FIRST M & F CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 2004
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
134 West Washington Street
Kosciusko, Mississippi 39090
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Address of Principal Executive Offices Zip Code
(662) 289-5121
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Registrant's telephone number
No Change
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mart whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2004
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Common stock ($5.00 par value) 4,562,859 shares
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
INDEX
Page
----
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited): 3
Consolidated Statements of Condition 4
Consolidated Statements of Income 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 10
Independent Accountants' Review Report 14
Item 2 - Management's Discussion and Analysis of Operation 15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4 - Controls and Procedures 21
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 2 - Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 23
Item 3 - Defaults upon Senior Securities 23
Item 4 - Submission of Matters to a Vote of Security
Holders 23
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26
EXHIBIT INDEX
FIRST M & F CORPORATION
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
March 31, 2004 and 2003 and December 31, 2003
(Unaudited)
(In Thousands, Except Share Data)
March 31 December 31
-------- -----------
Assets 2004 2003 2003
- ------ ---- ---- ----
Cash and due from banks $ 28,328 $ 27,223 $ 39,849
Interest bearing bank balances 5,614 13,938 2,554
Federal funds sold 18,300 33,350 950
Securities available for sale, amortized cost
of $189,788, $220,235 and $181,375 195,925 229,076 187,577
Mortgage loans held for sale 2,653 2,397 2,141
Loans, net of unearned income 779,087 697,803 779,180
Allowance for loan losses (10,958) (10,393) (10,891)
-------------- -------------- ---------------
Net loans 768,129 687,410 768,289
-------------- -------------- ---------------
Bank premises and equipment 24,718 21,405 24,214
Accrued interest receivable 7,191 7,176 7,330
Other real estate 1,157 1,490 802
Goodwill 16,348 16,348 16,348
Other intangible assets 457 570 489
Bank owned life insurance 13,418 12,886 13,269
Other assets 14,074 8,912 14,486
-------------- -------------- ---------------
$ 1,096,312 $ 1,062,181 $ 1,078,298
============== ============== ===============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Noninterest-bearing deposits $ 115,895 $ 103,999 $ 123,191
Interest-bearing deposits 736,094 755,706 697,035
-------------- -------------- ---------------
Total deposits 851,989 859,705 820,226
-------------- -------------- ---------------
Short-term borrowings 17,099 16,940 15,205
Other borrowings 106,217 65,583 122,033
Accrued interest payable 1,375 1,816 1,379
Other liabilities 7,772 7,040 7,732
-------------- -------------- ---------------
Total liabilities 984,452 951,084 966,575
-------------- -------------- ---------------
Noncontrolling joint venture interest 152 752 1,045
-------------- -------------- ---------------
Stockholders' equity:
Preferred stock:
Class A; 1,000,000 shares authorized - - -
Class B; 1,000,000 shares authorized - - -
Common stock of $5.00 par value; 15,000,000 shares
authorized: 4,562,859, 4,641,137 and
4,565,038 shares issued 22,814 23,206 22,825
Additional paid-in capital 31,246 34,038 31,624
Retained earnings 55,333 49,080 53,873
Accumulated other comprehensive income 2,315 4,021 2,356
-------------- -------------- ---------------
Total stockholders' equity 111,708 110,345 110,678
-------------- -------------- ---------------
$ 1,096,312 $ 1,062,181 $ 1,078,298
============== ============== ===============
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands, Except Share Data)
Three Months Ended March 31
---------------------------
Interest income: 2004 2003
---- ----
Interest and fees on loans $ 12,226 $ 11,708
Taxable investments 1,392 1,933
Tax-exempt investments 561 596
Federal funds sold 69 107
Interest bearing bank balances 29 42
----------- -----------
Total interest income 14,277 14,386
----------- -----------
Interest expense:
Deposits 2,818 3,927
Short-term borrowings 147 167
Other borrowings 1,071 768
----------- -----------
Total interest expense 4,036 4,862
----------- -----------
Net interest income 10,241 9,524
Provision for loan losses 2,460 920
----------- -----------
Net interest income after
provision for loan losses 7,781 8,604
----------- -----------
Noninterest income:
Service charges on deposit accounts 1,821 1,760
Mortgage banking income 200 172
Agency commission income 865 837
Trust and brokerage income 110 45
Bank owned life insurance income 149 149
Securities gains (losses), net 70 (1)
Other income 791 414
----------- -----------
Total noninterest income 4,006 3,376
----------- -----------
Noninterest expenses:
Salaries and employee benefits 4,946 4,320
Net occupancy expenses 572 518
Equipment expenses 653 654
Software and processing expenses 338 316
Telecommunication expenses 212 219
Marketing and business development expenses 307 153
Intangible asset amortization 32 34
Noncontrolling interest in joint venture earnings (loss) (893) 96
Other expenses 1,917 1,946
----------- -----------
Total noninterest expenses 8,084 8,256
----------- -----------
Income before income taxes 3,703 3,724
Income taxes 1,102 1,070
----------- -----------
Net income $ 2,601 $ 2,654
=========== ===========
Earnings per share:
Basic $ .57 $ .57
Diluted .57 .57
=========== ===========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands)
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Net income $ 2,601 $ 2,654
Other comprehensive income:
Change in unrealized gains (losses) on securities
available for sale, net of tax of $1 and $243 3 (409)
Reclassification adjustment for gains on securities
available for sale included in net income, net of
tax of $26 and $0 (44) -
Minimum pension liability adjustment, net of tax - -
----------- -----------
Other comprehensive income (41) (409)
----------- -----------
Total comprehensive income $ 2,560 $ 2,245
=========== ===========
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands, Except Share Data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
------------- -------------- ------------- ----------------- ---------------
January 1, 2003 $ 22,935 $ 33,260 $ 47,585 $ 4,430 $ 108,210
Net income - - 2,654 - 2,654
Cash dividends ($.25 per share) - - (1,159) - (1,159)
131,445 common shares issued
in exercise of stock options 657 2,878 - - 3,535
77,354 common shares
repurchased (386) (2,100) - - (2,486)
Net change - - - (409) (409)
------------- -------------- ------------- ----------------- ---------------
March 31, 2003 $ 23,206 $ 34,038 $ 49,080 $ 4,021 $ 110,345
============= ============== ============= ================= ===============
January 1, 2004 $ 22,825 $ 31,624 $ 53,873 $ 2,356 $ 110,678
Net income - - 2,601 - 2,601
Cash dividends ($.25 per share) - - (1,141) - (1,141)
34,321 common shares issued
in exercise of stock options 172 741 - - 913
36,500 common shares
repurchased (183) (1,119) - - (1,302)
Net change - - - (41) (41)
------------- -------------- ------------- ----------------- ---------------
March 31, 2004 $ 22,814 $ 31,246 $ 55,333 $ 2,315 $ 111,708
============= ============== ============= ================= ===============
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands)
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 2,601 $ 2,654
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 483 494
Provision for loan losses 2,460 920
Net investment amortization 192 300
Gain on securities available for sale (70) -
Other asset sale (gains)/losses (88) (242)
Earnings (loss) of noncontrolling joint venture interest (893) 96
Deferred income taxes 64 199
(Increase) decrease in:
Accrued interest receivable 139 (51)
Cash surrender value of bank owned life insurance (149) (149)
Mortgages held for sale (512) (226)
Other assets 23 (587)
Increase (decrease) in:
Accrued interest payable (4) (104)
Other liabilities 365 62
----------------- ---------------
Net cash provided by operating activities 4,611 3,366
----------------- ---------------
Cash flows from investing activities:
Purchases of securities available for sale (23,881) (18,764)
Sales of securities available for sale 9,390 -
Maturities of securities available for sale 5,991 25,120
Net (increase) decrease in:
Interest bearing bank balances (3,060) (1,328)
Federal funds sold (17,350) (25,650)
Loans (2,854) (22,500)
Bank premises and equipment (939) (344)
Proceeds from sales of other real estate and other repossessed assets 314 696
----------------- ---------------
Net cash provided by (used in) investing activities (32,389) (42,770)
----------------- ---------------
(Continued)
FIRST M & F CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Unaudited)
(In Thousands)
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Cash flows from financing activities:
Net increase (decrease) in deposits $ 31,763 $ 35,680
Net increase (decrease) in short-term borrowings 1,894 (6,659)
Proceeds from other borrowings 13,400 -
Repayments of other borrowings (29,270) (5,613)
Cash dividends (1,141) (1,159)
Common shares issued 913 3,535
Common shares repurchased (1,302) (2,486)
----------------- ---------------
Net cash provided by (used in) financing activities 16,257 23,298
----------------- ---------------
Net increase (decrease) in cash and due from banks (11,521) (16,106)
Cash and due from banks at January 1 39,849 43,329
----------------- ---------------
Cash and due from banks at March 31 $ 28,328 $ 27,223
================= ===============
Total interest paid $ 4,040 $ 4,966
Total income taxes paid 246 268
Transfers of loans to foreclosed property 570 438
================= ===============
The accompanying notes are an integral part of these financial statements.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements of First M & F Corporation include the financial statements of Merchants and Farmers Bank, wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F Bank Securities Corporation, M & F Insurance Agency, Inc., M & F Insurance Group, Inc., M & F Business Credit, Inc., and the Bank’s 51% ownership in Merchants Financial Services, LLC, an accounts receivable financing joint venture. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on form 10-K for the year ended December 31, 2003.
Note 2: Stock-Based CompensationThe Company accounts for its stock-based employee compensation plans based on the “intrinsic value method” provided in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized on option plans.
Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, requires pro forma disclosures for net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures below use the fair value method of SFAS No. 123 to measure compensation expense for stock-based employee compensation plans.
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Net income, as reported $ 2,601 $ 2,654
Less: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects 3 9
--------- ---------
Pro forma net income $ 2,598 $ 2,645
========= =========
Earnings per share:
Basic - as reported $ .57 $ .57
Basic - pro forma .57 .57
Diluted - as reported .57 .57
Diluted - pro forma .57 .57
========= =========
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 2 (Continued)
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option pricing
model.
The following table is a summary of outstanding options and weighted average exercises.
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Number Price Number Price
------ ----- ------ -----
January 1 174,406 $ 29.55 319,752 $ 28.31
Exercised (34,321) 26.60 (131,445) 26.90
--------------- ---------------- -------------- ---------------
March 31 140,085 $ 30.28 188,307 $ 29.28
=============== ================ ============== ===============
Note 3: Allowance for Loan Loss
The following table is a summary of the activity in the Allowance for Loan Loss for the first quarter of 2004 and
the first quarter of 2003.
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Balance at January 1 $ 10,891 $ 10,258
Loans charged off (2,508) (926)
Recoveries 115 141
-------------- -------------
Net charge-offs (2,393) (785)
-------------- -------------
Provision for loan losses 0 920
-------------- -------------
Balance at March 31 $ 10,958 $ 10,393
============== =============
Note 4: Earnings Per Share
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Net income $ 2,601 $ 2,654
=============== =============
Weighted average shares outstanding 4,565,225 4,626,110
Add dilutive effect of outstanding options 19,521 12,732
--------------- -------------
Adjusted dilutive shares outstanding 4,584,746 4,638,842
=============== =============
Earnings per share:
Basic $ .57 $ .57
Diluted .57 .57
=============== =============
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 5: Goodwill and Other Intangible Assets
Following is a summary of intangible assets, net of accumulated amortization, included in the Consolidated
Statements of Condition:
Customer
Core Renewal Noncompete
Goodwill Deposits Lists Agreements
Balance at December 31, 2002 $ 16,348 $ 81 $ 317 $ 206
Amortization expense - (20) (7) (7)
-------------- -------------- -------------- ---------------
Balance at March 31, 2003 $ 16,348 $ 62 $ 310 $ 199
============== ============== ============== ===============
Balance at December 31, 2003 $ 16,348 $ 21 $ 289 $ 179
Amortization expense - (18) (7) (7)
-------------- -------------- -------------- ---------------
Balance at March 31, 2004 $ 16,348 $ 3 $ 282 $ 172
============== ============== ============== ===============
Amortization expense related to intangible assets is expected to be $45 for the remainder of 2004. Amortization
expense is expected to be $55 per year for the years 2005 through 2008.
Note 6: Defined Benefit Pension Plan
As discussed in Note 10 to the December 31, 2003 financial statements, the Bank has a defined benefit pension
plan covering substantially all full time employees of the Bank and its subsidiaries. The following is a summary
of the components of net periodic benefit costs at March 31, 2004 and 2003:
Three Months Ended March 31
---------------------------
2004 2003
---- ----
Service cost $ - $ -
Interest cost 117 122
Expected return on plan assets (124) (105)
Amortization of transition asset (2) (2)
Amortization of prior service costs (9) (9)
Recognized actuarial (gain) loss 54 52
-------------- -----------------
Net pension cost $ 36 $ 58
============== =================
The Company disclosed in Note 10 to the December 31, 2003 financial statements that it expected to make $400 in
contributions in 2004. The Company did not make any contributions to the pension plan in the first quarter of
2004. The Company does expect to make $400 in contributions into the plan during the remainder of 2004.
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
Note 7: Other Borrowings
The following is a summary of other borrowings at March 31, 2004 and 2003:
2004 2003
---- ----
Company's line of credit in the amount of $15,000,000, renewable
annually; secured by approximately 29% of the Bank's common
stock; interest payable annually at .75% below the lender's base rate $ 6,292 $ 6,592
Bank's advances from Federal Home Loan Bank of Dallas, net of
unamortized purchase accounting adjustments of $161 and $788 99,925 58,991
-------------- --------------
$ 106,217 $ 65,583
============== ==============
The Bank has advances from the Federal Home Loan Bank of Dallas (FHLB) under Blanket Agreements for Advances and Security Agreements. These agreements allow the Bank to borrow funds from the FHLB to fund mortgage loan programs and to satisfy certain other funding needs. The value of mortgage-backed securities and mortgage loans pledged under these agreements must be maintained at not less than 115% and 150%, respectively, of the advances outstanding.
We have reviewed the accompanying consolidated statements of condition of First M & F Corporation and subsidiary as of March 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the three-month periods ended March 31, 2004 and 2003. 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, 2003, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated January 30, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of condition as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of condition from which it has been derived.
Shearer, Taylor & Co., PAThe following provides a narrative discussion and analysis of significant changes in the Company’s results of operations and financial condition. This discussion should be read in conjunction with the interim consolidated financial statements and supplemental financial data presented elsewhere in this report.
Certain of the information included in this discussion contains forward looking financial data and information that is based upon management’s belief as well as certain assumptions made by, and information currently available to management. Specifically, this discussion includes statements with respect to the adequacy of the allowance for loan losses, the effect of legal proceedings against the Company’s financial condition, results of operations and liquidity, and market risk disclosures. Should one or more of these risks materialize or the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected.
Financial SummaryNet income for the first quarter of 2004 was $2.601 million, or $.57 basic and diluted per share as compared to $2.654, or $.57 per share for the same period in 2003. The decrease in earnings per share was due primarily to a $2.0 million loan loss incurred in a 51% owned joint venture. Salary and benefit expenses also increased due to the hiring of additional commercial lenders during 2003, the opening of an asset-based lending operation in Memphis, Tennessee in the second quarter of 2003, and the addition of a fourth branch in the Tupelo market in the third quarter of 2003. Net loan growth was down in the first quarter of 2004 by $93 thousand as compared to being up by $21.228 million in the first quarter of 2003. The net interest margin for the first quarter of 2004 was 4.24% as compared to 4.12% in the first quarter of 2003 and 4.44% in the fourth quarter of 2003. The efficiency ratio for the first quarter of 2004 was 55.34% as compared to 62.17% for the first quarter of 2003 and 62.52% for the fourth quarter of 2003.The first quarter of 2004 efficiency ratio was influenced by a negative noncontrolling interest expense related to the partially owned joint venture. Excluding the noncontrolling interest, the efficiency ratio would have been 62.20%. Annualized non-interest revenues were 1.45% of average assets for the first quarter of 2004 as compared to 1.28% for the same period in 2003. Annualized non-interest expenses were 2.93% of average assets for the first quarter of 2004 as compared to 3.12% for the same period in 2003. The 2004 annualized non-interest expense ratio, excluding the effect of the noncontrolling interest adjustment, was 3.29%. Return on assets for the first quarter of 2004 was .94% and return on equity was 9.29%. Return on assets for the first quarter of 2003 was 1.00% while return on equity was 9.63%.
The following table shows performance ratios for the first quarters of 2004 and 2003 as well as for the fourth quarter of 2003:
1st Quarter 2004 4th Quarter 2003 1st Quarter, 2003
------------------- ------------------- --------------------
EPS, Diluted $ .57 $ .61 $ .57
Net interest margin 4.24% 4.44% 4.12%
Efficiency ratio 55.34% 62.52% 62.17%
Return on assets .94% 1.05% 1.00%
Return on equity 9.29% 10.15% 9.63%
Net Interest Income
Net interest income before loan loss expenses for the first quarter of 2004 was $10.241 million as compared to $9.524 million for the same period in 2003. Earning asset yields were 5.85% for the first quarter of 2004 as compared to 6.14% for the same period in 2003. Funding costs decreased to 1.86% in the first quarter of 2004 from 2.32% in the first quarter of 2003. Therefore, the spread between earning asset yields and liability costs increased by 16 basis points from the first quarter of 2003 to the first quarter of 2004. However, the spread decreased by 16 basis points from the fourth quarter of 2003 to the first quarter of 2004.
Average earning assets were $1.009 billion during the first quarter of 2004 as compared to $972.278 million for the same period in 2003. Average loans as a percentage of earning assets were 77.17% for the first quarter of 2004 as compared to 70.48% for the same period in 2003. Average interest-bearing liabilities were $869.496 million during the first quarter of 2004 as compared to $839.078 million during the same period in 2003. Average non-interest-bearing deposits were $134.101 million during the first quarter of 2004 as compared to $89.293 million during the same period in 2003.
FIRST M & F CORPORATION
The following table shows margin-related ratios for the first quarters of 2004 and 2003 as well as for the fourth
quarter of 2003:
1st Quarter, 2004 4th Quarter, 2003 1st Quarter, 2003
-------------------- -------------------- --------------------
Net interest income $ 10,241 $ 10,421 $ 9,524
Earning asset yield 5.85% 6.26% 6.14%
Funding cost 1.86% 2.10% 2.32%
Avg. loans as % of earning assets 77.17% 79.84% 70.48%
The following table shows the components of the net interest margin for the first quarters of 2004 and 2003:
Yields/Costs
------------
1st Quarter, 2004 1st Quarter, 2003
----------------- -----------------
Interest bearing bank balances 1.13% 1.23%
Federal funds sold .88 1.11
Taxable investments 4.34 4.49
Tax-exempt investments 6.64 7.07
Loans held for investment 6.31 6.87
------------------- ------------------
Earning asset yield 5.85 6.14
NOW, MMDA & Savings .81 1.43
Certificates of deposit 2.33 2.87
Short-term borrowings 3.26 3.19
Other borrowings 3.69 4.49
------------------- ------------------
Cost of interest-bearing liabilities 1.86 2.32
------------------- ------------------
Net interest spread 3.99 3.83
Effect of non-interest bearing deposits .21 .24
Effect of leverage .03 .05
------------------- ------------------
Net interest margin, tax-equivalent 4.24 4.12
Less: Tax equivalent adjustments:
Investments .14 .15
Loans .01 .01
------------------- ------------------
Reported book net interest margin 4.09% 3.96%
Provision for Loan Losses
The provision for loan losses for the first quarter of 2004 was $2.460 million as compared to $920 thousand for the first quarter of 2003. The provision includes $1.5 million of additional accruals related to a $2.0 million loan loss incurred in a 51% owned accounts receivable factoring company. The factoring company experienced a significant deterioration in one account with a balance of approximately $3.5 million. The factoring company charged off $2.0 million of the account balance and placed the remaining $1.5 million on nonaccrual status. The factoring company expects to collect the $1.5 million in remaining balances. The allowance for loan losses as a percentage of loans was 1.41% at March 31, 2004, 1.40% at December 31, 2003, and 1.49% at March 31, 2003. Nonaccrual loans and 90 days past due accruing loans as a percentage of loans outstanding were 1.11% at March 31, 2004, .77% at December 31, 2003, and .78% at March 31, 2003. Annualized net charge-offs as a percentage of average loans were 1.23% for the first quarter of 2004 as compared to .43% for the 2003 year.
Non-interest income, excluding securities transactions, for the first quarter of 2004 was $3.936 million as compared to $3.377 million for the same period in 2003. Mortgage income was up by 16.28% due to higher origination volumes. Agency commission revenues were up by 3.35% as property and casualty prices began to become more competitive, title insurance volumes decreased, and annuity commissions were flat. Trust and brokerage income was up significantly due to new personnel added during 2002 and 2003. Investment brokerage income improved by $28 thousand while trust income improved by $37 thousand. Other income was up in 2004 primarily due to contingency income received by the property and casualty insurance business. Contingency revenues, based upon new business and claims experience, were $275 thousand in 2004 as compared to $100 thousand for the first quarter of 2003.
Securities gains of approximately $70 thousand were incurred to restructure part of the investment portfolio. Approximately $6.7 million of mortgage-backed securities were sold and replaced with trust-preferred and corporate securities. This was done to match the investments more closely with their funding sources.
Non Interest ExpenseNon-interest expenses, excluding noncontrolling joint venture interests, were up by 10.03% in the first quarter of 2004 as compared to 2003. Salary and benefit expenses increased by 14.49% as the number of full-time equivalent employees increased to 441 at March 31, 2004 from 406 at March 31, 2003. The increases occurred primarily in Rankin County, where a new branch was opened in Flowood in March of 2004, and in Tupelo, where a new branch was opened in July of 2003. These additions expanded the staff by 11 positions. The mortgage lending division expanded by six (6) positions during 2003, resulting in increased mortgage originations. The Bank’s asset-based lending subsidiary, M & F Business Credit, Inc., was started in Memphis in April of 2003 and had a staff of four (4) associates as of March 31, 2004. Health plan expenses were up by approximately $88 thousand from the first quarter of 2003 due to the additional numbers of associates in the plan as well as to increased health care costs.
Marketing and business development expenses were up by $154 thousand for the first quarter of 2004 as compared to the first quarter of 2003. During the first quarter of 2004 $79 thousand was spent on product promotions as well as product and image advertising. Approximately $40 thousand was spent in grand opening and other branch promotion expenses.
The $893 thousand negative balance in noncontrolling joint venture losses is the amount of losses, primarily the result of the $2.0 million loan loss, attributable to the other partner in the venture. Excluding the additional loan loss accruals, the joint venture contributed $107 thousand in earnings for each partner for the first quarter of 2004.
The following table shows non-interest expense ratios for the first quarters of 2004 and 2003 after adjusting the noncontrolling joint venture losses for the additional loan loss accruals:
1st Quarter, 2004 1st Quarter, 2003
-------------------- --------------------
Efficiency ratio 62.20% 62.17%
Non-interest expense to average assets 3.29% 3.12%
Salaries and benefits to total non-interest expense 54.45% 52.33%
Income Taxes
Income taxes for the first quarter of 2004 were 2% lower than in the first quarter of 2003. The decrease in taxes was attributable to a decrease in pre-tax earnings. The effective tax rates for 2004 and 2003 were 29.76% and 28.73% respectively. The Company is currently at the conclusion of an examination of the final return filed by Community Federal Bancorp prior to its acquisition by the Company. Based upon the proposed adjustments, management estimates that taxes of approximately $160 thousand will be due.
Assets were up by 1.67% in the first quarter of 2004 as compared to 2.42% in the first quarter of 2003. Total assets were up by 3.21% from March 31, 2003. Investments increased by 4.45% in the first quarter of 2004 and declined by 2.98% during the first quarter of 2003. The Company increased investments during the first quarter of 2004 in corporate and trust-preferred securities by $5.3 million, while increasing agency securities and mortgage-backed securities by approximately $2.0 million each. Deposit growth, coupled with low loan demand, increased the amount of liquid assets available to be invested in the portfolio. Loan growth during the first quarter of 2003 required the use of cash flows from the investment portfolio. Loans decreased by $93 thousand in the first quarter of 2004 after increasing by $6.900 million in the fourth quarter of 2003. Loans increased by $21.228 million in the first quarter of 2003 as demand for commercial and real estate loans was strong. For the first quarter of 2004, loan growth was strong in DeSoto, Lee and Lafayette Counties. Growth was weak in Madison, Rankin and Hinds counties. During the first quarter of 2003, loan growth was strong in Madison, Rankin, DeSoto and Lee counties. Loans as a percent of total assets were 71.06% at March 31, 2004 as compared to 72.26% at December 31, 2003 and 65.70% at March 31, 2003.
Deposits increased by 3.87% in the first quarter of 2004 as compared to 4.33% in the first quarter of 2003. Deposits grew by $31.763 million in the first quarter of 2004, with municipality deposits making up $27.626 million of the total. Much of the retail growth occurred in money market deposits and certificates of deposit. Deposits grew by $35.681 million in the first quarter of 2003, with municipality deposits making up $29.586 million of the total. The large growth in municipality deposits is a natural trend that occurs during the early months of the year as tax receipts are collected. The funds generally move out during the summer months as spending occurs. The Company’s strategy is to build the core customer deposit base and rely less on borrowed funds for meeting loan demand and other cash flow requirements going forward. However, when borrowed funds are less costly than time deposits, the Company will still look to those sources to help maintain the spread between the yield on earning assets and the cost of funds.
Other borrowings were down by $15.816 million in the first quarter of 2004 after increasing by $50.891 million over the course of 2003. The increase in borrowing in 2003 was used to fund part of the $102.605 million in loan growth that occurred in 2003. The Company also has debt of $6.292 million which was used primarily to repurchase stock, beginning in 1999. Although the Company plans to repurchase additional shares in 2004, it expects to reduce the borrowings to approximately $5.6 million by the end of 2004.
EquityThe Company’s and Bank’s regulatory capital ratios at March 31, 2004, as shown below are in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.
First M & F Corporation M & F Bank
----------------------- ----------
Amount Ratio Amount Ratio
------ ----- ------ -----
Actual:
Total capital $ 101,337 12.52% $ 105,659 13.10%
Tier 1 capital 91,202 11.26% 95,562 11.85%
Leverage 91,202 8.38% 95,562 8.79%
For Capital Adequacy Purposes:
Total capital 64,775 8.00% 64,509 8.00%
Tier 1 capital 32,388 4.00% 32,255 4.00%
Leverage 43,513 4.00% 43,471 4.00%
To Be Well Capitalized Under Prompt
Corrective Action Provisions:
Total capital 80,969 10.00% 80,637 10.00%
Tier 1 capital 48,581 6.00% 48,382 6.00%
Leverage 54,391 5.00% 54,339 5.00%
The Company repurchased 77,354 shares during the first quarter of 2003 at an average price of $32.14 per share. The Company also issued 131,445 shares related to the exercise of stock options during the first quarter of 2003 at an average exercise price of $26.90 per share. The Company repurchased 36,500 shares during the first quarter of 2004 at an average price of $35.70 per share. The Company also issued 34,321 shares related to the exercise of stock options during the first quarter of 2004 at an average exercise price of $26.60 per share. The Company expects to continue to repurchase shares during 2004.
Interest Rate Risk and Liquidity ManagementResponsibility for managing the Company’s program for controlling and monitoring interest rate risk and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. Cash flow analyses are also used to project short-term interest rate risks and liquidity risks. Management believes, at March 31, 2004, there is adequate flexibility to alter the current rate and maturity structures as necessary to minimize the exposure to changes in interest rates, should they occur. The Company is currently in a positive gap position for assets and liabilities repricing within the next year. This generally means that for assets and liabilities maturing and repricing within the next 12 months, the Company is positioned for more assets to mature and reprice than it has in liabilities maturing and repricing.
The asset/liability committee further establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. These sources are primarily correspondent banks, the Federal Home Loan Bank and the Federal Reserve.
Credit Risk ManagementThe Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company strives to minimize risk through the diversification of the portfolio geographically within Mississippi as well as by loan purpose and collateral.
The Bank’s credit standards are enforced within the Bank as well as within all of its wholly-owned subsidiaries. As of March, 2004, management began to enforce the Bank’s credit standards on the Bank’s partially-owned joint venture as well. Management will enforce its credit standards as well as other quality and internal control standards on future business ventures in which it is a partner.
The adequacy of the allowance for loan losses is monitored quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by external examiners as well as by internal loan review personnel, past due loans, loan growth and loss history. The allowance as a percentage of loans at March 31, 2004 is comparable to other peer banks.
The following table shows non-performing loans and other assets of the Company:
March 31 December 31 March 31
2004 2003 2003
---- ---- ----
Nonaccrual loans $ 7,349 $ 4,517 $ 1,296
Past due 90 days or more and still
accruing interest 1,317 1,531 4,151
---------------- ----------------- ---------------
Total non-performing loans 8,666 6,048 5,447
Other real estate 1,157 802 1,490
---------------- ----------------- ---------------
Total non-performing assets $ 9,823 $ 6,850 $ 6,937
================ ================= ===============
Ratios:
Non-performing loans to loans 1.11% .78% .78%
Non-performing assets to assets .90% .64% .65%
================ ================= ================
The Company’s primary off-balance sheet arrangements are in the form of loan commitments and operating lease commitments. At March 31, 2004 the Company had $113.578 million in unused loan commitments outstanding. Of these commitments, $90.025 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.
Letters of credit are used to facilitate the borrowers’ business and are usually related to the acquisition of inventory or of assets to be used in the customers’ business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most letters of credit expire without being presented for payment. However, the presentment of a letter of credit would create a loan receivable from the Bank’s loan customer. At March 31, 2004 the Company had $6.615 million in letters of credit issued and outstanding.
In the ordinary course of business the Company enters into rental and lease agreements to secure office space and equipment. The Company has a variety of lease agreements in place, all of which are operating leases. The largest lease obligations are for office equipment and mainframe computer systems.
The Company does not have any variable interest entities or other off-balance sheet vehicles, obligations or derivatives as of March 31, 2004.
Tabular Disclosure of Contractual ObligationsThe following table summarizes the obligations of the Company:
Payments Due by Period
----------------------
Less More
Than 1 1 - 3 3 - 5 Than 5
Total Year Years Years Years
----- ---- ----- ----- -----
Contractual Obligations
Long-term debt $ 91,926 $ 12,872 $ 35,137 $ 21,504 $ 22,413
Capital lease obligations - - - - -
Operating leases 2,665 764 1,263 605 33
Purchase obligations - - - - -
Other long-term liabilities - - - - -
----------- ----------- ----------- ------------ -------------
Total $ 94,591 $ 13,636 $ 36,400 $ 22,109 $ 22,446
=========== =========== =========== ============ =============
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
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 institution. The asset/liability management committee determines the risk profile of the Company and determines strategies to maintain interest rate sensitivity at a low level. As of March 31, 2004, the institution was in a positive repricing gap position of approximately 12.90% of assets.
Interest rate shock analysis shows that the Company will experience a 6 basis point decrease over 12 months in its net interest margin with an immediate and sustained 100 basis point decrease in interest rates. An immediate and sustained increase in rates of 100 basis points will result in a 4 basis point increase in the net interest margin. The sensitivity of loan prices and the lack of sustainable deposit cost decreases are the primary drivers behind these simulation results.
An analysis of the change in market value of equity shows how an interest rate shock will affect the difference between the market value of assets and the market value of liabilities. With all financial instruments being stated at market value, the ratio of the market value of equity to the market value of assets will fall by 20 basis points with an immediate and sustained increase in interest rates of 100 basis points. The ratio of the market value of equity to the market value of assets will increase by 20 basis points with an immediate and sustained decrease in interest rates of 100 basis points.
The Company had no hedging instruments or other derivative contracts in place at March 31, 2004.
As defined by the Securities and Exchange Commission in Exchange Act Rules 13a-15(e), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of March 31, 2004 (the “Evaluation Date”), the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Subsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
There has been a trend toward increased litigation against financial services companies arising out of consumer lending and other consumer financial transactions, especially in Mississippi. Some of these actions have resulted in large settlements or substantial damage awards.
The Bank and one of its subsidiaries are subject to similar cases that seek substantial damages for claims arising out of transactions that involve relatively small amounts of money. While the allegations vary from case to case, in general they allege that loans were originated or renewed in a way that the borrowers were improperly sold insurance products, such as credit life insurance. The Company has denied these allegations and will vigorously defend the claims.
In total, there are cases involving approximately 300 plaintiffs that have been filed over a three year period. Some suits have been filed in Holmes County. Depositions have occurred in one suit, and a trial date has been tentatively set for October, 2004 in another suit. It is not possible at this time to determine the potential exposure related to possible damages in connection with these suits. Future legislation and court decisions may limit the amount of damages that can be recovered in legal proceedings such as these. However, management cannot predict at this time whether such legislation or court decisions will occur or the effect they may have on these cases.
The Bank’s insurance agency subsidiary is involved in a suit filed in Holmes County in August, 2003 by 13 plaintiffs alleging unfair pricing of insurance products by an insurance underwriting company whose products the agency sells. It is not possible at this time for management to determine the potential exposure related to possible damages involved in this suit. No action has occurred in the suit.
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.
During 2003 and 2004, the Company has repurchased shares of its stock in the open market. The following table summarizes the repurchases for the programs in place:
Maximum Number
Total Number (or Approximate
of Shares Dollar Value)
(or Units) Purchased of Shares (or Units)
Total Number As Part of That May Yet Be
of Shares (or Average Price Paid Publicly Announced Purchased Under the
Period units) Purchased Per Share (or Unit) Plans or Programs Plans or Programs
------ ---------------- ------------------- ----------------- -----------------
01/01/03 - 01/31/03 (1) 18,000 $ 29.13 18,000 138,852
02/01/03 - 02/28/03 14,500 31.82 14,500 124,352
03/01/03 - 03/12/03 3,000 31.90 3,000 121,352
03/13/03 - 03/31/03 (2) 41,854 33.57 41,854 198,146
04/01/03 - 04/30/03 10,000 34.92 10,000 188,146
05/01/03 - 05/31/03 5,000 35.00 5,000 183,146
06/01/03 - 06/30/03 30,000 34.80 30,000 153,146
07/01/03 - 07/31/03 20,000 33.85 20,000 133,146
09/01/03 - 09/30/03 5,000 36.75 5,000 128,146
10/01/03 - 10/31/03 12,500 36.62 12,500 115,646
11/01/03 - 11/30/03 10,000 36.30 10,000 105,646
02/01/04 - 02/29/04 36,500 35.70 36,500 69,146
(1) On August 14, 2002, the Board authorized a repurchase of 184,590 shares of stock between October 1, 2002
and September 30, 2004. The repurchases are to be accomplished through open market purchases of 92,295
shares between October 1, 2002 and September 30, 2003 and an additional 92,295 shares purchased between
October 1, 2003 and September 30, 2004.
(2) On March 12, 2003, the Board terminated the repurchase plan of August 14, 2002 and replaced it with a
new plan. The new repurchase plan called for the open market purchase, as shares became available, of
240,000 shares between March 13, 2003 and February 29, 2004.
Note: On April 14, 2004 the Board authorized a program to repurchase up to 120,000 shares of common stock in the open market over a twelve month period beginning on May 1, 2004 and ending on April 30, 2005. The authorization limits the number of shares that may be repurchased in any calendar month to no more than 10,000.
Item 3 - Defaults Upon Senior Securities
FIRST M & F CORPORATION
Item 6 - Exhibits and Reports on Form 8-K
Item 6(a) - Exhibits
Exhibit 3(A) - Articles of Incorporation, as amended. Filed as Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
September 15, 1986, incorporated herein by reference.
Exhibit 3(B) - By-Laws, as amended. Filed as Exhibit 3-b to the Company's Form S-1 (File No. 33-08751) September 15,
1986, incorporated herein by reference.
Exhibit 11 - Computation of Earnings Per Share - See note 4 to the consolidated financial statements included in this report.
Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications.
Exhibit 32 - Section 1350 Certifications.
Item 6(b) - Reports on Form 8-K - The following reports on Form 8-K were filed during the quarter ended March 31,
2004:
(1) Current report on Form 8-K dated January 16, 2004 and filed on January 21, 2004. Item 5 press release
related to earnings for 2003 and the quarter ended December 31, 2003.
(2) Current report on Form 8-K dated March 29, 2004 and filed on March 30, 2004. Items 7 and 9 related to
(a) the completion of a stock repurchase program and (b) the earnings effect of a loan loss incurred in a 51%
owned joint venture.
FIRST M & F CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST M & F CORPORATION
BY: /s/ Hugh S. Potts, Jr. BY: /s/ Robert C. Thompson, III
------------------------------------ -----------------------------
Hugh S. Potts, Jr. Robert C. Thompson, III
Chairman of the Board and Treasurer
Chief Executive Officer
Date: May 7, 2004 Date: May 7, 2004
---------------------------------- ---------------------------
FIRST M & F CORPORATION
EXHIBIT INDEX
3 (A) Articles of Incorporation, as amended. Filed as Exhibit 3 to the Company's Form S-1 (File No. 33-08751)
September 15, 1986, incorporated herein by reference.
3 (B) Bylaws, as amended. Filed as Exhibit 3-b to the Company's Form S-1 (File No. 33-08751) September 15,
1986, incorporated herein by reference.
11 Computation of Earnings Per Share - Filed herewith as note 4 to the consolidated financial statements.
31 Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a)Certification of Robert C.
Thompson, III, Treasurer
32 Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of Robert C.
Thompson, III, Treasurer