Item 1 Business Item 1A
Item 1A Risk Factors 11 Item 1B
Item 1B Unresolved Staff Comments 13 Item 2
Item 2 Properties 13 Item 3
Item 3 Legal Proceedings 13 Item 4
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Item 5
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 14 Item 6
Item 6 Selected Financial Data 16 Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A
Item 7A Quantitative and Qualitative Disclosures About Market Risk 28 Item 8
Item 8 Financial Statements and Supplementary Data 30 Item 9
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 62 Item 9A
Item 9A Controls and Procedures 62 Item 9B
Item 9B Other Information 62
PART III
Item 10
Item 10 Directors and Executive Officers of the Registrant 63 Item 11
Item 11 Executive Compensation 63 Item 12
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 63 Item 13
Item 13 Certain Relationships and Related Transactions 63 Item 14
Item 14 Principal Accounting Fees and Services 63
PART IV
Item 15
Item 15 Exhibits, Financial Statement Schedules 63 --------------
*Information called for by Part III (Items 10 through 14) is incorporated by reference to the Registrant’s Proxy Statement.
FIRST M&F CORPORATION AND SUBSIDIARY
PART I
BUSINESS
General
First M&F Corporation (the Company) is a one-bank holding company chartered and organized under Mississippi laws in 1979. The Company engages exclusively in the banking business through its wholly-owned subsidiary, Merchants and Farmers Bank of Kosciusko (the Bank).
The Bank was chartered and organized under the laws of the State of Mississippi in 1890, and accounts for substantially all of the total assets and revenues of the Company. The Bank is the sixth largest bank in the state, having total assets of approximately $1.264 billion at December 31, 2005. The Bank offers a complete range of commercial and consumer services at its main office and two branches in Kosciusko and its branches within central and north Mississippi, including Ackerman, Bruce, Brandon, Canton, Cleveland, Clinton, Durant, Flowood, Grenada, Jackson, Madison, Olive Branch, Oxford, Pearl, Philadelphia, Ridgeland, Southaven, Starkville, and Tupelo, Mississippi, and a loan production office in Memphis, Tennessee.
The Bank has six wholly-owned subsidiaries, M&F Financial Services, Inc., which is currently inactive, First M&F Insurance Company, Inc., a credit life insurance company, M&F Insurance Agency, Inc., a general insurance agency, M&F Insurance Group, Inc., a general insurance agency, Merchants and Farmers Bank Securities Corporation, a real estate property management company, and M&F Business Credit, Inc., an asset-based lending operation based in Memphis, Tennessee. The Bank owns 55% of MS Statewide Title, LLC, a title insurance agency. The remaining 45% ownership is held by unaffiliated parties. Since March 1, 2000 the Bank has owned 51% of a joint venture, Merchants Financial Services, 49% of which is owned by an unaffiliated company. The joint venture engages in small business accounts receivable factoring, and has been consolidated into the Company’s financial statements for reporting purposes. Merchants Financial Services sold substantially all of its receivables to its two owners as of December 31, 2004, and was inactive at the end of 2005.
The banking system offers a variety of deposit, investment and credit products to customers. The Bank provides these services to middle market and professional businesses, ranging from business checking, treasury management services and secured and unsecured lines of credit. Additional services include ach origination, sweep accounts and letters of credit. The Bank also offers a variety of checking accounts to its customers and other services, which include debit cards and automated teller machine access through several networks, and an overdraft protection plan. Trust services are offered through the Kosciusko main office and discount brokerage services are offered through the Madison and Tupelo offices.
As of December 31, 2005, the Company and its subsidiary employed 472 full-time equivalent employees.
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
Certain of the information included in these discussions contains forward looking financial data and information that is based upon management’s belief as well as certain assumptions made by, and information currently available to management. Specifically, these discussions include statements with respect to the adequacy of the allowance for loan losses, the effect of legal proceedings against the Company’s financial condition, results of operations and liquidity, and market risk disclosures. Should one or more of these risks materialize or the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected.
FIRST M&F CORPORATION AND SUBSIDIARY
Overview
In the opinion of First M&F Corporation’s management, the Company’s most significant accomplishments during 2005 were as follows:
Facilities
o In December 2004, opened a loan production office in Memphis Tennessee which contributed 20.74% of the Company's loan growth for 2005 o In September 2005 opened a third full-service branch in Southaven o Currently constructing a new location in Madison which will house a branch facility and several fee-generating services, expected to open early in the first quarter of 2006
Revenues
o Strong debit card revenue growth in excess of 45% was an encouraging component of deposit revenues o Retail investment brokerage revenues increased by 19.2% o Property, casualty, life and health insurance commissions increased by 3.3% to $3.5 million
Products and Services
o Balances in the new eRate Plus account, designed to accommodate only electronic transactions and paying a higher rate of interest, more than tripled in 2005 o Commercial checking balances grew in excess of 20% in 2005 o Completed another successful Gridiron loan campaign, an annual loan promotion offering college season football tickets to qualifying loan customers o Loans held for investment grew by 12.08% in 2005 o Continued the expansion of the insurance agency network by placing a full-service agent in the Olive Branch banking center
In the opinion of Management, the challenges and opportunities facing the Company going forward from December 31, 2005 are as follows:
o Complete the announced acquisitions in Bells, Tennessee and Columbiana, Alabama in the first quarter of 2006 and successfully execute a sales and growth strategy in and around the Memphis and Birmingham markets o Continue branch expansion in economically strong markets o Implement a sales and service initiative in 2006 designed to improve customer satisfaction, improve customer retention, and grow market share o Continue to increase the volumes and improve the products and services delivered through the insurance agencies and focus on expanding commercial insurance delivery capabilities o Use core deposit growth as the primary funding source for lending activities o Continue to build the retail investment brokerage business by expanding coverage into new banking markets o Refocus efforts on building the treasury services business through expanded offerings and a new sales effort to reach north Mississippi and southwest Tennessee businesses o Strengthen consumer lending primarily through home equity loan promotions o Continue to seek out commercial lending opportunities in economic and industry sectors where we have expertise o Contain expenses in current operations while also focusing on expansion into new locations and markets o Promote low-cost delivery channels such as debit cards and electronic banking that are convenient to the customers
FIRST M&F CORPORATION AND SUBSIDIARY
Competition
The Company competes generally with other banking institutions, savings associations, credit unions, mortgage banking firms, consumer finance companies, mutual funds, insurance companies, securities brokerage firms, and other finance related institutions; many of which have greater resources than those available to the Company. The competition relates primarily to interest rates, the availability and quality of services and products, and the pricing of those services and products. The Company’s philosophy is that of a community bank in which personal service is of primary importance, and leverages that philosophy in competing against the larger regional financial services companies which tend to depend on their vast array of products rather than individual service.
Supervision and Regulation
As a bank holding company, First M&F Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity which is determined to be so closely related to banking or managing or controlling banks that an exception is allowed for those activities.
As a state-chartered commercial bank, Merchants and Farmers Bank, First M&F Corporation’s banking subsidiary, is subject to regulation, supervision and examination by the Mississippi Department of Banking and Consumer Finance. Merchants and Farmers Bank (the “Bank”) is also subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”). State and Federal law also govern the activities in which the Bank engages, the investments it makes and the aggregate amount of loans that may be granted to one borrower. The insurance company subsidiary of the Bank is also regulated and examined by the Insurance Department of the State of Mississippi.
The earnings of the Bank and its subsidiaries are affected by general economic conditions, management policies, changes in state and Federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and Federal laws to which the Company, the Bank and subsidiaries are subject.
Capital
The Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve Board and the FDIC. There are two basic measures of capital adequacy for bank holding companies and their banking subsidiaries; a risk-based measure and a leverage measure.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among depository institutions and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The minimum guideline for the total capital to risk-weighted assets, including certain off-balance sheet items such as standby letters of credit (“total capital ratio”) is 8.0 percent. At least half of total capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (“Tier 1 capital”). The remainder may consist of subordinated debt, other preferred stock, a limited amount of loan loss reserves, and unrealized gains on equity securities subject to limitations (“Tier 2 capital”). At December 31, 2005, the Company and the Bank were in compliance with the total capital ratio and the Tier 1 capital ratio requirements. Note 17 of the Notes to Consolidated Financial Statements presents the Company’s and the Bank’s capital ratios.
FIRST M&F CORPORATION AND SUBSIDIARY
Deposit Insurance Assessments
The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law. A majority of the deposits of the Bank are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC. However, a portion of the Bank’s deposits, relating to a savings association acquisition, are subject to assessments imposed by the Savings Association Insurance Fund (“SAIF”) of the FDIC. The FDIC equalized the assessment rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. The assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. Legislation was enacted in 1996 requiring both SAIF-insured and BIF-insured deposits to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”). The FDIC is currently assessing, effective for the first quarter of 2006, BIF- and SAIF-insured deposits totaling an additional 1.32 basis points per $100 of deposits.
Available Information
The Company maintains an internet website at www.mfbank.com. The Company makes available free of charge on the website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission. These reports are made available on the Company’s website as soon as reasonably practical after the reports are filed with the Commission. Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not a part of them.
FIRST M&F CORPORATION AND SUBSIDIARY
STATISTICAL DISCLOSURE
The statistical disclosures for the Company are contained in Tables 1 through 12.
Table 1 ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS/YIELDS ------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 (Dollars in thousands) Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------------ ---------- -------- ----------- ---------- ------- ----------- ---------- ------- Interest-bearing bank balances $ 4,717 $ 214 4.54% $ 5,747 $ 98 1.71% $ 7,451 $ 108 1.45% Federal funds sold 7,566 194 2.56 11,449 113 .99 16,690 192 1.15 Taxable investments 139,753 5,797 4.15 131,105 5,439 4.15 152,447 6,653 4.36 Tax-exempt investments 50,314 3,228 6.42 53,500 3,528 6.59 54,980 3,793 6.90 Loans 893,317 59,521 6.66 805,977 50,515 6.27 734,240 48,904 6.66 ------------ ---------- -------- ----------- ---------- ------- ----------- ---------- ------- Total earning assets 1,095,667 68,954 6.29 1,007,778 59,693 5.92 965,808 59,650 6.18 Nonearning assets 113,387 102,411 96,129 ------------ ----------- ----------- Total average assets $1,209,054 $1,110,189 $1,061,937 ============ =========== ===========
NOW & MMDA 330,556 4,618 1.40 280,291 1,913 .68 291,723 2,786 .96 Savings deposits 84,282 1,523 1.81 86,758 1,180 1.36 90,305 1,434 1.59 Certificates of deposit 394,344 11,587 2.94 359,318 8,643 2.41 345,849 9,179 2.65 Short-term borrowings 19,056 776 4.07 20,839 664 3.19 18,757 608 3.24 Other borrowings 117,088 4,680 4.00 118,597 4,650 3.92 87,579 3,850 4.40 ------------ ---------- -------- ----------- ---------- ------- ----------- ---------- ------- Total interest-bearing 945,336 23,184 2.45 865,803 17,050 1.97 834,213 17,857 2.14 liabilities Noninterest-bearing deposits 140,036 123,773 107,493 Noninterest-bearing 7,959 8,618 9,323 liabilities Capital 115,723 111,995 110,908 ------------ ----------- ----------- Total avg. liabilities & $1,209,054 $1,110,189 $1,061,937 equity ============ ---------- -------- =========== ---------- ------- =========== ---------- ------- Net interest margin 45,770 4.18 42,643 4.23 41,793 4.33 Less tax equivalent adjustment Investments 1,204 .11 1,316 .13 1,415 .15 Loans 78 .01 88 .01 98 .01 ---------- -------- ---------- ------- ---------- ------- Reported book net interest $ 44,488 4.06% $ 41,239 4.09% $ 40,061 4.17% margin ========== ======== ========== ======= ========== =======
Tax equivalent adjustments were made using a blended Federal/State rate of 37.3%
Table 2 ------------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME VARIANCES ------------------------------------------------------------------------------------------------------------------------------------
005 Compared To 2004 2004 Compared To 2003 ------------------------------------------- -------------------------------------------- (Dollars in thousands) Increase (Decrease) Due To Increase (Decrease) Due To ------------------------------------------- -------------------------------------------- Yield/ Yield/ Volume Cost Net Volume Cost Net ------------ ------------- ---------- ----------- ------------- ------------ Interest earned on: Interest-bearing bank balances $ (32) $ 148 $ 116 $ (27) $ 17 $ (10) Federal funds sold (69) 150 81 (56) (23) (79) Taxable investments 358 - 358 (908) (306) (1,214) Tax-exempt investments (207) (93) (300) (100) (165) (265) Loans 5,647 3,359 9,006 4,637 (3,026) 1,611 ------------ ------------- ---------- ----------- ------------- ------------ Total earning assets 5,369 3,892 9,261 2,539 (2,496) 43
Interest paid on: NOW & MMDA 523 2,182 2,705 (94) (779) (873) Savings deposits (39) 382 343 (52) (202) (254) Certificates of deposit 936 2,008 2,944 341 (877) (536) Short-term borrowings (65) 177 112 67 (11) 56 Other borrowings (60) 90 30 1,290 (490) 800 ------------ ------------- ---------- ----------- ------------- ------------ Total interest-bearing liabilities 1,758 4,376 6,134 649 (1,456) (807) ------------ ------------- ---------- ----------- ------------- ------------ Change in net interest income on a tax-equivalent basis $ 3,611 $ (484) $3,127 $ 1,890 $ (1,040) $ 850 ============ ============= ========== =========== ============= ============
The rate/volume variances are computed for each line item and are therefore non-additive.
FIRST M&F CORPORATION AND SUBSIDIARY
Table 3 -------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE -------------------------------------------------------------------------------------------------------------------------------
Carrying Value of Securities ------------------------------------------------------------ (Dollars in thousands) December 31 -------------------- 2005 2004 2003 ------------- -------------------- ------------- Securities Available For Sale U. S. Treasury $ 3,963 $ 550 $ 560 Government agencies 69,068 61,796 69,794 Mortgage-backed securities 49,504 47,397 51,526 Obligations of states and political subdivisions 52,874 56,089 60,071 Other securities 9,662 9,822 5,626 ------------- -------------------- ------------- Total securities available for sale $185,071 $175,654 $187,577 ============= ==================== =============
Amortized Cost of Securities ------------------------------------------------------------ December 31 -------------------- 2005 2004 2003 ------------- -------------------- ------------- Securities Available For Sale U. S. Treasury $ 3,993 $ 528 $ 532 Government agencies 69,888 61,564 67,954 Mortgage-backed securities 50,128 46,718 49,986 Obligations of states and political subdivisions 52,549 54,274 57,503 Other securities 9,684 9,724 5,400 ------------- -------------------- ------------- Total securities available for sale $186,242 $172,808 $181,375 ============= ==================== =============
Table 4 ------------------------------------------------------------------------------------------------------------------------------------
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE ------------------------------------------------------------------------------------------------------------------------------------
After One Within But Within After Five (Dollars in thousands) One Five But Within Over Year Yield Years Yield Ten Years Yield Ten Years Yield Total Yield --------- ------- ---------- ------- ----------- ------- ---------- ------ ---------- ------- Securities Available For Sale U.S. Treasury $ - -% $ 3,993 4.14% $ - -% $ - -% $ 3,993 4.14% Government agencies 12,997 4.34 56,381 4.18 510 5.66 - - 69,888 4.22 Mortgage-backed securities 14,521 4.78 30,993 4.84 2,341 4.73 2,273 5.19 50,128 4.83 Obligations of states and political subdivisions 8,552 7.00 38,479 6.46 5,290 5.68 228 6.08 52,549 6.47 Other debt securities 551 7.08 7,093 5.27 - - 1,000 5.47 8,644 5.41 --------- ------- ---------- ------- ----------- ------- ---------- ------ ---------- ------- Total securities available for sale $36,621 5.18% $136,939 5.03% $ 8,141 5.41% $ 3,501 5.33% $185,202 5.08% Equity securities 1,040 ---------- $186,242 ==========
Tax equivalent adjustments were made using a blended Federal rate of 34.0% and a State rate of 5.0%. The amounts shown represent the investment portfolio as stated at amortized cost.
Non mortgage-backed securities are categorized in the earlier of their maturity dates or call dates. Mortgage-backed securities are distributed based upon their estimated average lives.
FIRST M&F CORPORATION AND SUBSIDIARY
Table 5 ------------------------------------------------------------------------------------------------------------------------------------
COMPOSITION OF THE LOAN PORTFOLIO ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in 2005 2004 2003 2002 2001 thousand) --------- ---------- --------- --------- ---------- % Of % Of % Of % Of % Of Held For Investment Amount Total Amount Total Amount Total Amount Total Amount Total --------- --------- ---------- --------- --------- ---------- --------- --------- ---------- --------- Commercial, financial and agricultural $151,598 16.25% $ 128,735 15.46% $109,558 14.24% $ 90,332 13.54% $ 81,822 12.64% Non-residential real Estate 462,819 49.60 369,100 44.34 339,547 44.15 262,141 39.30 234,950 36.29 Residential real Estate 274,333 29.40 284,823 34.21 263,450 34.25 241,861 36.26 242,288 37.42 Consumer loans 41,458 4.44 46,677 5.61 53,716 6.98 68,819 10.32 84,171 13.00 Other loans 2,872 .31 3,151 .38 2,885 .38 3,836 .58 4,219 .64 Lease financing - - - - - - 9 0.00 33 0.01 --------- --------- ---------- --------- --------- ---------- --------- --------- ---------- --------- Total loans $933,080 100.00% $ 832,486 100.00% $769,156 100.00% $666,999 100.00% $647,482 100.00% ========= ========= ========== ========= ========= ========== ========= ========= ========== =========
Loans held for sale $ 5,704 $ 12,236 $ 12,165 $ 11,747 $ 13,800 ========= ========= ========== ========= ========= ========== ========= ========= ========== =========
Table 6 ------------------------------------------------------------------------------------------------------------------------------------
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES ------------------------------------------------------------------------------------------------------------------------------------
Maturity distribution of loans at December 31, 2005
(Dollars in thousands) Within One to Five After Five One Year Years Years Total -------------- --------------- ------------- ------------- Commercial, financial and agricultural $ 85,462 $ 63,354 $ 2,782 $151,598 Non-residential real estate 141,415 280,400 41,004 462,819 Residential real estate 41,781 174,275 58,277 274,333 Consumer loans 11,068 30,204 186 41,458 Other loans 223 937 1,712 2,872 -------------- --------------- ------------- ------------- Total loans $279,949 $549,170 $103,961 $933,080 ============== =============== ============= =============
Rate sensitivity of loans at December 31, 2005
One to Five After Five Years Years Total -------------- --------------- ------------- Fixed rate loans $483,603 $ 71,387 $554,990 Floating rate loans 65,567 32,574 98,141 -------------- --------------- ------------- $549,170 $103,961 $653,131 ============== =============== =============
Table 7 ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2005 2004 2003 2002 2001 ----------- ----------- ------------ ------------ ------------ Nonaccrual loans $1,403 $3,302 $4,517 $1,582 $1,825 Restructured loans - - - - - ----------- ----------- ------------ ------------ ------------ Total nonperforming loans 1,403 3,302 4,517 1,582 1,825 Other real estate owned 3,042 3,314 1,282 1,430 1,757 ----------- ----------- ------------ ------------ ------------ Total nonperforming assets 4,445 6,616 5,799 3,012 3,582 Accruing loans past due 90 days or more 510 645 1,531 2,169 1,958 ----------- ----------- ------------ ------------ ------------ Total nonperforming assets and loans $4,955 $7,261 $7,330 $5,181 $5,540 =========== =========== ============ ============ ============
FIRST M&F CORPORATION AND SUBSIDIARY
Table 8 ------------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) 2005 2004 2003 2002 2001 ------------- ------------ ----------- ----------- ----------- Balance at beginning of year $11,619 $10,891 $10,258 $ 8,426 $ 8,510 Charge offs: Commercial, financial and agricultural (1,141) (3,832) (721) (650) (2,313) Real estate - nonresidential (182) (312) (318) (332) (301) Real estate - residential (464) (289) (1,120) (474) (507) Consumer (1,286) (1,193) (1,516) (1,849) (2,167) ------------- ------------ ----------- ----------- ----------- Total (3,073) (5,626) (3,675) (3,305) (5,288) Recoveries: Commercial, financial and agricultural 101 190 85 82 74 Real estate - nonresidential 49 24 56 37 20 Real estate - residential 152 445 27 6 50 Consumer 455 344 338 517 645 ------------- ------------ ----------- ----------- ----------- Total 757 1,003 506 642 789 ------------- ------------ ----------- ----------- ----------- Net charge-offs (2,316) (4,623) (3,169) (2,663) (4,499) Provision for loan losses 3,146 5,351 3,802 4,495 4,415 ------------- ------------ ----------- ----------- ----------- Balance at end of year $12,449 $11,619 $10,891 $10,258 $ 8,426 ============= ============ =========== =========== ===========
Net Charge-Offs To Average Loans 0.26% 0.58% 0.43% 0.40% 0.69% ============= ============ =========== =========== ===========
Table 9 ------------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES ------------------------------------------------------------------------------------------------------------------------------------
December 31 -------------------------------------------------------------------------- (Dollars in thousands) 2005 2004 2003 2002 2001 ------------ ------------ ----------- ----------- ----------- Commercial, financial and agricultural $ 5,642 $ 5,224 $ 4,833 $ 3,804 $2,380 Non-residential real estate 695 574 317 322 411 Residential real estate 1,351 1,241 330 1,048 1,102 Consumer loans 4,761 4,581 5,411 5,084 4,532 ------------ ------------ ----------- ----------- ----------- Total loans $12,449 $11,619 $10,891 $10,258 $8,426 ============ ============ =========== =========== ===========
Allowance As A Percentage Of Loan Type December 31 -------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------ ------------ ----------- ----------- ----------- Commercial, financial and agricultural 3.65% 3.96% 4.30% 4.04% 2.77% Non-residential real estate 0.15 0.16 0.09 0.12 0.18 Residential real estate 0.49 0.44 0.13 0.43 0.45 Consumer loans 11.48 9.81 10.07 7.39 5.38 ------------ ------------ ----------- ----------- ----------- Total loans 1.33% 1.40% 1.42% 1.54% 1.30% ============ ============ =========== =========== ===========
Net Charge-Offs As A Percent Of Year End Loans Outstanding, By Type December 31 -------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------ ------------ ----------- ----------- ----------- Commercial, financial and agricultural .67% 2.76% 0.57% .60% 2.60% Non-residential real estate 0.03 0.08 0.08 0.11 0.12 Residential real estate 0.11 (0.05) 0.41 0.19 0.19 Consumer loans 2.00 1.82 2.19 1.94 1.81 ------------ ------------ ----------- ----------- ----------- Total loans 0.25% 0.56% 0.41% 0.40% 0.69% ============ ============ =========== =========== ===========
Table 10 ------------------------------------------------------------------------------------------------------------------------------------
TIME DEPOSITS OF $100,000 OR MORE ------------------------------------------------------------------------------------------------------------------------------------
The table below shows maturities of outstanding time deposits of $100,000 or more at December 31, 2005 (in thousands):
Three months or less $ 51,621 Over three months through six months 26,501 Over six months through twelve months 35,799 Over one year 59,453 ------------------------------ Total $173,374 ==============================
FIRST M&F CORPORATION AND SUBSIDIARY
Table 11 ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS ------------------------------------------------------------------------------------------------------------------------------------
The following table reflects ratios for the Company for the last three years:
2005 2004 2003 ------------------ ------------------ ------------------ Return on average assets 1.04% .97% 1.03% Return on average equity 10.88 9.62 9.82 Dividend payout ratio 36.79 42.19 42.37 Average equity to assets ratio 9.57 10.09 10.44
Table 12 ------------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS ------------------------------------------------------------------------------------------------------------------------------------
The table below presents certain information regarding the Company's short-term borrowings for each of the last three years (in thousands):
2005 2004 2003 -------------- ------------- -------------- Securities sold under agreements to repurchase Outstanding at end of period $18,062 $16,808 $15,205 Maximum outstanding at any month-end during the period 18,062 18,872 22,859 Average outstanding during the period 14,875 15,428 16,984 Interest paid 619 557 584 Weighted average rate during each period 4.16% 3.61% 3.44%
Federal funds purchased Outstanding at end of period $ - $ - $ - Maximum outstanding at any month-end during the period 17,400 31,900 8,600 Average outstanding during the period 4,181 5,411 1,773 Interest paid 157 107 24 Weighted average rate during each period 3.77% 1.97% 1.36%
RISK FACTORS
The Company faces various risks that are inherent to our business such as credit, legal, market, operational, liquidity and regulatory risks. The following factors could affect the performance and operating results of the Company and its subsidiary.
The Company may be vulnerable to certain sectors of the economy.
If the economy deteriorated and real estate values became depressed, the approximately 79% of the Company's loan portfolio that is secured by real estate could come under stress, thus possibly requiring additional loan loss accruals. The Company may not be able to dispose of its foreclosed real estate at prices above the properties' carrying values, thus causing additional losses.
General economic conditions may adversely affect our customers' ability to meet their obligations.
A severe slowing of the economy may affect the ability of the Company's customers to make timely loan payments, or may cause customers to use up deposit balances, thereby causing a strain on the Company's liquidity.
The Company is subject to interest rate risk.
A much steeper than anticipated increase in interest rates or a steep decline in those rates over a short period of time could cause the Company's net interest margins to decrease, thereby decreasing net interest revenues.
Certain changes in interest rates, inflation, or the financial markets could affect demand for the Company's products and the Company's ability to deliver products efficiently.
Mortgage originations, and therefore mortgage revenues, would be hurt by steeply rising interest rates. A poor stock market could reduce brokerage transactions, therefore reducing investment brokerage revenues. An unanticipated increase in inflation could cause the Company's operating costs related to salaries, technology, supplies and property taxes to increase.
FIRST M&F CORPORATION AND SUBSIDIARY
The Company is subject to various litigation risks
Unfavorable judgments in excess of accrued liabilities related to ongoing litigation may result in additional expenses.
Weather-related and other natural disasters could affect the Company's ability to operate as well as the revenues of the insurance agencies.
Natural disasters could interrupt the ability of the Company to conduct business and could restrict our customer's ability to generate cash flows, causing loan losses and losses of revenues. Unanticipated catastrophic loss claims could occur that would reduce or eliminate the profit sharing revenues of the insurance agencies. Such claims may also affect the availability of insurance products for certain classes of customers, thereby reducing commission revenues available to the agencies.
The Company is subject to competition from various sources.
Unforeseen new competition from outside the traditional financial services industry could constrain the Company's ability to price its products profitably.
The projected benefit obligations of the Company's pension plan exceed the fair market value of its assets.
Investments in the portfolio of the Company's pension plan may not provide adequate returns to fund the accumulated and projected plan obligations, thus causing higher annual plan expenses and requiring additional contributions by the Company.
The Company relies on the financial markets to provide needed capital.
The Company's stock is listed and traded on the NASDAQ National Market System. The Company depends on the liquidity of the NASDAQ market to raise equity capital. If the market should fail to operate, the Company may be severely constrained in raising capital. The Company has an analyst following, and therefore, downgrades in the Company's prospects by an analyst may cause the Company's stock price to fall and prevent the Company from being able to access the markets for additional capital.
The Company is subject to regulation by various entities.
The Company is subject to the regulations of the Securities Exchange Commission (SEC), the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Mississippi Department of Banking and Consumer Finance, and the Mississippi Department of Insurance. New regulations issued by these agencies may adversely affect the Company's ability to carry on its business activities. The Company is subject to Federal and state laws and regulations such as labor, tax and environmental laws and regulations. Changes in these laws and regulations may adversely affect the Company's operations or result in unanticipated penalties or other costs. The Company is subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. The Company may become subject to accounting rules that adversely affect the reported financial position or results of operations of the Company, or that require extraordinary efforts and additional costs to implement.
The Company engages in acquisitions of other businesses.
The Company has two pending bank acquisitions scheduled for 2006. These acquisitions are expected to be paid in cash and therefore the Company will need to secure adequate financing while maintaining its regulatory capital ratios. Downturns in the acquired companies could result in insufficient cash flows to repay the financings as scheduled. Acquisitions also may result in customer and employee turnover, thus increasing the cost of operating the new businesses. Legal contingencies, related to the acquired companies, beyond those that the Company is aware of could arise, causing unexpected costs.
FIRST M&F CORPORATION AND SUBSIDIARY
UNRESOLVED STAFF COMMENTS
Not Applicable.
PROPERTIES
The Bank’s legal headquarters is a 21,000 square foot, three story, brick building located at 134 West Washington Street. This building houses the primary administrative offices of the Bank and Company.
The Bank owns its main office building and 32 of its branch facilities and leases four of its locations. The Bank’s insurance agency subsidiary owns four of its locations and leases one. The Bank’s asset-based lending subsidiary leases one office. The facilities occupied under lease agreements have terms which range from month to month to five years. It is anticipated that all leases will be renewed.
LEGAL PROCEEDINGS
There has been a trend toward increased litigation against financial services companies arising out of consumer lending and other consumer financial transactions, especially in Mississippi. Some of these actions have resulted in large settlements or substantial damage awards.
The Bank and one of its subsidiaries are subject to similar cases that seek substantial damages for claims arising out of transactions that involve relatively small amounts of money. While the allegations vary from case to case, in general they allege that loans were originated or renewed in a way that the borrowers were improperly sold insurance products, such as credit life insurance. The Company has denied these allegations and will vigorously defend the claims.
In total, there are cases involving over 200 plaintiffs that have been filed over a three year period. Some suits have been filed in Holmes County. It is not possible at this time to determine the potential exposure related to possible damages in connection with the remaining suits. Future legislation and court decisions may limit the amount of damages that can be recovered in legal proceedings such as these. However, management cannot predict at this time the effect that legislation or court decisions may have on these cases.
Additionally, the Company and its subsidiaries are defendants in various other lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of this category of claims should not have a material adverse effect on the Company’s consolidated financial position or results of operations.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a shareholder vote during the fourth quarter of 2005.
FIRST M&F CORPORATION AND SUBSIDIARY
PART II
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Effective September 1, 1996, the Company's common stock was listed with the National Association of Securities Dealers, Inc. Automated Quotation National Market System (NASDAQ) and became subject to trading and reporting over the counter with most securities dealers.
At December 31, 2005, there were 1,247 shareholders of record of the Company's common stock. On December 31, 2005, the Company's stock closed at $33.71 per share.
The following table summarizes the trading ranges and dividend payouts for the two years ended December 31, 2005.
Quarterly Closing Common Stock Price Ranges and Dividends Paid First Second Third Fourth ----------------------- --------------------- -------------------- --------------------- -------------------- 2005: High $35.95 $35.75 $35.53 $35.28 Low 32.25 31.49 33.08 32.68 Close 34.13 34.23 35.25 33.71 Dividend .25 .26 .26 .26 ----------------------- --------------------- -------------------- --------------------- -------------------- 2004: High $39.10 $36.00 $34.00 $34.55 Low 30.50 30.65 31.01 32.65 Close 33.51 31.14 33.35 33.85 Dividend .25 .25 .25 .25
The following table summarizes stock and dividend performance ratios for the five years ended December 31, 2005.
Stock and Dividend Performance 2005 2004 2003 2002 2001 ---------------------------------- -------------- -------------- -------------- -------------- -------------- Price/earnings ratio 12.04x 14.28x 16.06x 12.50x 13.23x Price/book value ratio 1.29x 1.36x 1.56x 1.18x .95x Book value/share $26.11 $24.96 $24.24 $23.59 $21.68 Dividend payout ratio 36.79% 42.19% 42.37% 45.05% 64.52% Historical dividend yield 3.04% 2.64% 3.60% 4.88% 5.93%
The following table summarizes repurchases of common stock for the program in place during the fourth quarter of 2005:
Maximum Number Total Number (or Approximate of Shares Dollar Value) (or Units) Purchased of Shares (or Units) Total Number As Part of That May Yet Be of Shares (or Average Price Paid Publicly Announced Purchased Under the Period Units) Purchased Per Share (or Unit) Plans or Programs Plans or Programs ------ ---------------- ------------------- ----------------- ----------------- 10/01/05 - 10/31/05 (1) - $ - - 70,000 11/01/05 - 11/30/05 - - - 60,000 12/01/05 - 12/31/05 - - - 50,000
(1) On May 11, 2005 the Board authorized a program to repurchase up to 10,000 shares of common stock per month in the open market over a twelve month period beginning on May 15, 2005 and ending on May 14, 2006.
FIRST M&F CORPORATION AND SUBSIDIARY
The following table provides information regarding securities issued under our equity compensation plans that were in effect during 2005.
Number of Securities to be Issued Upon Weighted-Average Exercise of Exercise Price of Outstanding Outstanding Number of Securities Options, Warrants Options, Warrants Remaining Available Plan Name and Rights and Rights for Future Issuance ---------------- -------------------- ---------------------- --------------------------
Equity compensation plans 1999 Stock 119,685 30.4023 - approved by security holders Option Plan 2005 Equity - - 290,117 Incentive Plan
Equity compensation plans not None - - - approved by security holders -------------------- ---------------------- --------------------------
Total 119,685 30.4023 290,117 ==================== ====================== ==========================
In April 2005 the 2005 Equity Incentive Plan was approved by a shareholder vote and replaced the 1999 Stock Option Plan. In 2005, under the 2005 Equity Incentive Plan, the Company issued to senior and executive officers 56,883 shares of restricted stock that vest in terms of from three to seven years at a weighted average fair value at the date of grant of $34.01. Also in 2005, under the 2005 Equity Incentive Plan, the Company issued 3,000 shares of unrestricted stock at a grant date fair value of $33.71 to senior and executive officers.
FIRST M&F CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
(Thousands, except per share data) 2005 2004 2003 2002 2001 ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
EARNINGS
Interest income $ 67,672 $ 58,289 $ 58,137 $ 62,068 $ 70,506 Interest expense 23,184 17,050 17,857 23,702 37,355 Net interest income 44,488 41,239 40,280 38,366 33,151 Provision for loan losses 3,146 5,351 3,802 4,495 4,415 Noninterest income 16,401 15,169 14,138 13,893 13,597 Noninterest expense 39,141 36,994 34,732 33,094 31,750 Income taxes 6,004 4,075 4,748 4,247 3,199 Noncontrolling interests 6 (787) 244 188 231 Net income $ 12,592 $ 10,775 $ 10,892 $ 10,235 $ 7,153 Net interest income, taxable equivalent $ 45,770 $ 42,643 $ 41,793 $ 40,007 $ 34,939 Cash dividends paid $ 4,648 $ 4,535 $ 4,604 $ 4,610 $ 4,615
PER COMMON SHARE
Net income (basic) $ 2.80 $ 2.37 $ 2.36 $ 2.22 $ 1.55 Cash dividends paid 1.03 1.00 1.00 1.00 1.00 Book value 26.11 24.96 24.24 23.59 21.68 Closing stock price 33.71 33.85 37.90 27.75 20.50
SELECTED AVERAGE BALANCES
Assets $1,209,054 $1,110,189 $1,061,937 $1,023,046 $1,010,122 Earning assets, amortized cost 1,095,667 1,007,778 965,809 931,817 923,327 Loans held for investment 884,232 794,010 720,955 652,098 637,315 Investments, amortized cost 190,067 184,605 207,427 250,687 249,677 Total deposits 949,228 850,140 835,370 816,630 800,665 Equity 115,723 111,995 110,908 104,954 100,197
SELECTED YEAR-END BALANCES
Assets $1,267,118 $1,142,712 $1,078,298 $1,037,134 $1,018,309 Earning assets, carrying value 1,130,576 1,029,031 972,402 935,166 917,328 Loans held for investment 933,080 832,486 769,156 666,999 647,482 Investments, carrying value 185,071 175,654 187,577 236,110 250,358 Total deposits 973,671 877,264 820,226 824,024 816,617 Equity 117,377 112,468 110,678 108,210 100,063
SELECTED RATIOS
Return on average assets 1.04% .97% 1.03% 1.00% .71% Return on average equity 10.88 9.62 9.82 9.75 7.14 Average equity to average assets 9.57 10.09 10.44 10.26 9.92 Dividend payout ratio 36.79 42.19 42.37 45.05 64.52 Price to earnings (x) 12.04x 14.28x 16.06x 12.50x 13.23x Price to book (x) 1.29 1.36 1.56 1.18 .95
FIRST M&F CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and obligations. Management evaluates these judgments and estimates on an ongoing basis to determine if changes are needed. Management believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.
(1) Allowance for loan losses (2) Goodwill, intangible assets and related impairment (3) Contingent liabilities
Allowance for loan losses
The Company’s policy is to maintain the allowance for loan losses at a level that is sufficient to absorb estimated probable losses in the loan portfolio. Accounting standards require that loan losses be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Management’s estimate is reflected in the balance of the allowance for loan losses. Changes in this estimate can materially affect the provision for loan losses, and thus net income.
Management of the Company evaluates many factors in determining the estimate for the allowance for loan losses. Historical loan losses by loan type and loan grade are a significant factor in estimating future losses. Management reviews loan quality on an ongoing basis to determine the collectibility of individual loans and reflects that collectibility by assigning loan grades to individual credits. The grades will generally determine how closely a loan will be monitored on an ongoing basis. A customer’s payment history, financial statements, cash flow patterns and collateral, among other factors, are reviewed to determine if the loan has potential losses. Concentrations of credit by loan type and collateral type are reviewed to determine exposures and risks of loss. General economic factors as well as economic factors for individual industries or factors that would affect certain types of loan collateral are reviewed to determine the exposure of loans to economic fluctuations. The Company also has a loan review department that audits types of loans as well as geographic segments to determine credit problems and loan policy violations that require the attention of management. All of these factors are used to determine the adequacy of the allowance for loan losses and adjust its balance accordingly.
The allowance for loan losses is increased by the amount of the provision for loan losses and by recoveries of previously charged-off loans. It is decreased by loan charge-offs as they occur when principal is deemed to be uncollectible.
Goodwill, intangible assets and related impairment
The policy of First M&F Corporation is to assess goodwill for impairment at the reporting unit level on an annual basis. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting unit in making an annual assessment of impairment. Management performs this assessment as of January 1 of each year.
Impairment of goodwill is recognized by a charge against earnings and is to be shown as a separate line item in the noninterest expense section of the consolidated statement of income.
The estimate of fair value is dependent on such assumptions as: (1) future cash flows determined from the budget, strategic plan, and forecasts of growth, and (2) discount rates and earnings multiples used to determine the present value of those cash flows. Management uses a model similar to those used to evaluate potential mergers and acquisitions. No impairments have been recognized since beginning testing in 2002.
FIRST M&F CORPORATION AND SUBSIDIARY
Identifiable intangible assets are amortized over their estimated lives. Identifiable intangible assets that have indefinite lives are not amortized until such time that their estimated lives are determinable. Intangible assets with indefinite lives must be assessed for impairment annually.
Contingent liabilities
Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. Management must estimate the probability of occurrence and estimate the potential exposure of a variety of contingencies such as health claims, legal claims, tax liabilities and other potential claims against the Company’s assets or requirements to perform services in the future.
Management’s estimates are based upon their judgment concerning future events and their potential exposures. However, there can be no assurance that future events, such as changes in a regulator’s position or court cases will not differ from management’s assessments. When management, based upon current facts and expert advice, believes that an event is probable and reasonably estimable, it accrues a liability in the consolidated financial statements. That liability is adjusted as facts and circumstances change and subsequent assessments produce a different estimate.
FINANCIAL CONDITION
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.
SUMMARY
Net income for 2005 was $12.592 million, or $2.80 basic and $2.79 diluted per share as compared to $10.775 million, or $2.37 basic and $2.36 diluted per share in 2004 and $10.892 million, or $2.36 basic and $2.35 diluted per share in 2003. Major factors contributing to the increased earnings were (1) strong loan growth throughout 2005 combined with solid deposit growth in the first quarter of 2005, (2) improved asset quality that resulted in lower net charge-offs and a lower level of loan loss accruals than in 2004, (3) solid noninterest revenue growth as compared to 2004 and (4) a net interest margin decrease of five basis points for 2005 from 2004 as compared to the ten basis point decrease for 2004 from 2003. The Company’s stock buy-back program throughout 2004 and through the first half of 2005 was another positive contributor to the increased earnings per share in 2005 over 2004
In the third quarter of 2005 the Company completed construction of a branch facility in Southaven. The Company also substantially completed a financial service office complex in Madison which it expects to occupy in the first quarter of 2006. The building will house a branch facility as well as several fee-generating businesses.
In the first quarter of 2004 the Company completed construction of a branch facility in Flowood in Rankin County and commenced full-service operations. In the third quarter of 2004 the Company rented a location in Jackson and opened a full-service banking office. In the fourth quarter of 2004, the Company closed two small, limited-service branches. The Company also completed construction of a bank building in Olive Branch in DeSoto County, and moved its operations over from a rented office location. In the fourth quarter the Company also opened a loan production office in Memphis, Tennessee with a three-person staff.
In the first quarter of 2003 the Company opened a loan production office in Olive Branch, which eventually was moved into a newly constructed facility in the fourth quarter of 2004. In the second quarter of 2003 the Company opened a new business, M&F Business Credit, Inc., in Memphis Tennessee. The business is a wholly owned subsidiary of M&F Bank and is an asset-based lending operation with a target market area of the southeastern United States. In the third quarter of 2003 the Company opened an additional branch in Tupelo, giving it four (4) locations in the Tupelo market. The location is a former bank building purchased in 2002 and remodeled in 2003.
During the third and fourth quarters of 2005 the Company restructured its item processing technology by converting from a traditional proof environment to an image proof-of-deposit environment. The new system is designed to capture images of items rather than the items having to go through the traditional encoding process. This environment will minimize the handling of paper documents, lower labor costs, automate internal processes and improve the Company’s preparedness for future industry migration toward full check image exchange.
FIRST M&F CORPORATION AND SUBSIDIARY
In the second quarter of 2004 the internet banking product was converted to a new system to accommodate corporate customer needs and enhance the availability of information to customers. The core information processing system underwent a significant upgrade that further streamlined the branch platform processes and enhanced the information available to customer service representatives for meeting customer needs. Technology that allows for e-mailing of account statements to customers was also implemented in the third quarter of 2004.
In November and December of 2003 the mainframe processing system was enhanced with faster equipment as well as the addition of a storage area network. These additions were made with expectations for lower ongoing combined lease, maintenance and depreciation costs.
Total assets increased by 10.89% in 2005, ending the year at $1.267 billion. Total assets increased by 5.97% in 2004, ending the year at $1.143 billion. Total assets increased by 3.97% in 2003 to end the year at $1.078 billion. The compounded annual growth rate for total assets for the last five (5) years was 4.43%, while the compounded growth rate for deposits was 4.33%.
EARNING ASSETS
The average earning asset mix for 2005 was 81.53% in loans, 17.35% in investments, and 1.12% in short-term funds. The average earning asset mix for 2004 was 79.97% in loans, 18.32% in investments and 1.71% in short-term funds. The average earning asset mix for 2003 was 76.02% in loans, 21.48% in investments, and 2.50% in short-term funds. Loans held for investment grew by 12.08% in 2005 while deposits grew by 10.99%. Loans held for investment grew by 8.23% in 2004 while deposits grew by 6.95%. Loans held for investment grew by 15.32% in 2003 while deposits decreased. Noninterest-bearing deposits grew by 19.21% in 2005, grew by 11.80% in 2004, and grew by 20.88% in 2003. Average noninterest-bearing deposits grew by 13.14% in 2005, grew by 15.15% in 2004, and grew by 7.85% in 2003. The following table shows the volume changes in loans and deposits over the last three years.
2005 2004 2003 ------------- ------------ ------------- Net increase in loans $100,594 $ 63,330 $102,157 Net increase in deposits 96,407 57,038 (3,798) Ratio of loan growth to deposit growth 104.34% 111.03% -
Loan growth for 2005 was made up primarily of commercial and real estate loans. Commercial loans grew by 17.76% in 2005 after growing by 17.50% in 2004. The asset-based lending operation in Memphis, M&F Business Credit, Inc., accounted for 20.51% of the increase in commercial loans during 2005 and 49.64% of that increase in 2004. Commercial real estate-secured loans grew by 25.39% in 2005 after growing by 8.70% in 2004 and by 29.53% in 2003. Much of the loan growth occurred in the stronger economies such as Madison, Rankin and DeSoto Counties and in the college markets of Oxford and Starkville. The Company maintains strict credit policies related to collateral and underlying cash flow requirements in making loans to small businesses. However, the strength of the Madison, Hinds, Lee and DeSoto County economies has provided growth opportunities for the Company in its expansion efforts. Consumer loans decreased by 11.18% in 2005, by 13.10% in 2004 and by 21.95% in 2003. Consumer loan growth has been problematic for the Company since exiting the indirect automobile lending business in 2000. Home equity loans were flat for 2005 after growing by 8.95% in 2004. The commercial lending staff has been increased since 2002 in an effort to grow commercial and real estate-secured commercial loans, and the Company looks to the small business market for loan as well as deposit growth. The Company’s strategy is to continue to grow the loan portfolio in the stronger economic markets. The Company expects to strengthen its current operations in Madison County with continued branch expansion efforts. The Company also expects to expand its lending efforts and physical presence in Memphis, Tennessee and its surrounding areas as well as in the Birmingham, Alabama market.
FIRST M&F CORPORATION AND SUBSIDIARY
INVESTMENT SECURITIES
The Company’s investment portfolio increased by 5.36% in 2005, decreased by 6.36% in 2004 and decreased by 20.56% in 2003. In 2005 the Company purchased $53.7 million in U. S. Government agency securities to replace $44.0 million of maturities and to create a liquidity portfolio primarily for public funds deposit demands. The Company also purchased $19.0 million in mortgage-backed securities with funds obtained through deposit growth and other mortgage-backed securities principle payments of $15.6 million. The mortgage-backed securities were purchased mainly for their attractive yields and secondarily for the liquidity provided through the monthly principal payments. The Company sold approximately $6.6 million in mortgage-backed securities in a restructuring transaction during the first quarter of 2004 and reallocated the proceeds to corporate debt and debt collateralized by trust preferred securities. The Company purchased approximately $20.5 million of mortgage-backed securities during 2004, offsetting the effect of the year’s monthly principal pay-downs. The 2004 decrease in securities was used primarily for lending purposes, and was provided equally by calls and maturities of Government agency securities and securities of municipalities. The 2003 decrease was used to provide funding for the loan portfolio as well. Most of the cash flows diverted to the 2003 lending effort were generated from mortgage-backed securities. As of December 31, 2005, municipal securities represented 28.22% of total debt securities as compared to 31.41% at December 31, 2004 and 31.70% at December 31, 2003. The Company uses investments in municipal securities for their tax benefits and also to take advantage of local investment opportunities.
DEPOSITS AND BORROWINGS
Deposits increased by 10.99% in 2005, increased by 6.95% in 2004 and decreased by .46% in 2003. Consumer and commercial deposits increased by 11.17% in 2005 and by 4.64% in 2004. Public funds, deposits of states and local municipalities, grew by 10.12% in 2005 and by 19.78% in 2004. Much of the commercial and consumer deposit growth occurred in the Madison, Rankin and Hinds County markets as well as in the Oxford and Tupelo markets. A new deposit acquisition campaign between February and June 2005, primarily targeting checking and savings deposits, generated 4,601 new accounts and average new deposit balances of $17.778 million. Much of the public funds growth occurred in the first quarter of 2005 primarily in NOW and MMDA balances with one large relationship providing over half of that growth. Retail and commercial deposits increased by $81.207 million during 2005 with certificates of deposit representing $42.661 million of the growth. The large growth in public funds deposits is a natural trend that occurs during the early months of the year as tax receipts are collected. The funds generally move out during the summer months as spending occurs. Public funds deposits increased by $64.585 million in the first quarter of 2005, and subsequently decreased by $49.385 million during the last three quarters with much of that decrease occurring in the fourth quarter. In the NOW account category, the Company saw its new eRate Plus account, an account designed for electronic transactions, provide 91.90% of the consumer and commercial deposit growth in 2005. In noninterest-bearing checking accounts, consumer and commercial accounts increased by 20.52% in 2005 and by 11.84% in 2004. As interest rates increased through 2004 and 2005, certificates of deposit became more attractive. Certificates of deposit grew by 6.87% in 2005 as consumer and commercial balances increased and public fund balances decreased. The Company also used special certificate of deposit promotions in 2004 and 2005 to attract consumer funds. The Company used brokered deposits as an alternative to borrowings to provide funding for the loan growth that occurred in 2004 and 2005. Core deposit growth is expected to be a primary component of the Company’s funding in the foreseeable future. The Company’s business development strategy includes the acquisition of noninterest-bearing and interest-bearing demand deposits held by customers who primarily use the Company as a source of credit.
FIRST M&F CORPORATION AND SUBSIDIARY
The following table shows the deposit mix for the latest three year ends.
December 31, 2005 December 31, 2004 December 31, 2003 ------------------------ ----------------------- ---------------------- Noninterest-bearing demand $ 164,189 $ 137,728 $ 123,191 NOW deposits 192,792 149,572 131,430 Money market deposits 115,509 122,409 135,067 Savings deposits 82,512 85,342 86,794 Certificates of deposit 397,835 372,262 343,744 Brokered certificates of deposit 20,834 9,951 - ------------------------ ----------------------- ---------------------- Total $ 973,671 $ 877,264 $ 820,226 ======================== ======================= ======================
The following table shows the mix of public funds deposits as of the last three year ends.
December 31, 2005 December 31, 2004 December 31, 2003 ------------------------ ----------------------- ---------------------- Noninterest-bearing demand $ 4,331 $ 5,089 $ 4,594 NOW deposits 84,539 59,241 41,665 Money market deposits 28,772 21,394 20,149 Savings deposits 241 299 557 Certificates of deposit 47,137 64,225 58,467 Brokered certificates of deposit 428 - - ------------------------ ----------------------- ---------------------- Total $ 165,448 $ 150,248 $ 125,432 ======================== ======================= ======================
Other borrowings increased by 15.29% in 2005 after increasing by 5.58% in 2004 and by 71.53% in 2003. The Company used other borrowings as a source of liquidity during 2004 and 2005. Borrowings in 2005 were generally used to fund loans in the two to five year maturity ranges. As the loan portfolio has become a larger percentage of the assets of the Company, borrowings have been used to fund those increases that are beyond the deposit growth and ordinary investment portfolio maturities. Borrowing increases that occurred during 2004 were generally paid off with deposit growth that occurred during the third and fourth quarters. The increase in 2003 was used along with investment maturities to fund loan portfolio growth. The Company uses wholesale funding sources such as the Federal Home Loan Bank to provide the liquidity needed for loan growth. However, the long-term strategy of the Company is to primarily fund loan growth through deposit growth first, with borrowings used when deposit funding is uneconomical or is insufficient in volume.
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. Historically, deposit growth has been sufficient to provide for the Company’s liquidity needs. In 2003 the Company used low-cost Federal Home Loan Bank borrowings to fund loan growth when deposit volumes were decreasing. This trend continued to a much lesser extent during 2004 and again in 2005. The Company has sufficient lines available through the Federal Home Loan Bank and correspondent banks to meet all anticipated liquidity needs. However, it is the Company’s strategy to balance the use of deposits and debt as funding sources for asset growth.
The Company announced a general purpose stock repurchase plan in August of 2002. The Company terminated the 2002 plan in March of 2003 and replaced it with a 12-month plan to repurchase up to 240,000 shares through February, 2004. The 2003 plan was completed on schedule in February, 2004. In April of 2004 the Company announced a 12-month plan to repurchase up to 120,000 shares through April of 2005. The 2004 plan stipulated that no more than 10,000 shares may be repurchased in a single calendar month. The 2003 and 2004 plans were authorized to offset the dilutive effect that stock option issuances were having, and would have, on reported earnings per share. In May of 2005 the Company announced a stock repurchase plan for the purchase of up to 10,000 shares per month for a twelve month period ending in May of 2006. During 2003, the Company issued 147,846 shares related to stock option exercises, at an average price of $26.99 per share. During 2004, the Company issued 40,721 shares related to stock option exercises, at an average price of $26.53 per share. During 2005, the Company issued 6,000 shares related to stock option exercises, at an average price of $26.56 per share.
The resulting debt from the repurchase programs will be paid off through dividends received by the Company from Merchants and Farmers Bank. The repurchase programs have not had any negative effect on liquidity.
FIRST M&F CORPORATION AND SUBSIDIARY
The following table shows the stock repurchase activity for 2003 through 2005.
2003 Plan 2004 Plan 2005 Plan Target of 240,000 Target of 120,000 Target of 120,000 Totals ------------------------- ------------------------- ------------------------- --------------------------- Year Shares Average Shares Average Shares Average Shares Average Purchased Purchased Price Purchased Price Purchased Price Purchased Price ------------ ------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- 2003 (1) 30,000 $ 30.25 - $ - - $ - 30,000 $ 30.25 2003 135,000 33.29 - - - - 135,000 33.29 2004 36,500 35.70 60,000 33.41 - - 96,500 34.27 2005 - - 10,000 34.23 10,000 34.74 20,000 34.48 ------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- Plan Total 201,500 $ 33.27 70,000 $ 33.53 60,000 $ 34.74 281,500 $ 33.39 ============ =========== ============ =========== ============ =========== ============ ===========
(1) Purchases made in 2003 under the 2002 repurchase plan.
Purchases of stock outside of the formally announced plans amounted to 4,854 shares at an average price of $31.70 during 2003 and 3,100 shares at an average price of $33.83 during 2004.
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. The Company embarked on a strategy over the last four years to increase the rate sensitivity of assets while reducing the sensitivity of liabilities. This was done by reducing the maturity terms of loans made, match funding certain other long-term loans originated, as well as by purchasing shorter-maturity securities. The Company also has used long-term CD promotions and FHLB borrowings to increase the average maturity of the liability portfolio. Beginning in 2002 these initiatives were taken with the anticipation of a rising interest rate environment. At the end of 2005 the one-year repricing gap stood at + 33.05% as compared to + 20.57% at the end of 2004 and + 3.85% at the end of 2003. The increase in the one-year repricing gap from 2003 to 2005 was due primarily to shorter investment maturities, the reduction of loan maturities and an increase in short-term, floating-rate loans. The Company targets its one year repricing gap at between + 7.5% and - 7.5%.
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 kept the dividend payout ratio between 35% and 40%, ending 2005 with a 36.79% ratio, ending 2004 with a ratio of 42.19% and ending 2003 with a ratio of 42.37%. The high payout percentage prior to 2005 was due to the lower than historical earnings per share, as the five-year compounded growth rate for earnings per share through 2004 was 1.87%. The Company maintained a $1.00 annual dividend rate for 1999 through the first quarter of 2005. The dividend rate was changed to $1.04 annually during the second quarter of 2005. The ratio of capital to assets stood at 9.26% at December 31, 2005, 9.84% at December 31, 2004 and 10.26% at December 31, 2003, with risk-based capital ratios well in excess of the regulatory requirements. The Company 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.
The Company's regulatory capital ratios for 2004 and 2005 are summarized in Note 17 of the audited financial statements included in Item 8, Financial Statements and Supplementary Data, in this Form 10-K.
FIRST M&F CORPORATION AND SUBSIDIARY
RESULTS OF OPERATIONS
The following table shows performance ratios for the last three years:
2005 2004 2003 ------------------- ------------------- ------------------ Net interest margin 4.18% 4.23% 4.33% Efficiency ratio 62.96 63.99 62.10 Return on assets 1.04 .97 1.03 Return on equity 10.88 9.62 9.82 Noninterest income to avg. assets 1.36 1.37 1.33 Noninterest income to revenues (1) 26.38 26.24 25.28 Noninterest expense to avg. assets 3.24 3.33 3.27 Salaries and benefits to total noninterest expense 58.09 55.92 53.19 Contribution margin (2) 63.43 64.22 66.97 Nonperforming loans to loans .20 .47 .77 Net charge-offs as a percent of average loans .26 .58 .43
(1) Revenues equal tax-equivalent net interest income before loan loss expense, plus noninterest income. (2) Contribution margin equals revenues minus salaries & benefits, divided by revenues.
The following table shows revenue related performance statistics for the last three years:
(Amounts in thousands) 2005 2004 2003 --------------------- ---------------------- -------------------- Mortgage originations $ 57,691 $ 61,632 $ 75,051 Commissions from annuity sales 324 401 228 Trust and retail investment revenues 484 433 310 Revenues per FTE employee 133 128 132 Agency commissions per agency FTE employee (1) 79 76 76 (1) Agency commissions are property, casualty, life and health commissions produced by the insurance agency personnel.
Net Interest Income
Net interest income was $44.488 million in 2005 as compared to $41.239 million in 2004 and $40.280 million in 2003. The 2005 improvement was the result of growth in average loans of 10.84% over 2004 and an increase in tax-equivalent loan yields to 6.66% from 6.27% in 2004. Deposit costs increased to 2.19% in 2005 from 1.62% in 2004. The improvement in loan yields resulted from the general increase in interest rates during 2004 and 2005, but more importantly, floating rate loans outstanding increased by 22.90% during 2005. Loans have continued to grow as a component of earning assets as the percentage of average loans to average earning assets increased to 81.53% in 2005 from 79.98% in 2004 and 76.02% in 2003. The impact of loan volumes and yields offset the negative effect of the increased total cost of funds, which moved from 1.97% in 2004 to 2.45% in 2005. Although the cost of funds increased by 48 basis points, the net interest margin decreased only five basis points to 4.18% in 2005. The 2004 improvement was the result of decreases due to the decrease in net interest spreads from 4.04% in 2003 to 3.95% in 2004, offset by increases due to a 9.77% increase in average loan balances from 2003 to 2004. Another factor that reduced the negative impact of falling asset yields from 2002 to 2004 was the growth in noninterest-bearing deposits. Average noninterest-bearing deposits represented 12.51% of total funding during 2004 as compared to 11.41% during 2003. Earning asset yields decreased by 26 basis points from 2003 to 2004 while funding costs decreased by 17 basis points. The margin improvement in 2003 was due to increased loan volumes and decreased costs of deposits and borrowings. Average loans outstanding increased from $663.503 million in 2002 to $734.240 million in 2003. Interest and fees on loans decreased from 2002 to 2003 due to decreasing rates, as loan yields fell from 7.33% in 2002 to 6.66% in 2003. Interest expense decreased from 2002 to 2003 as liability costs decreased to 2.14% in 2003 from 2.93% in 2002. Competition for loans kept new loan yields from increasing as quickly as general interest rates did in 2004. However, economic growth in 2005 resulted in a growing demand for loans, easing some of the competitive pricing pressures. There was also a delayed reaction of floating rate loan repricing as compared to changes in the prime rate due to the volume of loans that had contractual floor rates that were above the 2004 prime rates, and therefore did not reprice until late in 2004 and into 2005.
FIRST M&F CORPORATION AND SUBSIDIARY
Provision for Loan Losses
During 2005 the Company’s provision decreased to $3.146 million after increasing to $5.351 million in 2004 from $3.802 million in 2003. The reduced accruals in 2005 were the result of improved credit quality as the ratio of net charge-offs to average loans fell to .26% from .58% in 2004. Nonperforming loans as a percentage of total loans also decreased to .20% at the end of 2005 from .47% at the end of 2004. Approximately $3.131 million of the 2004 loan loss accruals related to Merchants Financial Services Group (MFS), of which the Company is a 51% owner. MFS, an accounts receivable factoring company, incurred the losses primarily in one account. MFS sold substantially all of its accounts receivable to its two owners at the end of 2004. The Company received approximately $2.020 million in receivables in the transfer. Loans past due for over 90 days received in the transfer amounted to $311 thousand. Net charge-offs for 2004 were $4.623 million, which included $3.283 million of losses at MFS. Net charge-offs were $3.169 million in 2003 as compared to $2.663 million in 2002. Net charge-offs as a percentage of average loans were .58% in 2004 and .43% in 2003. The strategy of the Company is to maintain credit quality at levels that produce net charge-off percentages in the .30% to .35% range. The net charge-off percentage in 2004 would have been .17%, excluding the loss at MFS. The net charge-off percentage for 2003 would have been .36%, excluding one large write-down on some rental properties in Lee County. Nonaccrual loans as a percentage of total loans were .15% at the end of 2005, .39% at the end of 2004, and .58% at the end of 2003. The nonaccrual loan totals for 2003 included non-accruing loans on rental properties mentioned above of approximately $1.890 million. Management maintains a conservative approach to classifying loans internally for purposes of determining needed loan loss allowances. The percentage of allowance for loan loss to total loans held for investment was 1.33% at December 31, 2005, 1.40% at December 31, 2004, and 1.42% at December 31, 2003.
Noninterest Income
Noninterest income increased by 8.12% in 2005, by 7.29% in 2004 and by 1.76% in 2003. Deposit income increased by 12.33% after increasing by 0.23% in 2004, and increasing by 2.17% in 2003. The 2005 improvement was due to growth in overdraft fee revenues of 14.68% over 2004 and growth in debit card revenues of 46.71% over 2004. The lack of growth in deposit revenues in 2003 and 2004 was due mainly to lower insufficient check volumes than in 2002. The number of checking accounts with balances of less than $100 thousand increased by 2.84% in 2004 after increasing by 1.10% in 2003, contributing to the lack of growth in deposit account service charges from 2002 to 2004. Debit card revenues more than doubled in 2004, partially offsetting the decrease in other deposit revenues. Mortgage banking income increased by 2.24% in 2005 after decreasing by 14.77% in 2004 and increasing by 7.18% in 2003. Rising interest rates during 2004 and 2005 reduced the activity resulting from mortgage refinancings. The low interest rate environment in 2002 and much of 2003 was the main contributing factor to the increased originations in 2003. However, the presence of mortgage originators in economically strong markets such as Madison, DeSoto, Rankin and Lee counties helps to maintain origination volumes. Agency commissions continued to grow in 2005 as in 2004 and 2003 as the Company continued its efforts to place insurance agents in branch locations and to build relationships with the Bank’s retail and commercial sales associates. Annuity commissions decreased by 19.13% in 2005, grew by 75.97% in 2004 and fell by 11.41% in 2003. Property, casualty, life and health commissions increased by 3.31% in 2005, by 4.65% in 2004 and by 7.88% in 2003. Pricing in the property and casualty industry became more competitive in 2004 and 2005 after having been high in 2003 and 2002. Trust and brokerage income increased by 11.78% in 2005, by 39.68% in 2004 and by 65.78% in 2003. The Company has committed to building the Trust and retail investment businesses and added an additional licensed broker to the retail investment staff in 2004. Trust and wealth management services, as well as retail investment brokerage services have become more significant contributors to the Company’s revenues in 2004 and 2005. Other areas such as treasury management services and electronic banking are not yet significant contributors to the Company’s overall revenues. However, management continues to focus on building these businesses and revenue streams as an important strategic objective for the future. Items in other income for 2005 were loan and letter of credit fees of $439 thousand, net gains on sales of loans of $231 thousand, insurance agency profit sharing revenues of $471 thousand, rental revenues on foreclosed properties of $106 thousand and revenue from the receipt of $128 thousand paid to members of the PULSE network upon its acquisition by the Discover Financial Services network. An item reducing other income in 2005 was $614 thousand in losses on disposals of foreclosed properties. Increases in other income for 2004 over 2003 were the result of insurance agency contingency revenues of $286 thousand, revenues from the sale of timber on undeveloped properties of $123 thousand, rental revenues on foreclosed property of $92 thousand, and loan and letter of credit fees of $285 thousand.
FIRST M&F CORPORATION AND SUBSIDIARY
Noninterest Expense
Salary and benefit expenses increased by 9.91% in 2005 after increasing by 11.99% in 2004 and increasing by 3.73% in 2003. The number of full-time equivalent employees was 472.0 at the end of 2005, 458.5 at the end of 2004 and 436.0 at the end of 2003. New branch locations and new services required additions of 14 full time equivalent employees in 2005 and 19 in 2004 as compared to 10 in 2003. The mortgage department reduced staffing in 2005 to match decreasing volumes. Health care related costs increased by 17.47% in 2005 after increasing by 57.52% in 2004. The 2004 expense included extraordinary claims. The 2005 expense reflects primarily the increasing cost of health care as well as the increasing number of employees covered by the plan.
The Company expects to add producers as it expands in current markets and moves into future new markets and businesses. However, the Company also expects that the contributions, as can be measured by the contribution margins, will increase as the new associates produce earning assets and fee revenues.
Occupancy expenses increased by 10.42% in 2005 and 8.22% in 2004, reflecting the costs of branch expansion efforts during 2003 through 2005.
Marketing and business development expenses were down in 2005 after trending up in 2004 as compared to 2003. Several marketing campaigns during 2004, grand opening and branch promotion expenses, and new sponsorships all contributed to the 27.90% increase in marketing costs in 2004. During 2005 there were less external advertising campaigns and more in-branch promotion efforts. Also, ticket costs for the Gridiron summer loan campaign were limited during 2005 and replaced with other promotional incentives.
ATM and debit card network and processing expenses increased by 25.75% due to volume increases after leveling off in 2004 and increasing by $358 thousand in 2003. The 2003 increase resulted from a change in debit card providers and upgrades in the debit card product.
There was no impairment recognized as a result of the goodwill impairment tests performed by the Company in 2003 through 2005. The Company is required to test its goodwill intangible asset annually for impairment.
Income Taxes
The Company’s effective tax rate was 32.28% in 2005 as compared to 28.98% in 2004, and 29.89% in 2003. The 2005 increase was due to an increase in pre-tax earnings of 32.28%, the lessening effect on pre-tax earnings of tax-exempt revenues from municipal investments, and the effect of the $2.522 million loss of MFS, resulting in tax benefits in 2004. The Company primarily uses tax-exempt securities and loans to provide tax benefits and does not use any exotic tax-shelter vehicles. The Company paid $130 thousand in Federal tax assessments and $11 thousand in Mississippi tax assessments in 2004. The Federal assessment was related to the audit of the final 1999 returns of Community Federal Bancorp, which was acquired by the Company in November, 1999.
Noncontrolling Interest In Subsidiaries
The $787 thousand negative balance in noncontrolling subsidiary losses for 2004 is the amount of losses, net of tax benefits of $469 thousand, primarily the result of a $2.0 million loan loss, attributable to the other minority owner in the Merchants Financial Services (MFS) factoring business. The business was substantially curtailed by the end of 2004, with all performing receivables being sold to the owners of MFS.
FIRST M&F CORPORATION AND SUBSIDIARY
Quarterly Financial Trends
The following table summarizes components of the Company's statements of income by quarter for 2005 and 2004.
------------------------------------------------------- 4th Qtr 05 First Second Third Fourth Vs (Dollars in Thousands) Quarter Quarter Quarter Quarter 4th Qtr 04 ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Interest income $ 15,565 $ 16,390 $ 17,231 $ 18,486 20.78% Interest expense 4,888 5,455 6,130 6,711 44.29 Net interest income 10,677 10,935 11,101 11,775 10.51 Provision for loan losses 871 818 767 690 (45.75) Noninterest income 4,105 4,015 4,466 3,815 4.32 Noninterest expense 9,209 9,638 9,924 10,370 7.55 Income taxes 1,505 1,446 1,588 1,465 59.41 Noncontrolling interest (1) 3 4 - - Net income $ 3,198 $ 3,045 $ 3,284 $ 3,065 16.10% ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Per common share: Net income (basic) $ .71 $ .68 $ .73 $ .68 17.24% Net income (diluted) $ .71 $ .67 $ .73 $ .68 17.24% ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Cash dividends .25 .26 .26 .26 4.00 ---------------------------------- ------------ ---------------- ------------ ------------ ---------------
------------------------------------------------------- 4th Qtr 04 First Second Third Fourth Vs Quarter Quarter Quarter Quarter 4th Qtr 03 ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Interest income $ 14,305 $ 14,122 $ 14,556 $ 15,306 2.93% Interest expense 4,036 4,107 4,256 4,651 5.58 ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Net interest income 10,269 10,015 10,300 10,655 1.82 Provision for loan losses 2,460 999 620 1,272 32.50 Noninterest income 3,977 3,685 3,850 3,657 4.22 Noninterest expense 8,977 8,890 9,485 9,642 8.94 Income taxes 768 1,155 1,233 919 (28.15) Noncontrolling interest (560) (97) 31 (161) (314.67) Net income $ 2,601 $ 2,753 $ 2,781 $ 2,640 (6.02%) ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Per common share: Net income (basic) $ .57 $ .60 $ .62 $ .58 (4.92%) Net income (diluted) $ .57 $ .60 $ .61 $ .58 (4.92%) ---------------------------------- ------------ ---------------- ------------ ------------ --------------- Cash dividends .25 .25 .25 .25 - ---------------------------------- ------------ ---------------- ------------ ------------ ---------------
Credit Risk Management
The Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Management reviews loan quality on a monthly basis. Classified and past due loans are monitored to determine if deterioration is occurring and if corrective actions need to be taken. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company has an internal Officer’s Loan Committee which reviews certain proposed large extensions and renewals of credit. Those credits that are approved within the Committee’s limits may be funded. Larger credit requests that the Committee approves are forwarded to the Board Loan Committee for a final approval or denial. The Board has authorized a Loan Committee which meets weekly to review potential large extensions and renewals of credit. The Loan Committee must approve those credits before they can be funded. The Company strives to minimize risk through the diversification of the portfolio geographically within Mississippi as well as by loan purpose and collateral.
The Bank’s credit standards are enforced within the Bank as well as within all of its wholly-owned subsidiaries. As of March, 2004, management began to enforce the Bank’s credit standards on the Bank’s partially-owned joint venture as well. Management will enforce its credit standards as well as other quality and internal control standards on future business ventures in which it is a partner.
The adequacy of the allowance for loan losses is monitored quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by external examiners as well as by internal loan review personnel, past due loans, collateral reviews, loan growth and loss history. The allowance as a percentage of loans at December 31, 2005 is comparable to other peer banks.
FIRST M&F CORPORATION AND SUBSIDIARY
The following table shows nonperforming loans and other assets of the Company:
(Amounts in thousands) December 31 -------------------- -- -------------------- -- -------------------- 2005 2004 2003 -------------------- -------------------- -------------------- Nonaccrual loans $ 1,403 $ 3,302 $ 4,517 Past due 90 days or more and still accruing interest 510 645 1,531 -------------------- -------------------- -------------------- Total nonperforming loans 1,913 3,947 6,048 Other real estate 3,042 3,314 1,282 -------------------- -------------------- --------------------
Total nonperforming assets $ 4,955 $ 7,261 $ 7,330 ==================== ==================== ====================
Ratios: Nonperforming loans to loans .20% .47% .77% Nonperforming assets to assets .39% .64% .68% ==================== ==================== ====================
OFF-BALANCE SHEET ARRANGEMENTS
The Company’s primary off-balance sheet arrangements are in the form of loan commitments and operating lease commitments. At December 31, 2005 the Company had $179.514 million in unused loan commitments outstanding. Of these commitments, $97.964 million mature in one year or less. Lines of credit are established using the credit policy of the Company concerning the lending of money.
Letters of credit are issued to facilitate the borrowers’ business and are usually related to the acquisition of inventory or of assets to be used in the customers’ business. Letters of credit are generally secured and are underwritten using the same standards as traditional commercial loans. Most standby letters of credit expire without being presented for payment. However, the presentment of a standby letter of credit would create a loan receivable from the Bank’s loan customer. The Bank’s asset-based lending subsidiary uses commercial letters of credit to facilitate the purchase of inventory items by its customers. There were $84 thousand in commercial letters of credit outstanding at December 31, 2005. At December 31, 2005 the Company had $29.443 million in financial standby letters of credit issued and outstanding.
A liability of $181 thousand is recognized in other liabilities at December 31, 2005 related to the obligation to stand ready to perform related to standby letters of credit.
The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $12.229 million at December 31, 2005. These commitments are accounted for as derivatives and are marked to fair value with changes in fair value recorded in mortgage banking income. Mortgage origination-related derivatives are included in other assets and other liabilities.
The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2005 the Company had $4.092 million in locked forward sales agreements in place. Forward sale-related derivatives are included in other assets and other liabilities.
In the ordinary course of business the Company enters into rental and lease agreements to secure office space and equipment. The Company has a variety of lease agreements in place, all of which are operating leases. The largest lease obligations are for office equipment and mainframe computer systems.
The Company does not have any variable interest entities or other off-balance sheet financing vehicles as of December 31, 2005.
FIRST M&F CORPORATION AND SUBSIDIARY
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes the obligations of the Company.
(Amounts in thousands) Payments Due by Period ------------------------------------------------------------------------------------- Less More Than 1 1 - 3 3 - 5 Than 5 Contractual Obligations Total Year Years Years Years -------------------------------------------- ---------------- ----------------- ---------------- ---------------- ---------------- Long-Term Debt $ 113,852 $ 29,737 $ 29,415 $ 45,753 $ 8,947 Capital Lease Obligations - - - - - Operating Leases 3,172 1,273 1,532 299 68 Purchase Obligations - - - - - Other Long-Term Liabilities - - - - - ---------------- ----------------- ---------------- ---------------- ---------------- Total $ 117,024 $ 31,010 $ 30,947 $ 46,052 $ 9,015 ================ ================= ================ ================ ================
Long-term debt obligations represent borrowings from the Federal Home Loan Bank that have an original maturity in excess of one (1) year. Operating leases are primarily leases on office space and information technology. Leases on office space range from those that are month-to-month to 60-month leases. Most leases have options to renew for periods equal to the original term of the lease. Technology leases are all contractual and have remaining lives of 12 to 60 months. There are no bargain purchase options in any of the current leases.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk comes in the form of risk to the net interest income of the Company as well as to the market values of the financial assets and liabilities on the balance sheet and the values of off-balance sheet activities such as commitments. The Company monitors interest rate risk on a monthly basis with quarterly sensitivity analyses. The following table shows the gap position of the Company at December 31, 2005, placing variable-rate instruments in the earliest repricing category and including estimated prepayment activity for certain loans and mortgage-backed securities. The cash flows for deposits without maturities are estimated based upon historical decay rates, averaged over increasing and decreasing rate periods.
----------------------------------------------------------------------------------------------------------------------------------- Rate Sensitivity Gap Report As of December 31, 2005 -----------------------------------------------------------------------------------------------------------------------------------
Floating 1-12 months 1-5 years Over 5 years Total --------------------------------------------------------------------------------------- Short-term funds $ 3,700 $ 3,021 $ - $ - $ 6,721 Investments - 42,032 121,217 20,770 184,019 Loans 244,737 415,426 250,850 27,771 938,784 --------------------------------------------------------------------------------------- Total earning assets 248,437 460,479 372,067 48,541 1,129,524
NOW, MMDA & savings 111,187 - 259,229 - 370,416 Time deposits - 110,650 301,825 26,591 439,066 Short-term borrowings - 18,062 - - 18,062 Other borrowings 2,642 47,566 98,326 - 148,534 --------------------------------------------------------------------------------------- Total int. bearing liabilities 113,829 176,278 659,380 26,591 976,078
Rate sensitive gap $134,608 $284,201 $(287,313) $ 21,950
Cumulative gap $134,608 $418,809 $ 131,496 $ 153,446 ----------------------------------------------------------------------- Cumulative % of assets 10.62% 33.05% 10.38% 12.11% -----------------------------------------------------------------------
Interest rate shock analysis shows that the Company will experience a 10 basis point decrease over 12 months in its net interest margin with an immediate and sustained 100 basis point decrease in interest rates. An immediate and sustained increase in interest rates of 100 basis points will result in an 8 basis point increase in net interest margin. The higher sensitivity of loan pricing in a falling rate environment than in a rising rate environment and the tendency of deposit rate changes to lag the general interest rate trends in a period of rising rates, combined with the Company’s current balance sheet gap position and mix of interest-bearing and noninterest-bearing funding tend to give simulation results for net interest margins that are positively correlated with interest rate movements.
FIRST M&F CORPORATION AND SUBSIDIARY
An analysis of the change in market value of equity shows how an interest rate shock will affect the difference between the market value of assets and the market value of liabilities. With all financial instruments being stated at market value, the market value of equity will increase by 1.40% with an immediate and sustained increase in interest rates of 100 basis points. The market value of equity will decrease by 3.24% with an immediate and sustained decrease in interest rates of 100 basis points. These simulated changes in market value of equity are strongly influenced by the shorter duration of loans due to the percentage of the portfolio represented by floating-rate loans. In a rising rate environment, fixed-rate loan durations tend to extend and deposit durations tend to decrease, typically causing a decrease in market value of equity. The floating-rate loans have an offsetting effect on the typical duration changes.
The Company has no hedging instruments in place at December 31, 2005.
FIRST M&F CORPORATION AND SUBSIDIARY
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of First M&F Corporation and its subsidiary has prepared the consolidated financial statements and other information in our Annual Report in accordance with generally accepted accounting principles and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.
In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system. The Company’s bank subsidiary maintains an internal audit staff which monitors compliance with the Company’s and Bank’s systems of internal controls and reports to management and to the Audit Committee of the Board of Directors.
The Audit Committee of First M&F Corporation’s Board of Directors consists entirely of outside directors. The Audit Committee meets periodically with the internal auditor and the independent accountants to discuss audit, internal control, financial reporting and related matters. The Company’s independent accountants and the internal audit staff have direct access to the Audit Committee.
First M&F Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including First M&F Corporation’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on First M&F Corporation’s evaluation under the framework in Internal Control - Integrated Framework, management concluded that internal control over financial reporting was effective as of December 31, 2005. Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Shearer, Taylor & Co., P.A., an independent registered public accounting firm, as stated in their report which is contained herein.
/s/ Hugh S. Potts, Jr. /s/ John G. Copeland Hugh S. Potts, Jr. John G. Copeland Chairman and Chief Executive Officer EVP and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders First M&F Corporation Kosciusko, Mississippi
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that First M&F Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First M&F Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that First M&F Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, First M&F Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows of First M&F Corporation and subsidiary, and our report dated February 3, 2006, expressed an unqualified opinion.
/s/ Shearer, Taylor & Co., P.A. Ridgeland, Mississippi February 3, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders 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, 2005 and 2004, 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, 2005. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 2005 and 2004, and the results of their consolidated operations and their consolidated cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First M&F Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 3, 2006, expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.
/s/ Shearer, Taylor & Co., P.A. Ridgeland, Mississippi February 3, 2006
FIRST M&F CORPORATION AND SUBSIDIARY Consolidated Statements of Condition December 31, 2005 and 2004 (In Thousands, Except Share Data)
Assets 2005 2004 ----------------- -----------------
Cash and due from banks $ 56,398 $ 40,376 Interest-bearing bank balances 3,021 5,105 Federal funds sold 3,700 3,550 Securities available for sale, amortized cost of $186,242 and $172,808 185,071 175,654 Loans held for sale 5,704 12,236
Loans, net of unearned income 933,080 832,486 Allowance for loan losses (12,449) (11,619) ----------------- ----------------- Net loans 920,631 820,867 ----------------- -----------------
Bank premises and equipment 28,922 25,999 Accrued interest receivable 9,101 7,126 Other real estate 3,042 3,314 Goodwill 16,348 16,348 Other intangible assets 358 413 Other assets 34,822 31,724 ----------------- -----------------
$1,267,118 $1,142,712 ================= ================= Liabilities and Stockholders' Equity Liabilities: Noninterest-bearing deposits $ 164,189 $ 137,728 Interest-bearing deposits 809,482 739,536 ----------------- ----------------- Total deposits 973,671 877,264 ----------------- ----------------- Short-term borrowings 18,062 16,808 Other borrowings 148,534 128,838 Accrued interest payable 2,717 1,728 Other liabilities 6,736 5,605 ----------------- ----------------- Total liabilities 1,149,720 1,030,243 ----------------- -----------------
Noncontrolling joint venture interest 21 1 ----------------- -----------------
Stockholders' equity: Preferred stock: Class A; 1,000,000 shares authorized - - Class B; 1,000,000 shares authorized - - Common stock of $5.00 par value; 15,000,000 shares authorized: 4,495,159 and 4,506,159 shares issued 22,476 22,531 Additional paid-in capital 29,340 29,587 Nonvested restricted stock awards 86 - Retained earnings 68,058 60,113 Accumulated other comprehensive income (loss) (2,583) 237 ----------------- ----------------- Total stockholders' equity 117,377 112,468 ----------------- -----------------
$1,267,118 $1,142,712 ================= =================
The accompanying notes are an integral part of these financial statements.
FIRST M&F CORPORATION AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 2005, 2004 and 2003 (In Thousands, Except Share Data)
2005 2004 2003 ---------------- ----------------- ----------------- Interest income: Interest and fees on loans $ 59,022 $ 50,053 $ 48,324 Interest on loans held for sale 421 374 482 Taxable investments 5,797 5,439 6,653 Tax-exempt investments 2,024 2,212 2,378 Federal funds sold 194 113 192 Interest-bearing bank balances 214 98 108 ---------------- ----------------- ----------------- Total interest income 67,672 58,289 58,137 ---------------- ----------------- -----------------
Interest expense: Deposits 17,728 11,736 13,399 Short-term borrowings 776 664 608 Other borrowings 4,680 4,650 3,850 ---------------- ----------------- ----------------- Total interest expense 23,184 17,050 17,857 ---------------- ----------------- -----------------
Net interest income 44,488 41,239 40,280 Provision for loan losses 3,146 5,351 3,802 ---------------- ----------------- ----------------- Net interest income after provision for loan losses 41,342 35,888 36,478 ---------------- ----------------- -----------------
Noninterest income: Service charges on deposit accounts 8,475 7,545 7,528 Mortgage banking income 820 802 941 Agency commission income 3,910 3,822 3,505 Trust and brokerage income 484 433 310 Bank owned life insurance income 429 580 532 Securities gains (losses), net (24) 46 7 Other income 2,307 1,941 1,315 ---------------- ----------------- ----------------- Total noninterest income 16,401 15,169 14,138 ---------------- ----------------- -----------------
Noninterest expenses: Salaries and employee benefits 22,738 20,688 18,473 Net occupancy expenses 2,544 2,304 2,129 Equipment expenses 2,552 2,544 2,565 Software and processing expenses 1,144 1,325 1,261 Telecommunications expenses 785 807 928 Marketing and business development expenses 1,380 1,453 1,136 Intangible asset amortization 55 76 115 Other expenses 7,943 7,797 8,125 ---------------- ----------------- ----------------- Total noninterest expense 39,141 36,994 34,732 ---------------- ----------------- -----------------
Income before income taxes 18,602 14,063 15,884 Income taxes 6,004 4,075 4,748 Noncontrolling interest in earnings (losses) of subsidiaries, net of income taxes of $4, $469 and $145 6 (787) 244 ---------------- ----------------- -----------------
Net income $ 12,592 $ 10,775 $ 10,892 ================ ================= =================
Earnings per share: Basic $ 2.80 $ 2.37 $ 2.36 Diluted 2.79 2.36 2.35 ================ ================= =================
The accompanying notes are an integral part of these financial statements.
FIRST M&F CORPORATION AND SUBSIDIARY Consolidated Statements of Comprehensive Income Years Ended December 31, 2005, 2004 and 2003 (In Thousands)
2005 2004 2003 ---------------- ----------------- -----------------
Net income $ 12,592 $ 10,775 $ 10,892
Other comprehensive income: Change in unrealized gains (losses) on securities available for sale, net of tax of $1,507, $1,229 and $1,226 (2,534) (2,081) (2,058) Reclassification adjustment for (gains) losses on securities available for sale included in net income, net of tax of $9, $18, and $3 15 (28) (4) Minimum pension liability adjustment, net of tax of $179, $6, and $7 (301) (10) (12) ---------------- ----------------- -----------------
Other comprehensive income (2,820) (2,119) (2,074) ---------------- ----------------- -----------------
Total comprehensive income $ 9,772 $ 8,656 $ 8,818 ================ ================= =================
The accompanying notes are an integral part of these financial statements.
FIRST M&F CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years Ended December 31, 2005, 2004 and 2003 (In Thousands, Except Share Data)
Nonvested Accumulated Additional Restricted Other Common Paid-in Stock Retained Comprehensive Stock Capital Awards Earnings Income Total ------------ ------------ ------------- ------------ ----------------- ------------ January 1, 2003 $ 22,935 $ 33,260 $ 47,585 $ 4,430 $ 108,210
Net income - - - 10,892 - 10,892 Cash dividends ($1.00 per share) - - - (4,604) - (4,604) 147,846 common shares issued in exercise of stock options 739 3,251 - - - 3,990 169,854 common shares repurchased (849) (4,887) - - - (5,736) Net change - - - - (2,074) (2,074) ------------ ------------ ------------- ------------ ----------------- ------------
December 31, 2003 22,825 31,624 - 53,873 2,356 110,678 ------------ ------------ ------------- ------------ ----------------- ------------
Net income - - - 10,775 - 10,775 Cash dividends ($1.00 per share) - - - (4,535) - (4,535) 40,721 common shares issued in exercise of stock options 204 877 - - - 1,081 99,600 common shares repurchased (498) (2,914) - - - (3,412) Net change - - - - (2,119) (2,119) ------------ ------------ ------------- ------------ ----------------- ------------
December 31, 2004 22,531 29,587 - 60,113 237 112,468 ------------ ------------ ------------- ------------ ----------------- ------------
Net income - - - 12,592 - 12,592 Cash dividends ($1.03 per share) - - - (4,648) - (4,648) 3,000 shares of unrestricted stock awards issued 15 86 - - - 101 6,000 common shares issued in exercise of stock options 30 129 - - - 159 20,000 common shares repurchased (100) (590) - - - (690) Share-based compensation recognized - 10 86 1 - 97 Tax benefits on stock option transactions - 118 - - - 118 Net change - - - - (2,820) (2,820) ------------ ------------ ------------- ------------ ----------------- ------------
December 31, 2005 $ 22,476 $ 29,340 $ 86 $ 68,058 $ (2,583) $ 117,377 ============ ============ ============= ============ ================= ============
The accompanying notes are an integral part of these financial statements.
FIRST M&F CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004 and 2003 (In Thousands)
2005 2004 2003 ---------------- ----------------- -----------------
Cash flows from operating activities: Net income $ 12,592 $ 10,775 $ 10,892 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation 198 - - Depreciation and amortization 1,995 1,926 1,933 Provision for loan losses 3,146 5,351 3,802 Net investment amortization 444 829 977 Capitalized dividends on FHLB stock (298) (123) (110) Net change in unearned fees/deferred costs on loans 159 50 (277) Net accretion of discount on time deposits 45 1 - (Gain) loss on securities available for sale 24 (46) (7) Gains on loans held for sale (231) (96) (59) Other asset sale (gains) losses 573 78 180 Earnings (loss) of noncontrolling interest 10 (1,256) 389 Deferred income taxes (241) (23) (330) (Increase) decrease in: Accrued interest receivable (1,975) 204 (205) Cash surrender value of bank owned life insurance (429) (580) (532) Loans held for sale 6,746 25 (359) Other assets (1,431) (822) 267 Increase (decrease) in: Accrued interest payable 990 349 (541) Other liabilities 1,539 (1,226) (527) ---------------- ----------------- -----------------
Net cash provided by operating activities 23,856 15,416 15,493 ---------------- ----------------- -----------------
Cash flows from investing activities: Purchases of securities available for sale (82,317) (38,134) (33,980) Sales of securities available for sale 3,178 15,086 4,063 Maturities of securities available for sale 65,236 30,832 74,189 Net (increase) decrease in: Interest-bearing bank balances 2,084 (2,551) 10,056 Federal funds sold (150) (2,600) 6,750 Loans (105,278) (75,612) (106,062) Bank premises and equipment (4,773) (4,095) (4,492) Purchases, net of redemptions, of FHLB stock (2) (475) (2,646) Proceeds from sales of other real estate and other repossessed assets 1,967 2,049 1,427 Proceeds from sale of loans by consolidated joint venture, net - 2,789 - ---------------- ----------------- -----------------
Net cash used in investing activities (120,055) (72,711) (50,695) ---------------- ----------------- -----------------
Cash flows from financing activities: Net increase (decrease) in: Noninterest-bearing deposits 26,461 14,000 21,276 Money market, NOW and savings deposits 33,490 4,031 (24,638) Certificates of deposit 36,411 38,469 (436) Short-term borrowings 1,254 1,603 (8,394) Proceeds from other borrowings 72,800 45,750 76,100 Repayments of other borrowings (53,144) (39,160) (25,836) Contributions of, net of distributions to, noncontrolling interests 10 (5) - Cash dividends (4,648) (4,535) (4,604) Common shares issued 159 1,081 3,990 Common shares repurchased (690) (3,412) (5,736) Tax benefits on stock option transactions 118 - - ---------------- ----------------- -----------------
Net cash provided by financing activities 112,221 57,822 31,722 ---------------- ----------------- -----------------
Net increase (decrease) in cash and due from banks 16,022 527 (3,480)
Cash and due from banks at January 1 40,376 39,849 43,329 ---------------- ----------------- -----------------
Cash and due from banks at December 31 $ 56,398 $ 40,376 $ 39,849 ================ ================= =================
The accompanying notes are an integral part of these financial statements.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting 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 accounting principles generally accepted in the United States of America 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 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 subsidiaries, real estate subsidiary, asset-based lending subsidiary and 51% owned accounts receivable financing joint venture and 55% owned title insurance agency. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses represents a significant estimate.
Comprehensive Income
Comprehensive income includes net income reported in the statements of income and changes in unrealized gain (loss) on securities available for sale and minimum pension liability reported as a component of stockholders’ equity. Unrealized gain (loss) on securities available for sale and minimum pension liability, net of deferred income taxes, are the only components of accumulated other comprehensive income (loss) for the Company.
Securities Available for Sale
Securities which are available to be sold prior to maturity are classified as securities available for sale and are recorded at fair value. Unrealized holding gains and losses are reported net of deferred income taxes as a separate component of stockholders’ equity.
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.
Loans Held for Sale
Loans held for sale, consisting primarily of mortgages and student loans, are accounted for at the lower of cost or fair value applied on an individual loan basis. Valuation changes are recorded in other income.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 1: (Continued)
Loans Held for Investment
Loans held for investment are stated at the principal amount outstanding, net of unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loan origination fees and direct loan origination costs are deferred and recognized over the life of the related loans as adjustments to interest income.
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.
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.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed to be adequate by management to absorb estimated probable loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on estimated credit losses for specifically identified loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Management considers a number of factors in estimating probable credit losses inherent in the loan portfolio, including: historical loan loss experience for various types of loans; composition of the loan portfolio; past due trends in the loan portfolio; current trends; current economic conditions; industry exposure and allowance allocation percentages for various grades of loans, with such grades being assigned to loans based on internal and external loan reviews, loan risk, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant in grading loans.
Management’s evaluation of the allowance for loan losses is inherently subjective as it requires material estimates. The actual amounts of loan losses realized in the near term could differ from the amounts estimated in arriving at the allowance for loan losses reported in the financial statements.
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 fair 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 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.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 1: (Continued)
Intangible Assets
The Company adopted Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. Under SFAS 142, goodwill and intangible assets that have indefinite lives are not amortized, but are tested for impairment annually and when there is an impairment indicator. Goodwill impairment losses are reported in a company’s income statement. The Company has no intangible assets having indefinite lives other than goodwill. Prior to adoption of SFAS 142 on January 1, 2002, goodwill was being amortized on a straight-line basis over 40 years and 15 years.
Intangible assets, such as core deposit intangibles, customer renewal lists and noncompete agreements with determinable useful lives are amortized over their respective useful lives.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), “Share-Based Payment”, as of July 1, 2005. SFAS No. 123R requires the use of the fair value method of accounting for stock-based compensation. The Company adopted the modified prospective method of transition whereby stock-based compensation expense is recognized prospectively for all stock-based awards that were not fully vested as of the date of adoption of the Statement, and for all awards issued thereafter. The following table shows the 2005 effect of share-based compensation on certain operating items of adopting SFAS No. 123R.
(In thousands, except share data) Under SFAS No. 123 And Under SFAS No. 123R APB Opinion No. 25 Difference ----------------------------- --------------------------------- --------------- Net income before tax (198) (188) (10) Net income (123) (117) (6) Cash flows from operations 38 156 (118) Cash flows from financing activities: Stock options exercised 159 159 - Tax benefits realized 118 - 118
Earnings per share effect: Basic (.03) (.03) - Diluted (.03) (.03) - ============================= ================================= ===============
Through June 30, 2005 the Company accounted for its stock-based employee compensation plans based on the “intrinsic value method” provided for in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The Company elected not to adopt the recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, which require a fair-value based method of accounting for stock options and similar equity awards. Because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized on stock option plans. SFAS No. 123, as amended by SFAS No. 148, requires pro forma disclosures for net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. SFAS No. 123R requires that these disclosures be made for all periods for which SFAS No. 123R is not retrospectively applied. The pro forma disclosures required by SFAS No. 123 are shown in the table below using the fair value method of SFAS No. 123R to measure compensation expense for stock-based employee plans as if the Company had used the fair value method of accounting. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions in 2005, 2004 and 2003: expected dividend yield of 3.25%, 3.25% and 5.00%; expected volatility of 22.35%, 22.35% and 22.57%; risk-free interest rate of 6.50%; and an expected life of 10 years. The estimated fair values of stock options at their grant date were $9.75 in 2005, $9.96 in 2004 and $7.67 in 2003.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 1: (Continued)
Stock-based Compensation
(In thousands, except share data) 2005 2004 2003 -------------- ----------------- -----------------
Net income, as reported $ 12,592 $ 10,775 $ 10,892 Add: Stock option expense recognized, net of taxes 6 - - Restricted stock award expenses recognized, net of taxes 54 - - Unrestricted stock award expenses recognized, net of 63 - -
Less: Total stock option expense determined under the fair value method, net of taxes 11 29 85 Restricted stock award expenses, net of taxes 54 - - Unrestricted stock award expenses, net of taxes 63 - - -------------- ----------------- -----------------
Net income, pro forma $ 12,587 $ 10,746 $ 10,807 ============== ================= =================
Earnings per share, as reported: Basic $ 2.80 $ 2.37 $ 2.36 Diluted 2.79 2.36 2.35 ============== ================= =================
Earnings per share, pro forma: Basic $ 2.80 $ 2.36 $ 2.34 Diluted 2.79 2.35 2.33 ============== ================= =================
Income Taxes
The Company, the Bank and the Bank's wholly owned subsidiaries, except for the credit insurance subsidiary, 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.
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 consolidated statement of condition caption "Cash and Due from Banks." The following supplemental disclosures are made related to the consolidated statements of cash flows:
(In thousands) 2005 2004 2003 --------------- ----------------- ----------------- Interest paid $ 22,149 $ 16,701 $ 18,398 Federal and state income taxes paid 4,479 5,217 4,655 Other real estate and repossessions acquired in noncash foreclosures 2,121 3,920 1,575 =============== ================= =================
Concentrations of Credit
Substantially all of the Company's loans, commitments and standby and commercial letters of credit have been granted to borrowers who are customers in the Company's market area. As a result, the Company is subject to this concentration of credit risk. A substantial portion of the loan portfolio, as presented in Note 3, is represented by loans collateralized by real estate. The ability of the borrowers to honor their contracts is dependent upon the real estate market and general economic conditions in the Company's market area.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 1: (Continued)
Recent Pronouncements
The adoption of the following recent accounting pronouncements did not have a material impact on the Company’s financial condition and results of operations:
o FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34"
o FASB Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity"
o FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51"
o FASB Statement of Financial Accounting Standards (SFAS) No. 132 (R) (revised 2003), "Employer's Disclosures about Pensions and Other Post-Retirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106"
o FASB Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
o SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments"
o FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations - An Interpretation of FASB Statement No. 143", and
o EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments"
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3." This statement generally requires retrospective application to prior periods' financial statements of changes in accounting principle, whereas under APB Opinion No. 20 the cumulative effect of a change in accounting principle was included in net income of the period in which the change was made. This Statement also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle, and therefore, accounted for prospectively. This Statement carries forward the guidance in APB Opinion No. 20 related to corrections of errors. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption to have a material impact on its financial condition or results of operations.
In November 2005, the FASB issued FASB Staff Position Nos. FAS 115-1 and FAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This pronouncement relates to determining when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. This pronouncement (1) nullifies paragraphs 10 - 18 of EITF Issue No. 03-1 related to determining when an impairment is other-than-temporary, (2) carries forward the requirements of paragraphs 8 and 9 of Issue 03-1 with respect to cost-method investments, (3) carries forward the disclosure requirements included in paragraphs 21 and 22 of Issue 03-1, which are presented in Note 2 to the Company's financial statements, and related examples and (4) references existing other-than-temporary impairment guidance as a replacement to the specific guidance originally given in paragraphs 10 - 18 of EITF Issue No. 03-1. The provisions of this FSP are to be applied to reporting periods beginning after December 15, 2005. The Company does not expect the adoption to have a material impact on its financial condition or results of operations.
Reclassifications
Certain reclassifications have been made to the 2004 and 2003 financial statements to be consistent with 2005 presentation.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 2: Securities Available for Sale
The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2005 and 2004:
(In thousands) Gross Unrealized Amortized ---------------------------- Fair Cost Gains Losses Value -------------- ----------- ------------- -------------
December 31, 2005: U. S. Treasury securities $ 3,993 $ 6 $ 36 $ 3,963 U. S. Government agencies 69,888 26 846 69,068 Mortgage-backed investments 50,128 296 920 49,504 Obligations of states and political subdivisions 52,549 685 360 52,874 Other 8,644 25 59 8,610 Equity securities 1,040 28 16 1,052 -------------- ----------- ------------- -------------
$186,242 $1,066 $2,237 $185,071 ============== =========== ============= =============
December 31, 2004: U. S. Treasury securities $ 528 $ 22 $ - $ 550 U. S. Government agencies 61,564 393 161 61,796 Mortgage-backed investments 46,718 891 212 47,397 Obligations of states and political subdivisions 54,274 1,867 52 56,089 Other 8,686 103 29 8,760 Equity securities 1,038 27 3 1,062 -------------- ----------- ------------- -------------
$172,808 $3,303 $ 457 $175,654 ============== =========== ============= =============
Provided below is a summary of securities available for sale which were in an unrealized loss position and the length of time that individual securities have been in a continuous loss position at December 31, 2005 and 2004.
(In thousands) Less Than 12 Months 12 Months or More Total ----------------------------- ----------------------------- ------------------------------ Fair Unrealized Fair Unrealized Fair Unrealized December 31, 2005: Value Losses Value Losses Value Losses ------------ ------------- ------------ ------------- ------------- ------------- U. S. Treasury securities $ 3,429 $ 36 $ - $ - $ 3,429 $ 36 U. S. Government agencies 57,095 704 7,367 142 64,462 846 Mortgage-backed investments 24,395 531 10,342 389 34,737 920 Obligations of states and political subdivisions 9,495 192 5,733 168 15,228 360 Other 2,189 2 1,575 57 3,764 59 Equity securities - - 969 16 969 16 ------------ ------------- ------------ ------------- ------------- -------------
$ 96,603 $ 1,465 $ 25,986 $ 772 $ 122,589 $ 2,237 ============ ============= ============ ============= ============= =============
December 31, 2004: U. S Government agencies $ 17,484 $ 117 $ 1,990 $ 44 $ 19,474 $ 161 Mortgage-backed investments 14,039 211 121 1 14,160 212 Obligations of states and political subdivisions 4,072 27 1,741 25 5,813 52 Other 2,894 29 - - 2,894 29 Equity securities 982 3 - - 982 3 ------------ ------------- ------------ ------------- ------------- -------------
$ 39,471 $ 387 $ 3,852 $ 70 $ 43,323 $ 457 ============ ============= ============ ============= ============= =============
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 2 (Continued)
Management believes that the impairments above are temporary and will be recovered over the investments’ holding periods. The impairments on U. S. Treasury, Government agency and mortgage-backed securities are due to interest rate fluctuations, as the impaired investments all have AAA credit ratings. Management has the ability and intent to hold these securities until their values are recovered. At December 31, 2005 there were 47 impaired U. S. Treasury and Agency securities, with 7 securities having impairments in excess of 12 months. At December 31, 2005 there were 48 impaired mortgage-backed securities, with 12 securities having impairments in excess of 12 months. Management believes that the municipality obligations will recover by or before their maturity dates based on the facts that (1) most of the securities mature before the end of 2009, and (2) management knows of no credit-related problems regarding any of the issuers. At December 31, 2005 there were 76 impaired municipal securities with 29 securities having impairments in excess of 12 months. The other securities represent 6 investments in corporate debt and debt collateralized by trust preferred securities, all of which have Moody’s credit ratings of at least A1, have long maturities which exacerbate interest rate risk, and which Management intends to hold until the unrealized losses are recovered. Of these securities, 3 have been impaired in excess of 12 months.
The amortized cost and fair values of debt securities available for sale at December 31, 2005, 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. Equity securities are not included since they have no stated maturity.
(In thousands) Amortized Fair Cost Value ----------------- -----------------
One year or less $ 22,100 $ 22,075 After one through five years 105,946 105,400 After five through ten years 5,800 5,827 After ten years 1,228 1,213 ----------------- ----------------- 135,074 134,515 Mortgage-backed investments 50,128 49,504 ----------------- -----------------
$ 185,202 $ 184,019 ================= =================
The following is a summary of the amortized cost and fair value of securities available for sale which were pledged to secure public deposits, short-term borrowings and for other purposes required or permitted by law.
(In thousands) Amortized Fair Cost Value ----------------- -----------------
December 31, 2005 $ 179,058 $ 177,812 ================= =================
December 31, 2004 $ 144,040 $ 146,532 ================= =================
The following is a summary of gains and losses on securities available for sale:
(In thousands) 2005 2004 2003 ---------------- ----------------- -----------------
Gross realized gains $ - $ 95 $ 36 Gross realized losses (24) (49) (29) ---------------- ----------------- -----------------
$ (24) $ 46 $ 7 ================ ================= =================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 3: 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 and North Mississippi. The following is a summary of the Bank's loans held for investment, net of unearned income of $1.071 million and $1.092 million at December 31, 2005 and 2004:
(In thousands) 2005 2004 ----------------- ------------------ Real estate loans: Residential $ 227,166 $ 237,746 Construction and land development 181,036 110,480 Farmland 47,215 38,466 Nonfarm nonresidential real estate 281,735 267,230 Commercial, financial and agricultural 151,599 128,735 Consumer 41,457 46,678 Other 2,872 3,151 ----------------- ------------------
$ 933,080 $ 832,486 ================= ==================
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, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility at the time of the transaction. A summary of such outstanding loans follows:
(In thousands) 2005 2004 ------------------- --------------------
Loans outstanding at January 1 $ 8,582 $ 4,077 New loans and advances 60,865 35,466 Repayments (58,188) (30,961) ------------------- --------------------
Loans outstanding at December 31 11,259 $ 8,582 =================== ====================
The following is a summary of nonperforming loans at December 31, 2005 and 2004:
(In thousands) 2005 2004 ----------------- ------------------
Nonaccrual loans $ 1,403 $ 3,302 Loans past due 90 days or more (based on contractual loan terms) and still accruing interest 510 645 ----------------- ------------------
$ 1,913 $ 3,947 ================= ==================
The Company accounts for certain distressed loans as impaired loans. Impaired loans are discounted, using an allowance, to their present value. The allowance on these impaired loans is included in the Company's Allowance for loan losses. The following table presents information about the Company's impaired loans as of December 31, 2005 and 2004.
(In thousands) 2005 2004 ------------------ ------------------ Impaired loans with an allowance $ 1,643 $ 1,077 Impaired loans without an allowance - 2,225 ------------------ -------------------
Total impaired loans $ 1,643 $ 3,302 ================== ===================
Allowance for impaired loans $ 822 $ 538 Average balance of impaired loans 2,196 4,618 Interest income recognized on impaired loans 66 138 ================== ===================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 4: Allowance for Loan Losses
Transactions in the allowance for loan losses are summarized as follows:
(In thousands) 2005 2004 2003 ------------------ ----------------- -----------------
Balance at January 1 $ 11,619 $ 10,891 $ 10,258
Loans charged off (3,073) (5,626) (3,675) Recoveries 757 1,003 506 ------------------ ----------------- ----------------- Net charge-offs (2,316) (4,623) (3,169) ------------------ ----------------- -----------------
Provision for loan losses 3,146 5,351 3,802 ------------------ ----------------- -----------------
Balance at December 31 $ 12,449 $ 11,619 $ 10,891 ================== ================= =================
Note 5: Bank Premises and Equipment
The following is a summary of bank premises and equipment at December 31, 2005 and 2004:
(In thousands) 2005 2004 ------------------- --------------------
Land $ 7,838 $ 7,079 Buildings 26,040 23,347 Furniture, fixtures and equipment 18,369 17,105 Leasehold improvements 386 389 ------------------- -------------------- 52,633 47,920 Less accumulated depreciation and amortization 23,711 21,921 ------------------- --------------------
$ 28,922 $ 25,999 =================== ====================
Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $1.943 million in 2005, $1.850 million in 2004, and $1.818 million in 2003.
Rent expense applicable to operating leases was as follows for the years ended December 31:
(In thousands) 2005 2004 2003 -------------------- -------------------- ----------------- Buildings and office space $ 358 $ 302 $ 260 Computer equipment 619 642 645 Other equipment and autos 192 173 124 -------------------- -------------------- ----------------- 1,169 1,117 1,029 Rental income (23) (28) (41) -------------------- -------------------- -----------------
Net rent expense $ 1,146 $ 1,089 $ 988 ==================== ==================== =================
The Company is obligated under a number of noncancelable operating leases for premises and equipment. Minimum future lease payments for noncancelable operating leases at December 31, 2005 are as follows:
(In thousands) 2006 $ 1,263 2007 1,025 2008 507 2009 196 2010 103 After 2010 68 ---------------------
Total minimum lease payments $ 3,162 =====================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 6: Other Assets
The following is a summary of other assets at December 31, 2005 and 2004:
(In thousands) 2005 2004 -------------------- --------------------
Cash surrender value of bank owned life insurance $ 14,278 $ 13,849 Federal Home Loan Bank stock 7,956 7,656 Deferred income tax 5,488 3,570 Other 7,100 6,649 -------------------- --------------------
$ 34,822 $ 31,724 ==================== ====================
As a condition to borrowing funds from the Federal Home Loan Bank of Dallas (FHLB), the Bank is required to purchase stock in the FHLB. No ready market exists for the stock, and it has no quoted market value. The investment in FHLB stock can only be redeemed by the FHLB at face value.
The Company adopted SFAS 142 effective on January 1, 2002. With the adoption of SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized. Instead they are reviewed for impairment at least annually or when certain indicators are encountered to determine if they should be written down with an accompanying charge to earnings. The Company had no indefinite lived intangible assets other than goodwill.
Intangible assets, such as core deposit intangibles, customer renewal lists and noncompete agreements with a determinable useful life continue to be amortized over their respective useful lives. Renewal list intangibles have 15 year lives with a remaining average life of 8.6 years at December 31, 2005. Noncompete agreement intangibles have 15 year lives with a remaining average life of 4.5 years at December 31, 2005.
The following is a summary of amortized intangible assets at December 31, 2005:
(In thousands) Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------------------ ------------------ -----------------
Customer renewal lists $ 467 $ 233 $ 234 Noncompete agreements 413 289 124 ------------------ ------------------ -----------------
$ 880 $ 522 $ 358 ================== ================== =================
Amortization expense for intangible assets having determinable useful lives amounted to $55 thousand in 2005, $76 thousand in 2004, and $115 thousand in 2003. Estimated amortization expense for the five succeeding years at December 31, 2005, is as follows:
(In thousands) 2006 $ 55 2007 55 2008 55 2009 55 2010 42 ===============
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 7: Deposits
The following is a summary of deposits at December 31, 2005 and 2004:
(In thousands) 2005 2004 ------------------------ ------------------------
Noninterest-bearing $ 164,189 $ 137,728
Interest-bearing: NOW and money market deposits 308,301 271,981 Savings deposits 82,512 85,342 Certificates of deposit of $100 thousand or more 173,374 166,467 Brokered certificates of deposit 20,834 9,951 Other certificates of deposit 224,461 205,795 ------------------------ ------------------------ Total interest-bearing 809,482 739,536 ------------------------ ------------------------
Total deposits $ 973,671 $ 877,264 ======================== ========================
Interest expense on certificates of deposit of $100 thousand or more amounted to $5.026 million in 2005, $3.651 million in 2004 and $3.419 million in 2003.
At December 31, 2005, the scheduled maturities of certificates of deposit are as follows:
(In thousands) 2006 $ 252,857 2007 67,056 2008 72,165 2009 21,845 2010 4,741 After 2010 5 -----------------
$ 418,669 =================
Note 8: Short-Term Borrowings
The following is a summary of information related to short-term borrowings:
(In thousands) Weighted Balance Outstanding Average Rate ---------------------------------------------------- -------------------------- Maximum Average At During At Month End Daily Year End Year Year End ------------- -------------- ---------------- ---------- ----------- 2005: Federal funds purchased $ 17,400 $ 4,182 $ - 3.77% - Securities sold under agreements to repurchase 18,062 14,874 18,862 4.16% 3.74% ------------- -------------- ---------------- ========== ===========
$ 35,462 $19,056 $18,062 ============= ============== ================
2004: Federal funds purchased $ 31,900 $ 5,411 $ - 1.97% - Securities sold under agreements to repurchase 18,872 15,428 16,808 3.61% 3.75% ------------- -------------- ---------------- ========== ===========
$ 50,772 $20,839 $16,808 ============= ============== ================
2003: Federal funds purchased $ 8,600 $ 1,773 $ - 1.36% - Securities sold under agreements to repurchase 22,859 16,984 15,205 3.44% 3.57% ------------- -------------- ---------------- ========== ===========
$ 31,459 $18,757 $15,205 ============= ============== ================
Federal funds purchased represent primarily overnight borrowings through relationships with correspondent banks. Securities sold under agreements to repurchase generally have maturities of less than 30 days and are collateralized by U. S. Treasury securities and securities of U. S. Government agencies and corporations.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 9: Other Borrowings
The following is a summary of other borrowings at December 31, 2005 and 2004:
(In thousands) 2005 2004 --------------------- ---------------------
Company's line of credit in the amount of $15 million, renewable annually; secured by approximately 29% of the Bank's common stock; interest payable quarterly at .75% below the lender's base rate $ 2,642 $ 6,642
Bank's advances from the Federal Home Loan Bank of Dallas, net 145,852 122,196
Banks' insurance subsidiary other note payable 40 - --------------------- ---------------------
$ 148,534 $ 128,838 ===================== =====================
The Bank has advances from the Federal Home Loan Bank of Dallas (FHLB) under Blanket Agreements for Advances and Security Agreements. These agreements allow the Bank to borrow funds from the FHLB to fund mortgage loan programs and to satisfy certain other funding needs. The value of mortgage-backed securities and mortgage loans pledged under these agreements must be maintained at not less than 115% and 150%, respectively, of the advances outstanding. The following is a summary of these advances, exclusive of purchase accounting adjustments, at December 31, 2005 and 2004:
(In thousands) 2005 2004 ------------------- --------------------
Single payment advances maturing within 12 months of year end: Balance $ 47,500 $ 35,530 Range of rates 2.80%-4.65% 1.30%-8.16%
Single payment advances maturing after 12 months of year end: Balance $ 44,800 $ 23,500 Range of rates 4.24%-6.50% 2.80%-6.50% Range of maturities 2008-2016 2006-2010
Amortizing advances: Balance $ 53,552 $ 63,166 Monthly payment amount 1,165 1,290 Range of rates 2.17%-8.48% 2.17%-8.48% Range of maturities 2006-2020 2005-2020
Scheduled principal payments on FHLB advances at December 31, 2005, are as follows:
(In thousands) 2006 $ 61,737 2007 12,717 2008 16,698 2009 11,776 2010 33,977 After 2010 8,947 ------------------
$ 145,852 ==================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 10: Employee Benefit Plans
Pension Plan
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 froze benefit accruals under this plan effective September 30, 2001.
The measurement date for actuarial calculations for the plan is October 1 of each year. The following is a summary of the plan's funded status:
(In thousands) 2005 2004 ------------------------ -----------------------
Change in benefit obligation: Projected benefit obligation at beginning of year $ 8,283 $ 8,038 Service cost - - Interest cost 457 463 Actuarial (gain) loss 647 217 Benefit payments (454) (435) ------------------------ ----------------------- Projected benefit obligation at end of year 8,933 8,283 ------------------------ -----------------------
Change in plan assets: Fair value of plan assets at beginning of year 7,451 6,868 Actual return on plan assets 513 559 Employer contributions 300 500 Benefit payments (454) (435) Expenses (23) (41) ------------------------ ----------------------- Fair value of plan assets at end of year 7,787 7,451 ------------------------ -----------------------
Funded status at measurement date: Plan assets less than projected benefit obligation (1,146) (832) Unrecognized net actuarial loss 3,670 3,236 Unrecognized transition asset (37) (45) Unamortized prior service credit (218) (256) ------------------------ -----------------------
Prepaid pension asset recognized 2,269 2,103
Pension accrual recognized (465) (465) ------------------------ -----------------------
Net amount recognized $ 1,804 $ 1,638 ======================== =======================
The following is a summary of amounts recorded in the consolidated statements of condition:
(In thousands) 2005 2004 --------------------- ---------------------
Prepaid benefit cost $ 2,269 $ 2,103 Accrued benefit liability (3,415) (2,934) Accumulated other comprehensive income, before income taxes 2,950 2,469 --------------------- ---------------------
Net amount recognized $ 1,804 $ 1,638 ===================== =====================
The following is a summary of information related to benefit obligations and plan assets:
(In thousands) 2005 2004 --------------------- ---------------------
Projected benefit obligation $ 8,933 $ 8,283 Accumulated benefit obligation 8,933 8,283 Fair value of plan assets 7,787 7,451
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 10: (Continued)
Net pension cost (benefit) included the following components:
(In thousands) 2005 2004 2003 ------------------ ------------------ -----------------
Service cost $ - $ - $ - Interest cost 463 469 488 Expected return on plan assets (504) (498) (419) Amortization of transition asset (9) (9) (9) Amortization of prior service credit (37) (37) (37) Recognized actuarial (gain) loss 220 220 210 ------------------ ------------------ -----------------
Net pension cost $ 133 $ 145 $ 233 ================== ================== =================
Total expense recorded in the accompanying consolidated statements of income related to the pension plan included the following components:
(In thousands) 2005 2004 2003 ------------------ ------------------ -----------------
Net pension cost $ 133 $ 145 $ 233 Payments for expenses made on behalf of the plan 56 54 93 ------------------ ------------------ -----------------
$ 189 $ 199 $ 326 ================== ================== =================
The following is a summary of weighted average assumptions:
2005 2004 2003 ----------------- ------------------ -----------------
Discount rate for determining current year's costs 5.75% 6.00% 6.75% Discount rate for determining year end benefit obligation 5.25% 5.75% 6.00% Expected return on plan assets for determining current years' costs 7.00% 7.50% 7.75% Rate of compensation increase (plan is frozen) -% -% -% ================= ================== =================
The Company estimates the long-term rate of return on plan assets using historical returns, changes in asset mix, general economic conditions and industry practice. Historical annual returns on plan assets have ranged from losses of approximately 10% to gains in excess of 15%. The short-term volatility of these returns makes them an unreliable indicator of future long-term returns. Therefore, the historical plan rate of return is not used as a starting point, but rather as a guideline in determining the plan assumption for returns. The plan return was 7.0% in 2005, and 7.8% in 2004. The mix of invested assets has changed over time from predominately fixed-income securities prior to 1997 to a mix of equity securities and fixed-income securities thereafter. The equity securities have brought more return volatility and higher expected returns to the portfolio. Management expects that the long-term equity market returns will approximate the past 50 years, which provided an average 12.3% return, based upon stock market historical data. Current and expected economic conditions also affect the determination of the estimate of long-term returns. Management also uses a survey of pension plan managers provided by a third party which indicates the rate of return assumptions that are predominant in the industry. Based upon these assumptions, management estimated long-term returns of 8% in 2002, given the expected asset mix. These return expectations have been reduced during the last three years due to economic factors and the interest rate environment. Management has determined that these assumptions are reasonable and are comparable to the return assumptions generally predominant in the industry.
The plan's asset allocations at December 31, 2005 and 2004 by asset category are as follows:
2005 2004 ---------------------- ----------------------
Interest-bearing bank balances 3% 6% Debt securities 33% 32% Equity securities 64% 62% ---------------------- ----------------------
100% 100% ====================== ======================
Equity securities included 9,434 shares of the Company's common stock at December 31, 2005 and 2004.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 10: (Continued)
The investment policy of the pension plan is based upon three principles: (1) the preservation of capital, (2) risk aversion, and (3) adherence to investment discipline. Investment managers should make reasonable efforts to preserve capital, understanding that losses may occur in individual securities. Investment managers are to make reasonable efforts to control risk, and will be evaluated regularly to ensure that the risk assumed is commensurate with the given investment style and objectives. Investment managers are expected to adhere to the investment management styles for which they were hired.
The plan investment objectives are: (1) income and growth, which is the primary objective, and the secondary objectives of (2) liquidity and (3) preservation of capital. The plan’s return objective is to achieve a balanced return of income and modest growth of principle. The goal of the plan is to achieve an absolute rate of return of 8% over the life of the plan. The secondary objectives ensure (1) the ability to meet all expected or unexpected cash flow needs by investing in securities which can be sold readily and efficiently and (2) the probability of loss of principle over the investment horizon is minimized, effectively emphasizing the minimizing of return volatility over the maximization of total return. Individual investment managers will be required to manage toward a market index, a blended index, or another target established by the Company’s Retirement Committee that reflects the expected style of management. Each individual portfolio manager is expected to display an overall level of risk in the portfolio which is consistent with the risk associated with the benchmark return. Risk is measured by the standard deviation of quarterly returns.
The following table outlines the target asset allocations in percentages for plan assets.
Minimum Maximum Preferred -------------------------- --------------------------- ------------------------
Equities 50% 70% 60% Fixed-income 30% 40% 35% Cash 2% 8% 5%
Plan assets are ultimately managed to provide for benefit payments. This is done by providing for targeted returns, to assure that future benefit obligations will be provided for, by providing income production as well as principle growth, and by investing in assets that are liquid. The Company’s Retirement Committee monitors expected cash flows and modifies the investment targets and allocations to provide for those future needs.
Prohibited investments include commodities and futures contracts, private placements, options, limited partnerships, venture-capital investments, real estate properties, interest-only (IO), principal-only (PO) and residual tranche CMO’s and hedge funds. Prohibited transactions within the plan are short selling and margin transactions.
Pension benefit payments are made from assets of the pension plan. It is anticipated that future benefit payments for the plan will be as follows.
(In thousands) Year Expected payments --------------------------------------- ----------------------------------------------
2006 $ 481 2007 479 2008 481 2009 502 2010 526 2011 - 2015 2,704 ==============================================
The Company expects to contribute $300 thousand to the pension plan in 2006.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 10: (Continued)
Profit and Savings Plan
The Bank has a profit and savings plan which includes features such as an Employee Stock Ownership 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 matched employee 401(k) contributions equal to 50% of an employee’s first 5% of salary deferral through 2004. Beginning in 2005, the Company matched contributions equal to 50% of an employee’s first 6% of salary deferral. Total matching contributions accrued for this plan were $369 thousand in 2005, $187 thousand in 2004, and $183 thousand in 2003. During 2004, the Company began making matching contributions on a monthly basis rather than on an annual basis. Additional contributions to the plan are at the discretion of the Board of Directors. Discretionary contributions, which are invested in the Company’s common stock, for this plan were $75 thousand in 2005, $65 thousand in 2004, and $50 thousand in 2003.
At December 31, 2005 and 2004, the profit and savings plan owned 98,782 and 89,817 shares of the Company’s common stock.
Nonqualified Deferred Compensation Plan
The Bank has a nonqualified deferred compensation plan for senior officers and executives of the Bank and its subsidiaries. The plan allows for the deferral of salary by the participants with the Company having the option of also making matching contributions and profit sharing contributions. The participant’s earnings credits are indexed to selected mutual fund returns. Matching contributions and profit sharing contributions vest evenly over a five (5) year period. The Company will use the earnings of Bank-owned life insurance policies to provide sufficient revenues to offset the cost of the liabilities incurred by participant earnings credits. The Company made a profit sharing contribution to the plan of $11 thousand and incurred administrative expenses of $1 thousand in 2005.
Note 11: Stock Compensation Plan
The Company implemented a stockholder approved Stock Option Plan, effective January 1, 1999, authorizing the grant of incentive stock options (ISO’s) to key employees and nonstatutory stock options (NSO’s) to members of the Board. The stated 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 500,000 shares. 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. In May 2005 the Stock Option Plan was replaced by the shareholder approved 2005 Equity Incentive Plan. The plan allows for share-based payments in the form of stock options, restricted stock awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be awarded are 350,000. However, there are limits on certain types of awards. The maximum number of shares that may be awarded in the form of stock options is 200,000. The maximum number of shares that may be awarded in forms other than options and stock appreciation rights is 250,000. The maximum number of shares that may be awarded to Directors is 50,000.
As discussed in Note 1 the Company adopted Statement of Financial Accounting Standards No. 123R “Share-Based Payment” on July 1, 2005. The Company is using the modified prospective method of transition. In determining the amounts of compensation expense to record for unvested stock options as of June 30, 2005 and all subsequently issued stock options, the Company is using an estimated forfeiture rate of 9.45% (1.89% annual rate) for employee grants and 5.45% (1.09% annual rate) for Director grants based upon the history of the 1999 Stock Option Plan.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 11: (Continued)
The following is a summary of stock option activity:
Weighted Average Outstanding Exercise Options Price ------------------------ ------------------------
January 1, 2003 319,752 $ 28.30 Options granted 2,500 38.00 Options exercised (147,846) 26.99 ------------------------ ------------------------ December 31, 2003 174,406 29.56 ------------------------ ------------------------ Options granted 2,500 34.73 Options exercised (40,721) 26.53 Options forfeited (10,000) 35.75 ------------------------ ------------------------ December 31, 2004 126,185 30.16 ------------------------ ------------------------ Options granted 3,500 34.00 Options exercised (6,000) 26.56 Options forfeited (4,000) 30.97 ------------------------ ------------------------
December 31, 2005 119,685 $ 30.40 ======================== ========================
The following is a summary of stock options outstanding at December 31, 2005:
Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Contractual Price- Price- Exercise Options Life Options Options Options Price Range Outstanding (Years) Outstanding Exercisable Exercisable -------------------- ----------------- ----------------- ----------------- --------------- ----------------- $ 20.00 - $ 20.25 4,000 4.96 $ 20.09 3,500 $ 20.11 25.25 - 27.92 45,185 1.59 27.56 43,985 27.62 31.75 - 38.00 70,500 3.88 32.82 63,500 32.57
In August 2005 the Company issued 38,383 restricted stock awards at a grant date fair value of $34.15 to certain senior officers of the Company. Substantially all of the shares vest in seven (7) years and are potentially forfeitable until the vesting date. Additionally the shares include a performance condition that may accelerate vesting at the achievement of a diluted earnings per share and net income target. Non-achievement of the performance condition during the seven (7) year vesting period would not prevent vesting of the shares. In December 2005 the Company issued 18,500 restricted stock awards at a grant date fair value of $33.71 to certain senior and executive officers of the Bank. 12,500 of the shares vest in seven (7) years with 3,000 shares vesting in five (5) years and 3,000 shares vesting in three (3) years. The share awards issued in December have the same potential acceleration criteria as the awards issued in August. At December 31, 2005 there was $1.845 million in unrecognized compensation cost. The Company estimates that 4.00% (.57% annual rate) of the nonvested shares will be forfeited in determining net compensation expenses recognized.
In December 2005 the Company issued 3,000 shares of stock bearing no restrictions at a grant date fair value of $33.71 to certain senior and executive officers as a performance bonus. The Company recognized $101 thousand in compensation expense related to the awards.
Note 12: Other Expenses
Significant components of other expenses are summarized as follows:
(In thousands) 2005 2004 2003 ------------------ ------------------ -----------------
Postage and shipping $ 604 $ 619 $ 637 Stationery and supplies 866 846 716 Accounting, legal and professional fees 905 1,234 1,228 Insurance expense 650 613 639 Other 4,918 4,485 4,905 ------------------ ------------------ -----------------
$ 7,943 $ 7,797 $ 8,125 ================== ================== =================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 13: Income Taxes
The components of income tax expense (benefit) are as follows:
(In thousands) Federal State Total ------------------ ------------------ ----------------- 2005: Current $ 5,523 $ 718 $ 6,241 Current taxes related to noncontrolling interests 3 1 4 Deferred (209) (32) (241) ------------------ ------------------ -----------------
Total $ 5,317 $ 687 $ 6,004 ================== ================== =================
2004: Current $ 4,150 $ 417 $ 4,567 Current taxes related to noncontrolling interests (406) (63) (469) Deferred (20) (3) (23) ------------------ ------------------ -----------------
Total $ 3,724 $ 351 $ 4,075 ================== ================== =================
2003: Current $ 4,385 $ 548 $ 4,933 Current taxes related to noncontrolling interests 126 19 145 Deferred (280) (50) (330) ------------------ ------------------ -----------------
Total $ 4,231 $ 517 $ 4,748 ================== ================== =================
The differences between actual income tax expense and expected income tax expense are summarized as follows:
(In thousands) 2005 2004 2003 ------------------ ------------------ -----------------
Amount computed using the Federal statutory rates on income before taxes $ 6,322 $ 4,739 $ 5,413 Increase (decrease) resulting from: Tax exempt income, net of disallowed interest deduction (665) (745) (795) State income tax expense, net of Federal effect 453 273 329 Life insurance income (146) (197) (181) Other, net 40 5 (18) ------------------ ------------------ -----------------
$ 6,004 $ 4,075 $ 4,748 ================== ================== =================
The change in the net deferred taxes is a result of current period deferred tax expense (benefit), and changes in accumulated other comprehensive income. The components of the net deferred tax asset (liability) at December 31, 2005 and 2004, consist of the following:
(In thousands) 2005 2004 ------------------------ ------------------------
Allowance for loan losses $ 4,643 $ 4,334 Loan fees 450 374 Purchase accounting adjustments 29 43 Accrued expenses 377 302 Minimum pension liability 1,101 921 Unrealized loss on securities available for sale 437 - Other 478 364 ------------------------ ------------------------ Total deferred tax assets 7,515 6,338 ------------------------ ------------------------
Fixed assets and depreciation (407) (507) Federal Home Loan Bank stock dividends (623) (552) Pension expense (673) (611) Unrealized gain on securities available for sale - (1,061) Prepaid expenses (269) - Other (55) (37) ------------------------ ------------------------ Total deferred tax liabilities (2,027) (2,768) ------------------------ ------------------------
$ 5,488 $ 3,570 ======================== ========================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 14: Earnings Per Share
The following table shows a reconciliation of earnings per share to diluted earnings per share:
(In thousands, except share data) 2005 2004 2003 ------------------ ------------------ -----------------
Basic earnings per share: Net income $ 12,592 $ 10,775 $ 10,892 ================== ================== =================
Weighted average shares outstanding 4,495,030 4,542,213 4,608,023 ================== ================== =================
Basic earnings per share $ 2.80 $ 2.37 $ 2.36 ================== ================== =================
Diluted earnings per share: Net income 12,592 10,775 10,892 ================== ================== =================
Weighted average shares outstanding 4,495,030 4,542,213 4,608,023 Dilutive effect of options and restricted stock grants 9,571 16,895 26,618 ------------------ ------------------ -----------------
Adjusted weighted average shares outstanding 4,504,601 4,559,108 4,634,641 ================== ================== =================
Diluted earnings per share $ 2.79 $ 2.36 $ 2.35 ================== ================== =================
Stock options not included in adjusted shares due to anti-dilutive effect 1,825 399 237
Note 15: Stockholders' Equity
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.
Dividend Reinvestment and Stock Purchase Plan
The Dividend Reinvestment and Stock Purchase Plan authorizes the sale of up to 100,000 shares of the Company’s common stock from authorized, but unissued, shares or from shares acquired on the open market to shareholders who choose to invest all or a portion of their cash dividends and make optional cash payments of $50.00 to $5,000.00 per quarter. All shares for this plan have been purchased on the open market. The price of shares purchased on the open market is the average price paid for all shares purchased for all participants.
Common Stock Repurchase Program
The Company’s Board of Directors approved a common stock repurchase program on August 14, 2002, authorizing the repurchase of up to 184,590 shares of the Company’s outstanding common stock beginning in September, 2002. The authorization specified that up to 92,295 shares may be repurchased in the first twelve months with an additional 92,295 shares authorized for repurchase during the second twelve month period.
The Company’s Board of Directors terminated the August 14, 2002, repurchase program and approved a common stock repurchase program on March 12, 2003, authorizing the repurchase of up to 240,000 shares of the Company’s outstanding common stock beginning in March, 2003. The authorization specified that the shares would be repurchased within twelve months.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 15: (Continued)
On April 14, 2004, the Company’s Board of Directors authorized a new stock repurchase program to repurchase up to 120,000 shares of common stock in the open market over a twelve month period beginning on May 1, 2004, and ending on April 30, 2005. The authorization limited the number of shares that may be repurchased in any calendar month to no more than 10,000.
On May 11, 2005, the company’s Board of Directors authorized a new stock repurchase plan allowing for the purchase of up to 10,000 shares per month through May 2006.
The timing and extent of any repurchases are subject to management’s discretion and will depend on market considerations. The Board will review the repurchase program after the first twelve months to allow for any needed adjustments. The reacquired shares will be held as authorized but unissued shares to be used for general corporate purposes.
Accumulated Other Comprehensive Income
The following is a summary of the gross amounts of accumulated other comprehensive income and the related income tax effects:
(In thousands) Gross Tax Net ------------------ ------------------ -----------------
December 31, 2005: Net unrealized gain on securities available for sale $ (1,171) $ (437) $ (734) Minimum pension liability (2,950) (1,101) (1,849) ------------------ ------------------ -----------------
$ (4,121) $ (1,538) $ (2,583) ================== ================== =================
December 31, 2004: Net unrealized gain on securities available for sale 2,846 1,061 1,785 Minimum pension liability (2,469) (921) (1,548) ------------------ ------------------ -----------------
$ 377 $ 140 $ 237 ================== ================== =================
December 31, 2003: Net unrealized gain on securities available for sale 6,202 2,308 3,894 Minimum pension liability (2,453) (915) (1,538) ------------------ ------------------ -----------------
$ 3,749 $ 1,393 $ 2,356 ================== ================== =================
Note 16: Commitments and Contingencies
Legal Proceedings
The Company, the Bank and the Bank’s subsidiaries are parties to lawsuits and other claims that arise in the ordinary course of business. Some of the lawsuits allege substantial claims for damages. The cases are being vigorously contested. In the regular course of business, management evaluates the estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, based upon present information, management cannot predict what effect, if any, the final resolution of pending legal proceedings will have on the Company’s consolidated financial position or results of operations.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 16: (Continued)
Credit Related Financial Instruments
The Company is a party to credit related financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk.
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. 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 Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company’s assessment of a customer’s credit worthiness.
Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. When issuing letters of credit, the Company applies the same credit policies and standards as it does in the normal lending process. Collateral is obtained based upon the Company’s assessment of a customer’s credit worthiness. A liability of $181 thousand is recognized at December 31, 2005 and a liability of $117 thousand is recognized at December 31, 2004 for the Company’s obligation to stand ready to perform related to standby letters of credit.
The maximum credit exposure in the event of nonperformance for loan commitments and letters of credit is represented by the contract amount of the instruments. A summary of these instruments at December 31, 2005 and 2004 follows:
(In thousands) 2005 2004 -------------------- ------------------- Commitments to extend credit $ 179,514 $ 139,277 Standby letters of credit 24,943 17,295 Commercial letters of credit 84 105 ==================== ===================
The Company makes commitments to originate mortgage loans that will be held for sale. The total commitments to originate mortgages to be held for sale were $12.229 million at December 31, 2005. These commitments are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2005 mortgage origination-related derivatives with positive fair values of $1 thousand were included in other assets and derivatives with negative fair values of $12 thousand were included in other liabilities. The Company also engages in forward sales contracts with mortgage investors to purchase mortgages held for sale. Those forward sale agreements that have a determined price and expiration date are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2005 the Company had $4.092 million in locked forward sales agreements in place. Forward sale-related derivatives with positive fair values of $8 thousand were included in other assets and derivatives with negative fair values of $10 thousand were included in other liabilities.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 17: Regulatory Matters
Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $17.496 million at December 31, 2005.
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 requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items, calculated under regulatory accounting practices must be met. The capital amounts and classifications 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, 2005, that all capital adequacy requirements have been met.
As of December 31, 2005, 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, and 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.
The Company’s and Bank’s actual capital amounts and ratios as of December 31, 2005 and 2004, are also presented in the table:
(In thousands) Actual Minimum Capital Well Capitalized -------------------------- ------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio -------------- -------- ------------- -------- ------------ ---------
December 31, 2005: Total capital (to risk weighted assets): Company $ 113,880 11.2% $ 81,057 8.0% $ - - Bank 114,823 11.3% 80,976 8.0% 101,220 10.0%
Tier I capital (to risk weighted assets): Company 101,425 10.0% 40,528 4.0% - - Bank 102,369 10.1% 40,488 4.0% 60,732 6.0%
Tier I capital (to average assets): Company 101,425 8.2% 49,377 4.0% - - Bank 102,369 8.3% 49,335 4.0% 61,669 5.0% ============== ======== ============= ======== ============ =========
December 31, 2004: Total capital (to risk weighted assets): Company $ 104,902 12.0% $ 70,143 8.0% $ - - Bank 109,620 12.5% 70,046 8.0% 87,558 10.0%
Tier I capital (to risk weighted assets): Company 93,923 10.7% 35,072 4.0% - - Bank 98,656 11.3% 35,023 4.0% 52,535 6.0%
Tier I capital (to average assets): Company 93,923 8.4% 44,850 4.0% - - Bank 98,656 8.8% 44,808 4.0% 56,010 5.0% ============== ======== ============= ======== ============ =========
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 17: (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: Pending Acquisitions
On October 12, 2005 the Company announced the signing of definitive agreements to acquire Columbiana Bancshares of Columbiana, Alabama and Crockett County Bancshares of Bells, Tennessee. Columbiana Bancshares is the parent of the First National Bank of Shelby County which has total assets of approximately $185 million. Crockett County Bancshares is the parent of Bells Banking Company which has approximately $31 million in total assets. The consideration paid in both acquisitions will be in cash. The Company will pay approximately $31.0 million in cash for all outstanding shares of Columbiana Bancshares with $2.5 million of the $31.0 million purchase price being held in escrow pending the resolution of contingent obligations of Columbiana. The Company will pay approximately $7.4 million for all outstanding shares of Crockett County Bancshares. Both transactions are subject to the approval of the stockholders of the to-be-acquired institutions and banking regulators and are expected to close in the first quarter of 2006. The Company expects to fund the acquisitions primarily through the issuance of trust preferred securities.
Note 19: Fair Value of Financial Instruments
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.
Because no market exists for a significant portion of the Company’s and Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions significantly affect the estimates and, as such, the derived fair value may not be indicative of the value negotiated in an actual sale and may not be comparable to that reported by other financial institutions.
In addition, the fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Fair value estimates, methods and assumptions for significant financial instruments are set forth below:
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.
Securities available for sale - The fair value of these financial instruments is considered to be their fair value as disclosed in note 2.
Loans held for sale - The fair value of these financial instruments is their carrying value at the financial statement dates, as they are reported at fair value on those dates.
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 19: (Continued)
Loans held for investment - 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 loan losses, is $920.631 million and $820.867 million and the estimated net fair value of loans is $915.080 million and $816.848 million at December 31, 2005 and 2004.
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 $973.671 million and $877.264 million and the estimated net fair value of deposits is $965.691 million and $870.426 million at December 31, 2005 and 2004.
Short-term and other borrowings - The net book value of the majority 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. The fair value of long term Federal Home Loan Bank (FHLB) advances is estimated by discounting the future cash flows, using current market rates for borrowings of similar terms and maturities. The carrying value of FHLB advances is $145.852 million and $122.196 million and the estimated fair value of FHLB advances is $142.921 million and $120.191 million at December 31, 2005 and 2004. The fair value of short-term and other borrowings is not materially different from their recorded book value at December 31, 2005 and 2004, as disclosed in Note 8 and Note 9.
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.
Note 20: Summarized Financial Information of First M & F Corporation
Summarized financial information of First M &amp; F Corporation (parent company only) is as follows:
STATEMENTS OF CONDITION
(In thousands) ------------------------- ------------------------- Assets 2005 2004 ------------------------- -------------------------
Cash $ 358 $ 703 Investment in subsidiary 118,320 117,201 Other assets 1,341 1,206 ------------------------- -------------------------
$ 120,019 $ 119,110 ========================= ========================= Liabilities and Stockholders' Equity
Note payable $ 2,642 $ 6,642 Other liabilities - - Stockholders' equity 117,377 112,468 ------------------------- -------------------------
$ 120,019 $ 119,110 ========================= =========================
FIRST M&F CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements
Note 20: (Continued)
Summarized financial information of First M & F Corporation (parent company only) is as follows:
STATEMENTS OF INCOME
(In thousands) 2005 2004 2003 ---------------- ----------------- ----------------- Income: Dividends received from subsidiary $ 9,200 $ 6,600 $ 8,600 Equity in undistributed earnings of subsidiary 3,624 4,383 2,506 Other income 21 35 17 ---------------- ----------------- ----------------- Total income 12,845 11,018 11,123 ---------------- ----------------- -----------------
Expenses: Interest 190 228 230 Other expenses 198 139 125 ---------------- ----------------- ----------------- Total expenses 388 367 355 ---------------- ----------------- -----------------
Income before income taxes 12,457 10,651 10,768
Income tax benefit 135 124 124 ---------------- ----------------- -----------------
Net income $ 12,592 $ 10,775 $ 10,892 ================ ================= =================
STATEMENTS OF CASH FLOWS
(In thousands) 2005 2004 2003 ---------------- ----------------- ----------------- Cash flows from operating activities: Net income $ 12,592 $ 10,775 $ 10,892 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (3,624) (4,383) (2,506) Other, net (252) (286) (144) ---------------- ----------------- ----------------- Net cash provided by operating activities 8,716 6,106 8,242 ---------------- ----------------- -----------------
---------------- ----------------- ----------------- Net cash provided by investing activities - - - ---------------- ----------------- -----------------
Cash flows from financing activities: Increase (decrease) in note payable (4,000) 750 (1,700) Cash dividends (4,648) (4,535) (4,604) Common shares issued 159 1,081 3,990 Common shares repurchased (690) (3,412) (5,736) Tax benefits on stock option transactions 118 - - ---------------- ----------------- ----------------- Net cash used in financing activities (9,061) (6,116) (8,050) ---------------- ----------------- -----------------
Net increase (decrease) in cash (345) (10) 192
Cash at January 1 703 713 521 ---------------- ----------------- -----------------
Cash at December 31 $ 358 $ 703 $ 713 ================ ================= =================
FIRST M&F CORPORATION AND SUBSIDIARY
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting principles and practices, financial statement disclosure, or auditing scope or procedure.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As defined by the Securities and Exchange Commission in Exchange Act Rule 13a-15(e), a company’s “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
As of December 31, 2005 (the “Evaluation Date”), the Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in the Exchange Act Rules. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are sufficiently effective to ensure that material information relating to the Company and required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
Management’s Annual Report on Internal Control over Financial Reporting is contained on page 30 of this Annual Report on Form 10-K and is hereby incorporated by reference.
The Report of Independent Registered Public Accounting Firm is contained on page 31 of this Annual Report on Form 10-K and is hereby incorporated by reference.
Design and Evaluation of Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included a report of management’s assessment of the design and effectiveness of its internal controls as part of this Annual Report on Form 10-K for the year ended December 31, 2005. The Company’s independent registered public accounting firm has also audited, and reported on, management’s assessment of the effectiveness of internal control over financial reporting. Management’s report and the independent registered public accounting firm’s report are included in the section, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under the headings “Management’s Annual Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
Subsequent to the Evaluation Date, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
OTHER INFORMATION
None.
FIRST M&F CORPORATION AND SUBSIDIARY
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the registrant is incorporated by reference and contained in the Proxy material on Page 3 and following.
The Company’s Board of Directors has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. A copy of this Code of Ethics can be found at the Company’s internet website at www.mfbank.com. The Company intends to disclose any amendments to its Code of Ethics, and any waiver from a provision of the Code of Ethics granted to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, on the Company’s internet website within five business days following such amendment or waiver. The information contained on or connected to the Company’s internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that we file with or furnish to the SEC.
EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference and contained in the Proxy material on Page 7.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of owners and management is incorporated by reference and contained in the Proxy material on Page 3 and following.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is incorporated by reference and contained in the Proxy material on Page 12.
PRINCIPAL ACCOUNTING FEES AND SERVICES (Last Two Fiscal Years)
Information concerning principal accounting fees and services, as well as information concerning the Company’s audit committee pre-approval policies and procedures, is incorporated by reference and contained in the Proxy material on Page 11.
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Exhibits
The following financial statements included under the heading “Financial Statements and Supplementary Data” are included in this report:
(a) Management's Annual Report on Internal Control Over Financial Reporting (b) Report of Independent Registered Public Accounting Firm (on internal control) (c) Report of Independent Registered Public Accounting Firm (d) Consolidated Statements of Condition - December 31, 2005 and 2004 (e) Consolidated Statements of Income - Years Ended December 31, 2005, 2004 and 2003 (f) Consolidated Statements of Comprehensive Income - Years Ended December 31, 2005, 2004 and 2003 (g) Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2005, 2004 and 2003 (h) Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004 and 2003 (i) Notes to Consolidated Financial Statements
FIRST M&F CORPORATION AND SUBSIDIARY
The following exhibits have been filed with the Securities and Exchange Commission and are available upon written request:
3 (A) Articles of Incorporation, as amended. Filed as Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3 (B) Bylaws, as amended. Filed as Exhibit 3-b to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
10(A) First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company's Proxy Statement, March 15, 2005, incorporated herein by reference
10(B) Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company's Form 10-Q on August 9, 2005, incorporated herein by reference
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
The following Rule 13a-14(a)/15d-14(a) Certifications are included as exhibits to this report:
31 Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer
The following Section 1350 Certifications are included as exhibits to this report:
32 Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer
FIRST M&F CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST M & F CORPORATION
BY: /s/ Hugh S. Potts, Jr. BY: /s/ John G. Copeland Hugh S. Potts, Jr. John G. Copeland Chairman of the Board and EVP & Chief Financial Officer Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
/s/ Hugh S. Potts, Jr. DATE: March 8, 2006 Hugh S. Potts, Jr., Director
/s/ Scott M. Wiggers DATE: March 8, 2006 Scott M. Wiggers, Director
/s/ Fred A. Bell, Jr. DATE: March 8, 2006 Fred A. Bell, Jr., Director
/s/ Jeffrey A. Camp DATE: March 8, 2006 Jeffrey A. Camp, Director
/s/ Hollis C. Cheek DATE: March 8, 2006 Hollis C. Cheek, Director
/s/ Jon A. Crocker DATE: March 8, 2006 Jon A. Crocker, Director
/s/ Charles T. England DATE: March 8, 2006 Charles T. England, Director
/s/ Toxey Hall, III DATE: March 8, 2006 Toxey Hall, III, Director
/s/ Barbara K. Hammond DATE: March 8, 2006 Barbara K. Hammond, Director
/s/ Charles V. Imbler, Sr. DATE: March 8, 2006 Charles V. Imbler, Sr., Director
/s/ J. Marlin Ivey DATE: March 8, 2006 J. Marlin Ivey, Director
/s/ R. Dale McBride DATE: March 8, 2006 R. Dale McBride, Director
/s/ Susan P. McCaffery DATE: March 8, 2006 Susan P. McCaffery, Director
/s/ Michael L. Nelson DATE: March 8, 2006 Michael L. Nelson, Director
FIRST M&F CORPORATION AND SUBSIDIARY
Signatures: (Continued)
/s/ Otho E. Pettit, Jr. DATE: March 8, 2006 Otho E. Pettit, Jr., Director
/s/ Charles W. Ritter, Jr. DATE: March 8, 2006 Charles W. Ritter, Jr., Director
/s/ L. F. Sams, Jr. DATE: March 8, 2006 L. F. Sams, Jr., Director
/s/ Michael W. Sanders DATE: March 8, 2006 Michael W. Sanders, Director
/s/ W. C. Shoemaker DATE: March 8, 2006 W. C. Shoemaker, Director
/s/ Larry Terrell DATE: March 8, 2006 Larry Terrell, Director
/s/ James I. Tims DATE: March 8, 2006 James I. Tims, Director
FIRST M&F CORPORATION AND SUBSIDIARY
EXHIBIT INDEX
3 (A) Articles of Incorporation, as amended. Filed as Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
3 (B) Bylaws, as amended. Filed as Exhibit 3-b to the Company's Form S-1 (File No. 33-08751) September 15, 1986, incorporated herein by reference.
10(A) First M&F Corporation 2005 Equity Incentive Plan. Filed as Appendix A to the Company's Proxy Statement, March 15, 2005, incorporated herein by reference
10(B) Merchants and Farmers Bank Profit and Savings Plan, as amended. Filed as Exhibit 10(B) to the Company's Form 10-Q on August 9, 2005, incorporated herein by reference
21 Subsidiaries of the Registrant
23 Consent of Independent Registered Public Accounting Firm
31 Rule 13a-14(a) Certification of Hugh S. Potts, Jr., Chief Executive Officer and Rule 13a-14(a) Certification of John G. Copeland, Chief Financial Officer
32 Section 1350 Certification of Hugh S. Potts, Jr., Chief Executive Officer and Section 1350 Certification of John G. Copeland, Chief Financial Officer