SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1997
Commission File Number O-18460
M & M FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0771433
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
307 N. Main Street
Marion, SC 29571
(Address of principal executive
offices, including zip code)
(803) 431-1000
(Registrant's telephone number, including area code)
--------------------------------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
equity as of the date of this filing.
335,372 shares of common stock, $5.00 par value
Traditional Small Business Disclosure Format: YES |X| NO |_|
<PAGE>
M & M FINANCIAL CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996................................................. 3
Condensed Consolidated Statements of Income - Three months ended
March 31, 1997 and 1996........................................... 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 1997 and 1996..................................... 5
Notes to Condensed Consolidated Financial Statements ............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. ................................... 7-11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K. .............................. 12
(a) Exhibits. ................................................. 12
(b) Reports on Form 8-K. ...................................... 12
2
<PAGE>
M & M FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 6,052,149 $ 7,022,370
Interest-bearing demand accounts with other banks 783,937 241,458
Federal funds sold 3,060,000 700,000
-------------- --------------
9,896,086 7,963,828
Time deposits with other banks 300,000 800,000
Securities held-to-maturity (estimated market
value of $3,247,812 and $3,463,852 at March 31, 1997
and December 31, 1996, respectively) 3,147,900 3,344,422
Securities available-for-sale 33,978,997 34,997,823
Loans receivable 89,141,802 80,922,947
Less allowance for loan losses (1,117,462) (1,027,355)
-------------- --------------
Loans, net 88,024,340 79,895,592
Premises, furniture & equipment, net 4,182,851 3,708,575
Accrued interest receivable 1,036,748 1,207,411
Other assets 2,953,456 1,996,546
-------------- --------------
Total assets $ 143,520,378 $ 133,914,197
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits:
Non-interest bearing $ 17,384,332 $ 17,925,223
Interest bearing 91,635,874 89,547,783
-------------- --------------
109,020,206 107,473,006
Short-term borrowings 1,077,614 549,095
Securities sold under agreements to repurchase 10,935,781 8,534,279
Borrowings from the Federal Home Loan Bank 10,000,000 5,000,000
Accrued interest and other liabilities 1,504,265 1,536,105
-------------- --------------
Total liabilities 132,537,866 123,092,485
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value, 800,000 shares
authorized, 335,372 shares issued and outstanding
at March 31, 1997 and December 31, 1996, respectively 1,676,860 1,676,860
Surplus 2,483,783 2,483,783
Unrealized gain (loss) on securities
available-for-sale, net of deferred taxes (61,462) 140,568
Retained earnings 6,883,331 6,520,501
-------------- --------------
Total stockholders' equity 10,982,512 10,821,712
-------------- --------------
Total liabilities and stockholders' equity $ 143,520,378 $ 133,914,197
============== ==============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
M & M FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
--------------------------
1997 1996
------------ ------------
Interest income:
Loans, including fees $ 2,085,068 $ 1,519,080
Securities, taxable 521,931 489,574
Securities, tax-exempt 64,391 81,332
Other interest income 41,755 130,659
------------ ------------
2,713,145 2,220,645
------------ ------------
Interest expense:
Deposit accounts 951,404 889,487
Borrowings from the Federal Home Loan Bank 109,167 -
Short-term borrowings 127,880 132,961
------------ ------------
1,188,451 1,022,448
------------ ------------
Net interest income 1,524,694 1,198,197
Provision for loan losses 84,000 45,000
------------ ------------
Net interest income after provision for loan losses 1,440,694 1,153,197
------------ ------------
Other operating income:
Service charges on deposit accounts 190,129 170,037
Other charges, commissions and fees 196,889 190,120
------------ ------------
387,018 360,157
------------ ------------
Other operating expenses:
Salaries and benefits 739,179 698,121
Net occupancy expense 191,653 191,637
Other operating expenses 369,498 285,718
------------ ------------
1,300,330 1,175,476
------------ ------------
Income before taxes 527,382 337,878
Income tax provision 164,552 81,100
------------ ------------
Net income $ 362,830 $ 256,778
============ ============
Net income per common share $ 1.08 $ .77
============ ============
Weighted average common
shares outstanding 335,372 335,372
============ ============
See notes to condensed consolidated financial statements
4
<PAGE>
M & M FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 362,830 $ 256,778
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 101,837 97,680
Provision for loan losses 84,000 45,000
Other, net 37,900 141,181
------------- -------------
Net cash provided by operating activities 586,567 540,639
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans to customers (8,212,748) (4,611,385)
Purchases of securities available-for-sale (593,285) (2,001,875)
Maturities of securities available-for-sale 1,288,581 2,368,083
Maturities of securities held-to-maturity 193,403 500,000
Purchase of Federal Home Loan Bank stock (735,300) -
Net (increase) decrease in time deposits
with other banks 500,000 (500,000)
Purchases of premises and equipment (572,181) (35,909)
------------- -------------
Net cash used by investing activities (8,131,530) (4,281,086)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits accounts 1,547,200 2,245,421
Advances from Federal Home Loan Bank 5,000,000 -
Increase in short-term borrowings 528,519 50,436
Increase in repurchase agreements 2,401,502 287,076
------------- -------------
Net cash provided by financing activities 9,477,221 2,582,933
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,932,258 (1,157,514)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,963,828 9,348,244
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,896,086 $ 8,190,730
============= =============
Cash paid during the period for:
Income taxes $ 140,494 $ 31,000
Interest $ 1,434,224 $ 1,067,385
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the requirements for interim financial statements and,
accordingly, they are condensed and omit disclosures which would substantially
duplicate those contained in the most recent annual report to stockholders. The
financial statements as of March 31, 1997 and for the interim periods ended
March 31, 1997 and 1996 are unaudited and, in the opinion of management, include
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation. The financial information as of December 31, 1996 has
been derived from the audited financial statements as of that date. For further
information, please refer to the financial statements and the notes included in
the Company's 1996 Annual Report.
Note 2 - Borrowings from the Federal Home Loan Bank
For the three months ended March 31, 1997, the Company had short-term, fixed
rate advances of $10,000,000 on its $10,000,000 credit availability line with
the Federal Home Loan Bank of Atlanta. As collateral, the Bank has pledged first
mortgage loans on one to four family residential properties and $1,600,000 of
debt securities. In addition, the Bank's Federal Home Loan Bank stock, which is
included in other assets, is pledged to secure the borrowings.
Note 3 - Stockholders' Equity
On April 17, 1997, the stockholders approved an increase in the number of
authorized shares outstanding from 800,000 shares to 3,000,000 shares. On May 5,
1997, the Company's Board of Directors approved a $.35 per share, or $117,380,
cash dividend to all stockholders as of May 5, 1997, payable June 2, 1997. The
Board of Directors also approved a 200% stock split effected in the form of a
dividend for all stockholders as of June 2, 1997, payable July 1, 1997.
Note 4 - Stock Compensation Plan
Effective April 17, 1997, the Company, upon receiving stockholder approval,
adopted an Incentive Stock Option Plan which provides for the granting of
options to purchase up to 26,000 shares of the Company's common stock, adjusted
for changes in capital structure, to officers and employees of the Company. The
per share exercise price of an option may not be less than the fair market value
of a share of common stock on the date the option is granted. Participants
become vested in options granted based on the participants' years of service to
the Company. At no time shall an option be exercised more than ten years from
the date of grant. Options that expire unexercised or are cancelled become
available for issuance. The Company has granted 18,000 options pursuant to the
terms of the Incentive Stock Option Plan.
Note 5 - Subsequent Events
The Company has received regulatory approval for its banking subsidiary to open
a branch on its lot in Florence, South Carolina, which was purchased February
28, 1997 for $441,000. The Company does not have any commitments for the
construction of the building.
6
<PAGE>
M & M FINANCIAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
The following is a discussion of the Company's financial condition at March 31,
1997 compared to December 31, 1996, and the results of operations for the three
months ended March 31, 1997 compared to the three months ended March 31, 1996.
These comments should be read in conjunction with the Company's condensed
consolidated financial statements and accompanying footnotes appearing in this
report.
Results of Operations
Net Interest Income
For the quarter ended March 31, 1997, net interest income increased $326,497, or
27.25%, over the first quarter of 1996. The improvement in the three-month
period ended March 31, 1997, is related to an increase in both the volume of and
yields on interest-earning assets due to an increase in the percentage of loans
to total earning assets. For the three months ended March 31, 1997, average
loans comprised 68% of earning assets compared to 57% for the same period of
1996. The improvement in interest income is partially offset by the increase in
interest paid on interest-bearing liability accounts due to a $16,545,798
increase in the average volume. The increase in the volume of both assets and
liabilities was attributable to management's ability to strengthen its influence
in the Company's market area and the Company's emphasis on growth.
Interest expense on liability accounts increased 16.24% for the quarter ended
March 31, 1997, compared to the three months ended March 31, 1996, due mainly to
an increase in borrowed funds, particularly borrowings from the Federal Home
Loan Bank. Interest expense on borrowings from the Federal Home Loan Bank for
the quarter ended March 31, 1997 was $109,167 compared to $0 for the quarter
ended March 31, 1996.
The influence of the factors above had the effect of increasing the interest
rate spread 56 basis points to 4.26% and increasing the net yield on earning
assets 45 basis point to 4.87% for the three-month period ended March 31, 1997.
Provision and Allowance for Loan Losses
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the allowance for possible loan losses
at an adequate level. For the quarter ended March 31, 1997, the provision was
$84,000, an increase of $39,000, from the comparable 1996 period. The increase
does not reflect a negative trend in nonperforming or classified assets but is
indicative of management's decision to maintain a target ratio of the allowance
for loan losses to total loans. Based on present information, management
believes the allowance for loan losses is adequate at March 31, 1997 to meet
presently known and inherent risks in the loan portfolio.
7
<PAGE>
M & M FINANCIAL CORPORATION
Non-Interest Income
Total non-interest income during the three months ended March 31, 1997 was
$387,018, an increase of $26,861, or 7.46%, from the comparable period in 1996.
The increase is due primarily to increased income from service charges on
deposit accounts due to changes in the fee structures on overdrawn accounts and
checks drawn on nonsufficient funds.
Non-Interest Expense
Total non-interest expense for the three months ended March 31, 1997 was
$1,300,330, an increase of 10.62% compared to the three months ended March 31,
1996.
The increase in non-interest expense is attributable mainly to the continuing
growth of the Company. The primary component of non-interest expense is salaries
and benefits which increased to $739,179 in 1997 from $698,121 in 1996, an
increase of $41,058. In addition, marketing expenses increased $20,177, or 64%,
from the comparable quarter in 1996.
Income Taxes
The income tax provision for the three months ended March 31, 1997, was $164,552
compared to $81,100 for the comparable 1996 period. For the quarter ended March
31, 1997, the effective income tax rate was approximately 31% compared to 24%
for the same period in 1996.
Net Income
The combination of the above factors resulted in net income for the three months
ended March 31, 1997 of $362,830 or $1.08 per share as compared to $256,778 or
$.77 per share for the three months ended March 31, 1996.
Assets and Liabilities
During the first three months of 1997, total assets grew $9,606,181, or 7.17%,
when compared to December 31, 1996. A large percentage of the growth was
attributable to the growth in loans which increased to $89,141,802 as of March
31, 1997 from $80,922,947 as of December 31, 1996. The increase in total assets
was substantially funded by increases in all categories of interest-bearing
liabilities with the $5,000,000 increase in borrowings from the Federal Home
Loan Bank being the most substantial change.
Investment Securities
Investment securities decreased by $1,215,348 since December 31, 1996, which is
in accordance with management's efforts to shift investable funds to loans,
which traditionally have higher yields.
Loans
In order to improve earnings and shift investable funds to loans, the Board of
Directors has recommended an increase in the loan-to-deposit ratio to 85% from
80%. Additionally, management has emphasized its commitment to loan growth and
the recommendations of the Board by hiring several experienced loan officers
within the past year.
8
<PAGE>
M & M FINANCIAL CORPORATION
Management believes that commercial loan demand will remain strong in Horry and
Florence Counties for the foreseeable future. Construction and tourism
activities are increasing in the Horry County market. Management evaluates
consumer loan demand in Horry, Florence, and Marion County markets as being
essentially flat. Balances within the major loan receivable categories as of
March 31, 1997 and December 31, 1996 are as follows:
March 31, December 31,
1997 1996
------------- --------------
Commercial and agricultural $ 57,263,446 $ 55,300,370
Real estate - construction 4,684,274 3,296,039
Consumer and other 27,194,082 22,326,538
------------- --------------
$ 89,141,802 $ 80,922,947
============= ==============
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
March 31, December 31,
1997 1996
------------- --------------
Loans:
Nonaccrual loans $ 633,000 $ 710,834
Accruing loans more than 90
days past due $ 9,000 $ 11,916
Loans identified by the internal
review mechanism:
Criticized $ 2,409,000 $ 1,751,459
Classified $ 1,890,000 $ 2,314,980
Activity in the Allowance for Loan Losses
is as follows:
March 31,
------------------------------
1997 1996
------------- --------------
Balance, January 1, $ 1,027,355 $ 818,637
Provision for loan losses for the period 84,000 45,000
Net loans (charged off) recovered for
the period 6,107 16,933
------------- --------------
Balance, end of period $ 1,117,462 $ 880,570
============= ==============
Gross loans outstanding, end of period $ 89,126,802 $ 65,972,522
Allowance for Loan Losses to loans outstanding 1.25% 1.35%
9
<PAGE>
M & M FINANCIAL CORPORATION
Deposits
Total deposits increased $1,547,200 or 1.44% from December 31, 1996. Expressed
in percentages, noninterest-bearing deposits decreased 3.02% and
interest-bearing deposits increased 2.33%.
Balances within the major deposit categories as of March 31, 1997 and December
31, 1996 are as follows:
March 31, December 31,
1997 1996
------------- --------------
Non-interest bearing demand deposits $ 17,384,332 $ 17,925,223
Interest bearing demand deposits 24,527,150 23,412,310
Savings deposits 16,283,660 15,164,905
Certificates of deposit 50,825,064 50,970,568
------------- --------------
$ 109,020,206 $ 107,473,006
============= ==============
Liquidity
Funding loans and deposit withdrawals utilizes the Company's liquidity. The
level of liquidity is measured by the loan-to-total borrowed funds ratio, which
was 67.18% at March 31, 1997 and 65.73% at December 31, 1996. Liquidity needs
are met by the Company through scheduled maturities of loans and investments,
borrowings, and through pricing policies for interest-bearing deposit accounts.
Management believes the Company's liquidity is adequate to meet the expected
strong loan demand in its marketplace.
Maturities and sales of securities are a ready source of liquidity. The Company
has a $10,000,000 line of credit with the Federal Home Loan Bank of Atlanta. As
of March 31, 1997, the Company has borrowed the full $10,000,000 on this line of
credit. The Company also has $8,500,000 of unused lines of credit with
correspondent banks to purchase federal funds. As a secondary source of
liquidity, the Company has securities available for sale with a carrying value
of $33,978,997 as of March 31, 1997.
Capital Resources
Total stockholders' equity increased $160,800 to $10,982,512 since December
31,1996. The increase is due to earnings for the period ended March 31, 1997 of
$362,830 and a negative net change of $202,030 in the fair value of securities
available-for-sale.
The Bank subsidiary of the Company is required by banking regulators to meet
certain minimum levels of capital adequacy. These are expressed in the form of
certain ratios. Capital is separated into Tier I capital (essentially common
stockholders' equity less intangible assets) and Tier II capital (essentially
the allowance for loan losses limited to 1.25% of risk-weighted assets). The
first two ratios, which are based on the degree of credit risk in the Bank's
assets, provide the weighting of assets based on assigned risk factors and
include off-balance sheet items such as loan commitments and stand-by letters of
credit. The ratio of Tier I capital to risk-weighted assets must be at least
4.0% and the ratio of total capital (Tier I capital plus Tier 2 capital) to
risk-weighted assets must be at least 8.0%. The capital leverage ratio
supplements the risk-based capital guidelines. The Bank is required to maintain
a minimum ratio of Tier I capital to adjusted quarterly average total assets of
3.0%.
10
<PAGE>
M & M FINANCIAL CORPORATION
The following table summarizes the Bank's risk-based capital at March 31, 1997:
Risk based capital ratios:
Tier I 11.01%
Total capital 12.14%
Leverage ratio 7.51%
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies with less
than $150,000,000 in consolidated assets.
Regulatory Matters
The management of the Company is not aware of any current recommendations by
regulatory authorities which, if they were to be implemented, would have a
material effect on liquidity, capital resources, or operations.
Accounting Rule Changes
During the first quarter of 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share", which addresses the computation,
presentation, and disclosure requirements for earnings per share by entities
with publicly held common stock. Statement No. 128 is effective for both interim
and annual periods ending after December 15, 1997.
11
<PAGE>
M & M FINANCIAL CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, the Company did not file
any reports on Form 8-k.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
M & M FINANCIAL CORPORATION
Date: May 14, 1997 By: /s/
-----------------------------------------
Chester A. Duke
President & Chief Executive Officer
Date: May 14, 1997 By: /s/
-----------------------------------------
Marion E. Freeman
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,836,086
<INT-BEARING-DEPOSITS> 300,000
<FED-FUNDS-SOLD> 3,060,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,978,997
<INVESTMENTS-CARRYING> 3,147,900
<INVESTMENTS-MARKET> 3,347,812
<LOANS> 89,141,802
<ALLOWANCE> 1,117,462
<TOTAL-ASSETS> 143,520,378
<DEPOSITS> 109,020,206
<SHORT-TERM> 22,013,395
<LIABILITIES-OTHER> 1,504,265
<LONG-TERM> 0
0
0
<COMMON> 1,676,860
<OTHER-SE> 9,305,652
<TOTAL-LIABILITIES-AND-EQUITY> 143,520,378
<INTEREST-LOAN> 2,085,068
<INTEREST-INVEST> 586,322
<INTEREST-OTHER> 41,755
<INTEREST-TOTAL> 2,713,145
<INTEREST-DEPOSIT> 951,404
<INTEREST-EXPENSE> 1,188,451
<INTEREST-INCOME-NET> 1,524,694
<LOAN-LOSSES> 84,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,300,330
<INCOME-PRETAX> 527,382
<INCOME-PRE-EXTRAORDINARY> 527,382
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,830
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 4.87
<LOANS-NON> 633,000
<LOANS-PAST> 9,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,890,000
<ALLOWANCE-OPEN> 1,027,355
<CHARGE-OFFS> 0
<RECOVERIES> 6,107
<ALLOWANCE-CLOSE> 1,117,462
<ALLOWANCE-DOMESTIC> 1,117,462
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
