefit Pension PlanAs discussed in Note 10 to the December 31, 2003 financial statements, the Bank has a defined benefit pension plan covering substantially all full time employees of the Bank and its subsidiaries. The following is a summary of the components of net periodic benefit costs for the three and six month periods ended June 30, 2004 and 2003:
Three Months Ended June 30 Six Months Ended June 30
------------------------------- ----------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ - $ - $ - $ -
Interest cost 117 122 234 244
Expected return on plan assets (125) (105) (249) (210)
Amortization of transition asset (2) (2) (4) (4)
Amortization of prior service costs (9) (9) (18) (18)
Recognized actuarial (gain) loss 56 53 110 105
------------- -------------- -------------- ------------
Net pension cost $ 37 $ 59 $ 73 $ 117
============= ============== ============== ============
The Company disclosed in Note 10 to the December 31, 2003 financial statements that it expected to make $400 thousand in contributions in 2004. The Company did not make any contributions to the pension plan during the first six months of 2004. The Company does expect to make $400 thousand in contributions into the plan during the remainder of 2004.
Other liabilities on the Consolidated Statements of Condition include an accrued benefit liability of $2.918 million at December 31, 2003 and June 30, 2004 and for $2.899 million at June 30, 2003 related to the deficit funded status of the Company’s defined benefit pension plan.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 7: Other Borrowings
The following is a summary of other borrowings at June 30, 2004 and 2003:
2004 2003
---- ----
Company's line of credit in the amount of $15,000,000, renewable
annually; secured by approximately 29% of the Bank's common
stock; interest payable annually at .75% below the lender's base rate $ 6,292 $ 7,592
Bank's advances from Federal Home Loan Bank of Dallas, net of
unamortized purchase accounting adjustments of $107 and $735 99,672 65,828
-------------- --------------
$ 105,964 $ 73,420
============== ==============
The Bank has advances from the Federal Home Loan Bank of Dallas (FHLB) under Blanket Agreements for Advances and Security Agreements. These agreements allow the Bank to borrow funds from the FHLB to fund mortgage loan programs and to satisfy certain other funding needs. The value of mortgage-backed securities and mortgage loans pledged under these agreements must be maintained at not less than 115% and 150%, respectively, of the advances outstanding.
We have reviewed the accompanying consolidated statements of condition of First M & F Corporation and subsidiary as of June 30, 2004 and 2003, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2004 and 2003, and the related consolidated statements of stockholders’ equity and cash flows for the six-month periods ended June 30, 2004 and 2003. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board, 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 interim consolidated financial statements for them to be in conformity with U. S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated statement of condition of First M & F Corporation and subsidiary as of December 31, 2003, 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 January 30, 2004, 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, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
/s/ Shearer, Taylor & Co., P.A. Ridgeland, Mississippi July 21, 2004
The following provides a narrative discussion and analysis 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.
Forward Looking StatementsCertain 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. For instance, if the economy deteriorated and real estate values became depressed, the approximately 77% of the Company’s loan portfolio that is secured by real estate could come under stress, thus possibly requiring additional loan loss accruals. The Company may not be able to dispose of its foreclosed real estate at prices above the properties’ carrying values, thus causing additional losses. The Company may sustain additional losses if collateral and receivables foreclosed on by its majority-owned factoring venture cannot be recovered at their carrying values. Unfavorable judgments in excess of accrued liabilities related to ongoing litigation may result in additional expenses. Unanticipated catastrophic loss claims could occur that would reduce or eliminate the profit sharing revenues of the insurance agencies. Such claims may also affect the availability of insurance products for certain classes of customers, thereby reducing commission revenues available to the agencies. A severe slowing of the economy may affect the ability of the Company’s customers to make timely loan payments, or may cause customers to use up deposit balances, thereby causing a strain on the Company’s liquidity. A much steeper than anticipated increase in interest rates could cause the Company’s net interest margins to decrease, thereby decreasing net interest revenues. Mortgage originations, and therefore mortgage revenues, would be hurt by steeply rising interest rates. A poor stock market could reduce brokerage transactions, therefore reducing investment brokerage revenues. An unanticipated increase in inflation could cause the Company’s operating costs related to salaries, technology, supplies and property taxes to increase. Unforeseen new competition from outside the traditional financial services industry could constrain the Company’s ability to price its products profitably. Investments in the portfolio of the Company’s pension plan may not provide adequate returns to fund the accumulated and projected plan obligations, thus causing higher annual plan expenses and requiring additional contributions by the Company. These examples are not intended to be exhaustive, and describe events, circumstances and contingencies that may never materialize. Nevertheless, the reader is cautioned that such types of occurrences, usually outside of the control of the Company, may cause financial results to be different than the reader or the Company’s management had originally estimated.
Financial SummaryNet income for the second quarter of 2004 was $2.753 million, or $.60 basic and diluted per share as compared to $2.638 million, or $.57 per share for the same period in 2003. The results for the year-to-date periods ended June 30, 2004 and 2003 showed the same trend as basic and diluted earnings per share increased to $1.17 in 2004 from $1.14 in 2003. The major factor behind the increases was the loan growth that occurred throughout 2003 and the resulting increase in net interest income. Although the net interest margin for the second quarter of 2004 was 4.19% as compared to 4.26% for the second quarter of 2003, the Company earned more net interest income in the second quarter of 2004 than in the second quarter of 2003 because of the higher loan balances. Another positive factor in the earnings per share growth was the Company’s stock buy-back program in 2003 and again in 2004.
FIRST M & F CORPORATION
Highlights for the first two quarters of 2003 and 2004 are as follows:
• Opened a loan production office in a rented location in Olive Branch in February, 2003, expanding to
full service branch capabilities in June, 2003
• Loans outstanding in Desoto County increased from $37.553 million at December 31, 2002 to $73.900
million at December 31, 2003
• Currently building an additional branch location in Southaven
• Currently building a new branch location in Olive Branch to replace the rented office space
• Opened M & F Business Credit, Inc., a wholly owned asset-based lending subsidiary, in Memphis, Tennessee
in April, 2003
• M & F Business Credit, Inc. had loans outstanding of $6.815 million at December 31, 2003 and $5.633
million at June 30, 2004
• Opened a fourth branch near the North Mississippi Regional Medical Center in Tupelo in July, 2003
• Opened a fourth branch in Rankin County at Flowood in February, 2004
• Plan to add another Rankin County branch and an additional branch in Ridgeland within the next 12 months
• Leased office space in Jackson in July, 2004 and have filed an application to establish a full-service
branch
• Plan to add a new location which will house a branch facility and several fee-generating services in
Madison within the next 12 months
• Started a Treasury Services department in June, 2003 to provide focused electronic banking, lockbox, and
other cash management services to our business customers
• Replaced the electronic banking product in May, 2004 with a flexible, technologically superior product
• Nonperforming loans were down by $3.422 million in the second quarter of 2004 from the first quarter of
2004.
The following table shows the quarterly net loan, non-interest bearing deposit, and interest bearing
deposit growth for 2003 and 2004.
(Net change, in thousands)
Non-Interest Interest
Quarter Loans Bearing Deposits Bearing Deposits
- --------------------- ------------------ ------------------------ -------------------------
1st Qtr 2003 $ 21,228 $ 2,084 $ 33,597
2nd Qtr 2003 28,586 16,672 (24,071)
3rd Qtr 2003 45,891 (8,894) (34,761)
4th Qtr 2003 6,900 11,414 161
1st Qtr 2004 (93) (7,296) 39,059
2nd Qtr 2004 10,354 11,261 (12,834)
The following table shows the quarterly net interest income, loan loss accruals, non-interest income and
non-interest expense amounts for 2003 and 2004.
(Net amount, in thousands)
Adjusted Adjusted
Net Interest Loan Loss Non-Interest Non-Interest
Quarter Income Accruals Income (1) Expense (2)
- ----------------------- ------------------- --------------- ----------------- ------------------
1st Qtr 2003 $ 9,524 $ 920 $ 3,377 $ 8,160
2nd Qtr 2003 9,777 962 3,638 8,585
3rd Qtr 2003 10,339 960 3,808 9,136
4th Qtr 2003 10,421 960 3,527 8,851
1st Qtr 2004 10,241 2,460 3,936 8,977
2nd Qtr 2004 9,979 999 3,738 8,891
(1) Non-interest income excluding securities gains (losses) of $(1) in 1 Qtr 2003, $(19) in 2 Qtr 2003, $1 in
3 Qtr 2003, $26 in 4 Qtr 2003, $70 in 1 Qtr 2004 and $(17) in 2 Qtr 2004.
(2) Non-interest expenses excluding noncontrolling interest in joint venture earnings (loss) of $96 in 1 Qtr
2003, $96 in 2 Qtr, 2003, $78 in 3 Qtr 2003, $119 in 4 Qtr 2003, $(893) in 1 Qtr 2004 and
$(155) in 2 Qtr 2004.
FIRST M & F CORPORATION
The following table shows the components of diluted earnings per share for the first two quarters of
2004 and 2003:
2nd Quarter 2004 1st Quarter 2004 2nd Quarter 2003 1st Quarter, 2003
-------------------- ------------------- -------------------- ---------------------
Net interest income $ 2.19 $ 2.24 $ 2.10 $ 2.05
Loan loss expense .22 .54 .21 .20
Noninterest income .81 .87 .77 .73
Noninterest expense 1.91 1.76 1.86 1.78
-------------------- ------------------- -------------------- ---------------------
Net income before taxes .87 .81 .80 .80
Income taxes .27 .24 .23 .23
-------------------- ------------------- -------------------- ---------------------
Net income $ .60 $ .57 $ .57 $ .57
The following table shows performance ratios for the first two quarters of 2004 and 2003:
2nd Quarter 2004 1st Quarter 2004 2nd Quarter 2003 1st Quarter, 2003
-------------------- ------------------- -------------------- ---------------------
Net interest margin 4.19% 4.24% 4.26% 4.12%
Efficiency ratio 62.16 55.36 63.02 62.17
Return on assets 1.01 .94 1.00 1.00
Return on equity 9.87 9.29 9.45 9.63
Noninterest income to avg. assets 1.36 1.45 1.37 1.28
Noninterest income
to revenues (1) 27.16 28.12 27.00 26.17
Noninterest expense to avg assets 3.20 2.93 3.29 3.12
Salaries and benefits to total
noninterest expense 56.39 61.18 53.15 52.33
Nonperforming loans to loans .66 1.11 .62 .78
Annualized net charge offs as a
percent of average loans .08 1.23 .53 .46
(1) Revenues equal net interest income before loan loss expense, plus noninterest income.
The following table shows revenue related performance statistics for the first two quarters of 2004 and
2003:
(Amounts in thousands)
2nd Quarter 2004 1st Quarter 2004 2nd Quarter 2003 1st Quarter, 2003
-------------------- ------------------- -------------------- ---------------------
Mortgage originations $ 21,942 $ 14,987 $ 17,445 $ 11,091
Commissions from annuity sales 130 63 75 66
Trust revenues 66 69 56 32
Retail investment revenues 59 41 19 13
Revenues per FTE employee 30 32 32 31
Agency commissions per agency
FTE employee (1) 18 18 20 18
(1) Agency commissions are property, casualty, life and health commissions produced by the insurance
agency personnel.
The following table shows additional statistics for the Company at the end of the first two quarters of
2004 and 2003:
2nd Quarter 2004 1st Quarter 2004 2nd Quarter 2003 1st Quarter, 2003
-------------------- ------------------- -------------------- ---------------------
Full-time equivalent employees 460 445 428 413
Number of noninterest-bearing
deposit accounts 30,410 30,014 29,379 28,942
Net interest income before loan loss expenses for the second quarter of 2004 was $9.979 million as compared to $9.777 million for the same period in 2003. Net interest income for the first half of 2004 was $20.220 million as compared to $19.301 million for the same period in 2003. Earning asset yields decreased from the second quarter of 2003 through 2004. However, liability costs also decreased by 24 basis points from the second quarter of 2003 to the second quarter of 2004. This decrease was not enough to offset the decrease in earning asset yields, thus producing a 5 basis point decrease in interest spreads from the second quarter of 2003 to the same quarter in 2004. Average earning assets grew significantly from the second quarter of 2003 to the second quarter of 2004, dominated by loan portfolio growth. Average borrowings were much higher in the second quarter of 2004 than in the second quarter of 2003, although borrowing costs decreased over the period.
The Company produced excellent loan growth year-over-year, especially in the Tupelo and Desoto County markets. Although loan yields have fallen through 2003 and 2004, the increased loan volumes have helped to support net interest margins and increase net interest income. Also, the Company used borrowings during 2003 as a lower cost alternative to funding loans with maturities extending to five (5) years and beyond. During 2004, Management refinanced certain of the borrowings to lock in funding costs, which increased costs currently. However, if interest rates increase over the next 12 months, these borrowings will provide an economic benefit. The Company also increased average noninterest-bearing deposit balances from the second quarter of 2003 to the second quarter of 2004. Incentive programs were used internally during the fourth quarter of 2003 and again in the first quarter of 2004 to build noninterest-bearing deposits, as Management sees these as critical funding sources for future balance sheet growth. The Company also used special certificate of deposit campaigns during 2003 and through the first half of 2004 to build time deposits that had moved due to rate competition. During the latter half of 2002 and much of 2003 the Company maintained a very conservative pricing strategy with respect to certificates of deposit, offering rates that were generally lower than the median of rates offered in its markets. This strategy helped to grow the net interest margins through 2002 and supported margins during 2003 and 2004 as earning asset yields fell. However, the strategy naturally displaced certificates of deposit, requiring the Company to use borrowed funds and investment securities cash flows to support its loan growth. Management began in 2003 to focus on deposit growth as its primary source of funding, with borrowings being a secondary source, in a strategic effort to provide stable, core deposit relationships and to add customers who would use other bank services.
Management believes that interest rates will increase over the next twelve months. Therefore, net interest margins may decrease over time. However, as loan growth continues in its economically stronger markets, the Company plans to produce loan volumes sufficient to grow net interest income and take advantage of the repricing opportunities that higher interest rates would provide.
The following table shows the components of the net interest margin for the first two quarters of 2004 and 2003:
Yields/Costs Yields/Costs
------------ ------------
2nd Quarter, 2004 1st Quarter, 2004 2nd Quarter, 2003 1st Quarter, 2003
-------------------- ------------------ -------------------- -------------------
Interest bearing bank balances 1.40% 1.13% 1.60% 1.23%
Federal funds sold .93 .88 1.15 1.11
Taxable investments 4.08 4.34 4.40 4.49
Tax-exempt investments 6.60 6.64 6.96 7.07
Loans held for investment 6.23 6.31 6.74 6.87
-------------------- ------------------ -------------------- -------------------
Earning asset yield 5.86 5.85 6.15 6.14
NOW & MMDA .66 .66 1.09 1.31
Savings 1.28 1.28 1.68 1.83
Certificates of deposit 2.36 2.33 2.74 2.87
Short-term borrowings 3.55 3.26 3.53 3.19
Other borrowings 4.19 3.69 4.76 4.49
-------------------- ------------------ -------------------- -------------------
Cost of interest-bearing liabilities 1.94 1.86 2.18 2.32
-------------------- ------------------ -------------------- -------------------
Net interest spread 3.92 3.99 3.97 3.83
Effect of non-interest bearing deposits .24 .21 .24 .24
Effect of leverage .03 .03 .05 .05
-------------------- ------------------ -------------------- -------------------
Net interest margin, tax-equivalent 4.19 4.24 4.26 4.12
Less: Tax equivalent adjustments:
Investments .13 .14 .15 .15
Loans .01 .01 .01 .01
-------------------- ------------------ -------------------- -------------------
Reported book net interest margin 4.05% 4.09% 4.10% 3.96%
FIRST M & F CORPORATION
The following table shows average balance sheets for the first two quarters of 2004 and 2003:
(Amounts in thousands)
2nd Quarter, 2004 1st Quarter, 2004 2nd Quarter, 2003 1st Quarter, 2003
-------------------- ------------------ -------------------- -------------------
Interest bearing bank balances $ 6,385 $ 10,290 $ 9,197 $ 13,680
Federal funds sold 12,724 31,348 26,672 38,257
Taxable investments 133,843 128,433 161,740 172,054
Tax-exempt investments 53,985 53,973 54,500 53,778
Loans held for investment 779,171 776,637 702,409 683,674
-------------------- ------------------ -------------------- -------------------
Earning assets 986,108 1,000,681 954,518 961,443
Other assets 104,726 103,950 100,087 95,371
-------------------- ------------------ -------------------- -------------------
Total assets $ 1,090,834 $ 1,104,631 $ 1,054,605 $ 1,056,814
NOW & MMDA deposits 281,508 295,986 310,604 309,185
Savings deposits 86,969 87,687 90,902 92,947
Certificates of deposit 358,633 351,722 348,725 347,653
Short-term borrowings 15,283 18,005 15,329 20,953
Other borrowings 106,464 116,096 63,746 68,341
-------------------- ------------------ -------------------- -------------------
Interest-bearing liabilities 848,857 869,496 829,306 839,079
-------------------- ------------------ -------------------- -------------------
Noninterest-bearing deposits 121,844 113,517 104,840 98,598
Other liabilities 8,591 9,668 8,798 8,889
Stockholders' equity 111,542 111,950 111,661 110,248
-------------------- ------------------ -------------------- -------------------
Liabilities and stockholders' equity $ 1,090,834 $ 1,104,631 $ 1,054,605 $ 1,056,814
Loans to earning assets 79.01% 77.61% 73.59% 71.11%
Loans to assets 71.43% 70.31% 66.60% 64.69%
Earning assets to assets 90.40% 90.59% 90.51% 90.98%
Noninterest-bearing deposits to assets 11.17% 10.28% 9.94% 9.33%
Equity to assets 10.23% 10.13% 10.59% 10.43%
The following table shows average market interest rates during the first two quarters of 2004 and 2003:
2nd Quarter, 2004 1st Quarter, 2004 2nd Quarter, 2003 1st Quarter, 2003
-------------------- ------------------ -------------------- -------------------
3 month Treasury 1.10% .93% 1.06% 1.18%
1 year Treasury 1.78 1.22 1.15 1.30
5 year Treasury 3.72 2.99 2.57 2.91
10 year Treasury 4.60 4.02 3.62 3.92
Prime 4.00 4.00 4.24 4.25
10-year minus 3 month spread 3.50 3.09 2.56 2.74
-------------------- ------------------ -------------------- -------------------
The following are prime rate changes
since November, 2002: Changed from: Changed to:
------------- -----------
November 7, 2002 4.75% 4.25%
June 27, 2003 4.25% 4.00%
July 1, 2004 4.00% 4.25%
The above interest rates were derived from the Federal Reserve’s FRED® economic database. The Treasury rates are all constant maturity calculations.
The Federal Reserve changed its targeted Fed funds rate from 1.00% to 1.25% on June 30, 2004, thus indicating that it was prepared to increase interest rates with improvements in economic conditions as a brake on inflationary pressures. The increase in the prime rate should initially improve earning asset yields during 2004. However, higher short-term rates will put increasing pressure on deposit pricing, thus potentially increasing the Company’s cost of funds over time.
The provision for loan losses for the second quarter of 2004 was $999 thousand as compared to $962 thousand for the second quarter of 2003. The provision for the first half of 2004 was $3.459 million as compared to $1.882 million in the second quarter of 2003. The provision includes $1.5 million of additional accruals related to a $2.0 million loan loss incurred in a 51% owned accounts receivable factoring company. The factoring company experienced a significant deterioration in one account with a balance of approximately $3.5 million. The factoring company charged off $2.0 million of the account balance in the first quarter and placed the remaining $1.5 million on nonaccrual status. The remaining balance at June 30 was approximately $1.0 million, which the factoring company expects to collect. Bank personnel are monitoring the collection of the receivables and other collateral in an effort to protect the Company from any further potential losses. The allowance for loan losses as a percentage of loans was 1.49% at June 30, 2004, 1.40% at December 31, 2003, and 1.42% at June 30, 2003. Net charge-offs were $165 thousand for the second quarter of 2004 as compared to $934 thousand for the second quarter of 2003.
Nonperforming loans as a percentage of loans declined to .66% at June 30, 2004 from 1.11% at March 31, 2004. Management believes that the positive trend in loan quality is sustainable, given a stable economy. Management stratifies and reviews certain sectors of the portfolio to detect if there are weaknesses related to economic, environmental or other customer-specific factors. The Company’s loan review personnel also monitor portfolios by geographic sector to address local credit issues expeditiously.
Management has decided to reduce the quarterly provision for loan losses starting in the third quarter by approximately $210 thousand based on the following factors. First, the net charge off percentage was .08% for the second quarter of 2004, indicating a positive trend. Second, excluding the nonaccrual loan in the factoring joint venture, nonperforming loans as a percentage of loans at June 30, 2004 was .54%. This is the lowest nonperforming loan percentage since the third quarter of 2002. Management believes that the joint venture credit will be ultimately collected, but the venture has also established an allowance that adequately covers any possible losses if the full amount of the remaining credit is not collectible. Given management’s assessment of the present quality of loans, its expectations for loan performance in the foreseeable future, and the magnitude of the allowance for loan losses, a reduction of the ongoing provision to a more reasonable estimate is warranted.
Non Interest IncomeNoninterest income, excluding securities transactions, for the second quarter of 2004 was $3.738 million as compared to $3.638 million for the same period in 2003. Noninterest income, excluding securities transactions, for the first half of 2004 was $7.674 million as compared to $7.015 million for the first half of 2003. Deposit income was up due primarily to fees generated from debit card transactions. Service charges on deposit accounts remained flat, even though the number of noninterest bearing deposit accounts increased by over one thousand accounts from June 30, 2003 to June 30, 2004. The Company has promoted its free checking product during 2003 and 2004, contributing to the lack of service charges. Although the free checking accounts generally produce overdraft fee income, this component of revenues has remained relatively flat comparing the first half of 2004 to the first half of 2003. Mortgage income has improved in spite of an unfavorable interest rate environment due to the addition of mortgage lending personnel in new markets in Desoto and Rankin counties. Agency commission income has flattened out as pricing has become more competitive for property and casualty products. The Company has embarked upon a strategy to place more insurance agents in Bank locations to provide convenience for customers, and increase production. Improved retail brokerage and trust capabilities have resulted in revenue increases in the second quarter of 2004 and the first half of 2004 over comparable periods. The Company is committed to building these services as customers become more financially sophisticated. The retail brokerage function assumed the management of the Bank’s annuity sales program in the second half of 2003, focusing sales efforts and resulting in annuity sales that exceeded $6.5 million in the first half of 2004. The Company had $6.1 million in annuity sales for the entire year of 2003. Treasury and electronic banking services are becoming an important part of the commercial customer relationship as these revenues grew by over 50% from the first half of 2003 to the first half of 2004. Although treasury services revenues are still at a low, start-up level, the Company has committed personnel to the long-term growth of this area. Other income was up in 2004 primarily due to contingency income received by the property and casualty insurance business. Contingency revenues, based upon new business and claims experience, were $276 thousand in 2004 as compared to $122 thousand for the first half of 2003.
Securities gains of approximately $70 thousand were incurred to restructure part of the investment portfolio. Approximately $6.7 million of mortgage-backed securities were sold and replaced with corporate securities. This was done to match the investments more closely with their funding sources.
The Company has a strategy to increase noninterest revenues as a proportion of total revenues over time. Increased noninterest revenues would contribute to a more stable revenue base, mitigating the income statement effects of changing interest rates.
Non-interest expenses, excluding noncontrolling joint venture interests, were up by 3.56% in the second quarter of 2004 as compared to 2003, and up by 6.71% for the first half of 2004 as compared to the same period in 2003. Salary and benefit expenses produced the largest increases with a 7.52% increase in the second quarter over last year and a 10.89% increase in the first half of 2004 over the comparable period in 2003. The Company added four (4) commercial lending positions, 18 other branch staff, and nine (9) non-branch retail and commercial positions between June, 2003 and June, 2004. The increases occurred (1) in Rankin County, where a new branch was opened in Flowood in March of 2004, (2) in Tupelo, where a new branch was opened in July of 2003, (3) in the addition of mortgage producers in 2003 and 2004, (4) in the treasury services area which was started in the first quarter of 2003, and in various other branch lending and sales positions.
Marketing and business development expenses were up in the second quarter and first half of 2004 as compared to the related periods in 2003 due to three factors. During the first quarter of 2004, expenses were up due to spending on a deposit campaign as well as an image campaign. Spending was also up due to grand opening and other branch promotion expenses in the first half of 2004. Finally, the Bank paid for several sponsorships in 2004 that offered advertising opportunities related to community events and programs.
The $1.048 million negative balance in noncontrolling joint venture losses is the amount of losses, primarily the result of a $2.0 million loan loss, attributable to the other minority owner in the factoring venture. Excluding the additional loan loss accruals, the joint venture contributed approximately $122 thousand in earnings for each partner for the first half of 2004.
As the Company continues to expand in strong economic markets, higher personnel costs will result. However, the Company will expand in those areas and into businesses that will provide a return in excess of its hurdle rate of return on capital.
Income TaxesIncome taxes for the first half of 2004 increased by 5.90% over the first half of 2003, due primarily to an increase in taxable earnings. The effective tax rates for 2004 and 2003 were 30.18% and 29.22% respectively. The increasing trend is due to the higher percentage of taxable revenues to total revenues over time as the Company continues to build the loan portfolio as a percentage of total earning assets. The Company recently concluded an examination of the final return filed by Community Federal Bancorp prior to its acquisition by the Company. Based upon the proposed adjustments, management estimates that taxes of approximately $160 thousand will be due.
Assets and LiabilitiesAssets were up by 1.45% in the first six months of 2004 as compared to 2.40% in the first six months of 2003. Total assets were up by 3.01% from June 30, 2003. Investments increased by 3.75% in the first six months of 2004 and declined by 9.43% during the first six months of 2003. The Company increased investments during the first quarter of 2004 in corporate securities by $5.3 million, while increasing agency securities and mortgage-backed securities by approximately $2.0 million each. During the second quarter of 2004 the Company increased investments in municipal securities by $1.4 million as an investment in the communities that it serves, and to add quality, tax-exempt investments to the portfolio. The Company also increased mortgage-backed securities during the second quarter by $2.6 million to provide better current yields and liquidity. Deposits grew by 3.87% in the first quarter of 2004 and remained flat for the second quarter. Low loan demand during the first quarter of 2004 and much of the second quarter created the liquidity that allowed the Company to increase the investment portfolio. Strong loan growth during the first two quarters of 2003 required the use of cash flows from the investment portfolio as well as from deposit sources. Loans began to grow toward the last half of June, providing an increase for the second quarter of 2004 after decreasing during the first quarter. For the first half of 2004, loan growth was strong in DeSoto, Lee, Lafayette and Bolivar counties. Growth was weak in Madison, Rankin and Holmes counties. Loans as a percent of total assets were 72.16% at June 30, 2004 as compared to 72.26% at December 31, 2003 and 68.40% at June 30, 2003. Management believes that one of the keys to the Company’s future success will be to expand into markets that are vital economically and can provide high loan demand. Much of the Company’s loan growth over the past year has been achieved in the commercial and real estate sectors. Management expects that trend to continue.
The following table shows loans held for investment by type as of June 30, 2004, December 31, 2003, and June 30, 2003.
June 30, 2004 December 31, 2003 June 30, 2003
------------------ ----------------------- -----------------
Commercial real estate $ 380,743 $ 370,559 $ 323,949
Residential real estate 228,030 232,437 230,674
Other commercial 119,222 108,612 97,599
Consumer 57,622 63,740 69,455
Other loans 3,824 3,832 4,712
------------------ ----------------------- -----------------
Total $ 789,441 $ 779,180 $ 726,389
Deposits increased by 3.68% in the first half of 2004 as compared to 3.43% during the first half of 2003. Deposits grew by $31.763 million in the first quarter of 2004 and then decreased by $1.573 million during the second quarter. Municipality deposits grew by $27.626 million in the first quarter of 2004 and decreased by $6.055 million during the second quarter. Much of the retail growth in the first quarter of 2004 occurred in money market deposits and certificates of deposit. Deposits grew by $35.681 million in the first quarter of 2003, followed by a decrease of $7.399 million in the second quarter. Municipality deposits accounted for over 80% of the deposit growth during the first half of 2003. The large growth in municipality deposits is a natural trend that occurs during the early months of the year as tax receipts are collected. The funds generally move out during the summer months as spending occurs. Management’s strategic initiative is to build the core customer deposit base and rely less on borrowed funds for meeting loan demand and other cash flow requirements going forward. However, when borrowed funds are less costly than time deposits, the Company will still look to those sources to help maintain the spread between the yield on earning assets and the cost of funds.
The following table shows the deposit mix as of June 30, 2004, December 31, 2003, and June 30, 2003.
June 30, 2004 December 31, 2003 June 30, 2003
------------------- ----------------------- -----------------
Noninterest-bearing demand $ 127,156 $ 123,191 $ 120,671
NOW deposits 155,386 131,430 152,638
Money market deposits 121,463 135,067 146,355
Savings deposits 86,490 86,794 89,937
Certificates of deposit 359,921 343,744 342,705
------------------- ----------------------- -----------------
Total $ 850,416 $ 820,226 $ 852,306
The following table shows the mix of municipality deposits as of June 30, 2004, December 31, 2003, and
June 30, 2003.
June 30, 2004 December 31, 2003 June 30, 2003
------------------- ----------------------- -----------------
Noninterest-bearing demand $ 4,837 $ 4,594 $ 4,020
NOW deposits 71,021 41,665 69,560
Money market deposits 8,325 20,149 26,692
Savings deposits 296 557 538
Certificates of deposit 62,524 58,467 43,892
------------------- ----------------------- -----------------
Total $ 147,003 $ 125,432 $ 144,702
Other borrowings decreased by $16.069 million during the first half of 2004 after increasing by $50.891 million over the course of 2003. The increased borrowings in 2003 were used to fund part of the $102.605 million in loan growth that occurred last year. Other borrowings consist of Federal Home Loan Bank (FHLB) borrowings, most of which were originated to fund loan growth. During the first half of 2004, the Company refinanced $13.000 million of FHLB borrowings to lock in funding costs in anticipation of a possible increase in interest rates. The Company also has debt of $6.292 million which was used primarily to repurchase stock, beginning in 1999. Although the Company has repurchased additional shares during 2004, it expects to reduce the borrowings to approximately $5.6 million by the end of 2004.
The Company’s and Bank’s regulatory capital ratios at June 30, 2004, as shown below are in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.
First M & F Corporation M & F Bank
----------------------- ----------
Amount Ratio Amount Ratio
------ ----- ------ -----
Actual:
Total capital $ 110,224 12.29% $ 112,621 12.90%
Tier 1 capital 92,005 11.04% 96,713 11.65%
Leverage 92,005 8.57% 96,713 9.01%
For Capital Adequacy Purposes:
Total capital 66,698> 8.00% 66,509> 8.00%
Tier 1 capital 33,349> 4.00% 33,211> 4.00%
Leverage 42,962> 4.00% 42,919> 4.00%
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total capital 83,373> 10.00% 83,029> 10.00%
Tier 1 capital 50,024> 6.00% 49,817> 6.00%
Leverage 53,702> 5.00% 53,649> 5.00%
The Company repurchased 122,354 shares during the first six months of 2003 at an average price of $33.14 per share. The Company also issued 146,772 shares related to the exercise of stock options during the first six months of 2003 at an average exercise price of $27.00 per share. The Company repurchased 56,500 shares during the first six months of 2004 at an average price of $35.05 per share. The Company also issued 34,321 shares related to the exercise of stock options during the first six months of 2004 at an average exercise price of $26.60 per share. The Company expects to continue to repurchase shares during 2004.
Interest Rate Risk and Liquidity ManagementResponsibility for managing the Company’s program for controlling and monitoring interest rate risk 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, 2004, 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 within 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.
The 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 Bank’s credit standards are enforced within the Bank as well as within all of its wholly-owned subsidiaries. As of March, 2004, management began to enforce the Bank’s credit standards on the Bank’s partially-owned joint venture as well. Management will enforce its credit standards as well as other quality and internal control standards on future business ventures in which it is a partner.
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 June 30, 2004 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company:
(Amounts in thousands)
June 30 December 31 June 30
2004 2003 2003
---- ---- ----
Nonaccrual loans $ 4,074 $ 4,517 $ 2,663
Past due 90 days or more and still
accruing interest 1,170 1,531 1,808
---------------- --------------- ----------------
Total non-performing loans 5,244 6,048 4,471
Other real estate 2,171 802 1,116
---------------- --------------- ----------------
Total non-performing assets $ 7,415 $ 6,850 $ 5,587
================ =============== ================
Ratios:
Non-performing loans to loans .66% .78% .62%
Non-performing assets to assets .68% .64% .53%
================ =============== ================
Off-Balance Sheet Arrangements
The Company’s primary off-balance sheet arrangements are in the form of loan commitments and operating lease commitments. At June 30, 2004 the Company had $107.883 million in unused loan commitments outstanding. Of these commitments, $67.804 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.
Letters of credit are used to facilitate the borrowers’ business and are usually related to the acquisition of inventory or of assets to be used in the customers’ business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most standby letters of credit expire without being presented for payment. However, the presentment of a standby letter of credit would create a loan receivable from the Bank’s loan customer. The Bank’s asset-based lending subsidiary uses commercial letters of credit to facilitate the purchase of inventory items by its customers. There were no commercial letters of credit outstanding at the end of the second quarter. At June 30, 2004 the Company had $11.889 million in financial standby letters of credit issued and outstanding.
A liability of $82 thousand is recognized in Other Liabilities related to the obligation to stand ready to perform related to standby letters of credit.
In the ordinary course of business the Company enters into rental and lease agreements to secure office space and equipment. The Company has a variety of lease agreements in place, all of which are operating leases. The largest lease obligations are for office equipment and mainframe computer systems.
The Company does not have any variable interest entities or other off-balance sheet vehicles as of June 30, 2004.
The following table summarizes the obligations of the Company:
(Amounts in thousands)
Payments Due by Period
----------------------
Less More
Than 1 1 - 3 3 - 5 Than 5
Contractual Obligations Total Year Years Years Years
- ----------------------- ----- ---- ----- ----- -----
Long-term debt $ 91,673 $ 12,951 $ 35,250 $ 19,238 $ 24,234
Capital lease obligations - - - - -
Operating leases 2,799 809 1,352 605 33
Purchase obligations 290 290 - - -
Other long-term liabilities - - - - -
----------- ----------- ----------- ----------- --------------
Total $ 94,762 $ 14,050 $ 36,602 $ 19,843 $ 24,267
=========== =========== =========== =========== ==============
Critical Accounting Policies
The preparation of the Company’s financial statements requires management to make certain assumptions and critical estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and obligations. Management believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.
Allowance for loan lossesThe Company’s policy is to maintain the allowance for loan losses at a level that is sufficient to absorb estimated probable losses in the loan portfolio. Accounting standards require that loan losses be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Management’s estimate is reflected in the balance of the allowance for loan losses. Changes in this estimate can materially affect the provision for loan losses, and thus net income.
Management of the Company evaluates many factors in determining the estimate for the allowance for loan losses. Historical loan losses by loan type and loan grade are a significant factor in estimating future losses. Management reviews loan quality on an ongoing basis to determine the collectibility of individual loans and reflects that collectibility by assigning loan grades to individual credits. The grades will generally determine how closely a loan will be monitored on an ongoing basis. A customer’s payment history, financial statements, cash flow patterns and collateral, among other factors, are reviewed to determine if the loan has potential losses. Concentrations of credit by loan type and collateral type are reviewed to determine exposures and risks of loss. General economic factors as well as economic factors of individual industries or factors that would affect certain types of loan collateral are reviewed to determine the exposure of loans to economic fluctuations. The Company also has a loan review department that audits types of loans as well as geographical segments to determine credit problems and loan policy violations that require the attention of management. All of these factors are used to determine the adequacy of the allowance for loan losses and adjust its balance accordingly.
The allowance for loan losses is increased by the amount of the provision for loan losses and recoveries of previously charged-off loans. It is decreased by loan charge-offs as they occur when principal is deemed to be uncollectible.
The policy of the Company is to assess goodwill for impairment at the reporting unit level on an annual basis. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting unit in making an annual assessment of impairment. Management performs this assessment as of January 1 of each year.
Impairment of goodwill is recognized by a charge against earnings and is to be shown as a separate line item in the noninterest expense section of the consolidated statement of income.
The estimate of fair value is dependent on such assumptions as: (1) future cash flows determined from the budget, strategic plan, and forecasts of growth, and (2) discount rates and earnings multiples used to determine the present value of those cash flows. Management uses a model similar to those used to evaluate potential mergers and acquisitions. Testing of the goodwill asset in the first quarters of 2003 and 2004 resulted in no impairment charges.
Contingent liabilitiesAccounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. Management must estimate the probability of occurrence and estimate the potential exposure of a variety of contingencies such as health claims, legal claims, tax liabilities and other potential claims against the Company’s assets or requirements to perform services in the future.
Management’s estimates are based upon their judgment concerning future events and their potential exposures. However, there can be no assurance that future events, such as changes in a regulator’s position or court cases will not differ from management’s assessments. When management, based upon current facts and expert advice, believes that an event is probable and reasonably estimable, it accrues a liability in the consolidated financial statements. That liability is adjusted as facts and circumstances change and subsequent assessments produce a different estimate.
Accounting PronouncementsIn March, 2004, The SEC issued Staff Accounting Bulletin No. 105 (SAB 105). SAB 105 provides guidance for accounting related to loan commitments accounted for as derivative instruments. Generally, interest-rate locks on loans that are to be held for sale are considered derivatives, and therefore accounted for under the guidelines of Statement of Financial Accounting Standards (SFAS) No. 133 and subsequent amendments. SAB 105 specifically prohibits the incorporation of the expected future cash flows related to servicing of the future loan to be considered in the valuation of the rate-lock commitment. The adoption of this statement did not have a material effect on the financial statements.
In March, 2004, the Financial Accounting Standards Board (FASB) approved certain additional provisions of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications to Certain Investments.” These revisions require disclosures for cost method investments similar to those previously presented in fiscal 2003 financial statements for investments accounted for under SFAS No. 115. These revisions also clarify the appropriate timing and methodology for evaluating whether an “other-than-temporary” impairment has occurred. The new impairment evaluation and recognition guidance is effective for reporting periods beginning after June 15, 2004.
In October, 2003, the FASB approved the AICPA’s issuance of SOP 03-3, “Accounting for Loans or Certain Debt Securities Acquired in a Transfer”, which modifies the accounting for certain loans that are acquired with evidence of deterioration in credit quality since origination. SOP 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recognized as a yield adjustment, valuation allowance, or other loss accrual. Therefore, the yield that may be accreted is limited to the excess of cash flows expected to be collected over the acquirer’s initial investment in the loan or security. SOP 03-3 is effective for years beginning after December 15, 2004.
In March, 2004, the FASB issued an exposure draft entitled “Share-Based Payment, and Amendment of FASB Statements No. 123 and 95.” This proposed statement would eliminate the ability to account for stock-based compensation using APB No. 25 and require such transactions to be recognized as compensation expense based on their fair values at the date of grant. Companies transitioning to this standard will use the “modified prospective” method whereby the company must recognize share-based compensation expense from the beginning of the year in which the statement is adopted. Companies will recognize the expense that they would have recognized if they had used the fair value method since the effective date of FASB Statement No. 123, which was December 31, 1994. As written, the standard would take effect in 2005. However, the controversy surrounding stock-based compensation accounting, primarily the ability to determine fair values for employee stock options, and the actions of the U. S. House of Representatives to negate the potential standard, make the issuance of a final standard this year very uncertain.
Item 3 - Quantitative and Qualitative Disclosures About Market RiskMarket 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 institution. 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, 2004, the institution was in a positive repricing gap position of approximately 19.03% of assets.
Interest rate shock analysis shows that the Company will experience a 10 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 rates of 100 basis points will result in a 6 basis point increase in the net interest margin. The sensitivity of loan yields and a 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 market value of equity will increase by .32% with an immediate and sustained decrease in interest rates of 100 basis points. The market value of equity will decrease by 2.59% with an immediate and sustained increase in interest rates of 100 basis points.
The Company had no hedging instruments or other derivative contracts in place at June 30, 2004.
Item 4 - Controls and ProceduresAs defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of June 30, 2004 (the “Evaluation Date”), the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Subsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
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.
The Bank and one of its subsidiaries are subject to similar cases that seek substantial damages for claims arising out of transactions that involve relatively 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.
In total, there are cases involving approximately 300 plaintiffs that have been filed over a three year period. Some suits have been filed in Holmes County. Depositions have occurred in one suit, and a trial date has been tentatively set for October, 2004 in another suit. It is not possible at this time to determine the potential exposure related to possible damages in connection with these suits. Future legislation and court decisions may limit the amount of damages that can be recovered in legal proceedings such as these. However, management cannot predict at this time whether such legislation or court decisions will occur or the effect they may have on these cases.
The Bank’s insurance agency subsidiary was involved in a suit filed in Holmes County in August, 2003 by 13 plaintiffs alleging damages in connection with the sale and purchase of insurance products. The case has been settled at no cost to the Company.
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.
FIRST M & F CORPORATION
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The following table summarizes repurchases of common stock for the program in place during the second
quarter of 2004:
Maximum Number
Total Number (or Approximate
of Shares Dollar Value)
(or Units) Purchased of Shares (or Units)
Total Number As Part of That May Yet Be
of Shares (or Average Price Paid Publicly Announced Purchased Under the
Period units) Purchased Per Share (or Unit) Plans or Programs Plans or Programs
------ ---------------- ------------------- ----------------- -----------------
04/01/04 - 04/30/04 (1) - $ - - 120,000
05/01/04 - 05/31/04 10,000 33.97 10,000 110,000
06/01/04 - 06/30/04 10,000 33.78 10,000 100,000
(1) On April 14, 2004, the Board authorized a program to repurchase up to 120,000 shares of common stock in
the open market over a twelve month period beginning on May 1, 2004 and ending on April 30,
2005. The authorization limits the number of shares that may be repurchased in any calendar
month to no more than 10,000.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
The annual stockholders' meeting was held on April 14, 2004. The stockholders elected eleven directors
to serve terms of from one to three years as summarized below:
Directors Elected Votes For Votes Withheld
- ----------------- --------- --------------
Term to Expire in April, 2007
Barbara K. Hammond 3,563,758 8,627
Charles Imbler, Sr. 3,565,321 7,064
R. Dale McBride 3,564,821 7,564
Michael L. Nelson 3,564,269 8,116
Hugh S. Potts, Jr. 3,563,769 8,616
W. C. Shoemaker 3,564,810 7,575
Michael W. Sanders 3,564,810 7,575
Scott M. Wiggers 3,564,821 7,564
Term to Expire in April, 2006
Jeffrey A. Camp 3,554,824 17,561
Larry D. Terrell 3,564,269 8,116
Term to Expire in April, 2005
Hollis C. Cheek 3,565,321 7,064
There were 4,561,169 shares entitled to vote on the proposals, with 3,572,385 shares, or 78.32% actually
being voted.
Item 5 - Other Information
None
FIRST M & F CORPORATION
Item 6 - Exhibits and Reports on Form 8-K
Item 6(a) - Exhibits
Exhibit 3(A) - 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(B) - 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
June 30, 2004:
(1) Report on Form 8-K filed on April 19, 2004. Item 5 disclosure and Item 7 press release related to a
stock repurchase plan to commence on May 1, 2004 and end on April 30, 2005.
(2) Report on Form 8-K filed on April 19, 2004. Item 7 press release with pro forma disclosures and Item 12
financial statements related to the first quarter earnings announcement.
(3) Report on Form 8-K filed on April 30, 2004. Item 5 related to the presentation of information at the
Gulf South Bank Conference on April 28, 2004.
(4) Report on Form 8-K filed on May 13, 2004. Item 5 disclosure and Item 7 press release announcing John G.
Copeland named as EVP and Chief Financial Officer.
FIRST M & F CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date : August 6, 2004
BY: /s/ Hugh S. Potts, Jr. BY: /s/ John G. Copeland
--------------------------------- -------------------------------
Hugh S. Potts, Jr. John G. Copeland
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
FIRST M & F CORPORATION
EXHIBIT INDEX
3 (A) 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.
3 (B) Bylaws, 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.
11 Computation of Earnings Per Share - Filed herewith as note 4 to the consolidated financial statements.
31 Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a)Certification of
John G. Copeland, Chief Financial Officer
32 Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of
John G. Copeland, Chief Financial Officer