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| FMFC > SEC Filings for FMFC > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
The following provides a narrative discussion and analysis of significant changes in the Company's results of operations and financial condition. This discussion should be read in conjunction with the interim consolidated financial statements and supplemental financial data presented elsewhere in this report.
Forward Looking Statements
Certain of the information included in this discussion contains forward looking financial data and information that is based upon management's belief as well as certain assumptions made by, and information currently available to management. Should the assumptions prove to be significantly different, actual results may vary from those estimated, anticipated, projected or expected. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following:
· A significant weakening of the economy.
· A collapse of real estate values or the values of other assets that may serve as collateral on customers' borrowings.
· Adverse changes in interest rates that could destabilize the Company's net interest margins.
· An unanticipated inflationary spike or deflationary decline.
· A market crash or a highly volatile market.
· A loss of market liquidity for financial products.
· Unfavorable judgments in ongoing litigation.
· Technological disruptions or breaches.
· Unanticipated catastrophic events or natural disasters.
· Unforeseen new competition from outside the traditional financial services industry.
· Unanticipated changes in laws and regulations related to businesses that the Company is in or anticipates entering into or related to transactions that the Company engages in or anticipates engaging in.
Financial Summary
The Company incurred a net loss for the first quarter of 2009 of $27.241 million, or $2.99 basic and diluted loss per share as compared to earnings of $3.139 million, or $.34 basic and diluted earnings per share for the same period in 2008 and a net loss of $4.357 million or $.48 basic and diluted loss per share for the fourth quarter of 2008. Major factors contributing to the decrease in year-over-year earnings were (1) an increase of $19.060 million in loan loss accruals as compared to 2008, (2) a decrease of $56.916 million in loans outstanding from the first quarter of 2008 to the first quarter of 2009, (3) a net interest margin of 3.33% for the first three months of 2009 as compared to 3.66% for the first three months of 2008, (4) a goodwill impairment charge of $15.800 million during the first quarter of 2009, and (5) additional intangible asset impairment charges of $1.248 million.
Highlights for the first three months of 2009 and 2008 are as follows:
· The Company received $30.000 million in February 2009 from the U. S. Treasury for preferred stock and a stock warrant as a participant in the U. S. Treasury's TARP Capital Purchase Program
· Debit card revenues increased by 12.06% over the first quarter of 2008
· The net interest margin decreased to 3.33% in the first quarter of 2009 from 3.60% in the fourth quarter of 2008 and 3.66% in the first quarter of 2008
· Loans held for investment decreased by $27.343 million during the first quarter of 2009 and by $13.267 million during the first quarter of 2008
· Nonaccrual loans were 4.51% of total loans at March 31, 2009 as compared to 1.74% at December 31, 2008 and .78% at March 31, 2008
· Annualized net charge-offs were 1.13% for the first quarter of 2009 as compared to 1.79% for the fourth quarter of 2008 and .27% for the first quarter of 2008
· Closed a full-service branch in Collierville, Tennessee in February 2009
FIRST M & F CORPORATION
The following table shows the quarterly net loan, non-interest bearing deposit,
and interest bearing deposit growth for the last five quarters:
(Net change, in thousands)
Non-Interest Interest
Loans Bearing Deposits Bearing Deposits
1st Qtr 2008 (13,267 ) (4,126 ) 55,246
2nd Qtr 2008 (10,966 ) 65 (45,263 )
3rd Qtr 2008 11,011 (8,165 ) (8,749 )
4th Qtr 2008 (29,618 ) (291 ) 10,215
1st Qtr 2009 (27,343 ) 12,697 39,076
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The following table shows the quarterly net interest income, loan loss accruals, non-interest income and non-interest expense amounts for the last five quarters:
(Net amount, in thousands)
Net Interest Loan Loss Non-Interest Non-Interest
Income Accruals Income Expense
1st Qtr 2008 13,127 780 5,512 13,354
2nd Qtr 2008 13,100 6,080 5,270 13,460
3rd Qtr 2008 13,020 2,190 5,517 13,229
4th Qtr 2008 12,749 10,684 4,832 14,241
1st Qtr 2009 11,844 19,840 5,188 31,043
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The following table shows the components of pre-tax basic earnings (loss) per share for the last five quarters:
1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008 1st Qtr 2008
Net interest income $ 1.31 $ 1.41 $ 1.43 $ 1.45 $ 1.44
Loan loss expense 2.19 1.18 .24 .67 .09
Noninterest income .57 .53 .61 .58 .61
Noninterest expense 3.42 1.57 1.46 1.49 1.47
Net income (loss) before taxes (3.73 ) (.81 ) .34 (.13 ) .49
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FIRST M & F CORPORATION
The following table shows performance ratios for the last five quarters:
1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008 1st Qtr 2008
Net interest margin 3.33 % 3.60 % 3.70 % 3.73 % 3.66 %
Efficiency ratio 80.41 79.29 69.93 71.85 70.33
Return on assets (6.71 ) (1.08 ) .55 (.12 ) .76
Return on equity (73.59 ) (12.27 ) 6.27 (1.30 ) 8.87
Noninterest income to avg. assets 1.28 1.19 1.37 1.31 1.34
Noninterest income to revenues
(1) 29.81 26.90 29.16 28.13 29.03
Noninterest expense to avg assets 7.65 3.52 3.29 3.34 3.25
Salaries and benefits to total
noninterest expense 23.07 47.47 54.66 54.28 57.33
Contribution margin (2) 58.85 62.36 61.78 61.00 59.68
Nonaccrual loans to loans 4.51 1.74 1.82 .94 .78
90 day past due loans to loans .12 .48 .05 .33 .45
Annualized net charge offs as a
percent of average loans 1.13 1.79 .49 .46 .27
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(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 five quarters:
(Dollars in thousands) 1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008 1st Qtr 2008 Mortgage originations $ 23,992 $ 14,379 $ 12,926 $ 17,443 $ 17,697 Commissions from annuity sales 9 11 18 49 26 Trust revenues 57 56 56 86 72 Retail investment revenues 59 75 61 112 66 Revenues per FTE employee 32 33 34 33 34 Agency commissions per agency FTE employee (1) 25 23 29 25 25 |
(1) Agency commissions are property, casualty, life and health commissions produced by the insurance agency personnel.
The following table shows additional statistics for the Company at the end of the last five quarters:
1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008 1st Qtr 2008
Full-time equivalent employees 535 543 548 556 565
Number of noninterest-bearing deposit
accounts 34,509 35,112 35,907 36,455 37,329
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Net Interest Income
Net interest income before loan loss expense for the first quarter of 2009 was $11.844 million as compared to $13.127 million for the first quarter of 2008 and $12.749 million for the fourth quarter of 2008. For the first quarter of 2009 compared to the same quarter of 2008: earning asset yields decreased by 133 basis points, liability costs decreased by 109 basis points, the net interest spread decreased by 24 basis points and the net interest margin decreased by 33 basis points. For the first quarter of 2009 compared to the fourth quarter of 2008: earning asset yields decreased by 54 basis points, liability costs decreased by 30 basis points, the net interest spread decreased by 24 basis points and the net interest margin decreased by 27 basis points.
Balance sheet dynamics affecting the comparative net interest margins for the first quarter of 2009 compared to 2008 include (1) a decrease of 3.96% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 81.90% in the first quarter of 2008 to 78.40% in the first quarter of 2009, (3) an increase in average interest-bearing deposits of .84%, (4) a decrease in average other borrowings of 12.31% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 10.89% in 2008 to 10.95% in 2009.
Balance sheet dynamics affecting the comparative net interest margins for the first quarter of 2009 compared to the fourth quarter of 2008 include (1) a decrease of 2.65% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 82.52% in the fourth quarter of 2008 to 78.40% in the first quarter of 2009, (3) an increase in average interest-bearing deposits of 4.50%, (4) a decrease in average other borrowings of 9.52% and (5) a decrease in average noninterest-bearing deposits as a percentage of total assets from 11.05% in the fourth quarter of 2008 to 10.95% in the first quarter of 2009.
Yield and cost dynamics affecting the comparative net interest margins for the first quarter of 2009 compared to 2008 include (1) a decrease of 134 basis points in yields on loans held for investment and for sale, (2) a decrease of 92 basis points in investment and short-term funds yields, (3) a decrease of 121 basis points in costs of deposits and (4) a decrease of 28 basis points in costs of borrowings.
Yield and cost dynamics affecting the comparative net interest margins for the
first quarter of 2009 compared to the fourth quarter of 2008 include (1) a
decrease of 42 basis points in yields on loans held for investment and for sale,
(2) a decrease of 70 basis points in investment and short-term funds yields, (3)
a decrease of 33 basis points in costs of deposits and (4) an increase of 10
basis points in costs of borrowings.
The decrease in asset yields for the first quarter of 2009 as compared to the same period in 2008 can be attributed to (1) a decrease in the prime lending rate of 400 basis points during 2008, (2) a steady decrease in short-term Treasury rates from 3.07% in December 2007 to 1.28% in March 2008 and .03% in December 2008 and (3) a decrease in loan activity through the second half of 2008 and into 2009. Average loans held to maturity were $1.201 billion during the fourth quarter of 2007 and $1.213 billion during the first quarter of 2008. In contrast, average loans held to maturity decreased from $1.197 billion during the fourth quarter of 2008 to $1.165 billion during the first quarter of 2009. Yields on loans held to maturity followed the prime rate trend, decreasing from 7.36% for the first quarter of 2008 to 6.03% for the first quarter of 2009. Deposit costs decreased to 2.30% for the first quarter of 2009 from 2.63% for the fourth quarter of 2008 and 3.51% for the first quarter of 2008. Average interest-bearing checking accounts increased by 30.14% and average money-market deposits increased by 4.25% while average certificates of deposit decreased by 9.67% from the first quarter of 2008 to the first quarter of 2009 as the Company successfully implemented a strategy during 2008 to replace certificates of deposit with premium-rate money-market and NOW accounts.
Net interest margins should be affected during the remainder of 2009 by the shape of the yield curve, credit spreads that are being priced into the corporate markets, and a lack of demand for commercial and consumer credit. The yield curve spread between the 3-month and 5-year Treasuries was 42 basis points during December 2007 and 120 basis points during March 2008. However, the 3-month to 5-year Treasury spread moved between 120 and 210 basis points throughout the last nine months of 2008, settling at 149 basis points in December. Although the absolute value of interest rates decreased significantly during the last three quarters of 2008, the spreads between short-term and medium-term Treasuries remained fairly stable. The AAA corporate bond to 3-month Treasury spread was 242 basis points during December 2007 and had widened to 423 basis points during March 2008. This measure of credit spreads was 502 basis points during December 2008 and was 528 basis points during March 2009, a direct result of the tightened liquidity in the corporate debt markets and heightened demand for Treasury securities as a safe-haven investment. The economy has continued to weaken since 2007 with a considerable slowing in the housing and construction sectors. The Federal Reserve Board has responded by providing liquidity facilities to the commercial and investment banking sectors as well as through discount rate reductions. The Federal Open Market Committee decreased its Fed funds target rate from 4.25% at the end of 2007 to a range of 0% to .25% at the end of 2008. Federal legislation was passed in 2008 in the form of the Emergency Economic Stabilization Act, which authorized the U. S. Treasury to implement the Troubled Asset Relief Program (TARP) in an effort to remove investments that had significant market losses and provide liquidity in their place. The Company received $30.000 million in funding from the TARP's Capital Purchase Program in 2009. This liquidity should help the Company in funding asset growth and in displacing high-cost sources of funds.
Management expects loan yields to continue to decrease over the course of 2009. Management expects deposit costs to continue to decrease as certificates of deposit mature and reprice in the current lower rate environment or are displaced by other competitive interest-bearing checking and money-market accounts. While certificates of deposit are not being aggressively marketed, the focus for 2009 and beyond has been and will continue to be the accumulation of core deposits and the building of customer relationships that accompany those deposits. The base product for this effort during 2008 and into 2009 has been the Summit interest-bearing checking account. Balances in this product have grown from $4.738 million at the end of 2007 to $60.784 million at December 31, 2008.
FIRST M & F CORPORATION
The following table shows the components of the net interest margin for the
first quarters of 2009 and 2008 and the fourth quarters of 2008 and 2007:
Yields/Costs Yields/Costs
1st Quarter, 2009 4th Quarter, 2008 1st Quarter, 2008 4th Quarter, 2007
Interest bearing bank balances 0.16 % 0.56 % 3.15 % 4.18 %
Federal funds sold 0.22 0.78 3.40 4.34
Taxable investments 4.92 5.23 5.03 4.89
Tax-exempt investments 6.07 6.13 6.24 6.24
Loans held for sale 3.56 4.44 5.52 5.56
Loans held for investment 6.03 6.44 7.36 7.75
Earning asset yield 5.63 6.17 6.96 7.30
Interest checking 1.37 1.49 1.46 1.43
Money market deposits 1.70 2.25 2.74 2.82
Savings 1.65 2.02 2.76 2.88
Certificates of deposit 3.04 3.30 4.49 4.65
Short-term borrowings 1.31 2.08 3.30 4.41
Other borrowings 4.60 4.47 4.75 5.01
Cost of interest-bearing liabilities 2.60 2.90 3.69 3.91
Net interest spread 3.03 3.27 3.27 3.36
Effect of non-interest bearing deposits .31 .35 .44 .50
Effect of leverage (.01 ) (.02 ) (.05 ) (.06 )
Net interest margin, tax-equivalent 3.33 3.60 3.66 3.83
Less: Tax equivalent adjustments:
Investments .09 .09 .09 .07
Loans .01 .01 .01 .01
Reported book net interest margin 3.23 % 3.50 % 3.56 % 3.75 %
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The following table shows average balance sheets for the first quarters of 2009 and 2008 and the fourth quarters of 2008 and 2007:
(Dollars in thousands)
1st Quarter, 2009 4th Quarter, 2008 1st Quarter, 2008 4th Quarter, 2007
Interest bearing bank balances $ 16,195 $ 9,086 $ 9,893 $ 4,616
Federal funds sold 44,819 19,568 10,463 3,656
Taxable investments 191,111 161,999 188,424 191,632
Tax-exempt investments 59,875 57,598 52,139 46,488
Loans held for sale 8,987 5,208 7,104 6,089
Loans held for investment 1,165,086 1,196,806 1,213,121 1,200,977
Earning assets 1,486,073 1,450,265 1,481,144 1,453,458
Other assets 159,482 161,179 173,807 172,298
Total assets $ 1,645,555 $ 1,611,444 $ 1,654,951 $ 1,625,756
Interest checking 263,716 214,154 202,638 181,676
Money market deposits 172,747 179,120 165,706 137,052
Savings deposits 114,655 114,742 111,973 105,331
Certificates of deposit 573,580 568,279 634,966 621,897
Short-term borrowings 10,163 13,127 7,319 12,977
Other borrowings 176,133 194,655 200,849 227,435
Interest-bearing liabilities 1,310,994 1,284,077 1,323,451 1,286,368
Noninterest-bearing deposits 180,207 178,088 180,161 188,496
Other liabilities 4,226 7,949 8,950 11,436
Stockholders' equity 150,128 141,330 142,389 139,456
Liabilities and stockholders' equity $ 1,645,555 $ 1,611,444 $ 1,654,951 $ 1,625,756
Loans to earning assets 78.40 % 82.52 % 81.90 % 82.63 %
Loans to assets 70.80 % 74.27 % 73.30 % 73.87 %
Earning assets to assets 90.31 % 90.00 % 89.50 % 89.40 %
Noninterest-bearing deposits to assets 10.95 % 11.05 % 10.89 % 11.59 %
Equity to assets 9.12 % 8.77 % 8.60 % 8.58 %
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Provision for Loan Losses
The accrual for the provision for loan losses for the first three months of 2009 was $19.840 million as compared to $780 thousand for the first three months of 2008. Net charge-offs were $3.252 million for the first three months of 2009 as compared to $801 thousand for the first three months of 2008. The allowance for loan losses as a percentage of loans was 3.61% at March 31, 2009, 2.12% at December 31, 2008, and 1.18% at March 31, 2008.
During the course of 2008 and into 2009 the loan loss provision has been more influenced by the effect of deteriorating real estate values on loans that are individually reviewed for impairment. The Credit Risk Management section of this discussion provides further details on the allowance provisioning process.
Non Interest Income
Noninterest income, excluding securities transactions, for the first quarter of 2009 was $5.188 million as compared to $5.501 million for the same period in 2008 and $4.831 million in the fourth quarter of 2008. For the first quarter of 2009 as compared to the first quarter of 2008: (1) deposit revenues decreased by $271 thousand, (2) mortgage banking revenues decreased by $25 thousand and (3) agency commissions decreased by $30 thousand. For the first quarter of 2009 as compared to the fourth quarter of 2008: (1) deposit revenues decreased by $406 thousand, (2) mortgage banking revenues increased by $180 thousand and (3) agency commissions increased by $37 thousand.
The first quarter of 2009 showed a decrease of 9.70% from the first quarter of 2008 and a 13.87% decrease from the fourth quarter of 2008 in deposit revenues. Overdraft fee revenues, which comprise approximately 70% of deposit revenues, decreased by 16.34% from the first quarter of 2008 to the first quarter of 2009 and decreased by 20.12% from the fourth quarter of 2008 to the first quarter of 2009. The decline in the first quarter of 2009 from the first and fourth quarters of 2008 was due to decreased item volumes as first quarter 2009 volumes were lower than first quarter 2008 volumes by 16.34% and lower than fourth quarter 2008 volumes by 20.12%. Overdraft fees are per item charges applied to each check paid on an overdrawn account or returned. The per item fee is determined by the Company's pricing committee and is based primarily on the competitive market prices as well as on costs associated with processing the items. The majority of the volumes of overdraft items processed comes from customers in the Company's overdraft protection program which grants overdraft limits to customers, generally allows account activity up to the overdraft limit balance, and requires that accounts have positive balances at some point within . . .
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