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EX-31.3 - SECTION 302 CEO CERTIFICATION - FIRST M&F CORP/MSa10-ka2exhibit313.htm
EX-32.4 - SECTION 906 CFO CERTIFICATION - FIRST M&F CORP/MSa10-ka2exhibit324.htm
EX-32.3 - SECTION 906 CEO CERTIFICATION - FIRST M&F CORP/MSa10-ka2exhibit323.htm
EX-31.4 - SECTION 302 CFO CERTIFICATION - FIRST M&F CORP/MSa10-ka2exhibit314.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
(AMENDMENT NO. 2)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Or
o
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
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
134 West Washington Street,  Kosciusko, Mississippi
 
39090
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  662-289-5121

Securities registered under Section 12(b) of the Act:
Common Stock, $5 par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨Yes   x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes   x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x Yes     ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   ¨ Yes    x No

Based on the closing sale price for shares on June 30, 2011, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $28,316,770.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common stock, $5 par value
 
9,154,936 Shares
Title of Class
 
Shares Outstanding at January 31, 2012

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement dated March 14, 2012, are incorporated by reference into Part III of the Form 10-K report.



FIRST M&F CORPORATION AND SUBSIDIARY


EXPLANATORY NOTE


First M&F Corporation (the "Company") is filing this Amendment No. 2 on Form 10-K/A (this "Amendment") to its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the "Original 10-K"), which was filed on March 14, 2012. This Amendment is being filed solely to remove certain extraneous figures inadvertently included in the margins between financial statement columns in the Consolidated Statements of Operations in the Original 10-K. This Amendment No. 2 includes the entire Item 8 information rather than only the Consolidated Statements of Operations which were included in Amendment No. 1.

Except for the foregoing, the Original 10-K remains unchanged; furthermore, nothing contained in this Amendment No. 2 reflects events occurring after the date on which the Company filed the Original 10-K. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, this Amendment No. 2 includes new certifications by our principal executive officer and principal financial officer.


2

FIRST M&F CORPORATION AND SUBSIDIARY


CROSS REFERENCE INDEX
PART II
 
 
Page
 
 
 
 
Item 8
 
Financial Statements and Supplementary Data
4

 
 
 
 
PART IV
 
 
 
 
 
 
 
Item 15
 
Exhibits, Financial Statement Schedules
63



3

FIRST M&F CORPORATION AND SUBSIDIARY


PART II


FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of First M&F Corporation and its subsidiary has prepared the consolidated financial statements and other information in our Annual Report in accordance with generally accepted accounting principles generally accepted in the United States of America and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.

In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system. The Company’s bank subsidiary maintains an internal audit staff which monitors compliance with the Company’s and Bank’s systems of internal controls and reports to management and to the Audit Committee of the Board of Directors.

The Audit Committee of First M&F Corporation’s Board of Directors consists entirely of outside directors. The Audit Committee meets periodically with the internal auditor and the independent accountants to discuss audit, internal control, financial reporting and related matters. The Company’s independent accountants and the internal audit staff have direct access to the Audit Committee.

First M&F Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including First M&F Corporation’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.

Based on First M&F Corporation’s evaluation under the framework in Internal Control – Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2011.

/s/ Hugh S. Potts, Jr.
 
/s/ John G. Copeland
Hugh S. Potts, Jr.
 
John G. Copeland
Chairman and Chief Executive Officer
 
EVP and Chief Financial Officer



4

FIRST M&F CORPORATION AND SUBSIDIARY

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
Audit Committee, Board of Directors and Stockholders
First M&F Corporation
Kosciusko, Mississippi
 
We have audited the accompanying consolidated statements of condition of First M&F Corporation as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First M&F Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ BKD, LLP
Jackson, Mississippi
March 14, 2012




5

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Condition
December 31, 2011 and 2010
(In Thousands, Except Share Data)

 
2011
 
2010
Assets
 
 
 
Cash and due from banks
$
39,976

 
$
45,099

Interest-bearing bank balances
39,391

 
72,103

Federal funds sold
25,000

 
25,000

Securities available for sale, amortized cost of $315,890 and $274,421
320,774

 
276,929

Loans held for sale
26,073

 
6,242

Loans, net of unearned income
996,340

 
1,060,146

Allowance for loan losses
(14,953
)
 
(16,025
)
Net loans
981,387

 
1,044,121

Bank premises and equipment
37,989

 
40,696

Accrued interest receivable
6,122

 
6,380

Other real estate
36,952

 
31,125

Other intangible assets
4,586

 
5,013

Bank owned life insurance
22,477

 
21,790

Other assets
27,924

 
29,466

 
$
1,568,651

 
$
1,603,964

Liabilities and Stockholders’ Equity
 

 
 

Liabilities:
 

 
 

Noninterest-bearing deposits
$
231,718

 
$
212,199

Interest-bearing deposits
1,139,745

 
1,163,213

Total deposits
1,371,463

 
1,375,412

Fed funds purchased and repurchase agreements
4,398

 
33,481

Other borrowings
43,001

 
50,416

Junior subordinated debt
30,928

 
30,928

Accrued interest payable
1,023

 
1,470

Other liabilities
8,242

 
5,192

Total liabilities
1,459,055

 
1,496,899

Commitments and contingencies (Note 12)
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock; 1,000,000 shares authorized; 30,000 shares issued and outstanding
17,564

 
16,390

Common stock of $5.00 par value; 50,000,000 shares authorized: 9,154,936 and 9,106,803 shares
 issued
45,775

 
45,534

Additional paid-in capital
31,895

 
31,883

Nonvested restricted stock awards
674

 
784

Retained earnings
14,456

 
12,225

Accumulated other comprehensive income (loss)
(768
)
 
249

Total equity
109,596

 
107,065

 
$
1,568,651

 
$
1,603,964


The accompanying notes are an integral part of these financial statements.



6

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations
Years Ended December 31, 2011, 2010 and 2009
(In Thousands, Except Share Data)
 
2011
 
2010
 
2009
Interest income:
 
 
 
 
 
Interest and fees on loans
$
60,201

 
$
62,070

 
$
66,782

Interest on loans held for sale
275

 
232

 
278

Taxable investments
6,745

 
7,616

 
9,531

Tax-exempt investments
1,252

 
1,549

 
2,105

Federal funds sold
63

 
82

 
95

Interest-bearing bank balances
179

 
143

 
42

Total interest income
68,715

 
71,692

 
78,833

Interest expense:
 

 
 

 
 

Deposits
13,501

 
18,809

 
23,701

Fed funds purchased and repurchase agreements
36

 
66

 
97

Other borrowings
1,979

 
3,024

 
5,449

Junior subordinated debt
1,335

 
1,992

 
1,992

Total interest expense
16,851

 
23,891

 
31,239

Net interest income
51,864

 
47,801

 
47,594

Provision for loan losses
9,720

 
9,220

 
49,601

Net interest income (expense) after provision for loan losses
42,144

 
38,581

 
(2,007
)
Noninterest income:
 

 
 

 
 

Deposit account income
10,293

 
10,221

 
10,976

Mortgage banking income
1,821

 
1,581

 
1,823

Agency commission income
3,636

 
3,809

 
3,881

Trust and brokerage income
584

 
526

 
489

Bank owned life insurance income
638

 
667

 
762

Other income
2,464

 
1,865

 
2,412

Securities gains, net
2,769

 
2,255

 
456

Total investment other-than-temporary impairment losses
(368
)
 
(435
)
 
(3,527
)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)
(263
)
 
32

 
2,698

Net investment impairment losses recognized
(631
)
 
(403
)
 
(829
)
Total noninterest income
21,574

 
20,521

 
19,970

Noninterest expenses:
 

 
 

 
 

Salaries and employee benefits
28,469

 
27,303

 
28,314

Net occupancy expenses
3,935

 
3,937

 
4,614

Equipment expenses
1,871

 
2,382

 
2,877

Software and processing expenses
1,540

 
1,627

 
1,898

Foreclosed property expenses
7,351

 
2,946

 
7,283

FDIC insurance assessments
2,426

 
3,261

 
3,276

Goodwill impairment

 

 
32,572

Intangible asset amortization and impairment
427

 
426

 
1,688

Other expenses
12,315

 
12,608

 
13,350

Total noninterest expenses
58,334

 
54,490

 
95,872

Income (loss) before income taxes
5,384

 
4,612

 
(77,909
)
Income tax expense (benefit)
1,011

 
602

 
(18,104
)
Net income (loss)
4,373

 
4,010

 
(59,805
)
Net loss attributable to noncontrolling interests

 
(1
)
 
(6
)
Net income (loss) attributable to First M&F Corporation
$
4,373

 
$
4,011

 
$
(59,799
)
Dividends and accretion on preferred stock
1,774

 
1,692

 
1,464

Gain on exchange of preferred stock

 
12,867

 

Net income (loss) applicable to common stock
$
2,599

 
$
15,186

 
$
(61,263
)
Net income (loss) allocated to common shareholders
$
2,584

 
$
15,071

 
$
(60,655
)
Earnings (loss) per share:
 

 
 

 
 

Basic
$
0.28

 
$
1.66

 
$
(6.69
)
Diluted
0.28

 
1.66

 
(6.69
)

The accompanying notes are an integral part of these financial statements.

7

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income
Years Ended December 31, 2011, 2010 and 2009
(In Thousands)

 
2011
 
2010
 
2009
Net income (loss)
$
4,373

 
$
4,010

 
$
(59,805
)
Other comprehensive income (loss):
 

 
 

 
 

Unrealized gains (losses) on securities:
 

 
 

 
 

Unrealized gains on securities available for sale arising during the period, net of tax of $1,728, $159, and $1,628
2,901

 
267

 
2,736

Unrealized losses on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $43, $54 and $1,462
(72
)
 
(92
)
 
(2,458
)
Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $1,033, $841, and $170
(1,736
)
 
(1,414
)
 
(286
)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $235, $150 and $309
396

 
253

 
520

Unrealized gains (losses) net of settlements on cash flow hedge arising during the period,
 net of tax of $989 and $305
(1,662
)
 
512

 

Defined benefit pension plans:
 

 
 

 
 

Net actuarial gains (losses) arising during the period, net of tax of $859, $111 and $32
(1,445
)
 
(187
)
 
53

Amortization of transition asset, net of tax of $0, $0 and $3

 

 
(4
)
Amortization of prior service cost, net of tax of $9, $14 and $14
(16
)
 
(23
)
 
(23
)
Amortization of actuarial loss, net of tax of $367, $330 and $338
617

 
554

 
568

Other comprehensive income (loss)
(1,017
)
 
(130
)
 
1,106

Total comprehensive income (loss)
3,356

 
3,880

 
(58,699
)
Comprehensive loss attributable to noncontrolling interests

 
(1
)
 
(6
)
Comprehensive income (loss) of First M&F Corp
$
3,356

 
$
3,881

 
$
(58,693
)

The accompanying notes are an integral part of these financial statements.



8

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2011, 2010 and 2009
(In Thousands, Except Share Data)

 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Nonvested
Restricted
Stock
Awards
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
January 1, 2009
$

 
$
45,317

 
$
30,447

 
$
780

 
$
60,133

 
$
(727
)
 
$
18

 
$
135,968

Net loss

 

 

 

 
(59,799
)
 

 
(6
)
 
(59,805
)
Cash dividends - common ($.16 per
 share)

 

 

 

 
(1,466
)
 

 

 
(1,466
)
Issuance of 30,000 shares of
  preferred stock
28,637

 

 

 

 

 

 

 
28,637

Issuance of stock warrant for
 513,113 shares

 

 
1,363

 

 

 

 

 
1,363

Dividends and accretion on
 preferred stock
201

 

 

 

 
(1,464
)
 

 

 
(1,263
)
6,000 restricted share awards vested

 
30

 
71

 
(101
)
 

 

 

 

Share-based compensation expense
 recognized

 

 
17

 
55

 
1

 

 

 
73

Tax benefits on restricted stock
 dividends paid

 

 
28

 

 

 

 

 
28

Net change

 

 

 

 

 
1,106

 

 
1,106

Distributions

 

 

 

 

 

 
(11
)
 
(11
)
December 31, 2009
$
28,838

 
$
45,347

 
$
31,926

 
$
734

 
$
(2,595
)
 
$
379

 
$
1

 
$
104,630

Net income

 

 

 

 
4,011

 

 
(1
)
 
4,010

Cash dividends - common ($.04 per
 share)

 

 

 

 
(366
)
 

 

 
(366
)
37,457 shares issued to directors

 
187

 
(54
)
 

 

 

 

 
133

Dividends and accretion on
 preferred stock
419

 

 

 

 
(1,692
)
 

 

 
(1,273
)
Gain on exchange of preferred stock
(12,867
)
 

 

 

 
12,867

 

 

 

Share-based compensation expense
 recognized

 

 
11

 
50

 

 

 

 
61

Net change

 

 

 

 

 
(130
)
 

 
(130
)
December 31, 2010
$
16,390

 
$
45,534

 
$
31,883

 
$
784

 
$
12,225

 
$
249

 
$

 
$
107,065

Net income

 

 

 

 
4,373

 

 

 
4,373

Cash dividends - common ($.04 per
 share)

 

 

 

 
(368
)
 

 

 
(368
)
42,133 shares issued to directors

 
211

 
(68
)
 

 

 

 

 
143

Dividends and accretion on
 preferred stock
1,174

 

 

 

 
(1,774
)
 

 

 
(600
)
6,000 restricted share awards vested

 
30

 
71

 
(101
)
 

 

 

 

Share-based compensation expense
 recognized

 

 
7

 
(9
)
 

 

 

 
(2
)
Tax benefits on restricted stock
 dividends paid

 

 
2

 

 

 

 

 
2

Net change

 

 

 

 

 
(1,017
)
 

 
(1,017
)
December 31, 2011
$
17,564

 
$
45,775

 
$
31,895

 
$
674

 
$
14,456

 
$
(768
)
 
$

 
$
109,596



The accompanying notes are an integral part of these financial statements.



9

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
(In Thousands)
 
2011
 
2010
 
2009
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
4,373

 
$
4,010

 
$
(59,805
)
Adjustments to reconcile net income (loss) to net cash provided by operating
   activities:
 

 
 

 
 
Share-based compensation
141

 
194

 
73

Amortization of pension costs
676

 
787

 
878

Depreciation and amortization
2,517

 
2,736

 
3,281

Goodwill impairment

 

 
32,572

Intangible asset impairments

 

 
1,248

Provision for loan losses
9,720

 
9,220

 
49,601

Net investment amortization
2,791

 
2,090

 
1,178

Net change in unearned fees/deferred costs on loans
(109
)
 
44

 
(243
)
Capitalized dividends on FHLB stock
(27
)
 
(27
)
 
(19
)
Gain on securities available for sale
(2,769
)
 
(2,255
)
 
(456
)
Impairment loss on securities available for sale
631

 
403

 
829

Gains on loans held for sale
(1,377
)
 
(1,285
)
 
(1,006
)
Other real estate losses
5,874

 
1,574

 
5,778

Other asset sale (gains) losses
(317
)
 
225

 
(732
)
Deferred income taxes
1,007

 
735

 
(10,855
)
Originations of loans held for sale, net of repayments
(92,009
)
 
(83,200
)
 
(107,959
)
Sales proceeds of loans held for sale
73,071

 
88,277

 
106,348

(Increase) decrease in:
 
 
 

 
 
Accrued interest receivable
258

 
1,218

 
2,234

Cash surrender value of bank owned life insurance
(638
)
 
(667
)
 
(762
)
Other assets
(1,683
)
 
(1,800
)
 
1,086

Increase (decrease) in:
 

 
 

 
 
Accrued interest payable
(447
)
 
(1,463
)
 
(604
)
Other liabilities
799

 
8,392

 
(4,874
)
Net cash provided by operating activities
2,482

 
29,208

 
17,791

 
 
 
 
 
 
Cash flows from investing activities:
 

 
 

 
 

Purchases of securities available for sale
(220,235
)
 
(170,862
)
 
(142,697
)
Sales of securities available for sale
114,435

 
89,164

 
17,240

Maturities of securities available for sale
63,678

 
87,509

 
67,318

Purchases of loans held for investment
(42,118
)
 
(44,167
)
 

Sales of nonperforming loans

 
500

 
6,350

Net decrease in other loans held for investment
75,124

 
397

 
21,506

Net (increase) decrease in:
 

 
 

 
 
Interest-bearing bank balances
32,712

 
12,707

 
(78,254
)
Federal funds sold

 
45,000

 
(60,650
)
Bank premises and equipment
1,119

 
(226
)
 
(1,061
)
Net benefits received (purchases) of bank owned life insurance
(49
)
 
(41
)
 
202

Proceeds from sales of other real estate and other repossessed assets
9,729

 
16,626

 
23,127

Payments for ORE improvements and lienholder payoffs
(563
)
 
(1,276
)
 
(599
)
Net redemptions of FHLB stock

 

 
225

Net cash provided by (used in) investing activities
33,832

 
35,331

 
(147,293
)
 
 
 
 
 
 





10

FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
(In Thousands)
 
2011
 
2010
 
2009
Cash flows from financing activities:
 
 
 
 
 
Net increase (decrease) in deposits
(3,973
)
 
(12,880
)
 
126,857

Net increase (decrease) in short-term borrowings
(29,083
)
 
24,839

 
(1,086
)
Proceeds from other borrowings
686

 
2,872

 
20,000

Repayments of other borrowings
(8,101
)
 
(74,966
)
 
(49,037
)
Earnings distributions to noncontrolling interests

 

 
(11
)
Common dividends paid
(368
)
 
(366
)
 
(1,466
)
Preferred dividends paid
(600
)
 
(1,385
)
 
(1,075
)
Preferred shares and common stock warrant issued to U.S. Treasury

 

 
30,000

Tax benefits related to share-based compensation
2

 

 
28

Net cash provided by (used in) financing activities
(41,437
)
 
(61,886
)
 
124,210

Net increase (decrease) in cash and due from banks
(5,123
)
 
2,653

 
(5,292
)
Cash and due from banks at January 1
45,099

 
42,446

 
47,738

Cash and due from banks at December 31
$
39,976

 
$
45,099

 
$
42,446

 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures:
 

 
 

 
 

Total interest paid
$
17,311

 
$
25,373

 
$
31,852

Total income taxes paid
3

 
232

 
69

Income tax refunds received

 
8,735

 
1,249

 
 
 
 
 
 
Transfers of loans to foreclosed property
20,870

 
24,192

 
40,048

Transfers of buildings to foreclosed property
139

 
180

 

Gain on exchange of Class B preferred stock

 
12,867

 

U.S. Treasury preferred dividend accrued but unpaid
75

 
75

 
187

Accretion on U.S. Treasury preferred stock
1,174

 
419

 
201



The accompanying notes are an integral part of these financial statements.



11

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  Summary of Significant Accounting Policies

The accounting and reporting policies of First M&F Corporation (the Company) which materially affect the determination of financial position and results of operations conform to accounting principles generally accepted in the United States of America and general practices within the banking industry. A summary of these significant accounting and reporting policies is presented below.

Organization and Operations

The Company is a one-bank holding company that owns 100% of the common stock of Merchants and Farmers Bank (the Bank) of Kosciusko, Mississippi. The Bank is a commercial bank and provides a full range of banking services through its offices in Mississippi, Alabama, Tennessee and Florida. The Bank provides brokerage and insurance services through its offices in Mississippi. As a state chartered commercial bank, the Bank is subject to the regulations of certain Federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Principles of Consolidation

The consolidated financial statements of First M&F Corporation include the accounts of the Company and its wholly owned subsidiary, Merchants and Farmers Bank, and the accounts of the Bank's wholly owned inactive finance subsidiary, credit insurance subsidiary, general insurance agency subsidiaries, real estate subsidiary, asset-based lending subsidiary and 55% owned title insurance agency. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company is substantially in the business of community banking and therefore is considered a banking operation with no separately reportable segments.

Reclassifications

Certain immaterial items within the accompanying financial statements for previous years have been reclassified to conform to the 2011 presentation. These reclassifications had no effect on net earnings or stockholders’ equity.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future economic and market conditions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although our estimates and assumptions contemplate current economic conditions and how we expect them to change in the future, it is reasonably possible that in 2012 actual conditions could be worse than those anticipated, which could materially affect our financial condition and results of operations. The allowance for loan losses, the fair value of financial instruments, the fair value of other real estate, the valuation of deferred tax assets and other-than-temporary investment impairments represent significant estimates.

Comprehensive Income

Comprehensive income includes net income reported in the statements of operations and net changes in stockholders’ equity arising from activity with non-owners. Components of accumulated other comprehensive income (loss) for the Company are: (1) changes in unrealized gains (losses) on securities available for sale, (2) changes in unrealized gains (losses) on cash flow hedges and (3) actuarial and other changes in net unamortized pension costs.

Fair Value Measurements

Fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that use observable market information as well as unobservable estimates and adjustments based upon the inputs that management believes that market participants would use. Certain assets and liabilities are accounted for at fair value on a recurring basis. Changes in fair value for these assets and liabilities are recorded in the statement of operations or in other comprehensive income as prescribed by applicable accounting standards.

Securities Available for Sale

Securities which are available to be sold prior to maturity are classified as securities available for sale and are recorded at fair value. Unrealized holding gains and losses are reported net of deferred income taxes as a separate component of stockholders' equity.

Premiums and discounts are amortized or accreted over the life of the related security using the interest method. Interest income is recognized when earned. Securities for which interest payments are past due are placed in nonaccrual status with interest income being recognized as interest payments are received.

12

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1: (Continued)

Realized gains and losses on securities available for sale are included in earnings and are determined using the specific amortized cost of the securities sold. When the fair values of available-for-sale securities fall below their amortized cost basis they are considered to be impaired. For debt securities, if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the debt security before the recovery of its amortized cost basis then the full impairment is recognized in earnings as a realized loss. However, if the Company does not have the intent to sell the debt security and it is more likely than not that it will not be required to sell the debt security before recovery of its amortized cost basis, then only the amount of the unrealized loss that is determined to be a credit loss is reflected in earnings. The remaining unrealized loss that is due to non-credit factors is reflected in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows, (4) changes in credit ratings of the issuers and (5) the Company’s intent to sell and assessment of the likelihood that the Company would be required to sell the security before it could recover its cost. For beneficial interests such as collateralized debt obligations the Company uses the expected cash flow analysis prescribed by applicable accounting standards as well as its intent related to the disposition of its investment to determine whether an other-than-temporary impairment exists.

Loans Held for Sale

Loans held for sale, consisting primarily of mortgages, are accounted for at the lower of cost or fair value applied on an individual loan basis. Valuation changes are recorded in mortgage banking income.

Loans Held for Investment

Loans that management has the ability and intent to hold for the foreseeable future or until maturity or payoff are considered held for investment. Loans held for investment are stated at the principal amount outstanding, net of unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees and direct loan origination costs, as well as purchase premiums and discounts, are deferred and recognized over the life of the related loans as adjustments to interest income using the level yield method.

The Bank discontinues the accrual of interest on loans and recognizes income only as received (places the loans in nonaccrual status) when, in the judgment of management, the collection of interest, but not necessarily principal, is doubtful. Unpaid accrued interest is charged against interest income on loans when they are placed in nonaccrual status. Payments received on loans in nonaccrual status are generally applied as a reduction to principal until such time that the Company expects to collect the remaining contractual principal. When a borrower of a loan that is in nonaccrual status can demonstrate the ability to repay the loan in accordance with its contractual terms, then the loan may be returned to accruing status. The Company determines past due status on all loans based on their contractual repayment terms. Loans are considered past due if either an interest or principal payment is past due in accordance with the loan’s contractual repayment terms.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank measures impaired and restructured loans at the present value of expected future cash flows, discounted at the loan's effective interest rate, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recorded on a cash basis if the loans are in nonaccrual status.

Allowance and Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against earnings. Loans are considered uncollectible when available information confirms that the loan can't be collected in full. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level believed to be adequate by management to absorb estimated probable loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on estimated credit losses for specifically identified impaired loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio based primarily on historical loss rates. Several asset quality metrics, both quantitative and qualitative, are considered in estimating both specific impairments and in the application of historical loss rates. The fundamental tool used by management to estimate individual impairment allowances and contingency allowances is the individual loan risk rate. For the purpose of determining allowances, management segregates the loan portfolio primarily by risk rating and secondarily by whether the loan is collateral dependent. Management considers a number of factors in assigning risk rates to individual loans and in determining impairment allowances and in the application of historical loss rates, including: past due trends, current trends, current economic conditions, industry exposure, internal and external loan reviews, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant. Loans not reviewed for specific impairment allowances are grouped into risk pools with similar traits and subjected to historical loss rates to estimate losses in each pool. Troubled debt restructurings are considered to be impaired loans and are included with the loans that are individually reviewed for impairment allowances. Troubled debt restructurings are loans in which the Company has granted a concession to the borrower which would not otherwise be considered due to the borrower’s financial difficulties.

13

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1: (Continued)

Certain risk characteristics are common to all real estate lending, whether it be construction and land development, commercial real estate or residential real estate. Real property values can fall, creating loan to value problems that can be exacerbated by over supply and falling demand. General economic conditions including increasing or stagnant unemployment rates can have a negative effect on normally credit-worthy borrowers in each real estate segment. Debt service ratios can weaken if real estate sales fall off or have not fully recovered. Commercial and asset-based lending credits are directly affected by swings in the economy and the inherent risks from lower retail sales, due to lower consumer and commercial demand, falling rental prices and rental vacancies. Unemployment also can weigh heavily on business credits and put additional strain on commercial cash flows. Consumer lending is most directly affected by unemployment issues and consumer confidence in the economy and jobs market. Retail lending volumes and credit-worthiness can come under strain as prices rise and income opportunities decline. The Company considers all of these qualitative risks in its determination of not only individual loan risk grading but also decisions about individual loan impairments and the need for any overall environmental factor or any adjustment of historical loss rates.

The Company monitors available credit on large lines to identify any off-balance sheet credit risks that may arise. Available credit lines are also taken into consideration for loans that are individually tested for impairment amounts. Any lines for which there is insufficient collateral or other sources of repayment will have impairment amounts accrued for deficiencies above the amount of the outstanding loan balance. The Company generally has the contractual right to suspend available credit on a commitment when a contractual default occurs. Available lines are generally suspended, except for the completion of construction projects, when loans are restructured. The Company did not have a liability accrued for any off-balance sheet credit risks at December 31, 2011.

Management’s evaluation of the allowance for loan losses is inherently subjective as it requires material estimates. The actual amounts of loan losses realized in the near term could differ from the amounts estimated in arriving at the allowance for loan losses reported in the financial statements.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed principally using the straight-line method and charged to operating expenses over the estimated useful lives of the assets. Costs of major additions and improvements are capitalized and subsequently depreciated over their estimated useful lives. Expenditures for maintenance and repairs are charged to expense as incurred.

Other Real Estate

Other real estate acquired through partial or total satisfaction of loans is carried at the lower of fair value, net of estimated costs to sell, or cost. The original cost of other real estate is recognized as the fair value of the property, net of estimated costs to sell, at the date of acquisition (foreclosure or transfer). Any loss incurred at the date of acquisition is charged to the allowance for loan losses. Gains or losses incurred subsequent to the date of acquisition are reported in current operations. Related operating income and expenses are reported in current operations.

Intangible Assets

Goodwill represents the excess of the cost of other entities acquired over the fair value of the net assets acquired. Goodwill and intangible assets that have indefinite lives are not amortized, but are tested for impairment annually and when there is an impairment indicator. An impairment indicator is an event or change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill impairment losses are reported as a separate line item in the Company’s statement of operations.

Intangible assets with determinable useful lives such as core deposit intangibles, customer renewal lists and noncompete agreements are amortized over their estimated respective useful lives. Intangible assets with determinable useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, these intangible assets are recorded at fair value.

Income Taxes

The Company, the Bank and the Bank's wholly owned subsidiaries file consolidated Federal and state income tax returns. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred income tax expenses (benefits) result from changes in deferred tax assets and liabilities between reporting periods. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Interest and penalties assessed by the taxing authorities are classified as income tax expense in the statement of operations.

14

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1: (Continued)

Contingent Liabilities

Contingent liabilities, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Concentrations of Credit

Substantially all of the Company’s loans, commitments and standby and commercial letters of credit have been granted to borrowers who are customers in the Company’s market area. As a result, the Company is subject to this concentration of credit risk. A substantial portion of the loan portfolio, as presented in Note 4, is represented by loans collateralized by real estate. The ability of the borrowers to honor their contracts is dependent upon the real estate market and general economic conditions in the Company’s market area.

Derivative Financial Instruments

All contracts that satisfy the definition of a derivative are carried at fair value. Interest rate swaps are used to hedge the Company’s exposure to changes in interest rates. The Company maintains written documentation for these derivatives which hedge forecasted transactions and are therefore considered cash flow hedges. This documentation identifies the hedging objective and strategy, the hedging instrument, the instrument being hedged, the reasoning behind the assertion that the hedge is highly effective and the methodology for measuring ongoing hedge effectiveness and ineffectiveness. Changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash flow hedge are initially recorded in other comprehensive income, and subsequently reclassified to earnings in the same period that the hedged item impacts earnings. Any ineffective portion is recorded in current period earnings. Assessments of hedge effectiveness are performed monthly, and hedge accounting ceases on transactions that are no longer deemed effective. For discontinued cash flow hedges where the hedged transaction remains probable to occur as originally designated, the unrealized gains and losses recorded in accumulated other comprehensive income would be reclassified to earnings in the period when the previously designated hedged cash flows occur. If the previously designated transaction were no longer probable of occurring, any unrealized gains and losses would be immediately reclassified to earnings.

The Company enters into interest rate lock and forward sale agreements on mortgage loans that are held for sale. These agreements are accounted for as freestanding derivatives with all changes in fair value recorded in mortgage banking income.

Restricted Cash Balances

The Company has entered into an interest rate swap agreement designed to convert floating rate interest payments on subordinated debentures into fixed rate payments. The Company had pledged interest bearing bank balances as collateral to an interest rate swap counterparty in the amounts of $1.861 million at December 31, 2011 and $1.500 million at December 31, 2010.

The Company holds $200 thousand in certificates of deposit in commercial banks as compensating balances for a third party debit card processor and a third party credit card originator. The certificates of deposit are included in interest-bearing bank balances.

Recent Pronouncements

Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The provisions of ASU 2010-06 became effective on January 1, 2010 with the exception of the requirement to provide Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which became effective on January 1, 2011. The adoption of the portion of ASU 2010-06 that became effective on January 1, 2011 did not have a material impact on the Company’s financial position or results of operations.
 

15

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1: (Continued)

Recent Pronouncements: (Continued)

Accounting Standards Update No. 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period are required for the Company’s financial statements that include periods beginning on or after January 1, 2011. The adoption of ASU 2010-20 as it relates to activity during a reporting period did not have a material impact on the Company’s financial position or results of operations.
 
Accounting Standards Update No. 2011-02, “Receivables (Topic 310) – A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring." ASU 2011-02 provides guidance and clarification to help in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. ASU 2011-02 became effective for the Company as of July 1, 2011, and was applied retrospectively to restructurings occurring on or after January 1, 2011. For purposes of measuring impairment of those receivables that were newly considered impaired, the provisions of ASU 2011-02 were applied prospectively as of July 1, 2011. The adoption of ASU 2011-02 did not have a material impact on the Company’s financial position or results of operations.

Accounting Standards Update No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements." ASU 2011-03 provides guidance related to the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 clarifies the guidance related to whether an entity has maintained effective control over transferred assets and therefore must treat the transaction as a financing rather than as a sale. ASU 2011-03 provides that the criterion pertaining to an exchange of collateral should not be a determining factor in assessing effective control. The assessment of effective control must focus on a transferor's contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. Therefore, the amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 will be effective for the Company as of January 1, 2012. Adoption of ASU 2011-03 is not expected to have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." ASU 2011-04 clarifies how fair values should be measured for instruments classified in stockholders' equity and under what circumstances premiums and discounts should be applied in fair value measurements. The guidance also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks or counterparty credit risks. Required new disclosures for financial instruments classified as Level 3 fair values include (1) quantitative information about unobservable inputs used in measuring fair values, (2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs and (3) a description of the valuation processes used. ASU 2011-04 also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair value is required to be disclosed. ASU 2011-04 will be effective for the Company prospectively for interim and annual periods beginning on January 1, 2012. Adoption of ASU 2011-04 is not expected to have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income." ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU 2011-05 will be effective for the Company retrospectively for interim and annual periods beginning on January 1, 2012. Certain provisions related to the presentation of reclassification adjustments were deferred by ASU 2011-12 as noted below. Adoption of ASU 2011-05 is not expected to have a material impact on the Company's financial position or results of operations.

16

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1: (Continued)

Recent Pronouncements: (Continued)

Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires the disclosure of both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for interim and annual periods beginning on January 1, 2013. Adoption of ASU 2011-11 is not expected to have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 is effective concurrent with the effective date of ASU 2011-05.



Note 2:  Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. Applicable accounting principles establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

17

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
Fair Value Measurements at
December 31, 2011, Using
 
Assets/Liabilities
Measured at Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
December 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
U.S. Government sponsored entities
$
58,792

 
$

 
$
58,792

 
$

Mortgage-backed investments
203,686

 

 
203,686

 

Obligations of states and political subdivisions
54,142

 

 
54,142

 

Collateralized debt obligations
819

 

 

 
819

Other debt securities
3,335

 

 
3,335

 

Total securities available for sale
$
320,774

 
$

 
$
319,955

 
$
819

Interest rate swap asset

 

 

 

Mortgage derivative assets
269

 

 

 
269

 
$
321,043

 
$

 
$
319,955

 
$
1,088

 
 
 
 
 
 
 
 
Interest rate swap liability
$
1,834

 
$

 
$

 
$
1,834

Mortgage derivative liabilities
291

 

 

 
291

 
$
2,125

 
$

 
$

 
$
2,125


 
 
 
Fair Value Measurements at
December 31, 2010, Using
 
Assets/Liabilities
Measured at Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
December 31, 2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
U.S. Government sponsored entities
$
58,611

 
$

 
$
58,611

 
$

Mortgage-backed investments
173,921

 

 
173,921

 

Obligations of states and political subdivisions
41,828

 

 
41,828

 

Collateralized debt obligations
934

 

 

 
934

Other debt securities
1,635

 

 
1,635

 

Total securities available for sale
$
276,929

 
$

 
$
275,995

 
$
934

Interest rate swap asset
817

 

 

 
817

Mortgage derivative assets
246

 

 

 
246

 
$
277,992

 
$

 
$
275,995

 
$
1,997

 
 
 
 
 
 
 
 
Interest rate swap liability
$

 
$

 
$

 
$

Mortgage derivative liabilities
28

 

 

 
28

 
$
28

 
$

 
$

 
$
28

 

18

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

U.S. Treasury, Government sponsored entity and mortgage-backed securities. Securities issued by the U.S. Treasury and Government sponsored entities and mortgage-backed securities are traded in a dealer market and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service that primarily uses trading activity in the dealer market to determine market prices.

Obligations of states and political subdivisions. Municipal securities include investments that are traded in a dealer market and investments that trade infrequently and are reported using Level 2 inputs. The fair value measurements are obtained from both an independent pricing service and from a pricing matrix that considers observable inputs such as dealer quotes, market yield curves, credit information (including observable default rates) and the instrument's contractual terms and conditions, obtained from a municipal security data provider.

Other debt securities. Other debt securities trade in a dealer market and are reported using Level 2 inputs. The fair value measurements are provided by an independent pricing service and are derived from trading activity in the dealer market.

Collateralized debt obligations. The Company owns certain beneficial interests in collateralized debt obligations secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Company utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes.

Mortgage derivatives.  Mortgage derivative assets and liabilities represent the fair values of the interest rate lock commitments (IRLCs) of the Company to originate mortgages at certain rates as well as the commitments, or forward sale agreements (FSAs), to sell the mortgages to investors at locked prices within a specified period of time. The Company uses an internal valuation model with observable market data inputs consisting primarily of dealer quotes, market yield curves and estimated servicing values, and non-observable inputs such as credit-related adjustments and estimated pull-through rates. These instruments are classified as Level 3 fair values. Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s statement of condition.

Interest rate swap.  The interest rate swap is valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using a rate derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

The following table reports the activity for 2011 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

 
Year Ended December 31, 2011
(Dollars in thousands)
Collateralized
Debt
Obligations
 
Mortgage
Derivatives
 
Interest
Rate
Swap
Beginning Balance
$
934

 
$
218

 
$
817

Total gains or losses (realized/unrealized):
 

 
 

 
 

Other-than-temporary impairment included in earnings
(631
)
 

 

Other-than-temporary impairment transferred from other comprehensive income
263

 

 

Other gains/losses included in other comprehensive income
253

 

 
(3,171
)
Net swap settlement recorded

 

 
520

IRLC and FSA issuances

 
398

 

IRLC and FSA expirations and fair value changes included in earnings

 
(398
)
 

IRLC transfers into closed loans/FSA transferred on sales

 
(240
)
 

Ending Balance
$
819

 
$
(22
)
 
$
(1,834
)
 
 
 
 
 
 
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
$
(631
)
 
$

 
$
(520
)

19

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

The following table reports the activity for 2010 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

 
Year Ended December 31, 2010
(Dollars in thousands)
Collateralized
Debt
Obligations
 
Mortgage
Derivatives
 
Interest
Rate
Swap
Beginning Balance
$
1,080

 
$
84

 
$

Total gains or losses (realized/unrealized):
 

 
 

 
 

Other-than-temporary impairment included in earnings
(403
)
 

 

Other-than-temporary impairment included in other comprehensive income
(32
)
 

 

Other gains/losses included in other comprehensive income
289

 

 
817

Net swap settlement recorded

 

 

IRLC and FSA issuances

 
702

 

IRLC and FSA expirations and fair value changes included in earnings

 
(188
)
 

IRLC transfers into closed loans/FSA transferred on sales

 
(380
)
 

Ending Balance
$
934

 
$
218

 
$
817

 
 
 
 
 
 
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
$
(403
)
 
$

 
$


The following table reports the activity for 2009 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

 
Year Ended December 31, 2009
(Dollars in thousands)
Collateralized
Debt
Obligations
 
Mortgage
Derivatives
Beginning Balance
$

 
$

Total gains or losses (realized/unrealized):
 

 
 

Other-than-temporary impairment included in earnings
(829
)
 

Other-than-temporary impairment included in other comprehensive income
(2,698
)
 

Other gains/losses included in other comprehensive income
641

 

Transfers in and/or out of Level 3
3,966

 
84

Ending Balance
$
1,080

 
$
84

 
 
 
 
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
$
(829
)
 
$


20

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
Fair Value Measurements Using
 
For the
Year-to-Date
Ended
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
12/31/11 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
15,533

 
$

 
$

 
$
15,533

Loan foreclosures
11,304

 

 

 
11,304

Other real estate
13,788

 

 

 
13,788


The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
Fair Value Measurements Using
 
For the
Year-to-Date
Ended
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
12/31/10 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
27,335

 
$

 
$

 
$
27,335

Loan foreclosures
5,013

 

 

 
5,013

Loans transferred to HFS

 

 

 

Other real estate
12,498

 

 

 
12,498


The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
Fair Value Measurements Using
 
For the
Year-to-Date
Ended
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
12/31/09 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
$
67,492

 
$

 
$

 
$
67,492

Loan foreclosures
17,899

 

 

 
17,899

Loans transferred to HFS

 

 

 

Other real estate
11,464

 

 

 
11,464

Bankers bank stock

 

 

 

Goodwill

 

 

 

Intangible assets

 

 

 


(a)
These amounts represent the resulting carrying amounts on the consolidated statement of condition for impaired real estate-secured loans and other real estate for which fair value re-measurements took place during the period. Loan foreclosures represent the fair value portion of the carrying amounts of other real estate properties that were re-measured at the point of foreclosure during the period.

21

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

(Dollars in thousands)
2011
 
2010
 
2009
Impaired loans
$
8,303

 
$
6,550

 
$
26,135

Loan foreclosures
4,892

 
4,080

 
12,025

Loans transferred to HFS

 
325

 
3,189

Other real estate
5,093

 
2,323

 
4,101

Bankers bank stock

 

 
78

Goodwill

 

 
32,572

Intangible assets

 

 
1,248


Gains and losses recognized due to fair value re-measurements are recorded in the consolidated statements of operations in (1) provision for loan losses for impaired loans, loan foreclosures and loans held for sale and (2) foreclosed property expenses for other real estate. The loss on bankers bank stock was recorded in other income. The goodwill and intangible asset impairments were recorded as separate noninterest expense line items.

Impaired Loans.  Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data and other internal estimates.

Loan Foreclosures.  Certain foreclosed assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on appraisals, observable market data and other internal estimates.

Loans Transferred To Held For Sale.  Certain nonperforming loans held for investment were transferred to held for sale status during 2010. Loans with an amortized cost of $825 thousand were written down by $325 thousand to a fair value of $500 thousand upon transfer to held for sale status. The $325 thousand write-down was charged to the allowance for loan losses. The loans were subsequently sold for $500 thousand.

Bankers bank stock.  Bankers bank stock consists of 100 shares of Silverton Bank, N.A. which was formerly known as the Georgia Bankers Bank. The stock was purchased in 2001 for $78 thousand. The Bank was closed by federal bank regulators on May 1, 2009 and taken into receivership. Since the stock did not have a readily determinable fair value it was carried at cost in other assets in the consolidated statement of condition. The Company wrote off the entire $78 thousand balance as an other asset impairment loss which was included in other income in the consolidated statements of operations.

Other real estate.  Other real estate consists of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers recent appraisals when available, what other properties have sold for, how long properties have been on the market, the condition of the property, the availability of liquid buyers and other assumptions that market participants may use in determining a price at which they would acquire the property. Since certain significant inputs to these estimates are management-derived and unobservable, fair values are reported as using Level 3 inputs.

Goodwill.  Goodwill is tested for impairment on an annual basis and also when there are indicators that an impairment may have occurred. The Company evaluated its goodwill asset as of March 31, 2009 and again at December 31, 2009 after the stock price continued to fall from $8.46 per share at December 31, 2008 to $6.12 per share at March 31, 2009 and to $2.21 per share at December 31, 2009 and as the Company continued to accrue for growing losses in the real estate construction loan portfolio during the first quarter and again during the fourth quarter. The implied fair value of goodwill was determined after valuing the community banking unit of the Company using Level 3 inputs based primarily on (1) historical deal prices for community banks, adjusted for bank size and credit quality factors and (2) discounted cash flow analyses. The implied fair value of goodwill was determined as a residual amount after allocating the estimated value of the net assets of the community banking unit to its identifiable recognized and unrecognized, both tangible and intangible, assets and liabilities in a manner similar to the purchase accounting allocations required by applicable accounting principles. These allocations required the estimation of the fair values of identifiable assets and liabilities, both recognized and unrecognized, primarily using Level 3 inputs such as discounted cash flow analyses utilizing cash flow projections, credit assumptions, and discount rate assumptions and other adjustments that management assumes that a market participant would use. The implied fair value of goodwill at March 31, 2009, which had a carrying value of $32.572 million, was estimated to be $16.772 million, requiring an impairment charge of $15.800 million. The implied fair value of goodwill at December 31, 2009, which had a carrying value of $16.772 million, was estimated to be zero, requiring an impairment charge of $16.772 million.

22

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

Intangible assets.  Intangible assets include a Florida banking charter and insurance agency customer renewal lists and noncompete agreements. The Company evaluated these assets for impairment during the first quarter of 2009. An analysis of expected cash flows related to insurance agency customer renewal lists and noncompete agreements indicated that the assets were impaired. An analysis of the Florida banking charter, based on indications of market value and management’s assessment of economic factors related to the Florida markets, indicated that it was impaired. The intangible assets were valued using unobservable (Level 3) inputs. The banking charter is an indefinite lived intangible asset for which the Company had recorded no amortization expense. The insurance agency assets were being amortized over their useful lives up until the time of the impairment test. The Company recorded $14 thousand in amortization expense related to the insurance agency assets during the first quarter of 2009. The banking charter was determined to be fully impaired, with an impairment charge of $1.025 million being recorded in intangible asset amortization and impairment expense during the first quarter of 2009. The insurance agency intangible assets were also deemed to be fully impaired with their remaining balances of $223 thousand being written off to intangible asset amortization and impairment expense.
 
Fair Value of Financial Instruments

The following table presents the carrying amounts and fair values of the Company’s financial instruments at December 31, 2011 and December 31, 2010:

 
December 31, 2011
 
December 31, 2010
(Dollars in thousands)
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and short-term investments
$
104,367

 
$
104,367

 
$
142,202

 
$
142,202

Securities available for sale
320,774

 
320,774

 
276,929

 
276,929

Loans held for sale
26,073

 
27,053

 
6,242

 
6,242

Loans held for investment
981,387

 
921,351

 
1,044,121

 
965,894

Agency accounts receivable
217

 
217

 
346

 
346

Accrued interest receivable
6,122

 
6,122

 
6,380

 
6,380

Nonmarketable equity investments
7,380

 
7,380

 
7,353

 
7,353

Investment in unconsolidated VIE
3,425

 
3,425

 
3,615

 
3,615

Mortgage derivative assets
269

 
269

 
246

 
246

Financial liabilities:
 

 
 

 
 

 
 

Noninterest-bearing deposits
231,718

 
231,718

 
212,199

 
212,199

NOW, MMDA and savings deposits
707,798

 
707,798

 
645,433

 
645,433

Certificates of deposit
431,947

 
439,518

 
517,780

 
527,971

Short-term borrowings
4,398

 
4,398

 
33,481

 
33,481

Other borrowings
43,001

 
45,193

 
50,416

 
53,213

Junior subordinated debt
30,928

 
25,204

 
30,928

 
25,123

Agency accounts payable
641

 
641

 
586

 
586

Accrued interest payable
1,023

 
1,023

 
1,470

 
1,470

Mortgage derivative liabilities
291

 
291

 
28

 
28

Other financial instruments:
 

 
 

 
 

 
 

Commitments to extend credit and letters of credit
(4
)
 
(320
)
 
(15
)
 
(306
)
   Interest rate swap
(1,834
)
 
(1,834
)
 
817

 
817


23

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

Cash and due from banks, interest-bearing deposits with banks and Federal funds sold are valued at their carrying amounts which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments.

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. We use an external pricing service to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. We use the one price per instrument provided for the securities that the service can produce prices for. We do not adjust the prices that are obtained from external pricing services. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use the pricing disclosed in the investment accounting product provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s accounting system uses prices provided by (1) the same external pricing service that we use, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At December 31, 2011, the only securities that were not priced by the primary provider were 13 municipal bonds representing 6 issuers and the collateralized debt obligations. We used the broker-dealer’s matrix prices for the municipal securities and a third-party provider’s modeled prices for the collateralized debt obligations (CDOs).

CDOs are valued by an external party using a model. The model inputs are (1) discount margins based on current market activity and (2) cash flows based upon contractual amounts adjusted for expected defaults, expected deferrals and expected prepayments. Expected defaults and deferrals are determined through a credit analysis of and risk rating assignment to each obligor of the collateral that funds the investment vehicles. Most of these inputs are not directly observable in the market, resulting in the fair values being classified as Level 3 valuations within the fair value accounting hierarchy.

The primary method of validation of investment security values that we use is the comparison of the prices that we receive from our primary pricing service provider with the prices that are used in the broker-dealer’s investment accounting reports. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs may be validated by comparing the fair values with those obtained by other valuation experts. We review the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are observable in the market.

Loans held for sale are valued by discounting the estimated cash flows using current market rates for instruments with similar credit ratings and maturities and adjusting those rates using dealer pricing adjustments for characteristics unique to the borrower’s circumstances or the structuring of the credit.

Loans held for investment are valued by discounting the estimated future cash flows, using rates at which these loans would currently be made to borrowers with similar credit ratings and similar maturities.

Agency accounts receivable are trade receivables of M&F Insurance Group, Inc. These receivables are short-term in nature and therefore the fair value is assumed to be the carrying value. These receivables are carried in other assets in the statement of condition.

Accrued interest receivable is short-term in nature and therefore the fair value is assumed to be the carrying value.

Nonmarketable equity securities are primarily securities of the Federal Home Loan Banks for which the carrying value is estimated to be an accurate approximation of fair value. These equity securities are carried in other assets in the statement of condition.

Investments in unconsolidated VIEs are the Company’s investment in the First M&F Statutory Trust I, which acquired the Company’s junior subordinated debt through funding provided by the issuance of trust preferred securities, and an investment in a low income housing tax credit entity. The investment in the statutory trust depends on the Company’s own cash flows and therefore, the carrying value is an accurate approximation of fair value. The low income housing tax credit investment is a limited partnership interest for which the carrying value is assumed to be a reasonable estimate of its fair value. These investments are carried in other assets in the statement of condition.

Noninterest-bearing deposits do not pay interest and do not have defined maturity dates. Therefore, the carrying value is equivalent to fair value for these deposits.

NOW, MMDA and savings deposits pay interest and generally do not have defined maturity dates. Although there are some restrictions on access to certain savings deposits, these restrictions are not assumed to have a material effect on the value of the deposits. Therefore, the fair value for NOW, MMDA and savings deposits is assumed to be their carrying value.

Certificates of deposit pay interest and do have defined maturity dates. The fair value of certificates of deposit is estimated by discounting the future cash flows, using current market rates for certificates of deposit of similar maturities.

24

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 2:  (Continued)

Short-term borrowings are highly liquid and therefore the net book value of the majority of these financial instruments approximates fair value due to the short term nature of these items.

The fair value of other borrowings, which consist of Federal Home Loan Bank advances and borrowings from correspondent banks, is estimated by discounting the future cash flows, using current market rates for borrowings of similar terms and maturities.

Junior subordinated debt is valued by discounting the expected cash flows using a current market rate for similar instruments.

Agency accounts payable are trade payables of M&F Insurance Group, Inc. due to insurance companies. These payables are very short term in nature and therefore the fair value of the payables is assumed to be their carrying value. These payables are carried in other liabilities in the statement of condition.

Accrued interest payable is short-term in nature and therefore the fair value is assumed to be the carrying value.

Commitments to extend credit and letters of credit are valued based on the fees charged to enter into similar credit arrangements.

Mortgage origination and sale commitments are considered derivatives and are therefore carried at fair market value with the changes in fair value recorded in mortgage banking income. Mortgage-related commitments with positive values are carried in other assets and those with negative values are carried in other liabilities in the statement of condition. Mortgage derivatives are valued using a combination of market discount rates, dealer quotes, estimated servicing values and pull-through rates.

The interest rate swap is being used to hedge the interest cash flows on the Company’s junior subordinated debentures. It is valued using a discounted cash flow methodology with cash flows being estimated from the 3-month LIBOR curve and discount rates derived from the swap curve.



Note 3:  Securities Available for Sale

The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2011, and 2010:

 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
December 31, 2011:
 
 
 
 
 
 
 
U.S. Government sponsored entities
$
58,714

 
$
174

 
$
96

 
$
58,792

Mortgage-backed investments
198,832

 
5,016

 
162

 
203,686

Obligations of states and political subdivisions
51,763

 
2,459

 
80

 
54,142

Collateralized debt obligations
3,137

 

 
2,318

 
819

Other debt securities
3,444

 
25

 
134

 
3,335

 
$
315,890

 
$
7,674

 
$
2,790

 
$
320,774

 
 
 
 
 
 
 
 
December 31, 2010:
 

 
 

 
 

 
 

U.S. Government sponsored entities
$
58,152

 
$
650

 
$
191

 
$
58,611

Mortgage-backed investments
170,039

 
4,268

 
386

 
173,921

Obligations of states and political subdivisions
40,924

 
1,104

 
200

 
41,828

Collateralized debt obligations
3,768

 

 
2,834

 
934

Other debt securities
1,538

 
97

 

 
1,635

 
$
274,421

 
$
6,119

 
$
3,611

 
$
276,929


25

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 3:  (Continued)

Provided below is a summary of securities available for sale which were in an unrealized loss position and the length of time that individual securities have been in a continuous loss position at December 31, 2011 and December 31, 2010. Securities on which we have taken only credit-related other-than-temporary-impairment (OTTI) write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the amortized cost basis and not the period of time since the OTTI write-down.

(Dollars in thousands)
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2011:
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
U.S. Government sponsored entities
$
23,734

 
$
96

 
$

 
$

 
$
23,734

 
$
96

Mortgage-backed investments
32,280

 
162

 

 

 
32,280

 
162

Obligations of states and political subdivisions
7,613

 
80

 

 

 
7,613

 
80

Collateralized debt obligations

 

 
819

 
2,318

 
819

 
2,318

Other debt securities
2,317

 
134

 

 

 
2,317

 
134

 
$
65,944

 
$
472

 
$
819

 
$
2,318

 
$
66,763

 
$
2,790

December 31, 2010:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored entities
$
10,898

 
$
191

 
$

 
$

 
$
10,898

 
$
191

Mortgage-backed investments
35,821

 
386

 

 

 
35,821

 
386

Obligations of states and political subdivisions
5,898

 
162

 
317

 
38

 
6,215

 
200

Collateralized debt obligations

 

 
934

 
2,834

 
934

 
2,834

 
$
52,617

 
$
739

 
$
1,251

 
$
2,872

 
$
53,868

 
$
3,611


At December 31, 2011 there were 19 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 16 mortgage-backed securities with unrealized losses less than 12 months. There were 20 municipal securities with unrealized losses less than 12 months. The unrealized losses associated with the U.S. government sponsored entity, mortgage-backed and municipal securities were primarily driven by changes in market rates and liquidity and not due to the credit quality of the securities.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. Management has evaluated these instruments for impairment as of each quarter end within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required management to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. Credit downgrades of the beneficial interests are also factored in when determining whether the impairments in these securities are other-than-temporary. The discounted cash flow estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities (the CDO collateral) of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations is determined based on an analysis of the financial condition of the banks. Generally, the same factors that result in credit rating downgrades of the beneficial interests also result in negative adjustments to the expected cash flows of the underlying collateral. This analysis results in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests if certain collateral coverage ratios are not maintained, with the remaining amounts eventually flowing through to the interests owned by the Company. Based on this type of analysis for each beneficial interest issuer, the cash flows of each of the five beneficial interests owned by the Company are projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis has resulted in other-than-temporary impairment (OTTI) conditions for all five of the securities since 2008. During 2011, three of the securities incurred other-than-temporary impairments that resulted in $631 thousand in credit-related losses being charged against earnings. During 2010, four of the securities incurred other-than-temporary impairments that resulted in $403 thousand in credit-related losses. The unrealized losses by individual security in the CDO portfolio as of December 31, 2011 ranged from 66% of amortized cost to 81% of amortized cost. Management believes that as the economy improves, the deferrals related to the CDO collateral will cure and provide enough cash flows to the CDOs for the Company to recover its adjusted book values.

26

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 3:  (Continued)

Management does not intend to sell any investment securities that have unrealized losses before the time that those losses could be recovered. Management has evaluated the investment securities that have unrealized losses within the framework of the Company’s liquidity and capital needs as well as its ability to hold those securities over an extended recovery period. Management’s evaluation involved (1) assessing whether significant future cash outflows would occur that would require the liquidation of securities and (2) determining if the balance sheet would need to be managed or reduced in a way that would require the liquidation of securities to meet regulatory capital ratio requirements. This analysis was performed to determine if it was more likely than not that the investments would have to be sold before their anticipated recoveries. Management determined that it was not more likely than not that the investments would have to be disposed of prior to their anticipated recoveries. In estimating whether there are other-than-temporary impairment losses on debt securities management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows and (4) changes in credit ratings of the issuers.

The following table provides a rollforward of the cumulative activity related to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 
Year Ended
December 31
(Dollars in thousands)
2011
 
2010
 
2009
Beginning balance
$
1,232

 
$
829

 
$

OTTI credit losses on securities not previously impaired

 

 
724

OTTI credit losses on previously impaired securities
631

 
403

 
105

Ending balance
$
1,863

 
$
1,232

 
$
829


The fair values of our investment securities could decline in the future if the underlying performance of the collateral for the trust preferred CDOs deteriorates and credit enhancements in the form of seniority in the cash flow waterfalls do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that additional OTTI may occur in the future if the economy deteriorates.

The amortized cost and fair values of debt securities available for sale at December 31, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with, or without, call or prepayment penalties. Mortgage-backed securities receive monthly payments based on the cash flows of the underlying collateral. Therefore, their stated maturities do not represent the timing of principal amounts received and no maturity distributions are shown for these securities.

(Dollars in thousands)
Amortized
Cost
 
Fair
Value
One year or less
$
27,286

 
$
27,281

After one through five years
59,747

 
60,971

After five through ten years
24,929

 
26,010

After ten years
5,096

 
2,826

 
117,058

 
117,088

Mortgage-backed investments
198,832

 
203,686

 
 
 
 
 
$
315,890

 
$
320,774


27

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 3:  (Continued)

The following is a summary of the amortized cost and fair value of securities available for sale which were pledged to secure public deposits, short-term borrowings and for other purposes required or permitted by law:

 
2011
 
2010
 
Amortized
 
Fair
 
Amortized
 
Fair
(Dollars in thousands)
Cost
 
Value
 
Cost
 
Value
Pledged to secure public and tax deposits
$
184,739

 
$
188,445

 
$
158,839

 
$
161,469

Pledged for Trust account deposits
3,902

 
4,084

 
4,877

 
4,990

Pledged for non-public repurchase agreements
8,049

 
8,458

 
37,420

 
37,109

Pledged for Fed funds purchased lines of credit
1,008

 
1,006

 
8,683

 
8,866

Pledged for interest rate swap
1,500

 
1,505

 

 

Pledged for letter of credit obtained
7,837

 
7,924

 
5,691

 
5,717

Pledged to an insurance commissioner
548

 
566

 
546

 
585

Total securities pledged
$
207,583

 
$
211,988

 
$
216,056

 
$
218,736


The following is a summary of gains and losses on securities available for sale:

(Dollars in thousands)
2011
 
2010
 
2009
Proceeds from sales
$
114,435

 
$
89,164

 
$
17,240

 
 
 
 
 
 
Gross realized gains
2,838

 
2,346

 
467

Gross realized losses
(69
)
 
(91
)
 
(11
)
Net gains from sales
$
2,769

 
$
2,255

 
$
456

Gross recognized losses related to the credit component of other-than-temporary impairments
$
631

 
$
403

 
$
829




Note 4:  Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $2.045 million and $2.439 million at December 31, 2011, and 2010:

(Dollars in thousands)
 
December 31,
2011
 
December 31,
2010
Construction and land development loans
 
$
69,325

 
$
89,093

Other commercial real estate loans
 
505,180

 
557,638

Asset-based loans
 
37,540

 
28,132

Other commercial loans
 
117,790

 
105,094

Home equity loans
 
37,024

 
40,305

Other 1-4 family residential loans
 
186,815

 
195,184

Consumer loans
 
42,666

 
44,700

Total loans
 
$
996,340

 
$
1,060,146


The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $18.005 million and $15.658 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at December 31, 2011 and December 31, 2010 respectively. Approximately $216.201 million and $247.422 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at December 31, 2011 and December 31, 2010, respectively.

28

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

During 2011 the Company purchased $31.144 million in participations of commercial loans extended to three companies. Additionally, the Company purchased $10.154 million of participations in 19 agricultural loans originated by an agribusiness customer. The commercial participations mature in five years while the agricultural participations mature during the first quarter of 2012. During 2010 the Company purchased two groups of participations in loans secured by church properties. The first group of 8 loan participations with a total face value of $10.062 million, secured by church properties in Florida, Georgia, Tennessee and Texas, were purchased at face value. The second group of 20 loan participations with a total face value of $26.968 million, secured by church properties in Florida, Georgia, Louisiana, North Carolina, Tennessee and Texas, were purchased for $26.159 million.

The Bank has made, and expects in the future to continue to make, in the ordinary course of business, loans to directors and executive officers of the Company and the Bank and to affiliates of these directors and officers. In the opinion of management, these transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectiblity at the time of the transaction.  A summary of such outstanding loans follows:

(Dollars in thousands)
2011
 
2010
Loans outstanding at January 1
$
4,485

 
$
5,018

New loans and advances
13,341

 
13,182

Repayments
(15,879
)
 
(11,380
)
Retirements
(156
)
 
(2,335
)
Loans outstanding at December 31
$
1,791

 
$
4,485


The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2011:

(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
Construction and land development loans
$
603

 
$

 
$
4,172

 
$
4,775

 
$
64,550

 
$
69,325

 
$
72

Other commercial real estate loans
2,194

 
679

 
9,792

 
12,665

 
492,515

 
505,180

 
279

Asset based loans

 

 

 

 
37,540

 
37,540

 

Other commercial loans
546

 
442

 
419

 
1,407

 
116,383

 
117,790

 
50

Home equity loans
121

 
37

 
141

 
299

 
36,725

 
37,024

 

Other 1-4 family residential loans
2,978

 
303

 
981

 
4,262

 
182,553

 
186,815

 
174

Consumer loans
214

 
67

 
41

 
322

 
42,344

 
42,666

 
27

Total
$
6,656

 
$
1,528

 
$
15,546

 
$
23,730

 
$
972,610

 
$
996,340

 
$
602


The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2010:

(Dollars in thousands)
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
Construction and land development loans
$
1,295

 
$
388

 
$
11,190

 
$
12,873

 
$
76,220

 
$
89,093

 
$
274

Other commercial real estate loans
997

 
1,453

 
11,632

 
14,082

 
543,556

 
557,638

 

Asset based loans

 

 

 

 
28,132

 
28,132

 

Other commercial loans
873

 
48

 
2,028

 
2,949

 
102,145

 
105,094

 
99

Home equity loans
453

 

 
220

 
673

 
39,632

 
40,305

 

Other 1-4 family residential loans
2,396

 
452

 
2,549

 
5,397

 
189,787

 
195,184

 
564

Consumer loans
315

 
147

 
46

 
508

 
44,192

 
44,700

 
14

Total
$
6,329

 
$
2,488

 
$
27,665

 
$
36,482

 
$
1,023,664

 
$
1,060,146

 
$
951


29

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

Loans are placed into nonaccrual status when, in management’s opinion, the borrowers may be unable to meet their payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. The following table presents a summary of the nonaccrual status of loans by type at December 31, 2011 and December 31, 2010 and other nonperforming assets:

(Dollars in thousands)
 
December 31,
2011
 
December 31, 
2010
Construction and land development loans
 
$
4,398

 
$
13,993

Other commercial real estate loans
 
9,937

 
13,027

Asset based loans
 

 

Other commercial loans
 
913

 
2,151

Home equity loans
 
474

 
303

Other 1-4 family residential loans
 
1,422

 
3,560

Consumer loans
 
33

 
93

Total nonaccrual loans
 
$
17,177

 
$
33,127

Other real estate owned
 
36,952

 
31,125

Total nonperforming credit-related assets
 
$
54,129

 
$
64,252

 
 
 
 
 
Accruing loans past due 90 days or more
 
$
602

 
$
951

Loans restructured and in compliance with modified terms
 
$
19,662

 
$
18,052


The Company applies internal risk ratings to all loans. The risk ratings range from 10, which is the highest quality rating, to 70, which indicates an impending charge-off. The following definitions apply to the internal risk ratings:

Risk rating 10 – Excellent:

Commercial – Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

Consumer – This grade is reserved for loans secured by cash collateral on deposit at the Bank with no risk of principal deterioration.

Risk rating 20 – Strong:

Commercial and Consumer – This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

Risk rating 30 – Good:

Commercial – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and they: (1) conform to Bank policy, (2) conform to underwriting standards and (3) conform to product guidelines.

30

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

Risk rating 31 – Moderate:

Commercial – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions – any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors, (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Consumer loans exhibiting this grade may have up to two mitigated guideline tolerances or exceptions.

Risk rating 32 – Fair:

Commercial – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics: (1) additional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank – although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors, (2) unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time – repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance and (3) marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Consumer loans exhibiting this grade generally have three or more mitigated guideline tolerances or exceptions.

Risk rating 40 – Special Mention:

Commercial – Special Mention loans include the following characteristics: (1) loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Consumer - Special Mention loans include the following characteristics: (1) loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Risk rating 50 – Substandard:

Commercial and Consumer – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower’s declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

31

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

Risk rating 60 – Doubtful:

Commercial and Consumer – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: (1) injection of capital, (2) alternative financing and (3) liquidation of assets or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been considered for nonaccrual status, and the repayment schedule is questionable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

Risk rating 70 – Loss:

Commercial and Consumer – Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets should be charged against the Reserve for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

The following table presents a summary of loans by credit risk rating at December 31, 2011.

(Dollars in thousands)
Construction
 
Other Commercial Real Estate
 
Asset-Based
 
Other Commercial
10 and 20
$

 
$

 
$

 
$
11,085

30-32
45,982

 
406,498

 
29,296

 
103,359

40
5,185

 
57,912

 
7,096

 
1,802

50
13,059

 
40,770

 
1,148

 
1,466

60
5,099

 

 

 
78

Total
$
69,325

 
$
505,180

 
$
37,540

 
$
117,790

 
(Dollars in thousands)
Home Equity
 
Other 1-4 Family
 
Consumer
 
Total
10 and 20
$

 
$
119

 
$
13,486

 
$
24,690

30-32
35,824

 
172,182

 
28,471

 
821,612

40
585

 
8,205

 
544

 
81,329

50
615

 
6,216

 
162

 
63,436

60

 
93

 
3

 
5,273

Total
$
37,024

 
$
186,815

 
$
42,666

 
$
996,340


32

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

The following table presents a summary of loans by credit risk rating at December 31, 2010.

(Dollars in thousands)
Construction
 
Other Commercial Real Estate
 
Asset-Based
 
Other Commercial
10 and 20
$

 
$

 
$

 
$
13,141

30-32
51,077

 
472,614

 
19,162

 
79,856

40
4,111

 
30,696

 
7,947

 
3,771

50
26,978

 
54,178

 
1,023

 
7,565

60
6,927

 
150

 

 
761

Total
$
89,093

 
$
557,638

 
$
28,132

 
$
105,094

 
(Dollars in thousands)
Home Equity
 
Other 1-4 Family
 
Consumer
 
Total
10 and 20
$

 
$
170

 
$
14,516

 
$
27,827

30-32
39,478

 
179,501

 
29,288

 
870,976

40
274

 
8,514

 
292

 
55,605

50
508

 
6,810

 
600

 
97,662

60
45

 
189

 
4

 
8,076

Total
$
40,305

 
$
195,184

 
$
44,700

 
$
1,060,146


Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

During 2011 the Company changed the way that it calculated the historical loss rates that were applied to the various risk pools of loans in determining the allowance for loan losses for loans not individually tested for impairment. Loss rates are calculated by loan type including the major categories of construction and land development, 1-4 family residential, commercial real estate secured, commercial and industrial and consumer loans. The Company has historically used a conservatively adjusted 13-year historical period for loss rates, believing that this time frame incorporated a broader range of economic and business cycles than a shorter time frame and gave a better estimate of expected losses. In September 2011, management began using a shorter historical period of five years, calculating a five year average loss rate by class of loan. This change was prompted by management and regulatory concerns about the current economic environment, observed industry changes and trends as well as management's view of the current business cycle and environment. Because of a conservative treatment of the former longer historic loss rate period - primarily by adjusting the 13-year average loss rate by two standard deviations in an attempt to include low probability events in the loss rate - there was no material difference between it and the new five year convention. The five year convention is a straight historical average which naturally includes recent high-loss years. Given the immaterial difference in the two calculations, no adjustment was required to the provision for loan losses. Management does believe that going forward the five year historical loss calculation will better reflect the risks inherent in the recent and current credit environment and that it is more appropriate than an even shorter historical period (e.g., three years) because a shorter period would too heavily weight improved periods and too quickly remove recent periods that included larger losses caused by factors that could still reasonably exist latent in the makeup of the loan class.

The Company uses environmental factors to adjust loss rates to reflect economic conditions and other circumstances that imply risk of loss in the current environment that is not necessarily reflected in the historical loss rates. At December 31, 2011 the Company adjusted the five-year loss rates by an economic environmental factor based on recessionary conditions and an illiquid market for undeveloped real estate collateral. The loss rate applied to commercial real estate loans was adjusted upward by 10 basis points. The loss rate applied to commercial, agricultural and municipal loans was adjusted upward by 50 basis points given their dependency on cash flows which are at risk absent a growing economy.

33

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2011:

(Dollars in thousands)
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired
Loans
 
Interest Income
Recognized
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Construction and land development loans
$
9,539

 
$
13,915

 
$

 
$
10,665

 
$
419

Other commercial real estate loans
33,048

 
36,117

 

 
33,597

 
1,361

Asset based loans

 

 

 

 

Other commercial loans
433

 
460

 

 
1,920

 
83

Home equity loans
159

 
159

 

 
291

 
4

Other 1-4 family residential loans
4,466

 
4,732

 

 
4,476

 
229

Consumer loans
128

 
154

 

 
147

 
14

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Construction and land development loans
$
8,620

 
$
11,294

 
$
1,750

 
$
10,991

 
$
356

Other commercial real estate loans
7,722

 
8,471

 
894

 
10,005

 
314

Asset based loans

 

 

 

 

Other commercial loans
1,111

 
1,111

 
485

 
2,099

 
91

Home equity loans
456

 
456

 
166

 
457

 
7

Other 1-4 family residential loans
1,843

 
1,843

 
397

 
1,848

 
93

Consumer loans
37

 
37

 
37

 
50

 
3

Total:
 

 
 

 
 

 
 

 
 

Construction and land development loans
$
18,159

 
$
25,209

 
$
1,750

 
$
21,656

 
$
775

Other commercial real estate loans
40,770

 
44,588

 
894

 
43,602

 
1,675

Asset based loans

 

 

 

 

Other commercial loans
1,544

 
1,571

 
485

 
4,019

 
174

Home equity loans
615

 
615

 
166

 
748

 
11

Other 1-4 family residential loans
6,309

 
6,575

 
397

 
6,324

 
322

Consumer loans
165

 
191

 
37

 
197

 
17

 

34

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2010:

(Dollars in thousands)
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired
Loans *
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
Construction and land development loans
$
20,531

 
$
29,004

 
$

 
$
20,641

Other commercial real estate loans
45,611

 
49,868

 

 
46,488

Asset based loans

 

 

 

Other commercial loans
7,028

 
8,049

 

 
7,288

Home equity loans
508

 
508

 

 
513

Other 1-4 family residential loans
4,695

 
4,961

 

 
4,721

Consumer loans
474

 
485

 

 
505

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

Construction and land development loans
$
12,900

 
$
13,921

 
$
2,871

 
$
12,936

Other commercial real estate loans
8,716

 
8,716

 
1,582

 
8,940

Asset based loans

 

 

 

Other commercial loans
1,268

 
1,419

 
809

 
1,387

Home equity loans
45

 
45

 
45

 
45

Other 1-4 family residential loans
2,304

 
2,304

 
765

 
2,317

Consumer loans
129

 
129

 
60

 
138

Total:
 

 
 

 
 

 
 

Construction and land development loans
$
33,431

 
$
42,925

 
$
2,871

 
$
33,577

Other commercial real estate loans
54,327

 
58,584

 
1,582

 
55,428

Asset based loans

 

 

 

Other commercial loans
8,296

 
9,468

 
809

 
8,675

Home equity loans
553

 
553

 
45

 
558

Other 1-4 family residential loans
6,999

 
7,265

 
765

 
7,038

Consumer loans
603

 
614

 
60

 
643

 
* These are the average year-to-date balances of loans that were reviewed for impairment in the December 31, 2010 testing.

35

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for 2011 by loan category:

(Dollars in thousands)
Construction
 
Other CRE
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
3,942

 
$
2,763

 
$
4,442

 
$
3,701

 
$
1,177

 
$

 
$
16,025

Provision charged to expense
2,159

 
5,308

 
971

 
904

 
378

 

 
9,720

Losses charged off
(2,935
)
 
(4,446
)
 
(2,534
)
 
(2,142
)
 
(952
)
 

 
(13,009
)
Recoveries
965

 
448

 
468

 
144

 
192

 

 
2,217

Balance, end of year
$
4,131

 
$
4,073

 
$
3,347

 
$
2,607

 
$
795

 
$

 
$
14,953

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

individually evaluated for impairment
$
1,750

 
$
894

 
$
485

 
$
563

 
$
37

 
$

 
$
3,729

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

collectively evaluated for impairment
$
2,381

 
$
3,179

 
$
2,862

 
$
2,044

 
$
758

 
$

 
$
11,224

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

loans acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

 
$

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
$
69,325

 
$
505,180

 
$
155,330

 
$
223,839

 
$
42,666

 
$

 
$
996,340

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

individually evaluated for impairment
$
18,159

 
$
40,770

 
$
1,544

 
$
6,924

 
$
165

 
$

 
$
67,562

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

collectively evaluated for impairment
$
51,166

 
$
464,410

 
$
153,786

 
$
216,915

 
$
42,501

 
$

 
$
928,778

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

loans acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

 
$


The following table summarizes activity in the allowance for loan losses for 2010 by loan category:

(Dollars in thousands)
Construction
 
Other CRE
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
7,416

 
$
5,959

 
$
5,893

 
$
3,407

 
$
1,339

 
$

 
$
24,014

Provision charged to expense
693

 
4,164

 
1,885

 
2,027

 
451

 

 
9,220

Losses charged off
(5,471
)
 
(7,854
)
 
(3,617
)
 
(1,854
)
 
(859
)
 

 
(19,655
)
Recoveries
1,304

 
494

 
281

 
121

 
246

 

 
2,446

Balance, end of year
$
3,942

 
$
2,763

 
$
4,442

 
$
3,701

 
$
1,177

 
$

 
$
16,025

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

individually evaluated for impairment
$
2,871

 
$
1,582

 
$
809

 
$
810

 
$
60

 
$

 
$
6,132

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

collectively evaluated for impairment
$
1,071

 
$
1,181

 
$
3,633

 
$
2,891

 
$
1,117

 
$

 
$
9,893

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

loans acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

 
$

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
$
89,093

 
$
557,638

 
$
133,226

 
$
235,489

 
$
44,700

 
$

 
$
1,060,146

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

individually evaluated for impairment
$
33,431

 
$
54,327

 
$
8,296

 
$
7,552

 
$
603

 
$

 
$
104,209

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

collectively evaluated for impairment
$
55,662

 
$
503,311

 
$
124,930

 
$
227,937

 
$
44,097

 
$

 
$
955,937

Ending balance:
 

 
 

 
 

 
 

 
 

 
 

 
 

loans acquired with deteriorated credit quality
$

 
$

 
$

 
$

 
$

 
$

 
$


36

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

Transactions in the allowance for loan losses are summarized as follows:

(Dollars in thousands)
2011
 
2010
 
2009
Balance at January 1
$
16,025

 
$
24,014

 
$
24,918

Loans charged off
(13,009
)
 
(19,330
)
 
(48,051
)
Charge offs resulting from write-downs of loans transferred to held for sale status

 
(325
)
 
(3,189
)
Recoveries
2,217

 
2,446

 
735

Net charge-offs
(10,792
)
 
(17,209
)
 
(50,505
)
Provision for loan losses
9,720

 
9,220

 
49,601

Balance at December 31
$
14,953

 
$
16,025

 
$
24,014


Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s impaired loans as of and for the years ended December 31, 2011, and 2010:

 
 
December 31, 2011
 
December 31, 2010
(Dollars in thousands)
 
Recorded Balance
 
Allowance
 
Recorded Balance
 
Allowance
Restructured loans with an allowance:
 
 
 
 
 
 
 
 
Construction and land development loans
 
$
136

 
$
61

 
$
2,135

 
$
450

Other commercial real estate loans
 
4,018

 
320

 
2,086

 
160

Other commercial loans
 
387

 
117

 
210

 
175

Other 1-4 family residential loans
 
199

 
76

 
1,179

 
512

Restructured loans without an allowance:
 
 

 
 

 
 

 
 

Construction and land development loans
 
2,725

 

 

 

Other commercial real estate loans
 
17,002

 

 
12,333

 

Other commercial loans
 
119

 

 

 

Other 1-4 family residential loans
 
1,194

 

 
167

 

Total restructured loans
 
$
25,780

 
$
574

 
$
18,110

 
$
1,297


At December 31, 2011, there were $356 thousand in available credit commitments for construction and land development restructured loans. At December 31, 2010, there were no available credit commitments for any restructured loans.

37

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 4:  (Continued)

The following table summarizes the activity for troubled debt restructurings that occurred during 2011.

(Dollars in thousands)
 
Number of Loans Modified
 
 Pre Modification Balance
 
Post Modification Balance
Interest Rate Modifications:
 
 
 
 
 
 
Construction and land development loans
 
3

 
$
1,125

 
$
1,125

Other commercial real estate loans
 
3

 
674

 
672

Other commercial loans
 
1

 
10

 
10

Other 1-4 family residential loans
 
3

 
157

 
157

Total rate modifications
 
10

 
$
1,966

 
$
1,964

 
 
 
 
 
 
 
Term Extensions and Renewals:
 
 
 
 
 
 
Construction and land development loans
 
6

 
$
3,685

 
$
3,483

Other commercial real estate loans
 
7

 
9,694

 
9,663

Other commercial loans
 
1

 
1,797

 
1,747

Other 1-4 family residential loans
 
3

 
537

 
536

Total extensions and renewals
 
17

 
$
15,713

 
$
15,429

Total loans restructured
 
27

 
$
17,679

 
$
17,393


The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during 2011 that were initially restructured during 2011.

(Dollars in thousands)
 
Number of Loans
 
Amortized Cost
Construction and land development loans
 
2

 
$
1,951

Other commercial real estate loans
 
5

 
6,655

Other 1-4 family residential loans
 
4

 
306

Total subsequent defaults
 
11

 
$
8,912


The defaults for construction and land development loans for were foreclosures. Three loans for $1.118 million of the defaults for other commercial real estate loans were foreclosures, with the remaining balances being subsequent ninety day past due defaults. The other 1-4 family loans were all subsequent ninety day past due defaults.



Note 5:  Bank Premises and Equipment

The following is a summary of bank premises and equipment at December 31, 2011 and 2010:

(Dollars in thousands)
2011
 
2010
Land
$
12,365

 
$
14,178

Buildings
36,293

 
36,292

Furniture, fixtures and equipment
19,901

 
19,890

Leasehold improvements
842

 
890

Construction in progress
131

 
428

 
69,532

 
71,678

Less accumulated depreciation and amortization
31,543

 
30,982

 
$
37,989

 
$
40,696


Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $2.090 million in 2011, $2.310 million in 2010, and $2.841 million in 2009.

38

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 5:  (Continued)

Rent expense applicable to operating leases was as follows for the years ended December 31:

(Dollars in thousands)
2011
 
2010
 
2009
Buildings and office space
$
665

 
$
581

 
$
844

Computer equipment
13

 
284

 
399

Other equipment and autos
163

 
184

 
276

 
841

 
1,049

 
1,519

Rental income
(41
)
 
(42
)
 
(47
)
Net rent expense
$
800

 
$
1,007

 
$
1,472


The Company is obligated under a number of noncancelable operating leases for premises and equipment. Minimum future lease payments for noncancelable operating leases at December 31, 2011, are as follows:

(Dollars in thousands)
 
2012
$
573

2013
384

2014
300

2015
271

2016
233

After 2016
201

Total minimum lease payments
$
1,962




Note 6:  Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually or when circumstances or events indicate that an impairment may be evident. Goodwill is tested for impairment annually during the first quarter of each year. No amortization resulted from the impairment tests performed during the first quarters of 2009 and 2008. Due to a continued decrease in the Company’s stock price coupled with increased first quarter loan impairments, an additional goodwill impairment test was performed at March 31, 2009. Step 1 of the test indicated that the net assets of the community banking unit of the Company had a fair value of less than their book value. Therefore, Step 2 was performed to determine if goodwill was an impaired asset in the allocation of the value of the community banking unit through the allocation of fair values to all of the identifiable assets and liabilities, both recorded and unrecorded, of the unit. The completion of this step resulted in the carrying value of goodwill exceeding its implied fair value by $15.800 million. Therefore, a goodwill impairment charge of $15.800 million was recorded during the first quarter of 2009. An increase in loan impairments in the fourth quarter of 2009 resulting in loan loss provisions of $10.956 million in excess of third quarter provisions and a decrease of over 60% in the stock price from the end of the first quarter to the end of the year prompted the Company to test goodwill for impairment at December 31, 2009. Step 1 of the test indicated that the net assets of the community banking unit of the Company had a fair value of less than their book value. Therefore, Step 2 was again required to determine if the goodwill asset was impaired. The Step 2 analysis resulted in no implied fair value for goodwill. Therefore, the remaining goodwill asset of $16.772 million was written off as an impairment charge during the fourth quarter of 2009.

The agency customer renewal lists and noncompete agreements arose from acquisitions of insurance agencies by M&F Insurance Group, Inc. Concurrent with the March 31, 2009 test of goodwill, these intangible assets with determinable useful lives were tested for impairment. Based on an analysis of expected cash flows, management determined that the renewal values and the value of the noncompete agreements were fully impaired. Therefore, the Company charged $191 thousand for customer renewal lists and $32 thousand for noncompete agreements to intangible asset amortization during the first quarter of 2009 to fully write off the remaining balances of the assets.

The Company acquired a Florida banking charter in a transaction with Ameris Bancorp of Moultrie, Georgia, in November 2006, for $1.025 million. The charter was being accounted for as an indefinite-lived intangible asset and therefore was not being amortized. The banking charter is tested for impairment annually and when circumstances arise or events occur that indicate that the asset may be impaired. The banking charter was tested for impairment at December 31, 2008, with no amortization being required. The banking charter was subsequently tested as of March 31, 2009 concurrent with the goodwill impairment test. The significant slowdown in the economy, especially in areas with historically heavy construction activity, throughout 2008 and into 2009 affected the Company’s ability to grow its business in the Florida panhandle. The lack of interest in the Florida markets as a means of expansion by commercial banks and loan impairments related to the Florida markets were key factors in determining the value of the Florida banking charter. The charter, with a recorded value of $1.025 million, was determined to be fully impaired and was written off in the first quarter of 2009.

39

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 6:  (Continued)

The following is a summary of intangible assets at December 31, 2010 and 2011:

 
 
Core Deposit Intangible
 
 
December 31
(Dollars in thousands)
 
2011
 
2010
Beginning Balance
 
$
5,013

 
$
5,439

Amortization expense
 
(427
)
 
(426
)
Ending Balance
 
$
4,586

 
$
5,013

Estimated amortization expense
 
 

 
 

2012
 
$
427

 
 

2013
 
427

 
 

2014
 
427

 
 

2015
 
427

 
 

2016
 
427

 
 


The following tables summarize the gross carrying amounts and accumulated amortization balances of amortizing intangible assets as of December 31, 2011, and 2010:

 
 
Core Deposit Intangible
 
 
December 31
(Dollars in thousands)
 
2011
 
2010
Gross carrying amount
 
$
7,060

 
$
7,060

Accumulated amortization
 
(2,474
)
 
(2,047
)
Net carrying amount
 
$
4,586

 
$
5,013


Intangible assets with a determinable useful life are amortized over their respective useful lives. Core deposit intangibles have lives of 16 to 20 years with a remaining average life of 11.0 years at December 31, 2011.

Amortization expense for intangible assets having determinable useful lives amounted to $427 thousand in 2011, $426 thousand in 2010, and $440 thousand in 2009. Impairment charges for intangible assets having determinable useful lives amounted to $223 thousand in 2009.



Note 7:  Other Assets

The following is a summary of other assets at December 31, 2011, and 2010:

(Dollars in thousands)
2011
 
2010
Federal Home Loan Bank stock
$
7,380

 
$
7,353

Income taxes receivable
175

 
129

Deferred income tax
14,115

 
14,563

Investment in First M&F Statutory Trust I
928

 
928

Investment in low income housing tax credit entities
2,497

 
2,687

Other
2,829

 
3,806

 
$
27,924

 
$
29,466


As a condition to borrowing funds from the Federal Home Loan Bank (FHLB) of Dallas, the Bank is required to purchase stock in the FHLB. No ready market exists for the stock, and it has no quoted market price. The investment in FHLB stock can only be redeemed by the FHLB at face value.



40

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

Note 8:  Deposits

The following is a summary of deposits at December 31, 2011, and 2010:

(Dollars in thousands)
2011
 
2010
Noninterest-bearing
$
231,718

 
$
212,199

Interest-bearing:
 

 
 

NOW and money market deposits
588,105

 
530,664

Savings deposits
119,693

 
114,769

Core certificates of deposit of $100 thousand or more
187,513

 
234,500

Other core certificates of deposit
227,867

 
268,272

Brokered certificates of deposit of $100 thousand or more
13,028

 
11,934

Other brokered certificates of deposit
3,539

 
3,074

Total interest-bearing
1,139,745

 
1,163,213

Total deposits
$
1,371,463

 
$
1,375,412


Interest expense on certificates of deposit of $100 thousand or more amounted to $4.265 million in 2011, $5.942 million in 2010 and $7.900 million in 2009.

The amount of overdrawn demand and savings deposits that were reclassified as loans held for investment were $492 thousand at December 31, 2011, and $627 thousand at December 31, 2010.

At December 31, 2011, the scheduled maturities of certificates of deposit are as follows:

(Dollars in thousands)
 
2012
$
250,353

2013
93,564

2014
41,629

2015
44,254

2016
2,147

After 2016

 
$
431,947


The amount of deposits of directors and executive officers and their related interests were $15.820 million at December 31, 2011, and $18.351 million at December 31, 2010.


41

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 9:  Short-Term Borrowings

The following is a summary of information related to short-term borrowings:

 
Balance Outstanding
 
Weighted
Average Rate
(Dollars in thousands)
Maximum Month End
 
Average Daily
 
At
Year End
 
During
Year
 
At
Year End
2011:
 
 
 
 
 
 
 
 
 
Federal funds purchased
$

 
$

 
$

 
%
 
%
Securities sold under agreements to repurchase
27,082

 
10,855

 
4,398

 
0.33
%
 
0.70
%
 
$
27,082

 
$
10,855

 
$
4,398

 
 

 
 

2010:
 

 
 

 
 

 
 

 
 

Federal funds purchased
$

 
$

 
$

 
%
 
%
Securities sold under agreements to repurchase
41,897

 
19,112

 
33,481

 
0.35
%
 
0.17
%
 
$
41,897

 
$
19,112

 
$
33,481

 
 

 
 

2009:
 

 
 

 
 

 
 

 
 

Federal funds purchased
$

 
$
117

 
$

 
0.80
%
 
%
Securities sold under agreements to repurchase
12,985

 
10,331

 
8,642

 
0.93
%
 
0.61
%
 
$
12,985

 
$
10,448

 
$
8,642

 
 

 
 


Federal funds purchased represent primarily overnight borrowings through relationships with correspondent banks. Federal funds purchased may be obtained through secured or unsecured lines. The Company had $37.000 million in available Federal funds purchased lines with its correspondent banks. The Company has pledged $1.006 million in investment securities to secure certain Federal funds lines. Securities sold under agreements to repurchase generally have maturities of less than 30 days and are collateralized by U. S. Treasury securities and securities of U. S. Government agencies and sponsored entities. The Company has pledged $8.458 million in investment securities to secure repurchase agreements. The amounts of repurchase agreement obligations due to directors and their related interests were $2.919 million at December 31, 2011 and $4.810 million at December 31, 2010.



Note 10:  Other Borrowings

The following is a summary of other borrowings at December 31, 2011, and 2010:

(Dollars in thousands)
 
2011
 
2010
Company’s line of credit in the amount of $5,000,000, maturing in March 2012; secured by approximately
 51% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%
 
$
3,292

 
$
3,417

 
 
 
 
 
Bank’s advances from Federal Home Loan Banks
 
39,709

 
46,999

 
 
$
43,001

 
$
50,416

 
 
 
 
 
Company’s junior subordinated debentures, interest payable quarterly at 90-day LIBOR plus 1.33%
 through March 2036; currently redeemable
 
$
30,928

 
$
30,928


The Company’s revolving correspondent line of credit, as modified in February and October 2011, requires two principal payments of at least $125 thousand each - one during the fourth quarter of 2011 and one during the first quarter of 2012. The October modification changed the line of credit from non-revolving to revolving. The line of credit contains certain restrictive covenants related to capital ratios, asset quality, returns on average assets, dividends and supervisory actions by the Company's regulators. The Company was current and in compliance with the covenants at December 31, 2011.

The Bank has advances and letters of credit from the Federal Home Loan Bank of Dallas (FHLB) collateralized by real estate-secured loans. The Bank must pledge collateral to obtain advances from the FHLB. Based on the amount of collateral pledged as of December 31, 2011 the Bank had approximately $431 thousand in available credit although any new advances could only be received after approval by the FHLB.

The Bank has a line of credit with the Federal Reserve Discount Window collateralized by commercial and consumer loans. The bank had a line of credit of approximately $10.081 million at December 31, 2011, all of which was available.

42

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 10:  (Continued)

The Company may elect to defer up to 20 consecutive quarterly payments of interest on the junior subordinated debentures. During an extension period the Company may not declare or pay dividends on its common stock, repurchase common stock or repay any debt that has equal rank or is subordinate to the debentures. The Company is prohibited from issuing any class of common or preferred stock that is senior to the junior subordinated debentures during the term of the debentures.

In November 2010 the Company entered into a forward-starting, pay-fixed, receive-floating interest rate swap with a notional value of $30 million designed to hedge the variability of interest payments when the junior subordinated debentures reset from a fixed rate of interest to a floating rate of interest on March 15, 2011. The interest rate swap payments became effective on March 15, 2011, and it terminates on March 15, 2018. The terms of the interest rate swap include fixed interest paid by the Company to the counterparty at a rate of 3.795% and floating interest paid from the counterparty to the Company based on 90-day LIBOR plus 1.33%. Based on its analysis, the Company expects the hedge to be highly effective.

Under the terms of an informal agreement with the Federal Reserve Bank of St. Louis, the Company must obtain prior approval by the Federal Reserve of the payment of interest on outstanding trust preferred securities and of the incurrence of additional debt by the holding company.

The following is a summary of FHLB advances at December 31, 2011, and 2010:

(Dollars in thousands)
2011
 
2010
Single payment advances maturing within 12 months of year end:
 
 
 
Balance
$

 
$
686

Range of rates
%
 
0.16
%
Single payment advances maturing after 12 months of year end:
 

 
 

Balance
$

 
$

Range of rates

 

Range of maturities

 

Amortizing advances:
 

 
 

Balance
$
39,709

 
$
46,313

Monthly payment amount
541

 
550

Range of rates
3.17%-7.83%

 
3.17%-7.83%

Range of maturities
2012-2020

 
2011-2020


Scheduled principal payments on FHLB advances at December 31, 2011, are as follows:

(Dollars in thousands)
 
2012
$
6,494

2013
19,488

2014
2,260

2015
2,346

2016
8,339

After 2016
782

 
$
39,709



43

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 11:  Variable Interest Entities

In February 2006, the Company issued $30.928 million in fixed/floating rate junior subordinated deferrable interest debentures to First M&F Statutory Trust I. The Company received $30.000 million in cash and $928 thousand of common securities from the Trust. The debentures mature in March 2036, and interest is payable quarterly. The subordinated debentures are redeemable at par at any time commencing in March 2011. The subordinated debentures are the only asset of the Trust. The Trust issued $30.000 million in capital securities through a placement and issued $928 thousand of common securities to the Company.

First M&F Statutory Trust I is a variable interest entity. A determination has been made that the Company, since its equity interest is not at risk, is not the primary beneficiary and therefore, the Trust is not consolidated with the Company’s financial statements.

The Company is involved as a limited partner in two low income housing tax credit entities. The Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance. The Company had a total investment and a total exposure in these entities of $2.497 million at December 31, 2011 and $2.687 million at December 31, 2010.


Note 12:  Commitments and Contingencies

Legal Proceedings

The Company, the Bank and the Bank’s subsidiaries are parties to lawsuits and other claims that arise in the ordinary course of business. Some of the lawsuits allege substantial claims for damages. The cases are being vigorously contested. In the regular course of business, management evaluates the estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, based upon present information, management cannot predict what effect, if any, the final resolution of pending legal proceedings will have on the Company’s consolidated financial position or results of operations.

Credit Related Financial Instruments

The Company is a party to credit related financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk.

Commitments to extend credit are agreements to lend money to customers pursuant to certain specified conditions and generally have fixed expiration dates or other termination clauses. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. When making these commitments, the Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company's assessment of a customer's credit worthiness.

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. When issuing letters of credit, the Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company's assessment of a customer's credit worthiness. A liability of $4 thousand is recognized at December 31, 2011, and a liability of $15 thousand is recognized at December 31, 2010, for the Company’s obligation to stand ready to perform related to standby letters of credit.

The maximum credit exposure in the event of nonperformance for loan commitments and letters of credit is represented by the contract amount of the instruments. A summary of these instruments at December 31, 2011, and 2010 follows:

(Dollars in thousands)
2011
 
2010
Commitments to extend credit
$
126,455

 
$
122,448

Standby letters of credit
1,580

 
6,169


At December 31, 2011 and December 31, 2010, there were no standby letters of credit issued on the Company’s behalf by any Federal Home Loan Banks. The Company generally uses these letters as security for public funds deposits and is obligated to the Federal Home Loan Bank if the letters of credit must be drawn upon.

44

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 12:  (Continued)

The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $11.246 million at December 31, 2011, and $4.398 million at December 31, 2010. These commitments are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2011, mortgage origination-related derivatives with positive fair values of $134 thousand were included in other assets and derivatives with negative fair values of $167 thousand were included in other liabilities. At December 31, 2010, mortgage origination-related derivatives with positive fair values of $1 thousand were included in other assets and derivatives with negative fair values of $28 thousand were included in other liabilities.  The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2011 and 2010, the Company had $37.507 million and $7.745 million in locked forward sales agreements in place. At December 31, 2011, forward sale-related derivatives with positive fair values of $135 thousand thousand were included in other assets and derivatives with negative fair values of $124 thousand were included in other liabilities. At December 31, 2010, forward sale-related derivatives with positive fair values of $245 thousand were included in other assets and no derivatives with negative fair values were included in other liabilities.

Mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Company may also be required to repurchase mortgages that do not conform to FNMA or FHA underwriting standards or that contain critical documentation errors or fraud. The Company only originates for sale mortgages that conform to FNMA and FHA underwriting guidelines. The Company incurred a recourse loss of $4 thousand on one mortgage in 2011. No recourse losses were incurred in 2010 or 2009. Mortgages sold that were still in the recourse period were $42.146 million at December 31, 2011, and $27.984 million at December 31, 2010. The Company did not have a recourse liability recorded at December 31, 2011 or 2010.

The Company is a guarantor of the First M&F Statutory Trust I to the extent that if at any time the Trust is required to pay taxes, duties, assessments or governmental charges of any kind, then the Company is required to pay to the Trust additional sums to cover the required payments.

The Company irrevocably and unconditionally guarantees, with respect to the Capital Securities of the First M&F Statutory Trust I, and to the extent not paid by the Trust, accrued and unpaid distributions on the Capital Securities and the redemption price payable to the holders of the Capital Securities.


Note 13:  Accumulated Other Comprehensive Income

The following is a summary of the gross amounts of accumulated other comprehensive income and the related income tax effects:

(Dollars in thousands)
Gross
 
Tax
 
Net
December 31, 2011:
 
 
 
 
 
Net unrealized gain on securities available for sale
$
7,202

 
$
2,688

 
$
4,514

Net unrealized loss on other-than-temporarily impaired securities available for sale
(2,318
)
 
(865
)
 
(1,453
)
Net unamortized pension costs
(4,272
)
 
(1,593
)
 
(2,679
)
Net unrealized loss on cash flow hedge
(1,834
)
 
(684
)
 
(1,150
)
 
$
(1,222
)
 
$
(454
)
 
$
(768
)
December 31, 2010:
 

 
 

 
 

Net unrealized gain on securities available for sale
$
5,342

 
$
1,993

 
$
3,349

Net unrealized loss on other-than-temporarily impaired securities available for sale
(2,834
)
 
(1,057
)
 
(1,777
)
Net unamortized pension costs
(2,927
)
 
(1,092
)
 
(1,835
)
Net unrealized gain on cash flow hedge
817

 
305

 
512

 
$
398

 
$
149

 
$
249

December 31, 2009:
 

 
 

 
 

Net unrealized gain on securities available for sale
$
7,171

 
$
2,675

 
$
4,496

Net unrealized loss on other-than-temporarily impaired securities available for sale
(3,091
)
 
(1,153
)
 
(1,938
)
Net unamortized pension costs
(3,476
)
 
(1,297
)
 
(2,179
)
 
$
604

 
$
225

 
$
379



45

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 14:  Stockholders’ Equity

Preferred Stock

On February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S. Treasury as part of its participation in the Capital Purchase Program. Concurrent with the issuance of the preferred stock, the Company also issued a ten-year warrant to purchase up to 513,113 shares of the Company’s common stock at an exercise price of $8.77 per share to the U. S. Treasury. The Company received $30.000 million from the U. S. Treasury in exchange for the preferred stock and common stock warrant. Cumulative dividends on the Class B, Series A Preferred Stock accrued on the $1,000 liquidation preference at a rate of 5% per annum.

On September 29, 2010 the Company redeemed the Class B, Series A Preferred Stock by issuing 30,000 shares of Class B, Series CD Preferred Stock issued pursuant to the U. S. Treasury Community Development Capital Initiative. The book value of the Class B, Series A Preferred Stock on the exchange date was $29.026 million. The fair value of the Class B, Series CD Preferred Stock issued on the exchange date was $16.159 million, resulting in a gain of $12.867 million which was recorded as a credit to retained earnings.

Cumulative dividends on the Class B, Series CD Preferred Stock accrue on the $1,000 liquidation preference at a rate of 2% per annum for the first eight years, and at a rate of 9% per annum thereafter but are paid only if, as, and when declared by the Company’s Board of Directors. The Company’s banking subsidiary must be re-certified as a Community Development Financial Institution (CDFI) by the Community Development Financial Institution Fund of the U. S. Treasury Department at three-year intervals. In the event that the banking subsidiary continues to be uncertified for 180 days, the dividend rate shall increase to 5%. If the banking subsidiary continues to be uncertified for an additional 90 days, then the dividend rate shall increase to 9% until the subsidiary becomes certified, at which time the dividend rate shall revert to its original 2% per annum. The Class B, Series CD Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Class B, Series CD Preferred Stock is generally non-voting.

The fair value of the Class B, Series CD Preferred Stock was determined using a discounted cash flow analysis. Cash flows under scenarios of continuing CDFI certification and loss of CDFI certification, weighted by estimated probabilities, were used. Terminal values were calculated as perpetuities on the dates that the dividend rates would accelerate to 9% under the different scenarios. All cash flows were discounted at a market rate of 10%.

Accretion of the discount associated with the preferred stock is recognized as an increase to preferred stock dividends in determining net income available to common shareholders. The discount on the Class B, Series A Preferred Stock was being accreted over a five-year period using the effective yield method. The discount on the Class B, Series CD Preferred Stock is being accreted over an eight-year period. The discount accretion recognized on the Class B, Series A Preferred Stock was $188 thousand during 2010 and $201 thousand during 2009. The discount accretion recognized on the Class B, Series CD Preferred Stock was $231 thousand during 2010. The discount accretion recognized on the Class B, Series CD Preferred Stock was $1.174 million during 2011.

The following table summarizes preferred stock of the Company:

 
 
 
 
Shares at
 
Shares at
 
Carrying Value
(Dollars in thousands)
 
December 31, 2011
 
December 31, 2010
 
December 31, 2011
 
December 31, 2010
 
 
Rate
 
Authorized
 
Outstanding
 
Authorized
 
Outstanding
 
 
Class A
 

 
1,000,000

 

 
1,000,000

 

 
$

 
$

Class B:
 
 

 
1,000,000

 
 

 
1,000,000

 
 

 
 

 
 

Series A
 
5
%
 
 

 

 
 

 

 

 

Series CD
 
2
%
 
 

 
30,000

 
 

 
30,000

 
17,564

 
16,390

 
 
 

 
 

 
 

 
 

 
 

 
$
17,564

 
$
16,390


Dividend Reinvestment and Stock Purchase Plan

The Dividend Reinvestment and Stock Purchase Plan authorizes the sale of up to 200,000 shares of the Company’s common stock from authorized, but unissued, shares or from shares acquired on the open market to shareholders who choose to invest all or a portion of their cash dividends and make optional cash payments of $50.00 to $5,000.00 per quarter. All shares for this plan have been purchased on the open market. The price of shares purchased on the open market is the average price paid for all shares purchased for all participants.

Dividend Restrictions

The Company and the Bank are subject to certain restrictions related to the payment of dividends. These restrictions are discussed in Note 20 – Regulatory Matters.

46

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 15:  Stock Compensation Plan

The Company implemented a stockholder approved Stock Option Plan, effective January 1, 1999, authorizing the grant of incentive stock options (ISO's) to key employees and nonstatutory stock options (NSO's) to members of the Board. The stated purpose of the plan was to provide incentives to key officers and directors by permitting them to purchase stock in the Company under the provisions of this plan. The maximum number of shares of stock that could be optioned or sold under the plan was 500,000 shares. Under the provisions of the plan, the Company and the participating employees and directors executed agreements, upon the grant of options, providing each participant with an option to purchase stock within ten years of the date of the grant. In May 2005, the Stock Option Plan was replaced by the shareholder approved 2005 Equity Incentive Plan. The plan allows for share-based payments in the form of stock options, restricted stock awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be awarded are 700,000. However, there are limits on certain types of awards. The maximum number of shares that may be awarded in the form of stock options is 400,000. The maximum number of shares that may be awarded in forms other than options and stock appreciation rights is 500,000. The maximum number of shares that may be awarded to Directors is 100,000.

The Company uses the fair value method of accounting for stock-based compensation. Stock options generally vest evenly over a five year period. Stock grants fully vest on certain dates (cliff vesting), for generally one, three, five or seven year terms. The fair values of stock options and restricted stock grants are accrued to salary and benefits expenses over their vesting periods. The amounts accrued are equal to the fair values less an estimate for expected forfeitures. These accruals are subsequently adjusted for differences between estimated forfeiture rates and the actual experienced forfeiture rates.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions in 2011, 2010 and 2009: expected dividend yields of 1.00%, 1.00% and 1.50%; expected volatility of 31.66%, 31.45% and 23.37%; risk-free interest rates of 2.84%, 3.28% and 2.47%; and expected lives of 7 years. Expected dividends are based on current dividend rates at the grant date. Expected volatility is estimated using the Company’s historical price variances over the prior ten years. The expected lives are calculated as the average of the contractual life and the vesting period, which approximates the Company’s historical experience. The estimated fair values of stock options at their grant date were $1.44 in 2011, $1.74 in 2010 and $1.28 in 2009. In determining the amounts of compensation expense to record for unvested stock options, the Company is using an estimated forfeiture rate of 9.45% (1.89% annual rate) for employee grants and 5.45% (1.09% annual rate) for Director grants based upon the history of the plan.

The following table shows the amounts of stock-based compensation that were included in salary and employee benefits expenses:

(Dollars in thousands, except share data)
2011
 
2010
 
2009
Stock option expense recognized, gross
$
7

 
$
11

 
$
17

Adjustment for actual vs expected forfeitures

 

 

Stock option expense recognized, net
7

 
11

 
17

Restricted stock award expenses recognized, gross
136

 
170

 
256

Adjustment for actual vs expected forfeitures
(145
)
 
(120
)
 
(200
)
Restricted stock award expenses recognized, net
(9
)
 
50

 
56

Total stock-based compensation
(2
)
 
61

 
73

Income tax benefits
1

 
(23
)
 
(27
)
Net stock-based compensation recognized
$
(1
)
 
$
38

 
$
46


The Company recognized $143 thousand in other expense in 2011 for the fair value of 42,133 shares of stock issued to Directors in lieu of quarterly fees. The Company recognized $133 thousand in other expense in 2010 for the fair value of 37,457 shares of stock issued to Directors in lieu of quarterly fees.

47

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 15:  (Continued)

The following is a summary of stock awards activity:

  
2005 Plan
 
1999 Plan
 
 
 
Restricted Stock
 
Stock Options
 
Stock Options
 
Shares
Available
for
Grant
 
Number
of
Shares
 
Weighted
Average
Grant
Date
Fair
Value
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2009
570,984

 
106,250

 
$
16.823

 
12,000

 
$
16.004

 
119,900

 
$
15.995

Awards Granted
(4,000
)
 

 

 
4,000

 
5.140

 

 

Vested

 
(6,000
)
 
16.855

 

 

 

 

Forfeitures
23,250

 
(23,250
)
 
16.754

 

 

 

 

Expired

 

 

 

 

 
(98,300
)
 
16.195

December 31, 2009
590,234

 
77,000

 
16.841

 
16,000

 
13.288

 
21,600

 
15.087

Awards Granted
(2,000
)
 

 

 
2,000

 
4.890

 

 

Vested

 

 

 

 

 

 

Forfeitures
15,400

 
(14,000
)
 
16.278

 
(1,400
)
 
16.051

 
(200
)
 
17.000

Expired

 

 

 

 

 
(5,600
)
 
12.127

December 31, 2010
603,634

 
63,000

 
16.995

 
16,600

 
12.043

 
15,800

 
16.018

Awards Granted
(3,000
)
 

 

 
3,000

 
4.120

 

 

Vested

 
(6,000
)
 
16.855

 

 

 

 

Forfeitures
12,800

 
(11,000
)
 
16.915

 
(1,800
)
 
13.840

 

 

Expired

 

 

 

 

 

 

December 31, 2011
613,434

 
46,000

 
$
17.032

 
17,800

 
$
10.526

 
15,800

 
$
16.018


The following is a summary of stock options outstanding at December 31, 2011:

Exercise Price Range
 
Options Outstanding
 
Weighted
Average
Remaining
Contractual
Life
(Years)
 
Weighted
Average
Exercise
Price-
Options
Outstanding
 
Options Exercisable
 
Weighted
Average
Exercise
Price-
Options
Exercisable
  $4.12 - 5.14
 
9,000

 
8.22

 
$
4.74

 
2,000

 
$
5.09

12.63 - 13.84
 
9,400

 
3.03

 
13.19

 
8,200

 
13.10

17.00 - 19.06
 
15,200

 
2.97

 
18.01

 
15,000

 
18.00

 
 
33,600

 
4.40

 
$
13.11

 
25,200

 
$
15.38


There was no aggregate intrinsic value of options exercisable at December 31, 2011 or December 31, 2010. At December 31, 2011, there was a total of $11 thousand in unrecognized compensation costs, expected to be recognized over a weighted-average period of 3.3 years, related to stock options.

The Company has issued restricted stock awards to certain executives and senior officers. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. Additionally the restricted shares include a performance condition that may accelerate vesting at the achievement of a diluted earnings per share and net income target. Non-achievement of the performance condition during the vesting period would not prevent vesting of the shares. Dividends are paid quarterly to restricted stock grantees. At December 31, 2011, there were $82 thousand in unrecognized compensation costs. The unrecognized costs at December 31, 2011, are expected to be recognized over a weighted-average period of nine months. The Company estimates that 4.00% (.57% annual rate) of the nonvested shares will be forfeited in determining net compensation expenses recognized. In May 2009, 6,000 shares of restricted stock with a fair value of $26 thousand became fully vested and outstanding. In June 2011, 6,000 shares of restricted stock with a fair value of $23 thousand became fully vested and outstanding.

48

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 15:  (Continued)

In July 2010 the Board of Directors approved the reservation of 1,000,000 shares of authorized, unissued shares for issuance in lieu of cash for directors’ fees earned for 2010 and beyond. All shares are issued at market value and provide a convenient way for directors to receive shares of the Company based on the amount of directors fees that would otherwise be paid. Directors individually elect a percentage of their compensation, not less than 50%, to be received in common stock with the balance of the fees being paid in cash each quarter. For 2010, the Board authorized the issuance of 37,457 shares to directors in lieu of fees, and in 2011, 42,133 shares were issued to directors in lieu of fees.



Note 16:  Other Expenses

Significant components of other expenses are summarized as follows:

(Dollars in thousands)
2011
 
2010
 
2009
Telecommunications expenses
$
909

 
$
980

 
$
1,043

Postage and shipping
896

 
875

 
926

Stationery and supplies
775

 
696

 
814

Marketing and business development expenses
1,139

 
1,014

 
1,351

Accounting, legal and professional fees
2,053

 
2,324

 
2,160

Insurance expense
911

 
836

 
782

Other
5,632

 
5,883

 
6,274

 
$
12,315

 
$
12,608

 
$
13,350




Note 17:  Income Taxes

The components of income tax expense (benefit) are as follows:

(Dollars in thousands)
Federal
 
State
 
Total
2011:
 
 
 
 
 
Current
$
4

 
$

 
$
4

Deferred
864

 
143

 
1,007

Total
$
868

 
$
143

 
$
1,011

2010:
 

 
 

 
 

Current
$
4

 
$
(137
)
 
$
(133
)
Deferred
417

 
318

 
735

Total
$
421

 
$
181

 
$
602

2009:
 

 
 

 
 

Current
$
(6,221
)
 
$
(1,028
)
 
$
(7,249
)
Deferred
(9,341
)
 
(1,514
)
 
(10,855
)
Total
$
(15,562
)
 
$
(2,542
)
 
$
(18,104
)

49

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 17:  (Continued)

The differences between actual income tax expense (benefit) and expected income tax expense (benefit) are summarized as follows:

(Dollars in thousands)
2011
 
2010
 
2009
Amount computed using the Federal statutory rates on income before taxes
$
1,831

 
$
1,568

 
$
(26,489
)
Increase (decrease) resulting from:
 
 
 

 
 

Tax exempt income, net of disallowed interest deduction
(488
)
 
(594
)
 
(770
)
State income tax expense (benefit), net of Federal effect
95

 
207

 
(1,677
)
Life insurance income
(217
)
 
(227
)
 
(259
)
Goodwill impairment expense

 

 
11,074

Low income housing tax credits
(248
)
 
(330
)
 

Other, net
38

 
(22
)
 
17

 
$
1,011

 
$
602

 
$
(18,104
)

The change in the net deferred taxes is a result of current period deferred tax expense (benefit), and changes in accumulated other comprehensive income. The components of the net deferred tax asset (liability) at December 31, 2011, and 2010 consist of the following:

(Dollars in thousands)
2011
 
2010
Allowance for loan losses
$
5,566

 
$
5,977

Loan fees
518

 
406

Purchase accounting adjustments
187

 
238

Nonperforming assets
4,432

 
3,131

Accrued expenses
148

 
71

Share-based compensation
277

 
324

Employee benefit plans
185

 
173

Net pension liability and unamortized pension costs
956

 
202

Unrealized loss on cash flow hedge
684

 

Net operating loss carry forward
5,606

 
7,989

Tax credit carry forward
982

 
507

Other
52

 
568

Total deferred tax assets
19,593

 
19,586

Fixed assets and depreciation
(1,460
)
 
(1,448
)
Federal Home Loan Bank stock dividends
(478
)
 
(468
)
Intangible assets
(1,290
)
 
(1,438
)
Prepaid expenses
(393
)
 
(401
)
Unrealized gain on securities available for sale
(1,823
)
 
(936
)
Unrealized gain on cash flow hedge

 
(305
)
Other
(34
)
 
(27
)
Total deferred tax liabilities
(5,478
)
 
(5,023
)
 
$
14,115

 
$
14,563



50

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 17:  (Continued)

In connection with the 2009 and 2010 net operating losses and estimated earnings for 2011, the Company had the following net operating losses and tax credits available for carryover for Federal and state income tax purposes at December 31, 2011:

(Dollars in thousands)
2009 NOL
 
Carried
Back
to Prior
Years
 
2010
NOL (Earnings)
 
Estimated 2011
NOL (Earnings)
 
Total
Carried
Forward
For
Future
Years
 
Expiring in 2029
 
Expiring in 2030
 
Expiring in 2031
Federal net operating loss
$
38,353

 
$
(23,653
)
 
$
4,321

 
$
(6,000
)
 
$
13,021

 
$
8,700

 
$
4,321

 
$

Mississippi net operating loss
34,371

 
(15,366
)
 
4,707

 
(5,500
)
 
18,212

 
13,505

 
4,707

 

Alabama net operating loss
3,206

 
(708
)
 
(477
)
 
(170
)
 
1,851

 
1,851

 

 

Tennessee net operating loss
1,790

 

 
86

 
(50
)
 
1,826

 
1,740

 
86

 

Florida net operating loss
654

 

 
20

 
25

 
699

 
654

 
20

 
25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax Credit Amounts
 
Expiration Dates
 
 
 
 
Federal tax credits from 2009
 
 
 
 
 
 
 
 
$
208

 
2029
 
 
 
 
Federal tax credits from 2010
 
 
 
 
 
 
 
 
299

 
2030
 
 
 
 
Federal tax credits from 2011
 
 
 
 
 
 
 
 
475

 
2031
 
 
 
 

No valuation allowance has been accrued for the deferred tax asset as it is more likely than not that the deferred tax assets will be recognized in the foreseeable future.

The Company had no material recognized uncertain tax positions as of December 31, 2011 and 2010 and therefore did not have any tax accruals in 2011 or 2010 related to uncertain positions.

Federal tax credits for 2011 include a $120 thousand credit related to an adjustment to the amended tax returns for 2006 and 2007. The Company carried back more than the allowable net operating losses for alternative minimum tax purposes and therefore, owes approximately $184 thousand in alternative minimum tax for 2007. This tax, net of $64 thousand in credits that were available but not taken in the amended 2006 return are available to be carried forward as tax credits.

As a result of an audit of its state tax returns for the years 2005 through 2007 by the Mississippi State Tax Commission, the Company paid $217 thousand in assessments in February 2010. The amount paid, included in current income tax expense, included $163 thousand in assessments and $54 thousand in interest. The primary issues related to (1) the apportionment of taxable income between state jurisdictions and (2) the excludable nature of interest income on certain investment securities issued by Federal government sponsored enterprises. The change in the calculation of apportioned revenues resulted in amendments of returns filed with the state of Tennessee. The amended returns related to Tennessee resulted in refunds receivable for 2005 through 2007 of $129 thousand, leaving the Company with a net tax expense of $88 thousand related to the assessment.

The Company is no longer subject to Federal income tax examinations of tax returns filed for years before 2008.


51

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 18:  Employee Benefit Plans

Pension Plan

The Bank has a defined benefit pension plan covering substantially all full-time employees of the Bank and subsidiaries. Benefits under this plan are based on years of service and average annual compensation for a five year period. The Bank froze benefit accruals under this plan effective September 30, 2001.

The measurement date for actuarial calculations for the plan has historically been October 1 of each year. On December 31, 2008, the Company transitioned to a calendar year-end measurement date. The transition involved the charging of an additional three months of net pension costs to retained earnings to compensate for the interim measurement period of October 1 through December 31, 2008. The following is a summary of the plan's funded status:

(Dollars in thousands)
2011
 
2010
Change in benefit obligation:
 
 
 
Projected benefit obligation at beginning of year
$
9,182

 
$
8,643

Interest cost
448

 
468

Actuarial loss
1,478

 
614

Benefit payments
(563
)
 
(543
)
Projected benefit obligation at end of year
10,545

 
9,182

Change in plan assets:
 

 
 

Fair value of plan assets at beginning of year
8,640

 
8,115

Actual return on plan assets
(235
)
 
874

Employer contributions
168

 
224

Benefit payments
(563
)
 
(543
)
Expenses
(29
)
 
(30
)
Fair value of plan assets at end of year
7,981

 
8,640

Funded status at measurement date
$
(2,564
)
 
$
(542
)

The following is a summary of amounts recorded in the consolidated statements of condition:

(Dollars in thousands)
2011
 
2010
Net pension asset
$

 
$

 
 
 
 
Net pension liability
$
(2,564
)
 
$
(542
)
 
 
 
 
Accumulated other comprehensive income, before income taxes
$
4,272

 
$
2,927


The following is a summary of information related to benefit obligations and plan assets:

(Dollars in thousands)
2011
 
2010
Projected benefit obligation
$
10,545

 
$
9,182

Accumulated benefit obligation
10,545

 
9,182

Fair value of plan assets
7,981

 
8,640


The following is a summary of the components of accumulated other comprehensive income:

(Dollars in thousands)
2011
 
2010
Unamortized prior service credit
$

 
$
(25
)
Unamortized actuarial loss
4,272

 
2,952

Accumulated other comprehensive income
$
4,272

 
$
2,927


52

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 18:  (Continued)

Components of net periodic benefit costs and other amounts recognized in retained earnings and other comprehensive income:

(Dollars in thousands)
2011
 
2010
 
2009
Net Periodic Benefit Cost:
 
 
 
 
 
Interest cost
$
448

 
$
468

 
$
486

Expected return on plan assets
(563
)
 
(529
)
 
(470
)
Amortization of transition asset

 

 
(7
)
Amortization of prior service credit
(25
)
 
(37
)
 
(37
)
Recognized actuarial loss
984

 
885

 
906

Net periodic benefit cost
$
844

 
$
787

 
$
878

Other Changes in Plan Assets and Benefit Obligations Recognized in Other
 Comprehensive Income:
 

 
 

 
 

Net (gain) loss
$
2,304

 
$
299

 
$
(85
)
Amortization of actuarial net loss
(984
)
 
(885
)
 
(906
)
Amortization of transition asset

 

 
7

Amortization of prior service credit
25

 
37

 
37

Total recognized in other comprehensive income
$
1,345

 
$
(549
)
 
$
(947
)
Total recognized in net periodic benefit cost and other comprehensive income
$
2,189

 
$
238

 
$
(69
)

The Company elected to amortize the unrecognized net gain or loss over a seven year period on a straight-line basis starting in 2007. For plan years up through 2006, the unrecognized gain or loss was amortized based on the average remaining service period of participants.

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2012 is $2.136 million.

Total expenses recorded in the accompanying consolidated statements of operations related to the pension plan included the following components:

(Dollars in thousands)
2011
 
2010
 
2009
Net pension cost
$
844

 
$
787

 
$
878

Payments for expenses made on behalf of the plan
32

 
43

 
39

Payments to PBGC for premiums
11

 
16

 
15

 
$
887

 
$
846

 
$
932


The following is a summary of weighted average assumptions:

 
2011
 
2010
 
2009
Discount rate for determining current year’s costs
5.05
%
 
5.60
%
 
6.25
%
Discount rate for determining year end benefit obligation
4.00
%
 
5.05
%
 
5.60
%
Expected return on plan assets for determining current year’s costs
6.75
%
 
6.75
%
 
6.75
%
Rate of compensation increase (plan is frozen)
%
 
%
 
%

The discount rate used to determine the present value of the pension benefit obligation has decreased since 2008 as the Federal Reserve has acted to reduce market rates in its economic stimulation efforts. The decreases in the discount rate for 2009, 2010 and 2011 resulted in actuarial losses as the present values of the liabilities increased. The Company bases the discount rate on general corporate rates prevalent in the market on the actuarial measurement date.

53

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 18:  (Continued)

The credit market disruptions and a severely slowing economy resulted in stock market losses in excess of 35% in 2008. The markets recovered some of the 2008 losses during 2009 and 2010, which resulted in positive plan returns. At the end of 2010, there was still uncertainty about the strength of the economic recovery going forward and the plan incurred investment losses in 2011. The lack of a market recovery would increase pension expense, which is dominated by the amortization of deferred actuarial gains and losses. Plan returns or losses that negatively deviate from expected returns result in increases in these actuarial deferred losses. Returns in excess of expectations would reduce the deferred actuarial loss and therefore would reduce pension expenses going forward.

The Company estimates the long-term rate of return on plan assets using historical returns, changes in asset mix, general economic conditions and industry practice. Historical annual returns on plan assets have normally ranged from losses of approximately 10% to gains in excess of 15%. The short-term volatility of these returns makes them an unreliable indicator of future long-term returns. Therefore, the historical plan rate of return is not used as a starting point, but rather as a guideline in determining the plan assumption for returns. The plan return was a 2.72% loss in 2011, a 10.77% profit in 2010 and a 16.25% profit in 2009. The mix of invested assets has remained relatively stable over the last five years with equity holdings representing between 45% and 60% of plan assets. The equity securities have brought more return volatility and higher expected returns to the portfolio. Management has operated under the general assumption that the long-term equity market returns will approximate the past 50 years, which provided an average 10% return, based upon stock market historical data. Current and expected economic conditions have also been considered in determining the estimate of long-term returns. Management also uses a survey of pension plan managers provided by a third party which indicates the rate of return assumptions that are predominant in the industry. At the end of 2006, management changed its investment horizon to coincide with the amortization period of the unamortized actuarial gain or loss. The assumption concerning expected returns for 2008 through 2010 was maintained at 2007 levels, which reflected management’s view of expected market returns over the investment horizon. The expected return assumption for 2011 was maintained at the same level as 2010. Management believes that the economy and the markets will recover enough over the next 5 to 7 years to allow the Company to achieve an expectation of 6.75% in annual returns over those periods. Management intends to terminate the Plan within the next 5 to 7 years.

The plan’s asset allocations at December 31, 2011, and 2010 by asset category were as follows:

 
2011
 
2010
Interest-bearing bank balances
7
%
 
5
%
Debt securities
26
%
 
32
%
Equity securities
67
%
 
63
%
 
100
%
 
100
%

Equity securities included 18,868 shares of the Company’s common stock at December 31, 2011, and 2010.

The following table summarizes the fair values of pension plan assets at December 31, 2011 by asset category.

 
 
 
Fair Value Measurements at
December 31, 2011, Using
 
Assets/Liabilities
Measured at Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
December 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
$
548

 
$
548

 
$

 
$

Equity securities – domestic
3,965

 
3,965

 

 

Equity securities – international
1,142

 
1,142

 

 

Mutual funds (bond funds)
214

 
214

 

 

Government debt securities
239

 

 
239

 

Corporate debt securities - domestic
1,528

 

 
1,528

 

Corporate debt securities - international
345

 

 
345

 

Total assets
$
7,981

 
$
5,869

 
$
2,112

 
$


54

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 18:  (Continued)

The following table summarizes the fair values of pension plan assets at December 31, 2010 by asset category.

 
 
 
Fair Value Measurements at
December 31, 2010, Using
 
Assets/Liabilities
Measured at Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
December 31, 2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
$
398

 
$
398

 
$

 
$

Equity securities – domestic
4,692

 
4,692

 

 

Equity securities – international
581

 
581

 

 

Mutual funds (bond funds)
212

 
212

 

 

Government debt securities
1,056

 

 
1,056

 

Corporate debt securities - domestic
1,389

 

 
1,389

 

Corporate debt securities - international
312

 

 
312

 

Total assets
$
8,640

 
$
5,883

 
$
2,757

 
$


Cash and cash equivalents – Cash and cash equivalents are funds held in commercial banks with the book value equal to the market value.

Equity securities – Equity securities are stocks traded on organized exchanges. The closing price as disclosed by the exchange is used as the fair value.

Mutual funds – Mutual funds are primarily fixed-income funds. Fair values for these are the net asset values (NAV) reported by the mutual fund sponsors.

Government, corporate and mortgage-backed debt securities – Fair values for these debt securities are provided by an independent third party pricing service that primarily uses trading activity in the dealer market to determine market prices.

The investment policy of the pension plan is based upon three principles: (1) the preservation of capital, (2) risk aversion, and (3) adherence to investment discipline. Investment managers should make reasonable efforts to preserve capital, understanding that losses may occur in individual securities. Investment managers are to make reasonable efforts to control risk, and will be evaluated regularly to ensure that the risk assumed is commensurate with the given investment style and objectives. Investment managers are expected to adhere to the investment management styles for which they were hired.

The plan investment objectives are: (1) income and growth, which is the primary objective, and the secondary objectives of (2) liquidity and (3) preservation of capital. The plan’s return objective is to achieve a balanced return of income and modest growth of principle. The goal of the plan is to achieve an absolute rate of return of 8% over the life of the plan. The secondary objectives ensure (1) the ability to meet all expected or unexpected cash flow needs by investing in securities which can be sold readily and efficiently and (2) the probability of loss of principle over the investment horizon is minimized, effectively emphasizing the minimizing of return volatility over the maximization of total return. Individual investment managers will be required to manage toward a market index, a blended index, or another target established by the Company’s Retirement Committee that reflects the expected style of management. Each individual portfolio manager is expected to display an overall level of risk in the portfolio which is consistent with the risk associated with the benchmark return. Risk is measured by the standard deviation of quarterly returns.

The following table outlines the target asset allocations in percentages for plan assets.

 
Minimum
 
Maximum
 
Preferred
Equities
50
%
 
70
%
 
60
%
Fixed-income
30
%
 
40
%
 
35
%
Cash
2
%
 
8
%
 
5
%

55

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 18:  (Continued)

Plan assets are ultimately managed to provide for benefit payments. This is done by providing for targeted returns, to assure that future benefit obligations will be provided for, by providing income production as well as principle growth, and by investing in assets that are liquid. The Company’s Retirement Committee monitors expected cash flows and modifies the investment targets and allocations to provide for those future needs.

Prohibited investments include commodities and futures contracts, private placements, options, limited partnerships, venture-capital investments, real estate properties, interest-only (IO), principal-only (PO) and residual tranche CMO’s and hedge funds. Prohibited transactions within the plan are short selling and margin transactions.

Pension benefit payments are made from assets of the pension plan. It is anticipated, assuming no plan termination, that future benefit payments for the plan will be as follows.

(Dollars in thousands)
 
Year
Expected payments
 
 
2012
$
622

2013
651

2014
688

2015
680

2016
682

2017 – 2021
3,370


The Company expects to make a contribution within a range of $150 thousand to $250 thousand to the pension plan in 2012.

Profit and Savings Plan

The Bank has a profit and savings plan which includes features such as an Employee Stock Ownership Plan (ESOP) and a 401(k) plan which provides for certain salary deferrals, covering substantially all full-time employees of the Bank and subsidiaries. The Bank matched employee 401(k) contributions equal to 50% of an employee's first 5% of salary deferral through 2004. Beginning in 2005, the Company matched contributions equal to 50% of an employee’s first 6% of salary deferral. Effective in May 2006, the Company began matching 60% of an employee’s first 6% of salary deferral for all employees with less than three years of credited service. Concurrently, the Company began matching 75% of an employee’s first 6% of salary deferral for all employees with three years or more of credited service. In March 2009 the Company cut the matching percentages in half. In September 2011 the Company returned the matching percentages to 60% of an employee's first 6% of salary deferral for employees with less than three years of credited service and 75% for all employees with three years or more of credited service. Total matching contributions for this plan were $402 thousand in 2011, $317 thousand in 2010 and $385 thousand in 2009. Additional contributions to the plan are at the discretion of the Board of Directors. Discretionary contributions, which are invested in the Company’s common stock, for this plan were $75 thousand in 2011, 2010 and 2009. ESOP shares are considered outstanding for basic earnings per share calculations. Dividends on ESOP shares are deducted from retained earnings when declared. The plan was amended in 2011 to allow employees to borrow from the plan. As of December 31, 2011, the plan had $142 thousand in loans receivable from employees.

At December 31, 2011, and 2010, the profit and savings plan owned 288,586 and 285,672 shares of the Company's common stock.

Nonqualified Deferred Compensation Plan

The Bank has a nonqualified deferred compensation plan for senior officers and executives of the Bank and its subsidiaries. The plan allows for the deferral of salary by the participants with the Company having the option of also making matching contributions and profit sharing contributions. The participants’ earnings credits are indexed to selected mutual fund returns. Matching contributions and profit sharing contributions vest evenly over a five (5) year period. The Company will use the earnings of Bank-owned life insurance policies to provide sufficient revenues to offset the cost of the liabilities incurred by participant earnings credits. Participants deferred $52 thousand of compensation during 2011, $51 thousand during 2010 and $67 thousand during 2009. The Company did not make any profit sharing contributions to the plan in 2011, 2010 or 2009. The plan also had distributions of $14 thousand in 2011, $23 thousand in 2010 and $80 thousand in 2009. Included in salaries and employee benefit expenses are credits for earnings declines of $2 thousand for 2011, charges for earnings increases of $40 thousand for 2010, and charges for earnings increases of $2 thousand in 2009. Also included in salaries and employee benefit expenses are administrative expenses of $4 thousand in 2011, $2 thousand in 2010 and $3 thousand in 2009.


56

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 19:  Earnings Per Share

The Company calculates earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that its outstanding non-vested restricted stock awards are participating securities.

(Dollars in thousands, except per share data)
2011
 
2010
 
2009
Net income (loss)
$
4,373

 
$
4,011

 
$
(59,799
)
Less: Preferred dividends
1,774

 
1,692

 
1,464

Add: Gain on exchange of preferred stock

 
12,867

 

Net income (loss) attributable to common stock
$
2,599

 
$
15,186

 
$
(61,263
)
Net income (loss) allocated to common stockholders:
 

 
 

 
 

Distributed
366

 
363

 
1,451

Undistributed
2,218

 
14,708

 
(62,106
)
 
$
2,584

 
$
15,071

 
$
(60,655
)
Weighted-average basic common and participating shares outstanding
9,180,997

 
9,150,980

 
9,157,752

Less: weighted average participating restricted shares outstanding
54,392

 
69,293

 
90,872

Weighted-average basic shares outstanding
9,126,605

 
9,081,687

 
9,066,880

Basic net income (loss) per share
$
0.28

 
$
1.66

 
$
(6.69
)
Weighted-average basic common and participating shares outstanding
9,180,997

 
9,150,980

 
9,157,752

Add: share-based options and stock warrant

 

 

 
9,180,997

 
9,150,980

 
9,157,752

Less: weighted average participating restricted shares outstanding
54,392

 
69,293

 
90,872

Weighted-average dilutive shares outstanding
9,126,605

 
9,081,687

 
9,066,880

Dilutive net income (loss) per share
$
0.28

 
$
1.66

 
$
(6.69
)
Weighted-average shares of potentially dilutive instruments that are not included in the
 dilutive share calculation due to anti-dilutive effect:
 

 
 

 
 

Compensation plan-related stock options
33,117

 
38,942

 
62,184

Common stock warrant
513,113

 
513,113

 
432,983




Note 20:  Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $2.258 million, which was covered by $12.311 million in vault cash, at December 31, 2011. The Company is also required to hold a clearing balance of $2.000 million with the Federal Reserve. This clearing balance is included in interest bearing bank balances.

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items, calculated under regulatory accounting practices must be met. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Total Capital and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as defined) to average assets (as defined). Management believes, as of December 31, 2011, that all capital adequacy requirements have been met.

As of December 31, 2011, the most recent notification by the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.

57

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 20:  (Continued)

The Company's and Bank's actual capital amounts and ratios as of December 31, 2011, and 2010, are also presented in the table:

 
Actual
 
Minimum Capital
 
Well Capitalized
(Dollars in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets):
 
 
 
 
 
 
 
 
 
 
 
Company
$
141,434

 
12.09
%
 
$
93,564

 
8.00
%
 
$

 
%
Bank
141,088

 
12.08
%
 
93,410

 
8.00
%
 
116,762

 
10.00
%
Tier I capital (to risk weighted assets):
 

 
 

 
 

 
 

 
 

 
 

Company
126,810

 
10.84
%
 
46,782

 
4.00
%
 

 
%
Bank
126,488

 
10.83
%
 
46,705

 
4.00
%
 
70,057

 
6.00
%
Tier I capital (to average assets):
 

 
 

 
 

 
 

 
 

 
 

Company
126,810

 
8.17
%
 
62,072

 
4.00
%
 

 
%
Bank
126,488

 
8.17
%
 
61,933

 
4.00
%
 
77,416

 
5.00
%
December 31, 2010:
 

 
 

 
 

 
 

 
 

 
 

Total capital (to risk weighted assets):
 

 
 

 
 

 
 

 
 

 
 

Company
$
135,291

 
11.30
%
 
$
95,790

 
8.00
%
 
$

 
%
Bank
134,020

 
11.22
%
 
95,568

 
8.00
%
 
119,460

 
10.00
%
Tier I capital (to risk weighted assets):
 

 
 

 
 

 
 

 
 

 
 

Company
120,310

 
10.05
%
 
47,895

 
4.00
%
 

 
%
Bank
119,074

 
9.97
%
 
47,784

 
4.00
%
 
71,676

 
6.00
%
Tier I capital (to average assets):
 

 
 

 
 

 
 

 
 

 
 

Company
120,310

 
7.74
%
 
62,211

 
4.00
%
 

 
%
Bank
119,074

 
7.66
%
 
62,155

 
4.00
%
 
77,693

 
5.00
%

Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to its shareholders and other cash needs. Applicable Federal and state statutes and regulations impose restrictions on the amounts of dividends that may be declared by the Bank. The Bank may also be restricted in its ability to pay dividends due to regulatory violations cited in an examination. In addition to the formal statutes and regulations, regulatory authorities also consider the Bank’s ability to produce current earnings and the adequacy of the Bank's total capital in relation to its assets, deposits and other such items, and as a result, capital adequacy considerations could further limit the availability of dividends from the Bank.

The Bank is required to get prior approval from its primary regulators - the Federal Deposit Insurance Corporation and the State of Mississippi Department of Banking and Consumer Finance - to pay dividends to the Company.

In November 2009, the Company entered into an informal agreement with the Federal Reserve Bank of St. Louis (the “Federal Reserve”). The agreement requires prior approval by the Federal Reserve of (1) the declaration or payment by the Company of dividends to shareholders and (2) the payment of interest on outstanding trust preferred securities and the payment of dividends on outstanding TARP preferred stock and (3) the incurrence of additional debt. The agreement is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended. The Federal Reserve approved, pursuant to the informal agreement, the common dividends payable to shareholders, the interest payment on the trust preferred securities and the dividends payable on the TARP preferred stock for 2010 and 2011.

In September 2010 the Company entered into an exchange transaction with the Department of the Treasury TARP Community Development Capital Initiative. Pursuant to the Agreement, the Company issued 30,000 shares of Class B, Series CD preferred stock bearing an annual dividend rate of 2% and redeemed 30,000 shares of Class B, Series A preferred stock bearing an annual dividend rate of 5%. Under the terms of the Exchange Agreement, the Company may not pay common dividends in excess of the aggregate per share dividends for the immediately prior fiscal year. This will limit future dividends through the earlier of September 2018 or the date the preferred stock is redeemed to the current rate of $.01 per share per quarter or $.04 per share per year.


58

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 21:  Derivative Financial Instruments

In November 2010 the Company entered into an interest rate swap designed to hedge the interest cash flows of its junior subordinated debentures. The swap became effective on March 15, 2011, which is the date on which the junior subordinated debentures switched from a fixed interest rate to a floating interest rate. The maturity date of the swap is March 15, 2018. The Company expects the hedge to be highly effective and it is being accounted for as a cash flow hedge. The unrealized gains and losses of the interest rate swap are being recorded in accumulated other comprehensive income until the interest payment due dates when the balances remaining in other comprehensive income are removed and charged or credited to interest expense. The swap is designed to make fixed rate payments at 3.795% to the counterparty and receive floating rate payments at three month LIBOR plus 1.33% from the counterparty. Government sponsored entity securities with a fair value of $1.505 million and cash of $1.861 million were pledged as collateral on the swap at December 31, 2011. Cash of $1.500 million was pledged as collateral on the swap at December 31, 2010.

The Company enters into interest rate lock agreements related to mortgage loan originations with customers. The Company also enters into forward sale agreements with mortgage investors. The interest rate lock agreements, which are written options, and the forward sale agreements are free-standing derivatives and are carried at fair value on the consolidated statements of condition with changes in fair value being recorded in earnings for the period.

The following tables summarize the Company’s derivative positions:

  
 
As of December 31, 2011
 
 
Asset Derivatives
 
Liability Derivatives
(Dollars in thousands)
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
Derivatives designated in cash flow
 hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
$

 
$

 
Other liabilities
 
$
30,000

 
$
1,834

Derivatives not designated as hedging
 instruments:
 
 
 
 

 
 

 
 
 
 

 
 

Forward sale agreements
 
Other assets
 
22,220

 
135

 
Other liabilities
 
15,287

 
124

Written interest rate options (locks)
 
Other assets
 
4,225

 
134

 
Other liabilities
 
7,021

 
167

Total derivatives
 
 
 
$
26,445

 
$
269

 
 
 
$
52,308

 
$
2,125

 
 
 
As of December 31, 2010
 
 
Asset Derivatives
 
Liability Derivatives
(Dollars in thousands)
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
Derivatives designated in cash flow
 hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
$
30,000

 
$
817

 
Other liabilities
 
$

 
$

Derivatives not designated as hedging
 instruments:
 
 
 
 

 
 

 
 
 
 

 
 

Forward sale agreements
 
Other assets
 
7,745

 
245

 
Other liabilities
 

 

Written interest rate options (locks)
 
Other assets
 
3,234

 
1

 
Other liabilities
 
1,164

 
28

Total derivatives
 
 
 
$
40,979

 
$
1,063

 
 
 
$
1,164

 
$
28


59

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 21:  (Continued)

Amounts included in the consolidated statements of operations and in other comprehensive income (OCI) in 2011, 2010 and 2009 are summarized in the following tables:

  
 
Year Ended December 31, 2011
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$
(3,171
)
 
Interest on junior subordinated debt
 
$
(520
)
 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
188

Written interest rate options (locks)
 
Mortgage banking income
 
(188
)
Total
 
 

 
 
 
$


 
 
Year Ended December 31, 2010
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$
817

 
Interest on junior subordinated debt
 
$

 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
502

Written interest rate options (locks)
 
Mortgage banking income
 
12

Total
 
 

 
 
 
$
514



  
 
Year Ended December 31, 2009
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$

 
Interest on junior subordinated debt
 
$

 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
(62
)
Written interest rate options (locks)
 
Mortgage banking income
 
128

Total
 
 

 
 
 
$
66


Net settlement payments of $496 thousand were made to the swap counterparty during 2011. The Company estimates that approximately $146 thousand will be recognized as a charge to interest expense during the first quarter of 2012 related to the swap. The Company expects approximately $585 thousand related to future swap settlements to be recognized as a charge to interest expense over the next twelve months.


60

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 22:  Summarized Financial Information of First M & F Corporation

Summarized financial information of First M & F Corporation (parent company only) is as follows:

STATEMENTS OF CONDITION

(Dollars in thousands)
2011
 
2010
Assets
 
 
 
 
 
 
 
Cash
$
976

 
$
2,901

Restricted interest bearing balances
1,861

 
1,500

Securities available for sale
1,505

 

Investment in banking subsidiary
137,470

 
133,947

Investment in statutory trust
928

 
928

Other assets
3,035

 
2,250

 
$
145,775

 
$
141,526

Liabilities and Stockholders’ Equity
 

 
 

 
 
 
 
Note payable
$
3,292

 
$
3,416

Junior subordinated debt
30,928

 
30,928

Other liabilities
1,959

 
117

Stockholders’ equity
109,596

 
107,065

 
$
145,775

 
$
141,526

 
STATEMENTS OF OPERATIONS

(Dollars in thousands)
2011
 
2010
 
2009
Income:
 
 
 
 
 
Dividends received from banking subsidiary
$
2,650

 
$
2,200

 
$
3,800

Dividends received from statutory trust
27

 
60

 
60

Equity in undistributed earnings (loss) of banking subsidiary
2,738

 
3,215

 
(59,869
)
Interest on investment securities
45

 

 

Other income
5

 
10

 
24

Total income (loss)
5,465

 
5,485

 
(55,985
)
Expenses:
 

 
 

 
 

Interest on other borrowings
146

 
84

 
64

Interest on junior subordinated debentures
1,335

 
1,992

 
1,992

Goodwill impairment

 

 
2,310

Other expenses
206

 
224

 
291

Total expenses
1,687

 
2,300

 
4,657

Income (loss) before income taxes
3,778

 
3,185

 
(60,642
)
Income tax benefit
595

 
826

 
843

Net income (loss)
$
4,373

 
$
4,011

 
$
(59,799
)

61

FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 22:  (Continued)

STATEMENTS OF CASH FLOWS

(Dollars in thousands)
2011
 
2010
 
2009
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
4,373

 
$
4,011

 
$
(59,799
)
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 

Equity in undistributed (earnings) loss of banking subsidiary
(2,738
)
 
(3,215
)
 
59,869

Goodwill impairment

 

 
2,310

Other, net
(608
)
 
(879
)
 
(45
)
Net cash provided by (used in) operating activities
1,027

 
(83
)
 
2,335

Cash flows from investing activities:
 

 
 

 
 

Purchases of securities available for sale
(1,500
)
 

 

Additional investment in Bank

 

 
(25,000
)
Net cash used in investing activities
(1,500
)
 

 
(25,000
)
Cash flows from financing activities:
 

 
 

 
 

Increase (decrease) in note payable
(125
)
 
1,500

 
(500
)
Cash dividends
(968
)
 
(1,751
)
 
(2,541
)
Preferred stock issued

 

 
30,000

Tax benefits on share-based transactions
2

 

 
28

Net cash provided by (used in) financing activities
(1,091
)
 
(251
)
 
26,987

Net increase (decrease) in cash
(1,564
)
 
(334
)
 
4,322

Cash at January 1
4,401

 
4,735

 
413

Cash at December 31
$
2,837

 
$
4,401

 
$
4,735





62

FIRST M&F CORPORATION AND SUBSIDIARY

PART IV


EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Financial Statements and Exhibits

The following financial statements included under the heading "Financial Statements and Supplementary Data" are included in this report:

(a)
Management’s Annual Report on Internal Control Over Financial Reporting
(b)
Report of Independent Registered Public Accounting Firm
(c)
Consolidated Statements of Condition – December 31, 2011 and 2010
(d)
Consolidated Statements of Operations – Years Ended December 31, 2011, 2010 and 2009
(e)
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2011, 2010 and 2009
(f)
Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2011, 2010 and 2009
(g)
Consolidated Statements of Cash Flows – Years Ended December 31, 2011, 2010 and 2009
(h)
Notes to Consolidated Financial Statements

The following exhibits have been filed with the Securities and Exchange Commission and are available upon written request:
3.1
 
Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
 
 
 
3.2
 
Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
3.3
 
By-laws of the Registrant, 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.
 
 
 
3.4
 
Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
4.1
 
Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.1
 
First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.
 
 
 
10.2
 
Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.
 
 
 
10.3
 
Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.4
 
Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.5
 
Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.6
 
CDCI Letter Agreement dated September 29, 2010.  Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
 
 
 
10.7
 
Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
11
 
Computation of Earnings per Share. Incorporated by reference to Exhibit 11 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
21
 
Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
23
 
Consent of Independent Registered Public Accounting Firm. Incorporated by reference to Exhibit 23 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
31.1 - 31.2
 
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. Incorporated by reference to Exhibit 31 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
31.3
 
Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer.
 
 
 
31.4
 
Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer.
 
 
 
32.1 - 32.2
 
Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer. Incorporated by reference to Exhibit 32 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
32.3
 
Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer.
 
 
 
32.4
 
Section 1350 Certification of John G. Copeland, Chief Financial Officer.
 
 
 
99
 
Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer. Incorporated by reference to Exhibit 99 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
101
 
Interactive Data File (XBRL). Incorporated by reference to Exhibits 101 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.



63

FIRST M&F CORPORATION AND SUBSIDIARY


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 on Form 10-K/A to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011 to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST M & F CORPORATION
BY:
/s/ John G. Copeland
 
 
John G. Copeland
 
 
EVP and Chief Financial Officer
 
 
 
 
DATE:   
September 28, 2012
 




64

FIRST M&F CORPORATION AND SUBSIDIARY


EXHIBIT INDEX

3.1
 
Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 to the Company’s Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
 
 
 
3.2
 
Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
3.3
 
By-laws of the Registrant, 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.
 
 
 
3.4
 
Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
4.1
 
Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.1
 
First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company’s Proxy Statement, March 15, 2005, incorporated herein by reference.
 
 
 
10.2
 
Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company’s Form 10-Q on August 9, 2005, incorporated herein by reference.
 
 
 
10.3
 
Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.4
 
Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.5
 
Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.6
 
CDCI Letter Agreement dated September 29, 2010.  Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
 
 
 
10.7
 
Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated by reference to Exhibit 10.7 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
11
 
Computation of Earnings per Share. Incorporated by reference to Exhibit 11 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
21
 
Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
23
 
Consent of Independent Registered Public Accounting Firm. Incorporated by reference to Exhibit 23 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
31.1 - 31.2
 
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. Incorporated by reference to Exhibit 31 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
31.3
 
Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer.
 
 
 
31.4
 
Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer.
 
 
 
32.1 - 32.2
 
Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer. Incorporated by reference to Exhibit 32 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
32.3
 
Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer.
 
 
 
32.4
 
Section 1350 Certification of John G. Copeland, Chief Financial Officer.
 
 
 
99
 
Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer. Incorporated by reference to Exhibit 99 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
101
 
Interactive Data File (XBRL). Incorporated by reference to Exhibits 101 of the Company's Form 10-K for December 31, 2011, filed on March 14, 2012.
 
 
 
 
 
 



65