FIRST M & F CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 2002 Commission File Number 0-9424
FIRST M & F CORPORATION
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(Exact name of registrant as specified in its charter)
Mississippi 64-0636653
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
134 West Washington Street
Kosciusko, Mississippi 39090
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Address of Principal Executive Officers Zip Code
(662) 289-5121
-----------------------------
Registrant's telephone number
No Change
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
----- ----------------------------
Common stock ($5.00 par value) 4,614,784 shares
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
CONTENTS
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Page
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PART I: FINANCIAL INFORMATION 3
Item 1 - Financial Statements (unaudited):
Consolidated Statements of Condition 4
Consolidated Statements of Income 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to Consolidated Financial Statements 10-11
Independent Accountants' Review Report 12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 19
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities 20
Item 3 - Defaults upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security
Holders 20
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21
SIGNATURE 22
EXHIBIT INDEX 23
EXHIBITS
Exhibit 11 - Computation of Earnings Per Share 24
Exhibit 99.1 - Chief Executive Officer Certification Under
Section 906 of Sarbanes-Oxley Act of 2002 25
Exhibit 99.2 - Chief Financial Officer Certification Under
Section 906 of Sarbanes-Oxley Act of 2002 26
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
(Unaudited)
June 30, December 31,
Assets 2002 2001 (1)
------ ---------- ------------
Cash and due from banks $ 30,138 $ 40,945
Interest bearing bank balances 5,354 3,088
Federal funds sold 12,250 2,600
Securities available for sale (amortized
cost of $257,184 and $247,456) 263,526 250,436
Loans 655,981 661,282
Allowance for loan losses (9,851) (8,426)
--------- ---------
Net loans 646,130 652,856
--------- ---------
Bank premises and equipment 21,208 21,651
Accrued interest receivable 7,456 7,863
Other real estate 1,095 1,077
Intangible assets 16,935 17,000
Other assets 22,059 20,793
--------- ---------
$ 1,026,151 $ 1,018,309
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 104,902 $ 108,745
Interest bearing 718,644 707,872
--------- ---------
Total deposits 823,546 816,617
--------- ---------
Federal funds and repurchase agreements 19,596 16,458
Other borrowings 68,856 73,635
Accrued interest payable 2,336 2,960
Other liabilities 6,800 7,719
--------- ---------
Total liabilities 921,134 917,389
--------- ---------
Noncontrolling joint venture interest 509 857
--------- ---------
Stockholders' equity:
Common stock of $5.00 par value. 15,000,000
shares authorized; 4,614,784 shares issued
and outstanding 23,074 23,074
Additional paid-in capital 33,876 33,876
Retained earnings 44,290 41,960
Accumulated other comprehensive income 3,268 1,153
--------- ---------
Net stockholders' equity 104,508 100,063
--------- ---------
$ 1,026,151 $ 1,018,309
========= =========
The accompanying notes are an integral part of these financial statements.
(1) Derived from audited financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 11,976 $ 13,936 $ 24,312 $ 27,968
Taxable investments 2,752 2,879 5,295 5,978
Tax exempt investments 644 715 1,326 1,390
Federal funds sold 38 227 114 500
Interest bearing bank
balances 33 118 75 265
------ ------ ------ ------
Total interest income 15,443 17,875 31,122 36,101
------ ------ ------ ------
Interest expense:
Deposits 5,192 8,317 10,826 17,085
Short-term borrowings 175 227 347 379
Other borrowings 807 1,248 1,620 2,823
------ ------ ------ ------
Total interest expense 6,174 9,792 12,793 20,287
------ ------ ------ ------
Net interest income 9,269 8,083 18,329 15,814
Provision for loan losses 1,280 1,115 2,480 2,015
------ ------ ------ ------
Net interest income after
provision for loan
losses 7,989 6,968 15,849 13,799
------ ------ ------ ------
Noninterest income:
Service charges on deposits 1,810 1,740 3,506 3,417
Credit insurance income 29 62 40 109
Mortgage banking income 225 239 477 433
Agency commission income 750 656 1,520 1,386
Other fee income 160 154 366 345
Gains (losses) on AFS
investments 25 (2) 26 311
Other income 316 423 653 987
------ ------ ------ ------
Total noninterest
income 3,315 3,272 6,588 6,988
------ ------ ------ ------
Noninterest expenses:
Salaries and employee benefits 4,491 4,340 8,846 8,324
Net occupancy expense 498 427 995 892
Equipment and data processing
expenses 854 777 1,756 1,680
Intangible asset amortization 32 342 65 685
Other expenses 2,203 2,169 4,344 4,211
------ ------ ------ ------
Total noninterest
expenses 8,078 8,055 16,006 15,792
------ ------ ------ ------
Income before income
taxes 3,226 2,185 6,431 4,995
Income taxes 897 617 1,793 1,487
------ ------ ------ ------
Net income $ 2,329 $ 1,568 $ 4,638 $ 3,508
====== ====== ====== ======
Earnings per share:
Basic $ 0.50 $ 0.34 $ 1.00 $ 0.76
Diluted 0.50 0.34 1.00 0.76
==== ==== ==== ====
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 2,329 $ 1,568 $ 4,638 $ 3,508
----- ----- ----- -----
Other comprehensive income (loss):
Unrealized holding gains
(losses) on securities,
net of taxes of $1,650
and $55 for the three
months ended June 30,
and $1,256 and $729 for
the six months ended
June 30 2,794 (92) 2,131 1,225
Plus (minus) reclassification
adjustments for (gains)
losses included in net
income, net of taxes of
$9 and $1 for the three
months ended June 30 and
$9 and $116 for the six
months ended June 30 (15) 1 (16) (195)
----- ----- ----- -----
Other comprehensive
income (loss) 2,779 (91) 2,115 1,030
----- ----- ----- -----
Total comprehensive
income $ 5,108 $ 1,477 $ 6,753 $ 4,538
===== ===== ===== =====
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
-------- ---------- -------- ------------- --------
January 1, 2001 $ 23,074 $ 33,876 $ 39,422 $ 571 $ 96,943
Net income - - 3,508 - 3,508
Cash dividends ($.50
per share) - - (2,308) - (2,308)
Net change - - - 1,030 1,030
June 30, 2001 $ 23,074 $ 33,876 $ 40,622 $ 1,601 $ 99,173
January 1, 2002 $ 23,074 $ 33,876 $ 41,960 $ 1,153 $ 100,063
Net income - - 4,638 - 4,638
Cash dividends ($.50
per share) - - (2,308) - (2,308)
Net change - - - 2,115 2,115
June 30, 2002 $ 23,074 $ 33,876 $ 44,290 $ 3,268 $ 104,508
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $4,638 $3,508
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,015 1,508
Provision for loan losses 2,480 2,015
Net investment amortization 321 159
Gain on sales of investments (26) (311)
Deferred income taxes (1,034) 809
(Increase) decrease in:
Accrued interest receivable 407 282
Cash surrender value of bank owned life
insurance (354) (332)
Increase (decrease) in:
Accrued interest payable (624) (440)
Income taxes payable (3,274) 124
Other, net 890 294
------ ------
Net cash provided by operating activities 4,439 7,616
------ ------
Cash flows from investing activities:
Purchases of securities available for sale (45,120) (39,104)
Sales of securities available for sale 1,537 11,794
Maturities of securities available for sale 34,045 43,847
Net (increase) decrease in:
Interest bearing bank balances (2,266) 13,899
Federal funds sold (9,650) (5,600)
Loans 3,416 (17,173)
Bank premises and equipment (497) (1,934)
Redemption of Federal Home Loan Bank stock - 4,116
Proceeds from sales of other real estate
and other repossessed assets 916 632
Net cash paid for current year acquisitions - (60)
Net cash paid related to prior year acquisitions - (53)
------ ------
Net cash provided by (used in) investing
activities (17,619) 10,364
------ ------
(Continued)
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FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Share Data)
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ (3,843) $6,914
Interest bearing deposits 10,772 (3,234)
Securities sold under agreements to
repurchase and other short-term borrowings 3,138 (11,812)
Repayments of other borrowings (4,886) (10,072)
Distribution to noncontrolling joint venture
interest (500) -
Cash dividends (2,308) (2,308)
------ ------
Net cash provided by (used in)
financing activities 2,373 (20,512)
------ ------
Net decrease in cash and due from banks (10,807) (2,532)
Cash and due from banks at January 1 40,945 31,484
------ ------
Cash and due from banks at June 30 $ 30,138 $ 28,952
====== ======
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 1: Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The condensed consolidated financial statements of First M & F
Corporation include the financial statements of Merchants & Farmers Bank, a
wholly owned subsidiary, and the Bank's wholly owned subsidiaries, First M & F
Insurance Co., M & F Financial Services, Inc., M & F Bank Securities
Corporation, M & F Insurance Group, Inc. and the Bank's 51% owned accounts
receivable financing joint venture. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
Note 2: Statements of Cash Flows
- ---------------------------------
During the six months ended June 30, 2002 and 2001, the Company had the following
payments:
2002 2001
---- ----
Interest $ 13,417 $ 20,727
Income taxes 5,067 1,187
====== ======
Note 3:Accounting Changes
- -------------------------
In July, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 141, "Business Combinations", and SFAS
142, "Goodwill and Other Intangible Assets". These statements make significant
changes to the accounting for business combinations, goodwill and other
intangible assets. SFAS 141, which replaces APB Opinion 16, eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. In addition, it establishes criteria for recognition of
indefinite lived intangible assets separately from goodwill. SFAS 141 is
effective for business combinations completed after June 30, 2001, and will
impact future acquisitions by the Company.
(Continued)
-----------
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
(Unaudited)
Note 3:(Continued)
- ------------------
With the adoption of SFAS 142, goodwill and indefinite lived intangible assets are
no longer amortized. Instead they are reviewed for impairment at least annually
or when certain indicators are encountered to determine if they should be
written down with an accompanying charge to earnings. At June 30, 2002, the
Company had no indefinite lived intangible assets other than goodwill.
Intangible assets, such as core deposit intangibles and customer renewal lists,
with a determinable useful life will continue to be amortized over their
respective useful lives. The Company adopted SFAS 142 effective on January 1,
2002. The non-amortization provisions were effective immediately for goodwill.
The transition impairment test was performed on the goodwill that resides in two
components of the Company. Those two components were Community Banking and
Insurance Agency Operations. The net worth of both components was calculated
from the cash flows of the operations using no growth assumptions and market
discount rates prevalent for community banking and insurance agency entities.
The market values of both components were higher than their book values.
Therefore, no impairment charge was necessary. The full effect of adopting SFAS
142 is expected to result in an increase in net income of approximately $1.2
million or $.26 per share in 2002. The following table summarizes the effect
of the application of SFAS 142 on current earnings as compared to last year's
earnings.
June 30, December 31, June 30,
2002 2001 2001
-------- ------------ --------
Goodwill $ 16,348 $ 16,348 $ 16,947
Core deposit intangibles 122 162 221
Renewal list intangibles 465 490 517
------ ------ ------
Total intangible assets $ 16,935 $ 17,000 $ 17,685
====== ====== ======
Year to Date
------------------------------------
June 30, December 31, June 30,
2002 2001 2001
-------- ------------ --------
Net income, as reported $ 4,638 $ 7,153 $ 3,508
Goodwill amortization - 1,199 599
----- ----- -----
Adjusted net income $ 4,638 $ 8,352 $ 4,107
===== ===== =====
Earnings per share as reported $ 1.00 $ 1.55 $ .76
Adjusted earnings per share 1.00 1.81 .89
==== ==== ===
We have reviewed the accompanying consolidated statement of condition of First M & F Corporation and subsidiary as of June 30, 2002, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2002 and 2001 and the related consolidated statements of stockholders’ equity and cash flows for the six-month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of condition of First M & F Corporation and subsidiary as of December 31, 2001, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated February 8, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
The following provides a narrative discussion and analyses of significant changes in the Company’s results of operations and financial condition. This discussion should be read in conjunction with the interim consolidated financial statements and supplemental financial data presented elsewhere in this report.
Certain of the information included in this discussion contains forward looking financial data and information that is based upon management’s belief as well as certain assumptions made by, and information currently available to management. Specifically, this discussion includes statements with respect to the adequacy of the allowance for loan losses; the effect of legal proceedings against the Company’s financial condition, results of operations and liquidity; and market risk disclosures. Should one or more of these risks materialize or the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected.
Net income for the first six months of 2002 was $4.638 million, or $1.00 per basic and diluted share as compared to $3.508 million, or $.76 per basic and diluted share for the same period in 2001. The increase in earnings per share was due primarily to a higher net interest margin in the first six months of 2002 than in 2001. The net interest margin for the first half of 2002 was 4.11% as compared to 3.64% for the same period in 2001. The efficiency ratio for 2002 improved to 62.12% from 66.63% in the first half of 2001. Annualized non-interest revenues were at 1.28% of average assets for 2002 as compared to 1.39% in 2001. Annualized non-interest expenses were 3.12% of average assets compared to 3.13% in 2001. Return on assets for the first half of 2002 was .90%, while the return on equity was 8.97%. Return on assets for the first half of 2001 was .70%, while the return on equity was 7.11%.
The following table shows performance ratios for the first two quarters of 2002 as compared to the first two quarters of 2001:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2002 2002 2001 2001
---------- ----------- ----------- ----------
EPS, diluted $ .50 $ .50 $ .34 $ .42
Net interest margin 4.20% 4.02% 3.72% 3.56%
Efficiency ratio 62.16% 62.08% 68.16% 65.10%
Return on assets .92% .89% .62% .77%
Return on equity 9.05% 8.90% 6.33% 7.90%
Net interest income for the first six months of 2002 was $18.329 million as compared to $15.814 million for the same period in 2001. Earning asset yields were 6.84% in 2002 as compared to 8.06% in 2001. However, funding costs decreased to 3.14% in 2002 from 4.99% in 2001. Average earning assets were $934.260 million in the first half of 2002 as compared to $918.537 million in the same period of 2001. Average loans as a percentage of earning assets were 69.85% in 2002 as compared to 69.45% in 2001. Average interest bearing liabilities were $814.443 million in the first half of 2002 as compared to $813.651 million in the same period in 2001. Average non-interest bearing deposits were $100.525 million in the first half of 2002 as compared to $87.904 million for the same period in 2001.
The following table shows margin-related ratios for the first two quarters of 2002 as compared to the first two quarters of 2001:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2002 2002 2001 2001
---------- ----------- ----------- ----------
Net interest income $ 9,269 $ 9,059 $ 8,083 $ 7,731
Earning asset yield 6.87% 6.82% 7.98% 8.13%
Funding cost 3.05% 3.23% 4.84% 5.14%
Average loans as
percentage of
earning assets 70.97% 68.74% 69.87% 69.02%
Average non-interest
deposits to total
funding 10.52% 11.46% 9.96% 9.54%
The provision for loan losses for the first six months of 2002 was $2.480 million as compared to $2.015 million for the first half of 2001. This increase was due to an increase in accruals starting in May, 2001 to cover a single customer loan loss of approximately $2,000,000. The allowance for loan losses as a percentage of loans was 1.27% at December 31, 2001, 1.38% at March 31, 2002 and 1.50% at June 30, 2002. Nonaccrual loans and 90 days past due accruing loans as a percentage of loans outstanding were .52% at June 30, 2002, .44% at March 31, 2002 and .57% at December 31, 2001. Annualized net charge-offs as a percentage of average loans were .32% for the first six months of 2002 as compared to .69% for the year ended December 31, 2001.
Non-interest income, excluding securities transactions, for the first six months of 2002 was $6,562 thousand as compared to $6,677 thousand in 2001. The decrease was primarily attributable to a decrease in the profit sharing revenues of the insurance agencies from $249 thousand in 2001 to $16 thousand in 2002. The decreased company profit sharing was due to claims from significant storm damage that occurred in 2001. Commission revenues in the agencies were up by 9.73% in 2002 as compared to 2001. Mortgage banking revenues were up by 10.08% from 2001 to 2002, due primarily to the favorable interest rate environment.
The Company also had approximately $300,000 in securities gains in 2001 brought about from the selling of certain mortgage-backed securities and reinvesting the proceeds in securities to be used as collateral to borrow $10,000,000 through a repurchase arrangement. The proceeds were used to pay down FHLB borrowings in 2001, and subsequently reduced the Company’s cost of borrowing.
The following table shows non-interest income components for the first two quarters of 2002 as compared to the first two quarters of 2001:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2002 2002 2001 2001
---------- ----------- ----------- ----------
Service charges on
deposits $ 1,810 $ 1,696 $ 1,740 $ 1,677
Mortgage income 225 252 239 194
Agency commissions 750 770 656 730
Other non-interest
income 505 554 639 802
Securities gains
(losses) 25 1 (2) 313
----- ----- ----- -----
Total $ 3,315 $ 3,273 $ 3,272 $ 3,716
===== ===== ===== =====
Non interest expenses increased by 1.35% in the first six months of 2002 as compared to the same period in 2001. Salary and benefit expenses were up due primarily to increased benefit plan expenses. The number of full-time equivalent employees in the Company was 400 at June 30, 2002 as compared to 418 at December 31, 2001 and 420 at June 30, 2001. Intangible expense amortization was down by $620 thousand from June 30, 2001 due to the elimination of goodwill amortization. Annualized non-interest expenses as a percentage of average assets were 3.12% for the first half of 2002 as compared to 3.18% for the year 2001 and 3.13% for the first half of 2001. The Company’s efficiency ratio was 62.12% for the first half of 2002 as compared to 66.15% for the year 2001 and 66.63% for the first half 2001.
The following table reflects the components of other non-interest expenses (in thousands) for the six months ended June 30, 2002 and 2001:
2002 2001
-------- --------
Telecommunications $ 381 $ 413
Postage and shipping 285 313
Supplies 311 380
Marketing and advertising 364 352
Foreclosed property 123 85
Goodwill amortization - 599
Other intangible amortization 65 86
Other expenses 2,880 2,668
----- -----
$ 4,409 $ 4,896
===== =====
The following table shows non-interest expense ratios for the first two quarters of 2002 as compared to the first two quarters of 2001:
2nd Quarter 1st Quarter 2nd Quarter 1st Quarter
2002 2002 2001 2001
---------- ----------- ----------- ----------
Efficiency ratio 62.16% 62.08% 68.16% 65.10%
Non-interest expense
to average assets 3.18% 3.05% 3.20% 3.07%
Salaries and benefits
to total non-interest
expense 55.60% 54.93% 53.88% 51.49%
Income taxes for the first half of 2002 were $20.61% higher than in the same period 2001. The effective tax rate for the first half of 2002 was 27.88% as compared to 29.77% in the first half of 2001. The primary difference in the effective rates is due to the higher amount of non-deductible interest in 2001 related to the funding of tax-exempt investments.
Assets were up by .77% from December 31, 2001 and up by 2.08% from June 30, 2001. Loans fell by .80% in the first six months of 2002 and grew by 1.40% from June 30, 2001. Investments grew by 5.23% in the first six months of 2002, funded primarily by deposit growth. Loan demand was weak during 2001 and continued to remain soft into 2002. Loans as a percentage of assets were 63.93% at June 30, 2002 as compared to 64.94% at December 31, 2001 and 64.35% at June 30, 2001.
Deposits grew by .85% in the first six months of 2002 and by 3.99% from June 30, 2001. NOW and money market deposits grew by $42.571 million in the first half of 2002, with much of this growth occurring in municipal deposit accounts. Certificates of deposit decreased by almost $29 million in the first half, due primarily to the low interest rate environment. Municipal deposits, up by $24 million in 2002, were dominated by tax receipts. Other NOW and money market deposits will probably remain at current levels until higher interest rates make reinvestment more attractive.
Total borrowings were down by $1.5 million in the first half of 2002. Debt is expected to decrease over the course of the year as excess liquidity is used to reduce leverage.
The Company’s regulatory capital ratios at June 30, 2002, as shown below are in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.
($ in thousands)
----------------
Tier 1 capital $ 84,101
Tier 2 capital 8,707
------
Total risk-based capital $ 92,808
======
Risk weighted assets $ 692,355
=======
Total risk-based capital ratio 13.40%
=====
Leverage ratio 8.43%
====
The total risk-based capital ratio for the Bank was 14.47% with a leverage ratio of 9.13%. The dividend payout ratio for the first six months of 2002 was 50.00% based upon a quarterly dividend of $.25 per share. The book value of the stock at June 30, 2002 was $22.65, with a traded market value of $25.00 per share.
Responsibility for managing the Company’s program for controlling and monitoring interest rate and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. Cash flow analyses are also used to project short-term interest rate risks and liquidity risks. Management believes, at June 30, 2002, there is adequate flexibility to alter the current rate and maturity structures as necessary to minimize the exposure to changes in interest rates, should they occur. The Company is currently in a neutral gap position for assets and liabilities repricing within the next year.
The asset/liability committee further establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. These sources are primarily correspondent banks, the Federal Home Loan Bank and the Federal Reserve.
The Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company strives to minimize risk through the diversification of the portfolio geographically within Mississippi as well as by loan purpose and collateral.
The adequacy of the allowance for loan losses is monitored quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by external examiners as well as by internal loan review personnel, past due loans, loan growth and loss history. The allowance as a percentage of loans at June 30, 2002 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company.
June 30, December 31, June 30,
2002 2001 2001
-------- ------------ --------
(Amounts in Thousands)
Nonaccrual loans $ 2,016 $ 1,825 $ 1,296
90 Day past due loans 1,377 1,958 1,625
----- ----- -----
Total non-performing loans 3,393 3,783 2,921
Other real estate 1,095 1,077 1,207
----- ----- -----
Total non-performing assets $ 4,488 $ 4,860 $ 4,128
===== ===== =====
Non-performing loans to loans .52% .57% .45%
Non-performing assets to assets .44% .48% .41%
=== === ===
Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. This risk of loss can be reflected in either reduced potential net interest income in future periods or diminished market values of financial assets.
The Company’s market risk arises primarily from interest rate risk, which the asset/liability management committee monitors and manages on a monthly basis. The committee manages the interest rate risks inherent in the loan, investment, deposit and borrowing portfolios of the Company. The asset/liability management committee determines the risk profile of the Company and determines strategies to maintain interest rate sensitivity at a low level. As of June 30, 2002 the institution was in a positive repricing gap position of approximately 1.71% of assets.
Interest rate shock analysis shows that the Company will experience a 3 basis point decrease over 12 months in its net interest margin with an immediate and sustained 100 basis point decrease in interest rates. An immediate and sustained increase in interest rates of 100 basis points will result in a 1 basis point increase in the interest margin. The sensitivity of loan prices and the lack of sustainable deposit cost decreases are the primary drivers behind these simulation results.
An analysis of the change in market value of equity shows how an interest rate shock will affect the difference between the market value of assets and the market value of liabilities. With all financial instruments being stated at market value, the ratio of the market value of equity to the market value of assets will fall by 74 basis points with an immediate and sustained increase in interest rates of 100 basis points. The ratio of the market value of equity to the market value of assets will increase by 52 basis points with an immediate and sustained decrease in interest rates of 100 basis points.
The Company has off balance sheet risks to the extent that it has made lending or investment purchase commitments. Total outstanding and unused loan commitments at June 30, 2002, were $82.264 million with $24.920 million of those commitments maturing in over one (1) year. The Company monitors these commitments with respect to credit quality as well as funding-related risks.
There has been a trend toward increased litigation against financial services companies arising out of consumer lending and other consumer financial transactions, especially in Mississippi. Some of these actions have resulted in large settlements or substantial damage awards.
Some of the Company’s subsidiaries are subject to similar cases that seek substantial damages for claims arising out of transactions that involve relative small amounts of money. While the allegations vary from case to case, in general they allege that loans were originated or renewed in a way that the borrowers were improperly sold insurance products, such as credit life insurance. The Company has denied these allegations and will vigorously defend the claims.
The number of these lawsuits filed against some of the Company’s subsidiaries increased during 2001 and the first half of 2002. Similarly, the number of plaintiffs participating in these lawsuits has increased significantly. Management has no reason to know whether these trends will continue. It is not possible to determine with any certainty at this point in time the potential exposure related to damages in connection with these suits. Future legislation and court decisions may limit the amount of damages that can be recovered in legal proceedings. However, management cannot predict at this time whether such legislation and court decisions will occur or the effect they may have on cases involving our subsidiaries.
Additionally, the Company and its subsidiaries are defendants in various other lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of this category of claims should not have a material adverse effect on the Company’s consolidated financial position or results of operations.
The annual stockholders’ meeting was held on April 10, 2002. The stockholders elected six directors to serve a term of three years as summarized below:
Votes
Directors Elected Votes For Withheld
----------------- --------- --------
Jon A. Crocker 3,468,739 19,356
Toxey Hall, III 3,418,679 69,416
J. Marlin Ivey 3,468,739 19,356
Otho E. Pettit, Jr. 3,468,571 19,524
Charles W. Ritter, Jr. 3,468,739 19,356
L. F. Sams, Jr. 3,414,397 73,698
The exhibits listed in the exhibit Index at page 23 of this Form 10-Q are filed herewith or are incorporated by reference herein.
No reports on Form 8-K were filed by the Company during the period April 1, 2002 to June 30 2002.
FIRST M & F CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FIRST M & F CORPORATION
- -----------------------
(Registrant)
DATE: August 13, 2002 /s/ Hugh S. Potts, Jr.
------------------------------------
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
DATE: August 13, 2002 /s/ Robert C. Thompson, III
------------------------------------
Robert C. Thompson, III
Executive Vice President and
Chief Financial Officer
Exhibit 11
FIRST M & F CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended June 30,
----------------------------
2002 2001
---- ----
Net income $ 2,328,576 $ 1,568,074
========= =========
Weighted average shares outstanding 4,614,784 4,614,784
Add dilutive effect of outstanding options - -
--------- ---------
Adjusted diluted shares outstanding 4,614,784 4,614,784
========= =========
Earnings per share:
Basic $ .50 $ .34
Diluted .50 .34
=== ===
Six Months Ended June 30,
----------------------------
2002 2001
---- ----
Net income $ 4,638,024 $ 3,508,104
========= =========
Weighted average shares outstanding 4,614,784 4,614,784
Add dilutive effect of outstanding options - -
--------- ---------
Adjusted diluted shares outstanding 4,614,784 4,614,784
========= =========
Earnings per share:
Basic $ 1.00 $ .76
Diluted 1.00 .76
==== ===
Exhibit 99.1
FIRST M & F CORPORATION
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First M & F Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002 as filed with Securities and
Exchange Commission on the date hereof (the "Report"), I, Hugh S. Potts, Jr., Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C.ss. 1350, as added
by ss. 906 of the Sarbanes-Oxley Act of 2002, that:
A. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
B. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
DATE:August 13, 2002 BY: /s/ Hugh S. Potts, Jr.
------------------------------
Hugh S. Potts, Jr.
Chief Executive Officer
Exhibit 99.2
FIRST M & F CORPORATION
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First M & F Corporation (the "Company")
on Form 10-Q for the period ended June 30, 2002 as filed with Securities and
Exchange Commission on the date hereof (the "Report"), I, Robert C. Thompson, III,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.ss. 1350, as
added by ss. 906 of the Sarbanes-Oxley Act of 2002, that:
C. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
D. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
DATE:August 13, 2002 BY: /s/ Robert C. Thompson, III
--------------------------------
Robert C. Thompson, III
Chief Financial Officer