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 March 31, 1998 Commission File Number 0-9424
FIRST M & F CORPORATION
(Exact name of registrant as specified in its charter)
Mississippi 64-0636653
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Registrant's telephone number: (601) 289-5121
No Change
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for shorter period that the registrant was required to
file such report), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 22, 1998
Common stock ($5.00 par value) 3,394,656 shares
Page 1 of 18
<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
FORM 10-Q
CONTENTS
Page
PART I: FINANCIAL INFORMATION 3
Item 1 - Financial Statements (unaudited):
Condensed Consolidated Statements of Condition 4
Condensed Consolidated Statements of Income 5
Condensed Consolidated Statements of Comprehensive
Income 6
Condensed Consolidated Statements of Stockholders'
Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security
Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
Exhibit 11 - Computation of Earnings Per Share 17
SIGNATURE 18
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<PAGE>
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements
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<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Condition
(Unaudited)
March 31, December 31,
Assets 1998 1997 (1)
--------- ------------
Cash and due from banks $ 24,498,454 $ 24,719,193
Interest bearing bank balances 3,309,326 10,801,934
Federal funds sold 20,000,000 2,000,000
Securities available for sale 128,027,499 109,002,998
Investment securities, market value of
$57,737,000 in 1998 and $59,696,000 in 1997 56,734,868 58,785,352
Loans 365,986,017 360,192,125
Reserve for possible loan losses (5,300,538) (5,170,000)
------------ -----------
Net loans 360,685,479 355,022,125
Bank premises and equipment 9,540,780 9,326,709
Accrued interest receivable 5,711,991 5,492,942
Other real estate 852,255 842,786
Intangible assets 2,476,822 2,519,053
Other assets 12,643,428 2,387,422
------------ -----------
$ 624,480,902 $ 580,900,514
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 68,290,285 $ 60,343,000
Interest bearing 493,128,565 449,439,762
------------ -----------
Total deposits 561,418,850 509,782,762
------------ -----------
Borrowings 2,620,486 12,860,760
Accrued interest payable 2,586,857 2,563,911
Other liabilities 2,523,853 1,487,359
------------ -----------
Total liabilities 569,150,046 526,694,792
------------ -----------
Stockholders' equity:
Common stock, $5.00 par value, 15,000,000 shares
authorized, 3,394,656 issued and outstanding 16,973,280 16,973,280
Additional paid-in capital 10,698,388 10,698,388
Retained earnings 27,106,374 26,013,973
Net unrealized gain on securities available for
sale, net of income taxes 552,814 520,081
------------ -----------
Net stockholders' equity 55,330,856 54,205,722
------------ -----------
$ 624,480,902 $ 580,900,514
=========== ===========
The accompanying notes are an integral part of these financial statements.
(1) Derived from audited financial statements.
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<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
1998 1997
Interest income:
Interest and fees on loans $ 8,668,195 $ 8,215,778
Interest bearing bank balances 141,048 50,586
Taxable investments 1,868,771 1,562,579
Tax exempt investments 586,823 497,179
Federal funds sold 271,404 187,745
----------- -----------
Total interest income 11,536,241 10,513,867
----------- -----------
Interest expense:
Deposits 5,373,396 4,798,801
Other borrowings 183,383 85,310
----------- -----------
Total interest expense 5,556,779 4,884,111
----------- -----------
Net interest income 5,979,462 5,629,756
Provision for possible loan losses 459,472 393,786
----------- -----------
Net interest income after provision
for possible loan losses 5,519,990 5,235,970
Other operating income:
Service charges on deposits 853,448 818,342
Credit insurance income 104,660 92,104
Gains (losses) on AFS investments (6,627) (295)
Other income 216,503 196,203
----------- -----------
Total other operating income 1,167,984 1,106,354
----------- -----------
Other operating expenses:
Salaries and employee benefits 2,212,084 2,012,163
Net occupancy expense 238,593 244,034
Equipment and data processing expenses 427,214 446,244
Other expenses 1,131,854 994,816
----------- -----------
Total other operating expenses 4,009,745 3,697,257
----------- -----------
Income before income taxes 2,678,229 2,645,067
Income taxes 771,111 750,530
----------- -----------
Net income $ 1,907,118 $ 1,894,537
=========== ===========
Earnings per share:
Basic $ 0.56 $ 0.56
==== ====
The accompanying notes are an integral part of these financial statements.
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<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net income $ 1,907,118 $ 1,894,537
--------- ---------
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses), net 28,578 (542,513)
Plus reclassification adjustment for
losses included in net income 4,155 185
--------- ---------
Other comprehensive income 32,733 (542,328)
--------- ---------
Total comprehensive income $ 1,939,851 $ 1,352,209
========= =========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<TABLE>
<CAPTION>
FIRST M & F CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Additional
Common Paid-In Retained Treasury Unrealized
Stock Capital Earnings Stock Gain (Loss) Total
----- ---------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
January 1,
1997 $ 16,973,280 $ 10,698,388 $ 21,087,133 $ - $ 329,835 $ 49,088,636
Net income - - 1,894,537 - - 1,894,537
Cash
dividends
paid ($.20
per share) - - (678,931) - - (678,931)
Net change in
unrealized
gain - - - - (542,328) (542,328)
------------ ------------ ------------ ------ ------- -------------
March 31,
1997 $ 16,973,280 $ 10,698,388 $ 22,302,739 $ - $ (212,493) $ 49,761,914
========== ========== ========== ===== ======= ==========
January 1,
1998 $ 16,973,280 $ 10,698,388 $ 26,013,973 $ - $ 520,081 $ 54,205,722
Net income - - 1,907,118 - - 1,907,118
Cash
dividends
paid ($.24
per share) - - (814,717) - - (814,717)
Net change in
unrealized
gain - - - - 32,733 32,733
------------ ------------ ------------ ------ ------- -------------
March 31,
1998 $ 16,973,280 $ 10,698,388 $ 27,106,374 $ - $ 552,814 $ 55,330,856
========== ========== ========== ===== ======= ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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</TABLE>
<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 1,907,118 $ 1,894,537
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 291,170 313,930
Provision for possible loan losses 459,472 393,786
Increase in interest receivable (219,049) 38,979
Increase in interest payable 22,946 129,465
Other, net 1,771,014 467,189
---------- ---------
Net cash provided by operating activities 4,232,671 3,237,886
---------- ---------
Cash flows from investing activities:
Net (increase) decrease in:
Interest bearing bank balances 7,492,608 (5,572,670)
Federal funds sold (18,000,000) (21,600,000)
Securities available for sale (19,991,768) (7,987,250)
Investment securities 2,050,484 2,010,733
Loans (6,122,826) 2,887,097
Bank premises and equipment (463,009) (307,173)
Investment in bank owned life insurance (10,000,000) -
---------- ---------
Net cash used in investing activities (45,034,511) (30,569,263)
---------- ----------
Cash flows from financing activities:
Net increase (decrease) in:
Deposits 51,636,088 30,844,078
Other borrowings (10,240,274) (1,525,095)
Cash dividends (814,713) (678,931)
---------- ---------
Net cash provided by financing activities 40,581,101 28,640,052
---------- ----------
Net increase (decrease) in cash and
due from banks (220,739) 1,308,675
Cash and due from banks at January 1 24,719,193 20,213,398
---------- ---------
Cash and due from banks at March 31 $ 24,498,454 $ 21,522,073
========== ==========
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE>
FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 its wholly owned subsidiaries, First M & F
Insurance Co., M & F Financial Services, Inc. and M & F Bank Securities
Corporation. 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, 1997.
Note 2: Statements of Cash Flows
During the three months ended March 31, 1998 and 1997, the Company had the
following payments:
1998 1997
---- ----
Income taxes $ 95,000 $ 56,000
Interest on deposit liabilities 5,337,000 4,663,000
Interest on other borrowings 174,000 86,000
========== =========
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<PAGE>
FIRST M & F CORPORATION
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 reserve for possible loan losses; the effect of legal proceedings against
the Company's financial condition, results of operations and liquidity; year
2000 compliance issues; 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 Summary
For the quarter ended March 31, 1998, the Company's net income increased to
$1,907,118 as compared to $1,894,537 for the same period of 1997. Basic and
diluted earnings per share was $0.56 for each quarter of 1998 and 1997. Net
income for 1998 reflects several factors which have contributed to the Company's
overall flatness in earnings. These include a lack of anticipated loan growth
during the quarter; higher than anticipated interest bearing deposit growth;
increased operating expenses associated with new branch locations; and added
personnel costs at both the administrative and operating levels.
Total assets at March 31, 1998, increased 7.5% over year end 1997 to $624.5
million, while stockholders' equity increased 2.08% over year end 1997 and
equaled $55.3 million. The return on average assets for the quarter ended March
31, 1998, decreased to 1.26% as compared to the same quarter of 1997 of 1.44%;
the return on average equity in 1998 was 13.99% as contrasted to 15.55% for
1997. Both of these declines reflect a percentage growth in total assets during
the quarter that exceeded the percentage growth in net income.
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<PAGE>
FIRST M & F CORPORATION
Asset/Liability Management/Liquidity
Responsibility for managing the Company's program for controlling and monitoring
interest rate 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
weekly reviews and analysis of asset/liability market conditions. These include
rate shocked scenarios of up and down 100, 200 and 300 basis points; yield curve
scenarios; and prepayment risk scenarios. Additionally, static gap analysis is
used to highlight short-term repricing volumes. Management believes, at March
31, 1998, there is adequate flexibility to alter the rate structure as necessary
to minimize the exposure to changes in interest rates, should they occur.
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 both the asset and liability sides of the balance sheet. These funding
requirements and the Company's ability to maintain liquidity is also enhanced by
the Company's consistent earning capacity and adequate capital.
Net Interest Income
Net interest income (NII) is income produced by interest earning assets reduced
by the interest expense associated with the funding of those assets. Changes
in the mix of these interest earning assets and interest bearing liabilities and
their yields and rates contribute to the levels of NII realized and have a
significant impact on earnings.
During the quarter ended March 31, 1998, the level of NII increased $349,706 or
6.21% over the comparable period of 1997. NII for 1997's first quarter
increased $459,563 or 8.63% over 1996's period. Average earning assets for the
period ended March 31, 1998, was $561.0 million as contrasted to $503.0 for
1997's period, reflecting a $57.1 million or 11.4% increase. 1997's average
earning assets reflected a $13.7 million or 2.8% increase over 1996.
For the 1998 period, this increase in average earning assets compared to same
period of 1997 was driven by a $21.7 million or 6.3% increase in loans and a
$26.9 million or 19% increase in the investment portfolio. Average interest
bearing liabilities increased $55.7 million or 13%. As a result, there was only
a slight improvement in NII, 1998's quarter versus 1997's quarter, as the cost
of funding the increase in funding sources almost equaled the earnings of the
higher volume of interest earning assets.
-11-
<PAGE>
FIRST M & F CORPORATION
Provision for Loan Losses
During the three month period ending March 31, 1998, the Company's provision for
loan losses was $459,472 contrasted to $393,786 for the same period of 1997.
This provision reflects management's assessment of the adequacy of the reserve
for possible loan losses to absorb potential losses in the loan portfolio.
Factors considered involve an assessment of growth and composition of the
portfolio; historical credit loss experience; current and anticipated economic
conditions; and changes in the borrower's financial condition. During the first
three months of 1997, the Company used $125,000 per month as its estimate of
1997 requirement. 1998's estimate is $150,000 per month and has been provided
primarily to raise the level of the reserve for overall growth.
Non Interest Income
One of the Company's key long-term strategies is to continue to boost its growth
in non interest income. For the three month period ending March 31, 1998, non
interest income was $1,167,984 as compared to $1,106,354 for 1997. Service
charges on deposits and credit insurance income reflected an approximate
$47,700 or 5.2% increase for 1998. Other income reflects an approximate
$20,300or 10.4% increase primarily in the area of fee income on non-deposit
products. Management continues to emphasize the non interest income area
through increased focus and budget/incentive processes.
Non Interest Expense
Another strategy of the Company is to contain non interest expenses within an
overall growth discipline. At March 31, 1998, the Company's efficiency ratio,
an indicator of control of non interest expenses, was 56% and compared
favorably with peer groups. Improvements continue to be made in the overall
monitoring and control of expense through the budgeting and review process.
Salaries and benefits comprise the largest portion of non interest expense and
increased 9.9% when compared to the same period of 1997. Additional staffing
has been required in several locations as a result of volume and increased
demand.
Other expense reflects an increase of approximately $137,000 in 1998 compared to
1997. Other expense for 1997 increased $96,000 over 1996. Both are considered
normal increases given the overall growth of the Company.
Income Taxes
For the three months ended March 31, 1998, the Company's effective tax rate was
28.8% as compared to 28.4% for the same period of 1997. This increase in
effective rate is the result of the reduction of the level of tax-exempt
investment income and a provision for estimated Mississippi corporate income
taxes.
-12-
<PAGE>
FIRST M & F CORPORATION
Assets/Liabilities
Loans, net of unearned discount, increased to $366.0 million at March 31, 1998,
as compared to $360.2 million at the end of 1997. This approximately $5.8
million, or 1.6% increase in loans since December 31, 1997, generally reflects
a lack of consumer and commercial loan volumes. The commercial real estate
lending sector has remained fairly strong, showing 4.7% growth in the first
quarter of 1998.
The current level of the reserve for possible loan losses approximates 1.45% of
total loans outstanding. The Company's nonperforming loans past due 90 days or
more remain well controlled and continue to compare favorably to peer levels.
The adequacy of the reserve is reviewed quarterly using criteria and guidance
provided by the appropriate regulatory agencies and is presented to the Board of
Directors for subsequent review and approval. Management will continue to take
a prudent approach in the evaluation of the reserve for loan losses.
The securities portfolio is utilized to provide quality investment alternatives
for available funds and a stable source of interest income. At March 31, 1998,
the total securities portfolio was approximately $185 million, up from the
December 31, 1997 level by approximately $17 million. Yield for the portfolio
was at 5.78% for the three months ended March 31, 1998 and is comparable to peer
groups. There were no sales of held to maturity securities during the period.
Deposits originating from the various communities served by the Company provide
the primary source of its funds. Total deposits increased approximately $52
million or 10.1% during the three month period ended March 31, 1998, ahead of
growth plans for the year.
Other borrowings of $2,620,486 represent advances from the Federal Home Loan
Bank of Dallas and are primarily funding sources tied to specific loans.
Approximately $10 million of advances were repaid prior to quarter-end
March 31, 1998.
During the 1998 quarter, the Company purchased Bank owned life insurance in the
amount of $10 million and is carrying such in other assets at March 31, 1998.
The Company's internal rate of return is 5.93% with an after tax yield of 8.45%.
-13-
<PAGE>
FIRST M & F CORPORATION
Equity
The Company's regulatory capital ratios at March 31, 1998, as shown below are in
excess of the minimum requirements and qualify the institution as "well
capitalized" under the definition of such.
($ in Thousands)
----------------
Tier 1 capital $ 52,301
Tier 2 capital element 4,879
---------
Total qualifying capital $ 57,180
=========
Risk weighted assets $ 390,288
=========
Total qualifying capital/risk weighted assets 14.65%
======
Leverage ratio 8.69%
=====
The dividend payout ratio for the three months ended March 31, 1998 was 42.7%
of net income reflecting total dividends of $.24 per share. Book value per
share at March 31, 1998 was $16.30 compared to a $44.00 per share market price.
-14-
<PAGE>
FIRST M & F CORPORATION
Year 2000 Compliance
The Company has established a task-force to review all computer based systems
and applications to ensure proper functioning in the year 2000. The plan has
been approved by the Board of Directors, and management believes that
implementation will not materially effect operations in the future. Management
does not expect costs of achieving year 2000 compliance to have a material
adverse effect on the Company's consolidated financial statements.
-15-
<PAGE>
FIRST M & F CORPORATION
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings
No new legal proceedings occurred in the third quarter.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 11 - Statement of computation of earnings per share
-16-
<PAGE>
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: April 22, 1998
/s/ Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
DATE: April 22, 1998
/s/ Robert C. Thompson, III
Executive Vice President and
Treasurer
-17-
FIRST M & F CORPORATION
Exhibit 11 - Computation of Earnings Per Share
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net income $ 1,907,118 $ 1,894,593
========= =========
Weighted average shares outstanding $ 3,394,656 $ 3,394,656
========= =========
Earnings per share:
Basic $ .56 $ .56
=== ===
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<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,498
<INT-BEARING-DEPOSITS> 3,309
<FED-FUNDS-SOLD> 20,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,027
<INVESTMENTS-CARRYING> 56,735
<INVESTMENTS-MARKET> 57,737
<LOANS> 365,986
<ALLOWANCE> 5,301
<TOTAL-ASSETS> 624,481
<DEPOSITS> 561,419
<SHORT-TERM> 2,620
<LIABILITIES-OTHER> 5,111
<LONG-TERM> 0
0
0
<COMMON> 16,973
<OTHER-SE> 38,358
<TOTAL-LIABILITIES-AND-EQUITY> 624,481
<INTEREST-LOAN> 8,668
<INTEREST-INVEST> 2,456
<INTEREST-OTHER> 412
<INTEREST-TOTAL> 11,536
<INTEREST-DEPOSIT> 5,373
<INTEREST-EXPENSE> 5,557
<INTEREST-INCOME-NET> 5,979
<LOAN-LOSSES> 459
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 4,010
<INCOME-PRETAX> 2,678
<INCOME-PRE-EXTRAORDINARY> 2,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,907
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 4.55
<LOANS-NON> 432
<LOANS-PAST> 1,809
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,464
<ALLOWANCE-OPEN> 5,170
<CHARGE-OFFS> 401
<RECOVERIES> 74
<ALLOWANCE-CLOSE> 5,301
<ALLOWANCE-DOMESTIC> 5,301
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 346
</TABLE>
