March 17, 1999
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
To the Shareholders of
First M & F Corporation
Kosciusko, Mississippi 39090
NOTICE IS HEREBY GIVEN that, pursuant to call of its Directors and in
compliance with the Bylaws, the regular annual meeting of shareholders of the
FIRST M & F CORPORATION (the "Company"), KOSCIUSKO, MISSISSIPPI, will be held at
the Mary Ricks Thornton Cultural Center at 204 North Huntington Street,
Kosciusko, Mississippi, on Wednesday, April 14, 1999, at 2:00 P.M., for the
purpose of considering and voting on the following proposals:
1. ELECTION OF DIRECTORS: The election of five (5) persons listed in the
Proxy Statement dated March 17, 1999, accompanying this notice, as
members of the Board of Directors for a term of three years.
2. To act on a proposal to adopt a Stock Option Plan which grants incentive
stock options (ISOs) to key employees and nonstatutory stock options
(NSOs) to members of the Board.
3. Whatever other business may be properly brought before the meeting or
any adjournment thereof.
Whether or not you contemplate attending the meeting, it is requested that
you complete and return the enclosed Proxy as soon as possible. If you attend
the meeting, you may withdraw your Proxy and vote in person.
Only those shareholders of record at the close of business on February 26,
1999, shall be entitled to notice of and to vote at this meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
Dated and mailed at
Cranford, New Jersey
On or about March 17, 1999
<PAGE>
March 17, 1999
Dear Shareholder:
Enclosed you will find a 1998 Annual Report for First M & F Corporation, a
Notice of the Annual Shareholders' Meeting for 1999, a Proxy Statement, and a
Proxy.
This institution is grateful for the loyalty and support of you, our
friends and shareholders. The Annual Shareholders' Meeting is to be held on
Wednesday, April 14, 1999, at 2:00 P.M. at the Mary Ricks Thornton Cultural
Center, located at the corner of East Washington Street and North Huntington
Street, Kosciusko, Mississippi. We encourage you to mark this date on your
calendar and make plans to attend, and share further in the affairs of your
corporation.
I urge you to complete the enclosed Proxy promptly and return it in the
enclosed self-addressed postage paid envelope, even if you plan to attend the
meeting. If you attend the meeting, you may withdraw your Proxy and vote in
person.
First M & F Corp's audited financial statements and other required
disclosures are attached to the Proxy Statement. Also enclosed is First M & F
Corp's Annual Report to shareholders.
We look forward to seeing you at the Annual Meeting.
Sincerely yours,
FIRST M & F CORPORATION
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
<PAGE>
PROXY STATEMENT
DATED MARCH 17, 1999
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
APRIL 14, 1999
SOLICITATION BY BOARD OF DIRECTORS OF FIRST M & F CORPORATION
This statement is furnished to the shareholders of First M & F
Corporation (the "Company") in connection with the solicitation by the
Board of Directors of Proxies to be voted at the Annual Meeting of
Shareholders to be held at the Mary Ricks Thornton Cultural Center at 204
North Huntington Street, Kosciusko, Mississippi, on Wednesday, April 14,
1999, at 2:00 P.M., local time or any adjournment(s) thereof, for the
matters set out in the foregoing notice of Annual Shareholders' Meeting.
The approximate date on which this Proxy Statement and form of proxy are
first being sent or given to shareholders is March 17, 1999.
Only those shareholders of record on the books of the Company at the
close of business on February 26, 1999, (the "Record Date") are entitled
to notice of and to vote at the meeting. On that date, the Company had
outstanding of record 3,639,779 shares of common stock. Each share is
entitled to one (1) vote. In the election of Directors, each shareholder
has cumulative voting rights, so that a shareholder may vote the number of
shares owned by him for as many persons as there are Directors to be
elected, or he may multiply the number of shares by the number of
Directors to be elected and allocate the resulting votes to one or any
number of candidates. For example, if the number of Directors to be
elected is five (5), a shareholder owning ten (10) shares may cast ten
(10) votes for each of five (5) nominees, or cast 50 votes for any one (1)
nominee or allocate the fifty (50) votes among several nominees.
The cost of soliciting proxies from shareholders will be borne by the
Company. The initial solicitation will be by mail. Thereafter, proxies may
be solicited by Directors, officers and regular employees of the Company,
by means of telephone, telegraph or personal contact, but without
additional compensation therefor. The Company will reimburse brokers and
other persons holding shares as nominees for their reasonable expenses in
sending proxy soliciting material to the beneficial owners.
Any shareholder giving a Proxy has the right to revoke it at anytime
before it is exercised. A shareholder may revoke his Proxy (1) by
personally appearing at the Annual Meeting, (2) by written notification to
the Company which is received prior to the exercise of the Proxy or (3) by
a subsequent Proxy executed by the person executing the prior Proxy and
presented at the Annual Meeting. All properly executed Proxies, if not
revoked, will be voted as directed on all matters proposed by the Board of
Directors, and, if the shareholder does not direct to the contrary, the
shares will be voted "For" each of the proposals described below.
The presence at the Annual Meeting, in person or by Proxy, of a
majority of the shares of Common Stock outstanding on February 26, 1999,
and entitled to vote, will constitute a quorum.
The 1998 Annual Report to shareholders of the Company is enclosed for
the information of the shareholders. The audited financial statements of
the Company are attached to the proxy soliciting material for the
information of the shareholders. The Annual Report and audited financial
statements are not a part of the proxy soliciting material.
<PAGE>
PROPOSAL NO. 1 - ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)
The Board of Directors of the Company is divided into three (3)
classes - Class I, Class II and Class III. Each class consists of five (5)
Directors. The term of Class II Directors expires at the 2001 Annual
Meeting. The term of Class III Directors will expire at the 1999 Annual
Meeting. The term of Class I Directors will expire at the 2000 Annual
Meeting.
The Board of Directors has nominated Jon A. Crocker, Toxey Hall, III,
J. Marlin Ivey, Otho E. Pettit, Jr., and Charles W. Ritter, Jr., for
election as Class III Directors to serve until the 2002 Annual Meeting.
Jon A. Crocker, Toxey Hall, III, J. Marlin Ivey, Otho E. Pettit, Jr., and
Charles W. Ritter, Jr., are currently serving as Class III Directors.
Unless authority is expressly withheld, the proxy holders will vote
the proxies received by them for the five (5) nominees for Class III
Directors listed above, reserving the right, however, to cumulate their
votes and distribute them among the nominees, in their discretion.
Although each nominee has consented to being named in this Proxy Statement
and to serve if elected, if any nominee should prior to the Annual Meeting
decline or become unable to serve as a Director, the proxies will be voted
by the proxy holders for such other persons as may be designated by the
present Board of Directors. During 1998, the Company's Board of Directors
had twelve (12) meetings. No incumbent Director attended less than 75% of
the total number of meetings of the Board of Directors or committees upon
which he served. The following table provides certain information about
the nominees and the other current Directors of the Company.
Pursuant to Mississippi Law and the Company's By Laws, Directors are
elected by a plurality of the votes cast in the election of Directors. A
"plurality" means that the individuals with the largest number of
favorable votes are elected as Director, up to the maximum number of
Directors to be chosen at the meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE ELECTION OF ALL THE NOMINEES
<PAGE>
<TABLE>
<CAPTION>
INFORMATION CONCERNING NOMINEES AND DIRECTORS
Amount and
Nature of
Beneficial
Positions & Ownership of Percent of
Offices With Common Stock as Common Stock
Company or/and Director of January 31, Beneficially
Name and Age Employment Since 1999 Owned (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I
Fred A. Bell, District manager, 1981 20,536 0.56%
Jr., 57 Mississippi
Materials Corp.
(Concrete and
building materials
manufacturer/
distributor
Charles T. Supervisor of 1980 15,208 (1) 0.42%
England, 62 Finance Company
subsidiaries of
Merchants and
Farmers Bank
beginning in
1995; Registered
Representative of
Security Financial
Network in 1994;
Farmer; formerly
Chancery Clerk,
Attala County
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INFORMATION CONCERNING NOMINEES AND DIRECTORS (CONTINUED)
Amount and
Nature of
Beneficial
Ownership
Positions & of Common Percent of
Offices With Stock as of Common Stock
Company or/and Director January 31, Beneficially
Name and Age Employment Since 1999 Owned (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I (continued)
Joseph M. President and CEO, 1994 103,022 (2) 2.83%
Ivey, 40 Building One (3) (11)
Services Corporation
(facilities services
company), since
February, 1999.
Chairman and CEO,
Ivey Mechanical
Company (plumbing
and electrical
contractors), until
February, 1999
Susan McCaffery, Retired; Member of 1987 117,098 (4) (5) 3.22%
59 Audit Committee;
Former Professor,
Wood College
Edward G. Member of Audit 1989 8,306 (6) 0.23%
Woodard, 44 Committee; President,
K. M. Distributing
Company, Inc.
(wholesaler of chain
saws, lawn and
gardening equipment)
CLASS II
Barbara K. Retired; Member of 1995 2,000 0.05%
Hammond, 54 Audit Committee;
Former Specialist,
Circuit Capacity
Management, BellSouth
R. Dale McBride, President, Merchants 1979 17,764 (8) 0.49%
59 and Farmers Bank,
Durant
Hugh S. Potts, Chairman of the 1979 392,754 (4) (9) 10.79%
Jr., 54 Board and CEO of
the Company since
1994; Vice Chairman,
1983-1993; Vice
President, 1979-1983
W. C. Shoemaker, Consultant, IMC 1979 40,266 1.11%
66 Webb Graphics
(Printing);
President, W.C.
Shoemaker, Inc.
(investments & real
estate)
Scott M. Wiggers, President of the 1983 5,800 (7) 0.16%
54 Company since 1988
and Treasurer since
1979; Corporate
President, Merchants
& Farmers Bank
CLASS III
Jon A. Crocker, Chairman & CEO, 1996 63,675 (10) 1.75%
56 Merchants & Farmers
Bank, Bruce Branch
Toxey Hall, III, Member of Audit 1984 2,112 0.06%
59 Committee; President,
Thomas-Walker-Lacey
(retail discount store)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INFORMATION CONCERNING NOMINEES AND DIRECTORS (continued)
Amount and
Nature of
Beneficial
Ownership
Positions & of Common Percent of
Offices With Stock as of Common Stock
Company or/and Director January 31, Beneficially
Name and Age Employment Since 1999 Owned (a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS III (continued)
J. Marlin Ivey, Member of Audit 1979 112,512 (2) (11) 3.09%
62 Committee; President,
Ivey National
Corporation (holding
company for various
businesses)
Otho E. Pettit, Attorney at Law, 1993 12,379 (12) 0.34%
Jr., 48 Thornton, Guyton,
Dorrill & Pettit
Charles W. Chairman of Audit 1979 152,000 (13) 4.18%
Ritter, Jr., Committee; President,
65 The Attala Company
(feed manufacturing
company)
</TABLE>
ALL DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (19 PERSONS)..................973,494...........................26.8%
(a) Constitutes sole ownership unless otherwise indicated.
(1) Mr. England shares voting and investment power with respect to
these shares with his wife.
(2) Director J. Marlin Ivey is the father of director Joseph M. Ivey
(3) Includes 300 shares owned by Mr. Joseph Ivey's minor children.
(4) Mrs. McCaffery and Hugh S. Potts, Jr. are brother and sister.
Their father is the Company's former Chief Executive Officer and
Chairman of the Board, Hugh S. Potts, Sr.
<PAGE>
(5) Mrs. McCaffery shares voting and investment power with respect
to 761 of these shares with her husband and includes 15,500
shares owned by Mrs. McCaffery's husband.
(6) Includes 880 shares owned by Mr. Woodard's wife.
(7) Includes 1,144 shares owned by Mr. Wiggers' wife and daughter.
(8) Mr. McBride shares voting and investment power with respect to
14,500 of these shares with his wife and children.
(9) Mr. Potts, Jr. shares voting and investment power with respect
to 69,500 of these shares, which are held in two trusts and
includes 43,984 shares owned by his wife and minor children. Mr.
Potts, Jr. is the trustee over The Salt & Light Foundation which
owns 46,754 shares.
(10) Of these shares, 6,325 are registered in the name of BellAire
Corporation, of which Mr. Crocker's wife is a director.
(11) Of these shares, 92,512 are registered in the name of Ivey
National Corporation, of which Mr. J. Marlin Ivey is the
President and Mr. Joseph M. Ivey is an officer.
(12) Includes 3,726 owned by Mr. Pettit's wife and children.
(13) Includes 60,000 shares owned by Mr. Ritter's wife.
Charles W. Ritter, Jr., is a director of Sanderson Farms, Inc.,
Laurel, Mississippi. Joseph M. Ivey is a director of Building One
Services Corporation, Washington, D.C. None of the other Directors
are a director of another company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of
1934 or subject to the reporting requirements of Section 15(d) of
the Act, or registered as an investment company under the Investment
Company Act of 1940.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to file with the Securities
and Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock. Executive officers and directors
are required by Securities and Exchange Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that
no other reports were required, during the fiscal year ended December
31, 1998, all Section 16(a) filing requirements applicable to the
Company's executive officers and directors were complied with, except
for the following:
Robert C. Thompson, III reported the acquisition of shares
to First M & F Corporation nine (9) days late for the month
required. This was due to an oversight by the reporting person
with no intent to delay.
<PAGE>
PRINCIPAL SHAREHOLDER
Management of the Company knows of no person who owns of record or
beneficially, directly or indirectly, more than 5% of the outstanding
common stock of the Company except as set forth below:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial Percent of
of Beneficial Owner Ownership of Common Stock Class
- --------------------------------------------------------------------------------
<S> <C> <C>
Hugh S. Potts, Jr 392,754 shares (1) 10.79%
1104 Walnut Road
Kosciusko, MS 39090
</TABLE>
(1) Mr. Potts shares voting and investment power with respect to 69,500 of
these shares, which are held in two trusts.
EXECUTIVE COMPENSATION
The following tables show the cash compensation for 1997, 1996 and
1995 for the Chief Executive Officer of the Company and all Executive
Officers of the Company and the Bank whose cash compensation exceeded
$100,000.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Name and Principal Year Salary Bonus Other Annual All Other
Position Compensation Compensation
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2,736 (1)
Hugh S. Potts, Jr. 1998 $ 175,000 $ 13,750 $ 3,680 (3) $ 4,375 (4)
-----------------------------------------------------------
Chairman of the $ 2,317 (1)
Board and CEO 1997 $ 167,308 $ 15,000 $ 3,219 (3) $ 4,183 (4)
-----------------------------------------------------------
since 4/15/94 $ 2,016 (1)
1996 $ 153,653 $ 12,292 $ 887 (2) $ 3,841 (4)
- --------------------------------------------------------------------------------
Scott M. Wiggers 1998 $ 130,000 $ 6,500 $ 1,958 (1) $ 3,250 (4)
-----------------------------------------------------------
President 1997 $ 121,731 $ 15,000 $ 1,640 (1) $ 3,043 (4)
-----------------------------------------------------------
1996 $ 113,654 $ 9,092 $ 1,613 (1) $ 2,841 (4)
- --------------------------------------------------------------------------------
Jeffrey A. Camp 1998 $ 98,077 $ 21,942 $ 330 (1) $ 5,659 (5)
Executive Vice $ 1,760 (2)
President And
Senior Credit
Officer
- --------------------------------------------------------------------------------
</TABLE>
(1)Cost of excess life insurance
(2)Automobile allowance
(3)Cost of country club memberships
(4)Company Contribution of the 401k plan
(5)Moving expense reimbursement
PENSION PLAN. The following table indicates the estimated annual benefits
payable to persons in specified classifications upon retirement at age 65.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Five Years
Average Annual
Compensation Credited Years of Service
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
15 20 25 30 35
$ 25,000 $ 3,000 $ 4,000 $ 5,000 $ 6,000 $ 7,000
50,000 6,000 8,000 10,000 12,000 14,000
75,000 9,000 12,000 15,000 18,000 21,000
100,000 12,000 16,000 20,000 24,000 28,000
160,000 19,200 25,600 32,000 38,400 44,800
</TABLE>
Credited years of service for the individuals named in the Summary
Compensation Table above are anticipated to be as follows: Hugh S.
Potts, Jr. - 37 years; Scott M. Wiggers - 34 years; Jeffrey A. Camp -
26 years.
<PAGE>
EXECUTIVE COMPENSATION (continued)
A participant in First M & F's Pension Plan whose service is
terminated on or before his normal retirement date is eligible to
retire and receive a normal retirement benefit. The amount of the
normal benefit under the Plan is equal to 1/12 of the sum of the
amounts described below in (1) and (2) multiplied by (3) where:
(1) = eight-tenths of one percent (0.8%) of the participant average
earnings;
(2) = twenty-five hundredths percent (0.25%) of the participants
average earnings in excess of Twenty-Four Thousand and no/100
dollars ($24,000.00); and
(3) = the participant's benefit service as of his normal retirement
date.
If a participant's annual benefit commences before the
participant's social security retirement age, but on or after age 62,
the amount of the benefit is reduced. If the annual benefit of a
participant commences prior to age 62, the amount of the benefit shall
be the actuarial equivalent of an annual benefit beginning at age 62
reduced for each month by which benefits commence before the month in
which the participant attains age 62. If the annual benefit of a
participant commences after the participant's social security
retirement age, the benefit amount is adjusted so that it is the
actuarial equivalent of an annual benefit beginning at the
participant's social security retirement age.
DIRECTOR COMPENSATION. Non-officer Directors receive annual
compensation in the amount of $1,000 per Board Meeting attended payable
at the end of the year, plus an additional $20 for each committee
meeting attended.
FIVE YEAR SHAREHOLDER RETURN COMPARISON
Set forth below is a line graph comparing the yearly percentage
change in the cumulative total stockholder return on the Company's
Common Stock against the cumulative total return of the NASDAQ Market
US Index and the NASDAQ Bank Index which consists of the period of five
(5) years beginning in 1993.
<PAGE>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
Among First M & F Corporation, The NASDAQ Stock Market (U.S.) Index and
The NASDAQ Bank Index
<TABLE>
<CAPTION>
Cumulative Total Return 12/93 12/94 12/95 12/96 12/97 12/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First M & F Corporation 100 108 190 258 366 337
NASDAQ Stock Market (U.S.) 100 98 138 170 209 293
NASDAQ Bank 100 100 148 196 328 325
</TABLE>
* 100 invested on 12/31/93 in stock or index - including reinvestment of
dividends. Fiscal year ending December 31.
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
Shearer, Taylor & Co., P.A. were the independent accountants for
the Company during the most recently completed fiscal year and will
serve as the independent accountant for the Company during the current
fiscal year. Representatives of this firm will be present at the Annual
Meeting and have an opportunity to make statements if they so desire
and are expected to be available to respond to appropriate questions.
SALARY AND BENEFIT COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report reflects the Company's compensation philosophy for all
executive officers, as endorsed by the Board of Directors and the
Salary and Benefits Committee. The committee is comprised of Directors:
Hugh S. Potts, Jr., J. Marlin Ivey, Charles W. Ritter, Jr., W. C.
Shoemaker, and Edward G. Woodard and determines annual base salary
adjustments and annual pay for performance bonus awards.
In determining the compensation to be paid to the Company's
executive officers in 1998, the Salary and Benefit Committee employed
compensation policies designed to align the compensation of Mr. Potts,
Mr. Wiggers, and other executive officers with the Company's overall
business strategy, values and management initiatives. These policies
are intended to reward executives for strategic management and the
enhancement of shareholder value and support a performance-oriented
environment that rewards achievement of internal goals.
In 1998, Messrs. Potts and Wiggers received an increase in base
salary of 4.6% and 6.8% respectively, from their 1997 base salary. The
increases were consistent with the 7.1% improvement in Company profits
for 1997 over 1996.
The Company has established performance goals in four categories
which are to be met by improvements in ratios or amounts as applicable
from the last fiscal year. The four categories are: Growth, which is
measured by increases in loan volume and core deposit volume; Profits,
measured by increases in net interest margin (%) and an increase in
non-interest income; Quality, the goal of which is to maintain the
previous year's percentage of nonperforming assets and net charge-offs,
with a penalty factor if the percentage increases from the previous
year; and Productivity, measured by an increase in pre-tax income
divided by salaries and benefits.
The model calculates the bonus by weighting the categories and
combining the results in each category to arrive at a bonus as a
percentage of base salary. A bonus is awarded if the 1998 Company
results in any category were an improvement over 1997 results. If the
1998 results were an improvement over 1997 results in each category, a
bonus of approximately 2.0% of base salary would be awarded. If the
1998 Company budget was met in each category, the bonus is
approximately 12%. If budget is exceeded in one or more categories, the
bonus increases on a sliding scale, with the maximum bonus of
approximately 22.0% of base salary.
The Company's loan volume was below the budgeted amount by 2.4% and
core deposit volume was above the budgeted amount by 10% in 1998. The
net interest margin was below the budgeted amount. Noninterest income
was slightly below the budgeted amount while noninterest expense was
above the budgeted amount in 1998. Based upon the model, bonuses of
$13,750 and $6,500 were awarded to Messrs. Potts and Wiggers
respectively.
Additionally, the Company subscribes to and participates in the
Mississippi Bankers Association survey, which provides the Committee
with comparative compensation data from the Company's market areas and
its peer groups. This information is used by the committee to ensure
that it is providing compensation opportunities comparable to its peer
group, thereby allowing the Company to retain talented executive
officers who contribute to the Company's overall and long-term success.
Submitted by the Company's Salary and Benefit Committee: Hugh S.
Potts, Jr., Chairman, J. Marlin Ivey, Charles W. Ritter, Jr., W. C.
Shoemaker, and Edward G. Woodard.
<PAGE>
TRANSACTIONS WITH MANAGEMENT
First M & F Corporation's subsidiary, Merchants and Farmers Bank,
Kosciusko, Mississippi, (the "Bank") has had, and expects to have in
the future, banking transactions in the ordinary course of its business
with directors, officers, principal shareholders, and their associates.
Such transactions are completed on the same terms, including interest
rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others, and do not involve more than the
normal risk of collectibility or present other unfavorable features.
Such loans are extended on a secured basis. The aggregate amount of
loans outstanding to directors, principal officers and their interests
to the Bank as of December 31, 1998, totaled $1,343,000. Other than
these transactions, there were no material transactions during 1998
between directors and officers and the Bank or the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Audit Committee of its Board of
Directors which met two (2) times during 1998. Presently Charles W.
Ritter, Jr., serves as Chairman and other members are Barbara K.
Hammond, J. Marlin Ivey, Susan P. McCaffery, Edward G. Woodard and
Toxey Hall III. The Audit Committee reviews audit plans, examination
results of both independent and internal auditors and makes
recommendations to the Board of Directors concerning independent
auditors.
The Company has a standing Salary and Benefit Committee which met
two (2) times during 1998 and makes recommendations to the Board of
Directors on all officers' salaries and compensation. Presently Hugh S.
Potts, Jr., serves as Chairman and other members are J. Marlin Ivey,
Charles W. Ritter, Jr., W. C. Shoemaker, and Edward G. Woodard.
The Company does not have a standing Nominating Committee. The
Company's By-Laws are silent as to nominations to the Board of
Directors, other than those made by or at the direction of the Board of
Directors.
Merchants & Farmers Bank has among other committees, an Investment
Committee which meets quarterly, a Loan and Policy Committee which
meets weekly, an Executive and Administrative committee which meets
bi-annually, a Trust Committee which meets monthly and an Electronic
Data Processing Steering Committee which meets quarterly.
PROPOSAL NO. 2 - ADOPTION OF STOCK OPTION PLAN
The Board of Directors on January 13, 1999, adopted a Stock Option
Plan which grants incentive stock options (ISOs) to key employees and
nonstatutory stock options (NSOs) to members of the Board. The purpose
of the plan is to provide compensatory incentives to key officers and
directors by permitting them to purchase stock in the Company at the
market value on the date of grant. The maximum number of shares of
stock that may be optioned or sold under the plan is 200,000 shares.
Under the provisions of the Stock Option Plan, the Company and the
participating employees and directors will execute agreements providing
each of them with an option to purchase stock for the market value of
the stock at the grant date within ten years of the execution of the
agreement. Such shares may be treasury, or authorized but unissued
shares of stock of the Company.
The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement
123).
Pursuant to section 422 of the Internal Revenue Code, shareholder
approval is required for the ISOs to qualify for favorable tax
treatment. The Board recommends that the shareholders approve the Stock
Option Plan.
<PAGE>
OTHER MATTERS
Management at present knows of no other business to be brought
before the meeting. However, if other business is properly brought
before the meeting, it is the intention of the management to vote the
accompanying Proxies in accordance with its judgement.
PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder who wishes to present a proposal at the Company's
next Annual Meeting and who wishes to have the proposal included in the
Company's Proxy Statement and form of proxy for the meeting must submit
the proposal to the undersigned at the address of the Company not later
than November 19, 1999.
The accompanying Proxy is solicited by Management.
By Order of THE BOARD OF DIRECTORS,
Hugh S. Potts, Jr.
Chairman and Chief Executive Officer
Dated and mailed at
Cranford, New Jersey
On or about March 17, 1999
<PAGE>
Article I - Purpose of the Plan
Purpose of the Plan. The purposes of this Plan are to encourage the
stock ownership of First M & F Corporation by directors, officers,
and other key employees of the Company and its Bank subsidiary, to
provide an incentive for such individuals to improve profitability,
and to assist the Company and subsidiary in attracting and retaining
key employees and directors through the grant of Options.
Article II - Definitions
Award means Options granted hereunder.
Bank means First M & F Corporation, a financial institution organized
under the laws of the State of Mississippi.
Board means the Board of Directors of the Company.
Code means the Internal Revenue Code of 1986, as amended. Reference in
this Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations
promulgated thereunder.
Company means First M & F Corporation, a Mississippi business
corporation registered as a bank holding company under the Bank Holding
Company Act of 1956, or any successors as described below.
Date of Disability means the date on which a Participant is classified
as Disabled.
Death means a Participant's death while holding Options granted under
this Plan.
Director means a member of the Board who is not also employed by the
Company or the Bank as an employee.
Disability or Disabled means the permanent inability of a Participant
to perform the duties and responsibilities for which he was employed by
the Company or the Bank due to reasons of health or mental incapacity.
Eligible Employee means any person employed by the Company or the Bank
on a full-time, salaried basis who satisfies all of the requirements
for eligibility.
Fair Market Value means the fair market value of the Stock, as
determined by the Board; provided, however, that (i) if the Stock is
admitted to quotation on the National Association of Securities Dealers
Quotation system on the date that the Option is granted, Fair Market
Value shall not be less than the average of the highest bid and lowest
asked prices of the Stock on such system on such date, or (ii) if
the Stock is admitted to trading on a national securities exchange
on the date the Option is granted, Fair Market Value shall not be less
than the last sale price reported for the Stock on such exchange on
such date or, in the absence of such a reported sale price, on the last
date preceding such date on which a sale was reported.
Incentive Stock Option means an Option that is an incentive stock
option within the meaning of Section 422 of the Code and that is
granted.
Nonqualified Stock Option means an Option that is not an Incentive
Stock Option and that is granted.
Option means either a Nonqualified Stock Option or an Incentive Stock
Option.
Participant means a Director or Eligible Employee who has been granted
an Award under this Plan.
<PAGE>
Article II - Definitions (continued)
Plan means this First M & F Corporation Stock Option Plan.
Retirement means normal retirement by an employee from the Company
under a retirement plan maintained by the Company, or, in the case of a
Director, termination from the Board due to attaining mandatory
retirement age.
Retirement Date is the Participant's date of Retirement.
Stock means the common stock, par value $5 per share, of the Company.
Stock Option Agreement means an agreement with respect to Options
granted.
Termination means (i) in the case of an Eligible Employee, the
resignation or discharge from employment with the Company, except in
the event of Death, Disability, or Retirement, and (ii) in the case of
a Director, the resignation or removal from, or the expiration of the
term of service on, the Board.
Vested Option means, at any date, an Option that a Participant is then
entitled to exercise pursuant to the terms of a Stock Option Agreement.
Article III - Effective Date and Duration
Effective Date. Except as provided to the contrary herein, this Plan
shall be effective as of January 1, 1999.
Period For Grants Of Awards. Awards may be made as provided herein for
a period of ten (10) years after the initial effective date of the
Plan.
Shareholder Approval. The Plan shall be submitted to the shareholders
of the Company for approval within 12 months after the date the Plan is
adopted by the Board.
Termination. This plan shall be terminated as provided in Article XII,
but shall continue in effect until all matters relating to the payment
of Awards and the administration of the Plan have been settled.
Article IV - Administration
Administration. This Plan shall be administered by the Board. All
questions of interpretation and application of this Plan, or of the
terms and conditions pursuant to which Awards are granted, exercised,
or forfeited under the provisions hereof, shall be subject to the
determination of the Board. Such determination shall be final and
binding upon all parties affected thereby.
<PAGE>
Article V - Grant Of Awards And Limitations On Number Of Shares Of Stock Awarded
Grant Of Awards; Number Of Shares. The Board may, from time to time,
grant Awards of Options to one or more Directors and/or Eligible
Employees; provided that:
(a) Subject to any adjustment pursuant to Article X or Article XI,
the aggregate number of shares of Stock subject to Awards under
this Plan may not exceed 200,000 shares;
(b) To the extent that an Award lapses or the rights of the
Participant to whom it was granted terminate, or to the extent
that the Award is canceled by mutual agreement of the Board and
the Participant (which cancellation opportunities may be offered
by the Board to Participants from time to time), any shares of
Stock subject to such Award shall again be available for the
grant of the Award hereunder;
(c) Shares of Stock ceasing to be subject to an Award because of the
exercise of an option shall no longer be available for the grant
of an Award hereunder;
(d) Directors shall not be eligible to receive awards of Incentive
Stock Options hereunder; and
(e) Shares of Stock that are the subject of grants of Options under
this Plan shall be set aside out of authorized but unissued
shares of Stock not reserved for other purposes.
In determining the size of Awards, the Board may take into account a
Participant's responsibility level, performance potential, cash
compensation level, the Fair Market Value of the Stock at the time of
Awards, and such other considerations as it deems appropriate.
Article VI - Eligibility
Eligible Individuals. Full-time, salaried officers and other key
employees of the Company (including officers or employees who are
members of the Board) and Directors shall be eligible to receive Awards
under this Plan, provided they are residents of the State of
Mississippi. Subject to the provisions of this Plan, the Board shall
from time to time select from such eligible persons those to whom
Awards shall be granted and determine the size of the Awards. A
Participant may hold more than one Option at any one time. No Director,
officer, or employee of the Company shall have any right to be granted
an Award under this Plan, as all Awards granted hereunder are granted
in the sole and absolute discretion of the Board, as provided herein.
Article VII - Options
Grants Of Options. Awards shall be granted to Participants in the form
of Options to purchase Stock.
Type Of Option. The Board may choose to grant a Participant who is a
a Director Nonqualified Stock Options and it may choose to grant a
Participant who is an Eligible Employee either Incentive Stock Options
or Nonqualified Stock Options or both, subject to the limitations
contained herein.
Incentive Stock Option Dollar Limitations. If the Board grants
Incentive Stock Options, the aggregate Fair Market Value (determined
at the time the Option is granted) of any such Options plus any
incentive stock options qualified under Section 422 of the Code and
granted under any other plans of the Company that shall be first
exercisable by any one Participant during any one calendar year shall
not exceed $100,000, or such other dollar limitation as may be provided
in the Code.
<PAGE>
Article VIII - Term And Conditions Of Stock Option Agreements
Stock Option Agreements. Awards shall be evidenced by Stock Option
Agreements in such form as the Board shall, from time to time, approve.
Such Stock Option Agreements, which need not be identical, shall comply
with and be subject to the following terms and conditions:
(a) Medium of Payment. Upon exercise of the Option, the Option price
shall be payable in United States dollars in cash or by certified
check, bank draft, money order payable to the order of the
Company, or Stock, or a combination thereof.
(b) Number of Shares. The Stock Option Agreement shall state the
total number of shares to which it pertains.
(c) Option Price. With respect to Incentive Stock Options, the
Option price shall be not less than the Fair Market Value of such
shares on the date of granting of the Option (or one hundred ten
percent (110%) of such amount if the Option is granted to an
individual owning stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the
Company). With respect to Nonqualified Stock Options, the Option
price shall not be less than the Fair Market Value of such shares
on the date of the granting of the Option. (d) Term of Options.
Each Nonqualified and Incentive Stock Option granted under this
Plan shall expire not more than ten (10) years from the date the
Option is granted, except that each Incentive Stock Option
granted under the plan to an individual owning stock possessing
more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company shall expire not more than
five (5) years from the date the Option is granted.
(e) Date of Exercise. Except for such limitations as may be provided
by the Board in its discretion pursuant to Article VII, any
Vested Option may be exercised in whole at any time during its
term or in part from time to time during its term.
(f) Exercise of Option or Forfeiture. Except as otherwise provided in
any employment agreement or other written agreement with the
Participant, if a Participant ceases employment with the Company
or ceases to be a Director, as the case may be, prior to exercise
of the Participant's Options, such Options shall be exercised or
forfeited as follows:
(i) Termination. Upon the Termination of a Participant who
is an Eligible Employee, the Participant's Vested
Options shall be exercisable within three (3) months
(or such shorter period as the Code or the terms of the
particular Options may require) of the Participant's
Termination. In default of such timely exercise, all
Options of the Participant shall be forfeited.
(ii) Retirement. Upon the Retirement of a Participant who is
an Eligible Employee, the Participant's Options (which
shall become Vested Options as of the Participant's
Retirement Date) shall be exercisable within three (3)
months (or such shorter period as the Code or the terms
of the particular Options may require) of the
Participant's Retirement Date. In default of such
timely exercise, all Options of the Participant shall
be forfeited.
(iii) Termination of Director Status. In the case of a
Participant who is a Director and who ceases to be a
Director for a reason other than Retirement or Death,
the Participant's Options shall be exercisable within
three (3) months (or such shorter period as the Code or
the terms of the particular Options may require) of the
termination. In the case of a Participant who is a
Director and who ceases to be a Director due to
Retirement, the Participant's Options shall be
exercisable within thirty-six (36) months (or such
shorter period as the terms of the particular Options
may require) of the termination.
(iv) Disability. Upon the Disability of a Participant, the
Participant's Options (which shall become Vested
Options as of the Participant's Date of Disability)
shall be exercisable within three (3) months (or such
shorter period as the Code or the terms of the
particular Options may require) of the Participant's
Date of Disability. In default of such timely exercise,
all Options of the Participant shall be forfeited.
<PAGE>
Article VIII - Term And Conditions Of Stock Option Agreements (continued)
(v) Death. If the Participant dies while in the employment
of the Company, while serving as a Director, or within
the period of time after Retirement during which the
Participant would have been entitled to exercise his or
her option rights, the Participant's estate, personal
representative, or beneficiary (as applicable) shall
have the right to exercise such Options (which shall
become Vested Options as of the date of the
Participant's Death) within one hundred eighty (180)
days from the date of the Participant's death (or such
shorter period as the Code or the terms of the
particular Options may require).
(g) Agreement as to Sale of Securities. If, at the time of the
exercise of any Option, in the opinion of counsel for the
Company, it is necessary or desirable, in order to comply with
any applicable laws or regulations relating to the sale of
securities, that the Participant exercising the Option shall
agree to purchase the shares that are subject to the Option for
investment only and not with respect to any present intention to
resell the same and that the Participant will dispose of such
shares only in compliance with such laws and regulations, the
Participant will, upon the request of the Company, execute and
deliver to the Company an agreement to such effect. The
Participant shall agree to comply with the right of first refusal
and other provisions of his or her Stock Option Agreement and to
become a party to any shareholder's agreement in effect among the
Company and its stockholders.
(h) Minimum Number of Shares. The minimum number of shares with
respect to which an Option may be exercised at any one time shall
be five hundred (500) shares, unless the number is the total
number at the time available for exercise under the Award.
(i) Required Amendments. Each Award shall be subject to any provision
necessary to ensure compliance with federal and state securities
laws.
(j) Limitation of Participant Rights. A Participant shall not be
deemed to be the holder of, or to have the rights of a holder
with respect to, any shares of Stock subject to such Option
unless and until the Option shall have been exercised pursuant to
the terms thereof, the Company shall have issued and delivered
the shares to the Participant, and the Participant's name shall
have been entered as a stockholder of record on the books of the
Company. Thereafter, the Participant shall have full voting,
dividend, and other ownership rights with respect to such shares
of Stock.
Article IX - Grants In Substitution For Options Granted By Other Corporations
Substitute Awards. Awards may be granted under this Plan from time to
time in substitution for similar awards held by employees of the
Company or the Bank as the result of merger or consolidation of the
employing corporation with the Company or the Bank, or the acquisition
by the Company of fifty percent (50%) or more of the stock of the
employing corporation, or the acquisition by the Company of the assets
of the employing corporation, or the acquisition by the Company of
fifty percent (50%) or more of the stock of the employing corporation
causing it to become a subsidiary. Subject to any conditions that may
be required for the Plan to satisfy the requirements of Rule 16b-3
under the Securities Exchange Act of 1934, as amended, the terms and
conditions set forth in this Plan to such extent as the Board at the
time of the grant may deem appropriate to conform, in whole or in part,
to the provisions of the options in substitution for which they are
granted.
<PAGE>
Article X - Changes In Capital Structure
Capital Structure Changes.
(a) If the outstanding shares of the Company's Stock as a whole are
increased, decreased, changed into, or exchanged for a different
number or kind of shares or securities of the Company, whether
through merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split, combination of
shares, exchange of shares, change in corporate structure, or the
like, an appropriate and proportionate adjustment shall be made in
the number and kinds of shares subject to the plan and in the
number, kinds, and per share exercise price of shares subject to
unexercised Options or portions thereof granted prior to any such
change. Any such adjustment in an outstanding Option, however,
shall be made without a change in the total price applicable to the
unexercised portion of the Option but with a corresponding
adjustment in the price for each share of Stock covered by the
Option.
(b) Upon dissolution or liquidation of the Company, or upon a
reorganization, merger, or consolidation in which the Company is
not the surviving corporation, or upon the sale of substantially
all of the assets of the Company to another corporation the Plan
and the Options issued thereunder shall terminate. In the event of
such termination, all outstanding Options shall be exercisable in
full for at least thirty (30) days prior to the termination date
whether or not otherwise exercisable during such period.
(c) In the event of a change in the Stock which is limited to a change
in the designation thereof to "capital stock" or other similar
designation, or in par value at no par value, without increase or
decrease in the number of issued shares, the shares resulting from
any such change shall be deemed to be Stock within the meaning of
this Plan.
(d) Adjustments under this Section shall be made by the Board, whose
determination as to what adjustment shall be made, and the extent
thereof, shall be conclusive. The Board shall have the discretion
and power in any such event to determine and to make effective
provision for the acceleration of time during which the Option may
be exercised, notwithstanding the provisions of the Option setting
forth the date or dates on which all or any part of it may be
exercised. No fractional shares of Stock shall be issued under the
Plan on account of any adjustment specified above.
Article XI - Company Successors
In General. If the Company shall be the surviving or resulting
corporation in any merger, sale of assets or sale of stock,
consolidation, or corporate reorganization (including a reorganization
in which the holders of Stock receive securities of another
corporation), any Award granted hereunder shall pertain to and apply to
the securities to which a holder of Stock would have been entitled. The
Board shall make such appropriate determinations and adjustments as it
deems necessary so as to substantially preserve the rights and
benefits, both as to the number of shares and otherwise, of
Participants under this Plan.
Article XII - Amendment
Amendments and Termination. The Plan shall terminate on the tenth
(10th) anniversary of the initial effective date of the Plan and, in
addition, the Board may at any time and from time to time alter, amend,
suspend, or terminate this Plan in whole or in part, except (i)
without such stockholder approval as may be required by law and the
Company's charter, no such action may be taken which changes the
minimum Option price, increases the maximum term of Options,
materially increases the benefits accruing to Participants hereunder,
materially increases the number of securities that may be issued
pursuant to this Plan (except as provided in Article X), extends the
period for granting Awards hereunder, or materially modifies the
requirements as to eligibility for participation hereunder, and (ii)
without the consent of the Participant to whom any Award shall
theretofore have been granted, no such action may be taken that
adversely affects the rights of such Participant concerning such
Award, except as such termination or amendment of this Plan is required
by statute, or rules and regulations promulgated thereunder, or as
otherwise permitted hereunder.
<PAGE>
Article XIII - Miscellaneous Provisions
Nontransferability. Except by the laws of descent and distribution, no
benefit provided hereunder shall be subject to alienation, assignment,
or transfer by a Participant (or by any person entitled to such benefit
pursuant to the terms of this Plan), nor shall it be subject to
attachment or other legal process of whatever nature, and any attempted
alienation, assignment, attachment, or transfer shall be void and of no
effect whatsoever and upon any such attempt, the benefit shall
terminate and be of no force or effect. During a Participant's
lifetime, Options granted to the Participant shall be exercisable only
by the Participant. Shares of stock shall be delivered only into the
hands of the Participant entitled to receive the same or into the hands
of the Participant's authorized legal representative.
No Employment Right. Neither this Plan nor any action taken hereunder
shall be construed as giving any right to any individual to be retained
as a director, officer, or employee of the Company.
Tax Withholding. The Company shall have the right to deduct from all
Awards paid by any federal, state, local, or employment taxes that it
deems are required by law to be withheld with respect to such
payments. In the case of Awards paid in Stock, the Participant
receiving such Stock may be required to pay the Company an amount
required to be withheld with respect to such Stock. At the request of a
Participant, such sums as may be required for the payment of any
estimated or accrued income tax liability may be withheld and paid over
to the governmental entity entitled to receive same.
Acceleration. Except as otherwise provided hereunder, the Board may in
its discretion accelerate the time at which an Option granted hereunder
may be exercised.
Fractional Shares. Any fractional shares concerning Awards shall be
eliminated at the time of payment or payout by rounding down for
fractions of less than one half (1/2) and rounding up for fractions
equal to or more than one half (1/2).
Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
government agencies as may be deemed necessary or appropriate by the
Board. If Stock awarded hereunder may in certain circumstances be
exempt from registration under the Securities Act of 1933, the Company
may restrict its transfer in such manner as it deems advisable to
ensure such exempt status. The Plan is intended to comply with Rule
16b-3 under the Securities Exchange Act of 1934, as amended. Any
provision inconsistent with such Rule shall be inoperative and shall
not affect the validity of the Plan. The Plan shall be subject to any
provision necessary to assure compliance with federal and state
securities laws.
Indemnification. Each person who is or at any time serves as a member
of the Board shall be indemnified and held harmless by the Company
against and from (i) any loss, cost, liability, or expenses that may be
imposed upon or reasonably incurred by such person in connection with
or resulting from any claim, action, suit, or proceeding to which such
person may be a party or in which such person may be involved by reason
of any action or failure to act under this Plan; and (ii) any and all
amounts paid by such person in satisfaction of judgement in any such
action, suit, or proceeding relating to the Plan. Each person covered
by this indemnification shall give the Company an opportunity, at its
own expenses, to handle and defend the same before such person
undertakes to handle and defend the same on such person's own behalf.
The foregoing right to indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled
under the charter or bylaws of the Company, as a matter of law, or
otherwise, or any power that the Company may have to indemnify such
person or hold such person harmless.
<PAGE>
Article XIII - Miscellaneous Provisions (continued)
Reliance on Reports. Each member of the Board shall be fully justified
in relying or acting in good faith upon any report made by the
independent public accountants of the Company, and upon any other
information furnished in connection with this Plan. In no event shall
any person who is or shall have been a member of the Board be liable
for any determination made or other action taken or any omission to act
in reliance upon any such report or information, or for any action
taken, including the furnishing of information, or failure to act, if
in good faith.
Governing Law. All matters relating to this Plan or to awards granted
hereunder shall be governed by the laws of the State of Mississippi,
without regard to the principles of conflict of laws thereof, except to
the extent preempted by the laws of the United States.
Relationship to Other Benefits. No payment under this Plan shall be
taken into account in determining any benefits under any pension,
retirement, profit sharing, or group insurance plan of the Company.
Expenses. The expenses of implementing and administering this Plan
shall be borne by the Company.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
First M & F Corporation
Kosciusko, Mississippi
We have audited the accompanying consolidated statements of
condition of First M & F Corporation and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
The consolidated financial statements as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December
31, 1998, have been restated to reflect the pooling of interests with
First Bolivar Capital Corporation as described in Note 2 to the
financial statements. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for First Bolivar Capital Corporation
as of December 31, 1997, and for the years ended December 31, 1997 and
1996, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of First M & F Corporation and subsidiary as of December 31,
1998 and 1997, the results of their consolidated operations and their
consolidated cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted
accounting principles.
Jackson, Mississippi
February 5, 1999
Certified Public Accountants
6360 I-55 North
Suite 330
P.O. Drawer 13157
Jackson, MS 39236-3157
Telephone 601/956-0993
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 22,807,101 $ 27,594,682
Interest bearing bank balances 6,485,441 10,801,934
Federal funds sold 18,850,000 3,500,000
Securities available for sale, amortized
cost of $207,794,000 and $126,807,000 210,646,083 127,721,719
Investment securities, market value of
$59,696,000 in 1997 - 58,785,352
Loans, net of unearned income 414,183,683 375,905,546
Allowance for possible loan losses (5,835,000) (5,315,077)
--------------------------------------
Net loans 408,348,683 370,590,469
--------------------------------------
Bank premises and equipment 11,372,484 9,847,527
Accrued interest receivable 6,489,178 5,854,687
Other assets 17,007,254 6,761,444
--------------------------------------
$ 702,006,224 $ 621,457,814
================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 625,398,006 $ 543,005,688
Short-term borrowings 829,072 -
Other borrowings 8,570,778 16,417,491
Accrued interest payable 2,706,227 2,783,377
Other liabilities 990,564 1,605,261
---------------------------------------
Total liabilities 638,494,647 563,811,817
---------------------------------------
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;
3,639,779 and 3,637,870 shares issued 18,198,895 18,189,350
Additional paid-in capital 10,800,455 10,741,276
Retained earnings 32,722,727 28,139,330
Accumulated other comprehensive income,
net unrealized gain on securities 1,789,500 576,041
available for sale
---------------------------------------
Net stockholders' equity 63,511,577 57,645,997
---------------------------------------
$ 702,006,224 $ 621,457,814
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 37,238,594 $ 35,378,995 $ 32,619,776
Taxable investments 8,582,067 8,418,728 8,201,904
Tax-exempt investments 2,915,578 2,244,399 2,184,676
Federal funds sold 870,612 626,433 822,269
Interest bearing bank balances 402,738 192,288 208,137
-----------------------------------------------
Total interest income 50,009,589 46,860,843 44,036,762
-----------------------------------------------
Interest expense:
Deposits 23,802,926 21,660,776 19,387,027
Short-term borrowings 22,046 16,618 940,052
Other borrowings 565,527 507,338 679,984
-----------------------------------------------
Total interest expense 24,390,499 22,184,732 21,007,063
-----------------------------------------------
Net interest income 25,619,090 24,676,111 23,029,699
Provision for possible loan
losses 1,964,746 2,062,085 1,232,536
-----------------------------------------------
Net interest income after
provision for possible
loan losses 23,654,344 22,614,026 21,797,163
-----------------------------------------------
Other operating income:
Service charges on deposit
accounts 3,789,439 3,589,094 3,690,424
Gains on securities available
for sale 134,918 42,339 58,192
Credit insurance income 492,851 1,022,996 468,052
Other income 1,084,101 586,245 548,383
-----------------------------------------------
Total other operating income 5,501,309 5,240,674 4,765,051
-----------------------------------------------
Other operating expenses:
Salaries and employee benefits 9,859,349 8,842,782 8,432,337
Net occupancy expenses 1,183,238 1,035,126 1,048,602
Equipment and data processing
expenses 2,154,188 1,876,508 1,861,463
Other 5,521,630 4,661,815 4,720,997
----------------------------------------------
Total other operating expenses 18,718,405 16,416,231 16,063,399
----------------------------------------------
Income before income taxes 10,437,248 11,438,469 10,498,815
Income taxes 2,594,981 3,291,988 2,875,774
----------------------------------------------
Net income $ 7,842,267 $ 8,146,481 $ 7,623,041
================================================================================
Basic earnings per share $ 2.16 $ 2.24 $ 2.10
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 7,842,267 $ 8,146,481 $ 7,623,041
Other comprehensive income,
net of tax:
Change in unrealized gains
(losses) on securities
available for sale 1,298,053 302,725 (352,039)
Reclassification adjustment
for gains on securities
available for sale included
in net income (84,594) (26,547) (38,407)
-------------------------------------------------
Other comprehensive income 1,213,459 276,178 (390,446)
-------------------------------------------------
Total comprehensive income $ 9,055,726 $ 8,422,659 $ 7,232,595
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31,
Additional
Common Paid-in Retained Unrealized Treasury
Stock Capital Earnings Gain (Loss) Stock Net
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1996, as
originally reported $ 16,973,280 $ 10,653,316 $ 16,242,675 $ 698,987 $ (48,828) $ 44,519,430
Effect of pooling
transaction 1,216,070 42,888 1,659,529 (8,678) - 2,909,809
-----------------------------------------------------------------------------------
January 1, 1996,
as restated 18,189,350 10,696,204 17,902,204 690,309 (48,828) 47,429,239
- ---------------------------------------------------------------------------------------------------------
Net income - - 7,623,041 - - 7,623,041
Cash dividends (0.75
per share) - - (2,545,098) - - (2,545,098)
Sale of 3,756 shares of
treasury stock - 45,072 - - 48,828 93,900
Net change in
unrealized gain (loss) - - - (390,446) - (390,446)
-----------------------------------------------------------------------------------
December 31, 1996 18,189,350 10,741,276 22,980,147 299,863 - 52,210,636
- -------------------------------------------------------------------------------------------------------
Net income - - 8,146,481 - - 8,146,481
Cash dividends ($0.88
per share) - - (2,987,298) - - (2,987,298)
Net change in
unrealized gain (loss) - - - 276,178 - 276,178
-----------------------------------------------------------------------------------
December 31, 1997 18,189,350 10,741,276 28,139,330 576,041 - 57,645,997
- ----------------------------------------------------------------------------------------------------------
Net income - - 7,842,267 - - 7,842,267
Cash dividends ($0.96
per share) - - (3,258,870) - - (3,258,870)
1,909 common shares
issued to acquire
minority interest
of merged bank 9,545 59,179 - - - 68,724
Net change in
unrealized gain (loss) - - - 1,213,459 - 1,213,459
------------------------------------------------------------------------------------
December 31, 1998 $ 18,198,895 $ 10,800,455 $ 32,722,727 $ 1,789,500 - $ 63,511,577
============================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,842,267 $ 8,146,481 $ 7,623,041
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,547,827 1,356,570 1,318,138
Provision for possible loan losses 1,964,746 2,062,085 1,232,536
Net investment amortization 730,872 440,203 287,770
Gain on sales of investments (134,918) (42,339) (58,192)
Deferred income taxes (293,264) (225,531) (150,687)
(Increase) decrease in:
Accrued interest receivable (634,491) (459,770) (22,809)
Cash surrender value of bank
owned life insurance (402,258) - -
Increase (decrease) in:
Accrued interest payable (77,150) 159,347 (68,379)
Income taxes payable (409,799) 439,624 (215,037)
Other, net (303,280) (389,863) 164,561
---------------------------------------
Net cash provided by
operating activities 9,830,552 11,486,807 10,110,942
---------------------------------------
Cash flows from investing activities:
Purchases of securities available
for sale (115,074,341) (62,606,201) (68,510,627)
Sales of securities available for
sale 25,975,341 13,575,648 20,747,839
Maturities of securities available
for sale 61,059,775 30,066,032 81,031,995
Purchases of investment securities - (12,538,559) (11,756,845)
Maturities of investment securities 5,344,261 10,837,441 7,322,310
Net (increase) decrease in:
Interest bearing bank balances 4,316,493 (10,652,140) 164,809
Federal funds sold (15,350,000) (3,000,000) 500,000
Loans (41,366,432) (20,434,546) (53,374,050)
Bank premises and equipment (2,829,517) (2,359,913) (1,585,118)
Investment in bank owned life
insurance (10,000,000) - -
Proceeds from sales of other real
estate and other repossessed
assets 1,190,480 1,480,807 1,209,601
----------------------------------------
Net cash used in investing
activities (86,733,940) (55,631,431) (24,250,086)
----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in:
Non-interest bearing deposits $ 12,885,744 $ 5,764,696 $ 4,407,845
Money market, NOW and
savings deposits 71,655,466 21,408,889 33,128,737
Certificates of deposit (2,148,892) 19,038,739 21,986,764
Securities sold under agreements
to repurchase and other
short-term borrowings 829,072 (70,000) (48,223,668)
Proceeds from other borrowings 3,000,000 10,101,723 11,848,000
Repayments of other borrowings (10,846,713) (4,067,371) (8,509,546)
Cash dividends (3,258,870) (2,987,298) (2,545,098)
Treasury stock transactions - - 93,900
------------------------------------------
Net cash provided by
financing activities 72,115,807 49,189,378 12,186,934
------------------------------------------
Net increase (decrease) in cash
and due from banks (4,787,581) 5,044,754 (1,952,210)
Cash and due from banks at January 1 27,594,682 22,549,928 24,502,138
------------------------------------------
Cash and due from banks at December 31 $ 22,807,101 $ 27,594,682 $ 22,549,928
================================================================================
</TABLE>
<PAGE>
Note 1: Summary of Significant Accounting and Reporting Policies
The accounting and reporting policies of First M & F Corporation
(the Company) which materially affect the determination of financial
position and results of operations conform to generally accepted
accounting principles and general practices within the banking
industry. A summary of these significant accounting and reporting
policies is presented below.
Organization and Operations
The Company is a one-bank holding company that owns 100% of the
common stock of Merchants and Farmers Bank (the Bank) of Kosciusko,
Mississippi. The Bank is a commercial bank and provides a full range of
banking services through its offices in central Mississippi. As a state
chartered commercial bank, the Bank is subject to the regulations of
certain Federal and state agencies and undergoes periodic examinations
by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements of First M & F Corporation
include the accounts of the Company and its wholly owned subsidiary,
Merchants and Farmers Bank, and the accounts of the Bank's wholly owned
finance subsidiary, credit insurance subsidiary, general insurance
agency subsidiary and real estate subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" effective January 1, 1998. As
required by this statement, the 1997 and 1996 financial statements have
been restated for comparative purposes. This statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income includes
net income reported in the statements of income and changes in
unrealized gain (loss) on securities available for sale reported as a
component of stockholders' equity. Unrealized gain (loss) on securities
available for sale, net of deferred income taxes, is the only component
of accumulated comprehensive income for the Company.
Investments
Securities, which are available to be sold prior to maturity are
classified as securities available for sale and are recorded at market
value. Unrealized holding gains and losses are reported net of deferred
income taxes as a separate component of stockholders' equity.
Investment securities (securities held to maturity) are those
securities which the Company has the ability and intent to hold until
maturity and are recorded at amortized cost.
Premiums and discounts are amortized or accreted over the life of
the related security using the interest method. Interest income is
recognized when earned. Realized gains and losses on securities
available for sale are included in earnings and are determined using
the specific amortized cost of the securities sold.
<PAGE>
Note 1: Summary of Significant Accounting and Reporting Policies (continued)
Loans
Loans are stated at the principal amount outstanding, net of
unearned income and an allowance for possible loan losses. Unearned
income on installment loans is recognized as income principally using
the interest method. Interest on all other loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding.
The Bank discontinues the accrual of interest on loans and
recognizes income only as received when, in the judgment of management,
the collection of interest, but not necessarily principal, is doubtful.
Nonaccrual loans, and the related effect on income, are not material.
A loan is considered impaired when, based on current information
and events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
The Bank measures impaired and restructured loans at the present value
of expected future cash flows, discounted at the loan's effective
interest rate or the fair value of collateral if the loan is collateral
dependent. Impaired loans are not material.
Allowance for Possible Loan Losses
The Bank provides for loan losses through an allowance for possible
loan losses established through a provision charged to expense.
Accordingly, all loan losses are charged to the allowance for possible
loan losses and all recoveries are credited to it. The allowance for
possible loan losses is based on the evaluation of the collectibility
of loans, past loan loss experience and other factors which, in
management's judgment, deserve consideration in estimating possible
loan losses. Such other factors considered by management include
changes in the nature and volume of the loan portfolio, current
economic conditions that may affect a borrower's ability to pay, review
of specific problem loans, and the relationship of the allowance to
outstanding loans.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Provisions for depreciation and
amortization are computed principally using the straight-line method
and charged to operating expenses over the estimated useful lives of
the assets. Costs of major additions and improvements are capitalized.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Other Real Estate
Other real estate acquired through partial or total satisfaction of
loans is carried at the lower of market value or the recorded loan
balance at date of acquisition (foreclosure). Any loss incurred at the
date of acquisition is charged to the allowance for possible loan
losses. Gains or losses incurred subsequent to the date of acquisition
are reported in current operations. Related operating income and
expenses are reported in current operations.
Amortization
The Company's costs in excess of net bank assets acquired are being
amortized on a straight-line basis over forty years. The Bank's costs
in excess of net assets acquired in branch acquisitions are being
amortized on a straight-line basis over five and ten years.
<PAGE>
Note 1: Summary of Significant Accounting and Reporting Policies (continued)
Income Taxes
The Company, the Bank and the Bank's finance, general insurance
agency and real estate subsidiaries file consolidated Federal and state
income tax returns. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. Deferred
income tax expense (benefit) is the result of changes in deferred tax
assets and liabilities between reporting periods.
Basic Earnings Per Share
Basic earnings per share are computed by dividing net income by the
weighted average number of shares outstanding during the year. Weighted
average shares outstanding were 3,637,875 in 1998, 3,637,870 in 1997,
and 3,636,423 in 1996, as restated for the effect of a business
combination accounted for as a pooling of interests in 1998.
Statements of Cash Flows
In the accompanying consolidated statements of cash flows, the
Company and subsidiary have defined cash equivalents as those amounts
included in the statement of condition caption "Cash and Due from
Banks." The following supplemental disclosures are made related to the
consolidated statements of cash flows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 24,468,000 $ 22,025,000 $ 21,075,000
Federal and state income taxes paid 3,346,000 3,078,000 3,301,000
Federal and state income tax refunds 48,000 - 60,000
Other real estate and repossessions
acquired in noncash foreclosures 932,000 1,812,000 1,875,000
================================================================================
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1997 and 1996
financial statements to be consistent with 1998 presentation.
Note 2: Business Combination
On December 31, 1998, First Bolivar Capital Corporation of
Cleveland, Mississippi (Bolivar) was merged with the Company and
Bolivar's banking subsidiary was merged with the Bank. The stockholders
of Bolivar received 243,214 shares of common stock of the Company in
exchange for all of the issued and outstanding common shares of
Bolivar. All financial data of the Company has been restated to reflect
the business combination using the pooling of interests method of
accounting. There were no material adjustments to the net assets of
Bolivar as a result of adopting the same accounting methods as the
Company. The effect of the pooling of interests on operations of the
Company is as follows:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 2: Business Combination (continued)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
First M & F Corporation $ 47,397,000 $ 44,216,000 $ 41,496,000
Bolivar 2,613,000 2,645,000 2,541,000
Combined 50,010,000 46,861,000 44,037,000
================================================================================
Other operating income:
First M & F Corporation $ 5,235,000 $ 4,965,000 $ 4,436,000
Bolivar 266,000 276,000 329,000
Combined 5,501,000 5,241,000 4,765,000
================================================================================
Net income:
First M & F Corporation $ 7,629,000 $ 7,914,000 $ 7,389,000
Bolivar 213,000 232,000 234,000
Combined 7,842,000 8,146,000 7,623,000
================================================================================
</TABLE>
Note 3: Investments
The following is a summary of the amortized cost and market value
(book value) of securities available for sale:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Market
Cost Gain Loss Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998:
U. S. Treasury
securities $ 17,541,000 $ 225,000 $ - $ 17,766,000
U. S. Government
agencies and
corporations 25,412,000 214,000 50,000 25,576,000
Mortgage-backed
investments 91,154,000 541,000 194,000 91,501,000
Obligations of states
and political
subdivisions 68,665,000 2,059,000 53,000 70,671,000
Other 2,955,000 110,000 - 3,065,000
Equity securities 2,067,000 - - 2,067,000
-------------------------------------------------------
$ 207,794,000 $ 3,149,000 $ 297,000 $210,646,000
================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 3: Investments (continued)
Amortized Gross Unrealized Market
Cost Gain Loss Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997:
U. S. Treasury
securities $ 23,575,000 $ 105,000 $ 24,000 $ 23,656,000
U. S. Government
agencies and
corporations 26,085,000 80,000 51,000 26,114,000
Mortgage-backed
investments 55,060,000 299,000 94,000 55,265,000
Obligations of states
and political
subdivisions 17,165,000 547,000 5,000 17,707,000
Other 2,670,000 58,000 - 2,728,000
Equity securities 2,252,000 - - 2,252,000
------------------------------------------------------
$126,807,000 $ 1,089,000 $ 174,000 $127,722,000
================================================================================
</TABLE>
The following is a summary of the amortized cost (book value) and
market value of investment securities (held to maturity) at December
31, 1997:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Market
Cost Gain Loss Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury
securities $ 1,050,000 $ 4,000 $ 2,000 $ 1,052,000
U. S. Government
agencies and
corporations 11,018,000 109,000 4,000 11,123,000
Mortgage-backed
investments 13,094,000 47,000 52,000 13,089,000
Obligations of states
and political
subdivisions 33,623,000 818,000 9,000 34,432,000
------------------------------------------------------
$ 58,785,000 $ 978,000 $ 67,000 $ 59,696,000
================================================================================
</TABLE>
<PAGE>
Note 3: Investments (continued)
The amortized cost and market values of debt securities at December
31, 1998, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the
right to call or prepay certain obligations with, or without, call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
One year or less $ 57,164,000 $ 57,504,000
After one through five years 80,016,000 81,463,000
After five through ten years 55,153,000 56,224,000
After ten years 13,394,000 13,388,000
----------------------------------------
$ 205,727,000 $ 208,579,000
================================================================================
</TABLE>
The following is a summary of the amortized cost and market value
of securities available for sale and investment securities which were
pledged to secure public deposits, short-term borrowings and for other
purposes required or permitted by law.
<TABLE>
<CAPTION>
Available for Sale Investment Securities
Amortized Market Amortized Market
Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998 $ 123,242,000 $ 125,107,000 $ - $ -
================================================================================
December 31, 1997 $ 83,387,000 $ 83,993,000 $ 40,937,000 $ 41,427,000
================================================================================
</TABLE>
The following is a summary of gross realized gains and losses on
sales of securities available for sale:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $ 165,000 $ 69,000 $ 82,000
Gross realized losses (30,000) (27,000) (24,000)
---------------------------------------------------
$ 135,000 $ 42,000 $ 58,000
================================================================================
</TABLE>
In accordance with the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities", which was issued in June, 1998, by the Financial
Accounting Standards Board, the Bank reclassified all investments
classified as held to maturity as securities available for sale in
October, 1998. The amortized cost of these investments was $53,427,000
and the market value was $54,882,000 at the date of the
reclassification.
<PAGE>
Note 4: Loans
The Bank's loan portfolio includes commercial, consumer,
agribusiness and residential loans throughout the State of Mississippi,
but primarily in its market area in Central Mississippi. The following
is a summary of the Bank's loan portfolio, net of unearned income of
$11,671,000 and $15,265,000, at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 55,232,000 $ 54,063,000
Residential real estate 121,885,000 106,439,000
Non-residential real estate 142,027,000 124,369,000
Consumer loans 95,040,000 91,035,000
----------------------------------
$ 414,184,000 $ 375,906,000
================================================================================
</TABLE>
The Bank's finance company subsidiary sold $709,000 in loans at one
of its branches in 1998 and closed this branch. The Bank's finance
company subsidiary sold $2,300,000 in loans at two of its branches in
1997 and closed these branches. The sales prices approximated net loan
value for these transactions.
The Bank has made, and expects in the future to continue to make,
in the ordinary course of business, loans to directors and executive
officers of the Company and the Bank and to affiliates of these
directors and officers. In the opinion of management, these
transactions were made on substantially the same terms as those
prevailing at the time for comparable transactions with other persons
and did not involve more than normal risk of collectibility or contain
any other unfavorable features. An analysis of such outstanding loans
follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans outstanding at January 1 $ 2,833,000 $ 2,948,000
New loans 2,056,000 2,302,000
Repayments and removals (3,546,000) (2,417,000)
----------------------------------
Loans outstanding at December 31 $ 1,343,000 $ 2,833,000
================================================================================
</TABLE>
<PAGE>
Note 5: Allowance for Possible Loan Losses
Transactions in the allowance for possible loan losses are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 5,315,000 $ 4,610,000 $ 4,373,000
Loans charged-off (2,019,000) (1,464,000) (1,152,000)
Recoveries 574,000 184,000 156,000
---------------------------------------------
Net charge-offs (1,445,000) (1,280,000) (996,000)
---------------------------------------------
Provision for possible loan losses 1,965,000 2,062,000 1,233,000
Sales of finance company branches - (77,000) -
---------------------------------------------
Balance at December 31 $ 5,835,000 $ 5,315,000 $ 4,610,000
================================================================================
</TABLE>
Note 6: Bank Premises and Equipment
The following is a summary of bank premises and equipment at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 12,624,000 $ 10,511,000
Furniture, fixtures and equipment 9,574,000 8,744,000
Leasehold improvements 375,000 308,000
--------------------------------
22,573,000 19,563,000
Less accumulated depreciation and amortization 11,835,000 10,619,000
--------------------------------
10,738,000 8,944,000
Construction in progress, estimated costs to
complete of $1,538,000 in 1998 and $382,000
in 1997 634,000 904,000
--------------------------------
$ 11,372,000 $ 9,848,000
================================================================================
</TABLE>
Amounts charged to operating expenses for depreciation and
amortization of bank premises and equipment were $1,311,000 in 1998,
$1,118,000 in 1997, and $1,081,000 in 1996.
<PAGE>
Note 7: Other Assets
The following is a summary of other assets at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Company's costs in excess of net bank
assets acquired, less accumulated amorti-
zation of $2,265,000 and $2,141,000 $ 2,732,000 $ 2,812,000
Bank's costs in excess of net assets
acquired in branch acquisitions,
less accumulated amortization
of $621,000 and $508,000 509,000 622,000
Other real estate, net 1,123,000 843,000
Deferred income tax 666,000 1,095,000
Cash surrender value of bank owned
life insurance 10,402,000 -
Other 1,575,000 1,389,000
----------------------------------
$ 17,007,000 $ 6,761,000
================================================================================
</TABLE>
Other expenses include amortization of intangible assets as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Company's costs in excess of net
bank assets acquired $ 124,000 $ 124,000 $ 124,000
Bank's costs in excess of net assets
acquired in branch acquisitions 113,000 114,000 114,000
----------------------------------------
$ 237,000 $ 238,000 $ 238,000
================================================================================
</TABLE>
Changes in the valuation allowance for other real estate are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 74,000 $ 50,000 $ 61,000
Provision charged to expense 41,000 24,000 9,000
Writedowns (59,000) - (20,000)
----------------------------------------
Balance at end of year $ 56,000 $ 74,000 $ 50,000
================================================================================
</TABLE>
<PAGE>
Note 8: Deposits
The following is a summary of deposits at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing $ 78,492,000 $ 65,606,000
Interest bearing:
Money market,
NOW and
savings accounts 287,723,000 216,067,000
Certificates of deposit of
$100,000 or more 64,395,000 58,847,000
Other certificates of deposit 194,788,000 202,486,000
---------------------------------------
Total interest bearing 546,906,000 477,400,000
---------------------------------------
Total deposits $ 625,398,000 $ 543,006,000
================================================================================
</TABLE>
Interest expense on certificates of deposit of $100,000 or more
amounted to $3,408,000 in 1998, $2,812,000 in 1997 and $2,120,000 in
1996.
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
1999 $ 188,646,000
2000 44,262,000
2001 8,995,000
2002 10,585,000
2003 6,382,000
After 2003 313,000
----------------
$ 259,183,000
===================================================
</TABLE>
<PAGE>
Note 9: Short-Term Borrowings
The following is a summary of information related to short-term
borrowings:
<TABLE>
<CAPTION>
Weighted
Balance Outstanding Average Rate
Maximum Average At At
Month End Daily Year End During Year Year End
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Federal funds
purchased $ - $ 82,000 $ - 5.50% -%
Securities sold
under agreement
to repurchase 2,384,000 452,000 829,000 3.88 4.07
Other short-term
borrowings by
the Company - - - - -
-----------------------------------------------------------
$ 2,384,000 $ 534,000 $ 829,000
================================================================================
1997:
Federal funds
purchased $ - $ 292,000 $ - 5.69% -%
Securities sold
under agreements
to repurchase - - - - -
Other short-term
borrowings by
the Company - 2,000 - 6.50 -
-----------------------------------------------------------
$ - $ 294,000 $ -
================================================================================
1996:
Federal funds
purchased $ - $ 71,000 $ - 6.95% -%
Securities sold
under agreements
to repurchase 50,986,000 19,272,000 - 4.78 -
Other short-term
borrowings by
the Company 250,000 245,000 70,000 6.41 6.50
-----------------------------------------------------------
$ 51,236,000 $19,588,000 $ 70,000
================================================================================
</TABLE>
Federal funds purchased represent primarily overnight borrowings.
Securities sold under agreements to repurchase in 1996 primarily
represented a relationship with a public university under a contract
that expired on June 30, 1996. These borrowings repriced on a monthly
basis. Other short-term borrowings by the Company represented unsecured
borrowings from various individuals and entities.
<PAGE>
Note 10: Other Borrowings
The following is a summary of other borrowings at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Line of credit in the amount of $9,000,000,
renewable annually; secured by approximately
29% of the Bank's common stock; interest
payable quarterly at the lender's base rate $ 27,000 $ 327,000
Note payable to commercial bank in annual
principal installments of $40,000, plus
interest at the lender's prime rate through
December, 2004; formerly collateralized by
stock of Bolivar's banking subsidiary 241,000 281,000
Note payable to commercial bank in annual
principal installments of $29,500, plus
interest at the lender's prime rate through
December, 2000; formerly collateralized by
stock of Bolivar's banking subsidiary $ 59,000 $ 88,000
Advances from Federal Home Loan Bank of Dallas
secured by first mortgage loans and Federal
Home Loan Bank stock:
5.56% advance in the amount of $1,000,000;
interest is payable monthly and principal
is payable on September 23, 2000 1,000,000 1,000,000
5.90% advance in the amount of $2,500,000;
principal and interest are payable in monthly
installments of approximately $28,000
through June 1, 2003 1,308,000 1,534,000
4.652% advance in the amount of $3,000,000;
principal and interest are payable in monthly
installments of approximately $56,000
through November 3, 2003 2,955,000 -
Various advances; principal and interest are
payable in variable monthly payments through
July 2008, at rates varying from 5.87% to
7.83% 2,981,000 3,187,000
Variable rate advance in the amount of
$10,000,000; interest is payable monthly and
is adjusted monthly to 21 basis points over
LIBOR; principal is payable on December 30,
2004 - 10,000,000
-------------------------------
$ 8,571,000 $ 16,417,000
================================================================================
</TABLE>
<PAGE>
Note 10: Other Borrowings (continued)
Scheduled principal payments on other borrowings are as follows:
<TABLE>
<S> <C>
1999 $ 1,082,000
2000 2,110,000
2001 1,139,000
2002 1,200,000
2003 1,041,000
After 2003 1,999,000
- -----------------------------------------------------
$ 8,571,000
=====================================================
</TABLE>
Note 11: Employee Benefit Plans
The Bank has a defined benefit pension plan covering substantially
all full time employees of the Bank and subsidiaries. Benefits under
this plan are based on years of service and average annual compensation
for a five year period. The Bank's funding policy for the plan is to
contribute annually in an amount not exceeding the allowable Federal
income tax deduction.
Net pension cost (benefit) included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 173,000 $ 132,000 $ 128,000
Interest cost 238,000 210,000 190,000
Actual return on plan assets (73,000) (407,000) (199,000)
Amortization of transition asset (35,000) (35,000) (35,000)
Amortization of (gain) loss 21,000 15,000 13,000
Unrecognized gain (loss) on assets (165,000) 208,000 (13,000)
---------------------------------------------
Net pension cost $ 159,000 $ 123,000 $ 84,000
================================================================================
</TABLE>
The following is a summary of the plan's funded status and amounts
recorded in the consolidated statements of condition:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Projected benefit obligation
at beginning of year $ 3,234,000 $ 2,681,000 $ 2,428,000
Service cost 173,000 132,000 128,000
Interest cost 238,000 210,000 190,000
Actuarial (gain) loss 54,000 319,000 30,000
Benefit payments (119,000) (108,000) (95,000)
----------------------------------------------
Projected benefit obligation
at end of year $ 3,580,000 3,234,000 2,681,000
----------------------------------------------
</TABLE>
<PAGE>
Note 11: Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in plan assets:
Fair value of plan assets
at beginning of year $ 3,022,000 $ 2,473,000 $ 2,388,000
Actual return on plan assets 73,000 407,000 199,000
Employer contributions 150,000 277,000 -
Benefit payments (119,000) (108,000) (95,000)
Expenses (33,000) (27,000) (19,000)
----------------------------------------------
Fair value of plan assets at
end of year 3,093,000 3,022,000 2,473,000
----------------------------------------------
Funded status (487,000) (212,000) (208,000)
Unrecognized net actuarial loss 804,000 573,000 450,000
Unrecognized transition asset (104,000) (139,000) (174,000)
Contributions after
measurement date - - 120,000
----------------------------------------------
Prepaid pension asset $ 213,000 $ 222,000 $ 188,000
================================================================================
</TABLE>
The following is a summary of weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 8.0% 8.0%
Expected return on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 4.0% 4.0% 4.0%
================================================================================
</TABLE>
The Bank has a profit and savings plan, which includes features
such as an Employee Stock Option Plan and a 401(k) plan which provides
for certain salary deferrals, covering substantially all full time
employees of the Bank and subsidiaries. The Bank matches employee
401(k) contributions equal to 50% of an employee's first 5% of salary
deferral. Total matching contributions accrued for this plan were
$88,000 in 1998, $90,000 in 1997 and $89,000 in 1996. Additional
contributions to the plan are at the discretion of the Board of
Directors. Discretionary contributions accrued for this plan were
$25,000 in 1998, $25,000 in 1997 and $25,000 in 1996.
At December 31, 1998, the profit and savings plan owned 104,035
shares of the Company's common stock and the pension plan owned 3,600
shares of the Company's common stock.
Note 12: Stock option plan
On January 13, 1999, the Board of Directors adopted a Stock Option
Plan, effective January 1, 1999, authorizing the grant of incentive
stock options (ISOs) to key employees and nonstatutory stock options
(NSOs) to members of the Board. The purpose of the plan is to provide
incentives to key officers and directors by permitting them to purchase
stock in the Company under the provisions of this plan. The maximum
number of shares of stock that may be optioned or sold under the plan
is 200,000 shares.
<PAGE>
Note 12: Stock option plan (continued)
Under the provisions of the plan, the Company and the participating
employees and directors will execute agreements, upon the grant of
options, providing each participant with an option to purchase stock
within ten years of the date of the grant. As provided by the plan, the
option price will not be less than the market price of the Company's
stock at the grant date.
Pursuant to section 422 of the Internal Revenue Code, shareholder
approval is required for the ISOs to qualify for favorable tax
treatment. It is anticipated that this matter will be submitted to the
shareholders for a vote at the annual meeting to be held on April 14,
1999.
Note 13: Other Operating Expense
Significant components of other operating expense are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and promotion $ 462,000 $ 484,000 $ 532,000
Communications 603,000 493,000 484,000
Postage and carriers 597,000 553,000 541,000
Professional fees 528,000 425,000 338,000
Stationery and supplies 564,000 456,000 529,000
Other 2,768,000 2,251,000 2,297,000
- --------------------------------------------------------------------------------
$ 5,522,000 $ 4,662,000 $ 4,721,000
================================================================================
</TABLE>
Note 14: Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Federal State Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998:
Current $ 2,637,000 $ 251,000 $ 2,888,000
Deferred (260,000) (33,000) (293,000)
-------------------------------------------------------
Total $ 2,377,000 $ 218,000 $ 2,595,000
================================================================================
1997:
Current $ 3,196,000 $ 321,000 $ 3,517,000
Deferred (195,000) (30,000) (225,000)
-------------------------------------------------------
Total $ 3,001,000 $ 291,000 $ 3,292,000
================================================================================
1996:
Current $ 2,941,000 $ 86,000 $ 3,027,000
Deferred (4,000) (147,000) (151,000)
-------------------------------------------------------
Total $ 2,937,000 $ (61,000) $ 2,876,000
================================================================================
</TABLE>
<PAGE>
Note 14: Income Taxes (continued)
The differences between actual income tax expense and expected
income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount computed using the
Federal statutory rates on
income before income taxes $ 3,549,000 $ 3,889,000 $ 3,569,000
Increase (decrease) resulting
from: ax exempt income, net
of disallowed interest
deduction (975,000) (724,000) (673,000)
State income tax expense
(benefit), net of Federal
effect 144,000 192,000 (40,000)
Increase in cash value (137,000) - -
Amortization of intangible assets 42,000 42,000 42,000
Small life insurance company
deduction (on amended returns
in 1997) - (67,000) -
Other, net (28,000) (40,000) (22,000)
-----------------------------------------------
$ 2,595,000 $ 3,292,000 $ 2,876,000
================================================================================
</TABLE>
The components of the recorded net deferred tax asset at December
31, 1998 and 1997, consist of the following:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for possible loan losses $ 1,981,000 $ 1,643,000
Intangible assets 77,000 52,000
Other real estate 53,000 36,000
Accrued expenses 34,000 75,000
Other 110,000 100,000
-------------------------------------
Total deferred tax assets 2,255,000 1,906,000
-------------------------------------
Depreciation (254,000) (242,000)
Prepaid pension asset (80,000) (83,000)
Federal Home Loan Bank stock dividends (179,000) (140,000)
Unrealized gain on securities available
for sale (1,062,000) (340,000)
Other (14,000) (6,000)
-------------------------------------
Total deferred tax liabilities (1,589,000) (811,000)
-------------------------------------
$ 666,000 $ 1,095,000
================================================================================
</TABLE>
<PAGE>
Note 14: Income Taxes (continued)
The following is a summary of the gross amounts of other
comprehensive income (net unrealized gain on securities available for
sale) and the related income tax effects:
<TABLE>
<CAPTION>
Gross Tax Expense Net
Amount (Benefit) Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1996 $ 1,045,000 $ 355,000 $ 690,000
Change in unrealized gains (532,000) (180,000) (352,000)
Reclassification adjustment (58,000) (20,000) (38,000)
---------------------------------------------------
Total for year (590,000) (200,000) (390,000)
---------------------------------------------------
December 31, 1996 455,000 155,000 300,000
---------------------------------------------------
Change in unrealized gains 503,000 200,000 303,000
Reclassification adjustment (42,000) (15,000) (27,000)
---------------------------------------------------
Total for year 461,000 185,000 276,000
---------------------------------------------------
December 31, 1997 916,000 340,000 576,000
---------------------------------------------------
Change in unrealized gains 2,071,000 772,000 1,299,000
Reclassification adjustment (135,000) (50,000) (85,000)
---------------------------------------------------
Total for year 1,936,000 722,000 1,214,000
---------------------------------------------------
December 31, 1998 $ 2,852,000 $ 1,062,000 $ 1,790,000
================================================================================
</TABLE>
Note 15: Preferred Stock
The Company is authorized to issue 1,000,000 shares of cumulative
Class A voting preferred stock of no par value and 1,000,000 shares of
cumulative Class B non-voting preferred stock of no par value. Dividend
rates, redemption terms and conversion terms may be set by the Board of
Directors.
Note 16: Commitments and Contingencies
The Company and Bank, in the normal course of business, are
defendants in certain legal claims. In the opinion of management, and
based on the advice of legal counsel, the ultimate resolution of these
matters is not anticipated to have a material effect on the Company's
consolidated financial position.
The consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course
of business and which involve elements of credit risk, interest rate
risk and liquidity risk. The Bank makes commitments to extend credit
and issues standby and commercial letters of credit in the normal
course of business to fulfill the financing needs of its customers.
Commitments to extend credit are agreements to lend money to
customers pursuant to certain specified conditions and generally have
fixed expiration dates or other termination clauses. Credit card
arrangements represent the amount that preapproved credit limits exceed
actual balances. Since many of these commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. When making these
commitments, the Bank applies the same credit policies and standards as
it does in the normal lending process. Collateral is obtained based
upon the Bank's assessment of a customer's credit worthiness.
<PAGE>
Note 16: Commitments and Contingencies (continued)
Standby and commercial letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a
customer to a third party. When issuing letters of credit, the Bank
applies the same credit policies and standards as it does in the normal
lending process. Collateral is obtained based upon the Bank's
assessment of a customer's credit worthiness.
The maximum credit exposure in the event of nonperformance for loan
commitments and standby letters of credit and credit card arrangements
is represented by the contract amount of the instruments.
A summary of commitments and contingent liabilities at December 31,
1998, is as follows:
<TABLE>
<S> <C>
Commitments to extend credit $ 33,137,000
Standby letters of credit 2,803,000
Credit card arrangements 4,723,000
----------------
$ 40,663,000
==============================================================
</TABLE>
Note 17: Regulatory Matters
Federal banking regulations require that the Bank maintain certain
cash reserves based on a percent of deposits. This requirement was
$2,479,000 at December 31, 1998.
The Company and its subsidiary bank are subject to various
regulatory capital requirements administered by Federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, specific capital
guidelines that involve quantitative measures of assets, liabilities
and certain off-balance-sheet items are calculated under regulatory
accounting practices must be met. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set
forth in the table below) of Total Capital and Tier I Capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier I Capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that all capital adequacy
requirements have been met.
As of December 31, 1998, the most recent notification by the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
<PAGE>
Note 17: Regulatory Matters (continued)
The Company's and Bank's actual capital amounts and ratios as of
December 31, 1998 and 1997, are also presented in the table (in
thousands of dollars):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 (Company):
Total capital
(to risk weighted assets) $ 63,958 14.30% $ 35,775 8.00% $ 44,719 10.00%
Tier I capital
(to risk weighted assets 58,481 13.08 17,888 4.00 26,832 6.00
Tier I capital
(to average assets) 58,481 8.46 27,665 4.00 34,582 5.00
========================================================================================================
December 31, 1998 (Bank):
Total capital
(to risk weighted assets) $ 64,027 14.64% $ 34,992 8.00% $ 43,741 10.00%
Tier I capital
(to risk weighted assets) 58,559 13.39 17,496 4.00 26,244 6.00
Tier I capital
(to average assets) 58,559 8.50 27,565 4.00 34,457 5.00
========================================================================================================
December 31, 1997 (Company):
Total capital
(to risk weighted assets) $ 58,491 15.06% $ 31,068 8.00% $ 38,836 10.00%
Tier I capital
(to risk weighted assets) 53,637 13.81 15,534 4.00 23,301 6.00
Tier I capital
(to average assets) 53,637 8.71 24,641 4.00 30,801 5.00
========================================================================================================
December 31, 1997 (Bank):
Total capital
(to risk weighted assets) $ 58,821 15.18% $ 30,995 8.00% $ 38,744 10.00%
Tier I capital
(to risk weighted assets) 53,978 13.93 15,497 4.00 23,246 6.00
Tier I capital
(to average assets) 53,978 8.84 24,438 4.00 30,547 5.00
========================================================================================================
</TABLE>
<PAGE>
Note 17: Regulatory Matters (continued)
Dividends paid by the Bank are the primary source of funds
available to the Company for payment of dividends to its shareholders
and other cash needs. Applicable Federal and state statutes and
regulations impose restrictions on the amounts of dividends that may be
declared by the Bank. In addition to the formal statutes and
regulations, regulatory authorities also consider the adequacy of the
Bank's total capital in relation to its assets, deposits and other such
items and, as a result, capital adequacy considerations could further
limit the availability of dividends from the Bank. These restrictions
are not anticipated to have a material effect on the ability of the
Bank to pay dividends to the Company.
Note 18: Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments" requires that
the Company disclose estimated fair value for its financial
instruments. However, such disclosures may be deemed not to be
practicable for certain classes of financial instruments. A summary of
financial instruments and related disclosures follows:
Cash and due from banks, interest bearing deposits with banks and
Federal funds sold - The net book value of these financial instruments
approximates fair value due to the immediate availability or short
maturity of these investments.
Investments - Fair value of these financial instruments is
considered to be their quoted market value as disclosed in note 3.
Loans - The fair value of variable rate loans that reprice
frequently, and with no significant changes in credit risk, are based
on carrying values. The fair value of fixed rate loans is estimated by
discounting the future cash flows, using the current rates at which
these loans would currently be made to borrowers with similar credit
ratings and similar maturities. The carrying value of loans, net of the
allowance for possible loan losses, is $408,349,000 and $370,590,000
and the estimated net fair value of loans is $409,212,000 and
$369,089,000 at December 31, 1998 and 1997.
Deposits - The fair value of demand deposits, NOW accounts, money
market accounts and savings deposits is the carrying amount at the
reporting date. The fair value of certificates of deposit is estimated
by discounting the future cash flows, using current market rates for
deposits of similar maturities. The carrying value of deposits is
$625,398,000 and $543,006,000 and the estimated net fair value of
deposits is $627,923,000 and $543,784,000 at December 31, 1998 and
1997.
Short-term and other borrowings - The net book value of these
financial instruments approximates fair value due to the short term
nature of these items or their applicable interest rates and repricing
and repayment terms.
Commitments to extend credit - Fair values for such commitments are
typically based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the parties' credit standing. The fair value of commitments to
extend credit is not material.
<PAGE>
Note 19: Summarized Financial Information of First M & F Corporation
Summarized financial information of First M & F Corporation (parent
company only) is as follow:
<TABLE>
<CAPTION>
STATEMENTS OF CONDITION
Assets 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 122,573 $ 251,900
Investment in subsidiary 63,589,115 57,964,355
Other assets 127,308 155,700
-------------------------------------
$ 63,838,996 $ 58,371,955
================================================================================
Liabilities and Stockholders' Equity
Notes payable $ 326,890 $ 696,390
Other liabilities 529 29,568
Stockholders' equity 63,511,577 57,645,997
-------------------------------------
$ 63,838,996 $ 58,371,955
================================================================================
STATEMENTS OF INCOME
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends received from
subsidiary $ 3,649,134 $ 3,449,134 $ 3,092,287
Equity in undistributed
earnings of subsidiary,
net of amortization 4,343,724 4,821,735 4,647,895
Other income 6,407 7,174 6,770
----------------------------------------------
Total income 7,999,265 8,278,043 7,746,952
----------------------------------------------
Expenses:
Interest 39,648 68,290 95,131
Other expenses 175,917 127,980 79,601
----------------------------------------------
Total expenses 215,565 196,270 174,732
----------------------------------------------
Income before income taxes 7,783,700 8,081,773 7,572,220
Income tax benefit 58,567 64,708 50,821
----------------------------------------------
Net income $ 7,842,267 $ 8,146,481 $ 7,623,041
================================================================================
</TABLE>
<PAGE>
Note 19: Summarized Financial Information of First M & F Corporation (continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,842,267 $ 8,146,481 $ 7,623,041
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiary (4,343,724) (4,821,735) (4,647,895)
Other, net 500 (5,645) (83,510)
-----------------------------------------
Net cash provided by operating
activities 3,499,043 3,319,101 2,891,636
-----------------------------------------
Cash flows from financing activities:
Increase (decrease) in:
Short-term borrowings - (70,000) (865,066)
Notes payable (369,500) (17,777) 235,500
Cash dividends (3,258,870) (2,987,298) (2,545,098)
Treasury stock transactions - - 93,900
-----------------------------------------
Net cash used in
financing activities (3,628,370) (3,075,075) (3,080,764)
-----------------------------------------
Net increase (decrease) in cash (129,327) 244,026 (189,128)
Cash at January 1 251,900 7,874 197,002
-----------------------------------------
Cash at December 31 $ 122,573 $ 251,900 $ 7,874
================================================================================
</TABLE>
<PAGE>
FINANCIAL CONDITION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The purpose of this discussion is to focus on significant changes
in financial condition and results of operations of the Company and its
banking subsidiary during the past three years. The discussion and
analysis is intended to supplement and highlight information contained
in the accompanying consolidated financial statements and selected
financial data presented elsewhere in this report and in the enclosed
Financial Summary - First M & F Corporation and Subsidiary.
SUMMARY
Net income for 1998 was $7,842,267, or $2.16 per share as compared
to $8,146,481, or $2.24 per share in 1997. Net income for 1997 was up
by 6.9% over net income in 1996 of $7,623,041, or $2.10 per share.
Income tax expense decreased from 1997 to 1998 due to a decrease in the
effective tax rate from 28.8% in 1997 to 24.9% in 1998. Net income
increased by 19.5% from 1995 to 1996.
During 1998, the Company added 4 locations; 1 in Oxford, 1 in
Grenada, 1 de nova expansion into a new market in Southaven and 1 by
acquisition in Cleveland. In 1997, a new loan production office was
opened in Clinton. In 1996, a new branch was added in the Starkville
market. The 1998 Cleveland acquisition added approximately $45 million
in assets to the Company.
Total assets grew by 13.0% in 1998 to end the year at $702.0
million. Total assets grew by 10.3% in 1997 and by 3.6% in 1996. The
compounded annual growth rate for total assets for the last five (5)
years was 10.0%, while the compounded growth rate for deposits was
12.0%. Net income grew at a compounded annual rate of 11.5% over the
five (5) year period ending in 1998.
EARNING ASSETS
Average earning asset mix for 1998 was 63.2% in loans, 33.2% in
investments, and 3.6% in short-term funds. For 1997, the average
earning asset mix was 65.2% in loans, 32.1% in investments, and 2.7% in
short-term funds. For 1996, the average earning asset mix was 62.9% in
loans, 33.5% in investments, and 3.6% in short-term funds. This mix has
changed as deposit growth has exceeded loan growth in dollars in each
of the last three years. The following table shows the volume changes
in loans and deposits over the last three years.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase in loans $ 38,278 $ 17,267 $ 50,503
Net increase in deposits 82,392 46,793 59,523
Ratio of loan growth to deposit growth 46.5% 36.9% 84.8%
</TABLE>
Continued market expansions have helped deposits to maintain a
strong growth pattern. Loan growth slowed in 1997, with the effect
being felt in 1998 earnings. Loans grew by 10.2% in 1998 while
competition for business and real estate loans grew more fierce. The
Company's strategy for loan growth has become twofold: (1) continue
steady growth at reasonable interest rates in current markets and (2)
enter into new markets to provide for additional growth opportunities.
This strategy has a short-term negative effect due to the fact that
much investment in facilities, salaries, and other expenses is made in
the current year to staff an operation that will provide loan growth
over the next several years. In de nova expansions, such as the
Southaven and Clinton branches, the payoff typically comes in 3 - 5
years. However, management believes that the tactical, short-term
strain on earnings is worth the growth in value that these new
operations can produce over the long term.
<PAGE>
INVESTMENT SECURITIES
The Company's investment portfolio grew by 12.9% in 1998 as
compared to 12.5% in 1997 and (15.2%) in 1996. The Company transferred
all held-to-maturity securities into the available-for-sale category on
October 1, 1998. This was done in order to provide more flexibility in
managing the portfolio. In 1998, the Company reduced the U.S. Treasury
and Agency portfolios in favor of mortgage-backed securities and
municipal securities. During 1998, the interest rate environment
favored municipal securities as tax-equivalent yields in the 5 - 15
year ranges exceeded other investment alternatives in those maturity
terms. Mortgage-backed securities with 3 - 5 year average estimated
maturities were purchased for their yields and liquidity.
The investment portfolio grew significantly during 1997 as loan
demand lagged and deposit growth continued at a strong pace. The growth
was distributed through the investment portfolio, with all major
investment types increasing.
The 1996 investment balances were down from the 1995 year end
balances by design, as a major contractual deposit relationship with a
state university matured and the monies of approximately $47 million
were paid out.
DEPOSITS AND BORROWINGS
As discussed earlier, deposits grew at a healthy pace from 1996
through 1998. In 1998, the Company experienced strong growth in
interest-bearing deposits. Much of this growth was in the savings
category with increases in the Flex fund and Liberty fund accounts.
These are bonus-rate savings deposits that follow a moving average of
Treasury rates. As rates in general have decreased, these accounts have
become attractive as an alternative to other savings vehicles and
short-term certificates of deposit. The interest-bearing demand account
increases in 1998 were primarily in public municipal funds that were
contractually obligated. However, as these contracts mature, the
Company is not bidding aggressively to keep the relationships that are
at the higher rates of interest.
Borrowings decreased significantly in 1998 from 1997 after
increasing significantly in 1997 from 1996. The changes were due to
borrowings that were incurred at the end of 1997 to acquire
approximately $10 million in GNMA securities. The Company used the
borrowings to lock in a spread on the securities in an effort to
leverage the equity of the Company and increase return on equity. As
interest rates declined in 1998, and core deposit growth created excess
liquidity, management decided to pay off the borrowings.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Liquidity is the ability of a bank to convert assets into cash and
cash equivalents without significant loss and to raise additional funds
by increasing liabilities. Liquidity management involves maintaining
the Company's ability to meet day-to-day cash flow requirements of
customers, whether they wish to withdraw funds or to borrow funds to
meet their capital needs. The Company instituted a program in 1998 to
create savings sub-accounts for NOW account customers in order to take
advantage of the lower reserve requirements for savings deposits as
compared to the reserve requirements for transaction accounts. This
change in customer accounts reduced reserve requirements by an average
of approximately $4 million in 1998, providing investable funds to the
Company. The increases in core deposits for 1996 through 1998 also
provided much liquidity to the Company.
Interest rate sensitivity is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities.
Interest rate sensitivity management focuses on repricing relationships
of these assets and liabilities during periods of changing market
interest rates. Management seeks to minimize the effect of interest
rate movements on net interest income. The asset-liability management
committee monitors the interest-sensitivity gap on a monthly basis. In
1998, the interest-sensitivity gap was maintained at a neutral to
slightly negative position. Management has set as a target to maintain
the one year repricing gap at between +5% and -5% of total assets.
<PAGE>
CAPITAL RESOURCES
Capital adequacy is continuously monitored by the Company to
promote depositor and investor confidence and provide a solid
foundation for future growth of the organization. The Company has
continued to increase its dividend payout ratio, and ended 1998 with a
ratio of 44.4%. The ratio of capital to assets has remained over 9%,
with risk-based capital ratios well in excess of the regulatory
requirements. The Company also has sufficient lines of credit at
commercial banks to raise additional funds if needed. The Company's
stock is publicly traded on NASDAQ, also providing an avenue for
additional capital if it is needed.
Results of Operations
First M & F Corporation and Subsidiary
NET INTEREST INCOME
Net interest income is the largest component of the Company's net
income and represents income from interest earning assets less the cost
of interest bearing liabilities. Net interest income for 1998 was $25.6
million as compared to $24.7 million for 1997 and $23.0 million for
1996. The 3.8% increase for 1998 and 7.1% increase for 1997 were
attributable to increases in volumes of earning assets. During 1997 and
1998, decreases in earning asset yields were more than the decreases in
interest-bearing liability costs.
As discussed above. The Company has experienced a change in earning
asset mix with loans becoming a smaller percentage of total earning
assets. However, management sees this as a temporary situation that
will change as new market expansions develop and those loan portfolios
are grown.
PROVISION FOR LOAN LOSSES
During 1998 the Company's provision decreased to $1.965 million
from $2.062 million in 1997 and $1.233 million in 1996. The 1997
additional provision was needed as net charge-offs expanded by $284
thousand over 1996. The 1998 loan loss accrual reflected a leveling out
as loan quality stabilized. Management has taken a conservative
approach to classifying loans internally for purposes of determining
needed reserves. The reserve as a percentage of total loans was 1.41%
at the end of 1998 and 1997.
NONINTEREST INCOME
Noninterest income for 1998 was $5.501 million as compared to
$5.241 million in 1997 and $4.765 million in 1996. The 1997 amount
included an item for $530,000 related to additional reinsurance
premiums received that were due for prior years' activity. In 1998 the
Company began selling fixed annuities, and generated approximately
$107,000 in commission income. Included in other noninterest income for
1998 is approximately $402,000 in increases in cash surrender value of
insurance policies purchased by the Company in 1998. The Company also
had increased gains on the sale of investments as the interest rate
environment provided certain opportunities to realize gains on Treasury
and Agency securities and redeploy the proceeds into other investments.
NONINTEREST EXPENSE
Noninterest expense increased to $18.718 million in 1998 from
$16.416 million in 1997 and $16.063 million in 1996. This increase was
due primarily to expansion efforts in Clinton, Grenada and Southaven.
The addition of certain senior-level administrative positions and of
commercial lenders in the more urban markets put pressure on
noninterest expenses in 1998. However, management expects these
additions to be positive for the Company as it continues to grow and
expand. The Company also invested in additional computer equipment as
systems were evaluated and upgraded to allow for greater processing
speed and capacity.
<PAGE>
INCOME TAXES
The Company's effective tax rate was 24.9% in 1998, 28.8% in 1997,
and 27.4% in 1996. The 1997 increase was due to the fact that the
Company had state income tax expense for the first time in 1997. The
decrease in 1998 was due to increased investments in tax-exempt
municipal securities as well as the increase in cash surrender value of
insurance policies, which are not taxable.
YEAR 2000
Monitoring and managing the Year 2000 project has resulted in
additional direct and indirect costs. Direct costs include actual and
potential charges by third party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing
contingency plans for critical software products that are not enhanced.
Indirect costs consist primarily of employee time committed to testing
Year 2000 compliance, determining the risks associated with customer
and other third party computer systems, and the development and
implementation of contingency plans. Part of this contingency planning
relates to the assessment of risk to the Company's loan portfolio for
the contingency of customer computer failures that would disrupt their
operations and cause a failure to provide for timely collections of
their receivables and payments of their debts. The Company has gone
through one assessment cycle of its commercial customer base and will
make a second assessment in 1999.
The Company expects to incur direct and indirect costs of $50,000
to $100,000 in 1999 for software purchases and enhancements, planning,
testing, loan quality assessments, and customer education.
<PAGE>
REVOCABLE PROXY
FIRST M&F CORPORATION
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of First M&F Corporation (the "Company") hereby
appoints Hugh S. Potts, Jr., J. Marlin Ivey, Charles W. Ritter, Jr., W. C.
Shoemaker and Edward G. Woodard as Proxies, each with the power to appoint his
substitute, and hereby authorizes either of them to represent and to vote, as
designated below, all the shares of Common Stock of the Company held on record
by the undersigned on February 26, 1999, at the Annual Meeting of Stockholders
to be held at 2:00 p.m. on April 14, 1999, at the Mary Ricks Thornton Cultural
Center, 204 North Huntington Street, Kosciusko, MS 39090 or at any adjournments
thereof. The Board of Directors recommends votes FOR Proposals 1 and 2.
1. Election of Directors
Jon A. Crocker Otho E. Pettit, Jr.
Toxey Hall, III Charles W. Ritter, Jr.
J. Marlin Ivey
[ ] FOR [ ] WITHHOLD [ ] FOR ALL EXCEPT
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
2. Proposal to adopt a Stock Option Plan.
[ ] FOR [ ]AGAINST [ ] ABSTAIN
This proxy will be voted as directed by the undersigned stockholder. UNLESS
CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2. The
Proxies are authorized, in their discretion, to vote upon such other business as
may properly come before the Annual Meeting or any adjournments thereof. The
undersigned stockholder may revoke this proxy at any time before it is voted by
delivering to the Secretary of the Company either a written revocation of the
proxy or a duly executed proxy bearing a later date, or by appearing at the
Annual Meeting and voting in person. The undersigned stockholder hereby
acknowledges receipt of the Notice of Annual Meeting and Proxy Statement.
Please be sure to sign and date this Proxy in the box below.
--------------------------
Date
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Stockholder sign above
-------------------------------------------
Co-holder (if any) sign above
*Sign your name exactly as it appears above.
Detach above card, sign, date and mail in postage paid envelope provided.
FIRST M&F CORPORATION
If you receive more than one proxy card, please sign and return all cards
in the accompanying envelope. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized
person.
PLEASE ACT PROMPTLY
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
