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| FMFC > SEC Filings for FMFC > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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 second quarter of 2009 of $5.111 million, or $.61 basic and diluted loss per share as compared to losses of $466 thousand, or $.05 basic and diluted loss per share for the same period in 2008 and a net loss of $27.241 million or $2.99 basic and diluted loss per share for the first quarter of 2009. The net loss for the first half of 2009 was $32.352 million or $3.60 basic and diluted loss per share as compared to net income of $2.673 million, or $.29 basic and diluted earnings per share for the same period in 2008. Major factors contributing to the decrease in year-over-year earnings were (1) an increase of $22.175 million in loan loss accruals as compared to 2008, (2) a decrease of $87.461 million in loans outstanding from the second quarter of 2008 to the second quarter of 2009, (3) a net interest margin of 3.25% for the first half of 2009 as compared to 3.69% for the first half 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 during the first quarter of 2009.
Highlights for the first half 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 45.12% for the second quarter of 2009 over the second quarter of 2008
· The net interest margin decreased to 3.16% in the second quarter of 2009 from 3.33% in the first quarter of 2009 and 3.73% in the second quarter of 2008
· Loans held for investment decreased by $68.854 million during the first half of 2009 and by $24.233 million during the first half of 2008
· Nonaccrual loans were 6.69% of total loans at June 30, 2009 as compared to 1.74% at December 31, 2008 and .94% at June 30, 2008
· Annualized net charge-offs were 6.87% for the second quarter of 2009 as compared to 1.13% for the first quarter of 2009, to 1.79% for the fourth quarter of 2008 and .46% for the second 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
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
2nd Qtr 2009 (41,511 ) (10,223 ) 6,610
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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
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 31,041
2nd Qtr 2009 11,265 9,195 4,976 15,815
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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
2nd Qtr 2009 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008
Net interest income $ 1.24 $ 1.31 $ 1.41 $ 1.43 $ 1.45
Loan loss expense 1.01 2.19 1.18 .24 .67
Noninterest income .55 .57 .53 .61 .58
Noninterest expense 1.74 3.42 1.57 1.46 1.49
Net income (loss) before taxes $ (.96 ) $ (3.73 ) $ (.81 ) $ .34 $ (.13 )
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FIRST M & F CORPORATION
The following table shows performance ratios for the last five quarters:
2nd Qtr 2009 1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008
Net interest margin 3.16 % 3.33 % 3.60 % 3.70 % 3.73 %
Efficiency ratio 95.10 80.41 79.29 69.93 71.85
Return on assets (1.27 ) (6.71 ) (1.08 ) .55 (.12 )
Return on total equity (14.84 ) (73.59 ) (12.27 ) 6.27 (1.30 )
Return on common equity (20.40 ) (81.82 ) (12.27 ) 6.27 (1.30 )
Noninterest income to avg. assets 1.24 1.28 1.19 1.37 1.31
Noninterest income to revenues (1) 29.92 29.81 26.90 29.16 28.13
Noninterest expense to avg assets 3.94 7.65 3.52 3.29 3.34
Salaries and benefits to total
noninterest expense 46.15 23.07 47.47 54.66 54.28
Contribution margin (2) 56.11 58.85 62.36 61.78 61.00
Nonaccrual loans to loans 6.69 4.51 1.74 1.82 .94
90 day past due loans to loans .50 .12 .48 .05 .33
Annualized net charge offs as a
percent of average loans 6.87 1.13 1.79 .49 .46
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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) 2nd Qtr 2009 1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008 Mortgage originations $ 32,438 $ 23,992 $ 14,379 $ 12,926 $ 17,443 Commissions from annuity sales 1 9 11 18 49 Trust revenues 51 57 56 56 86 Retail investment revenues 85 59 75 61 112 Revenues per FTE employee 31 32 33 34 33 Agency commissions per agency FTE employee (1) 25 25 23 29 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:
2nd Qtr 2009 1st Qtr 2009 4th Qtr 2008 3rd Qtr 2008 2nd Qtr 2008
Full-time equivalent employees 529 535 543 548 556
Number of noninterest-bearing deposit
accounts 34,116 34,509 35,112 35,907 36,455
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Net Interest Income
Net interest income before loan loss expenses for the first six months of 2009 was $23.109 million as compared to $26.227 million for the first six months of 2008. For the first six months of 2009 compared to 2008: earning asset yields decreased by 130 basis points, liability costs decreased by 93 basis points, the net interest spread decreased by 38 basis points and the net interest margin decreased by 44 basis points.
Net interest income before loan loss expenses for the second quarter of 2009 was $11.265 million as compared to $13.100 million for the second quarter of 2008 and $11.844 million for the first quarter of 2009. For the second quarter of 2009 compared to the same quarter of 2008: earning asset yields decreased by 128 basis points, liability costs decreased by 76 basis points, the net interest spread decreased by 52 basis points and the net interest margin decreased by 57 basis points. For the second quarter of 2009 compared to the first quarter of 2009: earning asset yields decreased by 33 basis points, liability costs decreased by 14 basis points, the net interest spread decreased by 19 basis points and the net interest margin decreased by 17 basis points.
Balance sheet dynamics affecting the comparative net interest margins for the first six months of 2009 compared to 2008 include (1) a decrease of 4.59% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 82.03% in the first six months of 2008 to 77.45% in the first six months of 2009, (3) an increase in average interest-bearing deposits of 1.37%, (4) a decrease in average other borrowings of 10.57% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 11.03% in 2008 to 11.21% in 2009.
Balance sheet dynamics affecting the comparative net interest margins for the second quarter of 2009 compared to 2008 include (1) a decrease of 5.22% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 82.16% in the second quarter of 2008 to 76.51% in the second quarter of 2009, (3) an increase in average interest-bearing deposits of 1.91%, (4) a decrease in average other borrowings of 8.48% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 11.17% in 2008 to 11.46% in 2009.
Balance sheet dynamics affecting the comparative net interest margins for the second quarter of 2009 compared to the first quarter of 2009 include (1) a decrease of 2.89% in average loans held for investment, (2) a decrease in average loans as a percentage of earning assets from 78.40% in the first quarter of 2009 to 76.51% in the second quarter of 2009, (3) a decrease in average interest-bearing deposits of .52%, (4) a decrease in average other borrowings of 10.83% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 10.95% in the first quarter of 2009 to 11.46% in the second quarter of 2009.
Yield and cost dynamics affecting the comparative net interest margins for the first six months of 2009 compared to 2008 include (1) a decrease of 124 basis points in yields on loans held for investment and for sale, (2) a decrease of 112 basis points in investment and short-term funds yields, (3) a decrease of 100 basis points in costs of deposits and (4) a decrease of 27 basis points in costs of borrowings.
Yield and cost dynamics affecting the comparative net interest margins for the second quarter of 2009 compared to 2008 include (1) a decrease of 115 basis points in yields on loans held for investment and for sale, (2) a decrease of 245 basis points in investment and short-term funds yields, (3) a decrease of 80 basis points in costs of deposits and (4) a decrease of 26 basis points in costs of borrowings.
Yield and cost dynamics affecting the comparative net interest margins for the
second quarter of 2009 compared to the first quarter of 2009 include (1) a
decrease of 31 basis points in yields on loans held for investment and for sale,
(2) a decrease of 25 basis points in investment and short-term funds yields, (3)
a decrease of 11 basis points in costs of deposits and (4) a decrease of 10
basis points in costs of borrowings.
The decrease in asset yields for the second quarter and first half of 2009 as compared to the same periods 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 1.89% in June 2008 to .03% in December 2008 and to .18% in June 2009 and (3) a decrease in loan activity through the second half of 2008 and into 2009. Average loans held to maturity were $1.213 billion during the first quarter of 2008 and $1.194 billion during the second quarter of 2008. Continuing the downtrend, average loans held to maturity decreased from $1.165 billion during the first quarter of 2009 to $1.131 billion during the second quarter of 2009 as the economy weakened and new lending opportunities became scarce. Yields on loans held to maturity followed the prime rate trend, decreasing from 6.86% for the second quarter of 2008 and 7.11% for the first half of 2008 to 5.72% for the second quarter of 2009 and 5.88% for the first half of 2009. In addition to the decrease in yields due to the rate environment, the volume of nonaccrual loans increased significantly from June 2008 through the end of 2008 and into 2009. Total nonaccrual loans at June 30, 2009 were $74.420 million, representing 6.72% of the loan portfolio. In contrast, total nonaccrual loans at June 30, 2008 were $11.317 million, or .95% of the loan portfolio. The Company also reversed $83 thousand in investment interest income representing the interest that had been accrued on two investments since the last interest payment received in 2008 related to two collateralized debt obligations that were placed in nonaccrual status during the second quarter of 2009. The investments had a combined par value of $1.751 million with a fair value of $1.047 million. Subsequently, one of the investments was reduced by a credit-related other-than-temporary impairment charge of $175 thousand. Deposit costs decreased to 2.19% for the second quarter of 2009 and 2.25% for the first half of 2009 from 2.99% for the second quarter of 2008 and 3.25% for the first half of 2008. For the second quarter of 2009 average interest-bearing checking accounts increased by 31.19% over the fourth quarter of 2008 and by 32.78% over the second quarter of 2008. Approximately half of this growth occurred through core customer growth in the Summit checking product while approximately half was provided through public funds acquired through a rate bidding process. Average certificates of deposit for the second quarter of 2009 decreased by 2.84% from the fourth quarter of 2008 and by 5.27% from the second quarter of 2008. During the first half of 2009, core customer certificate of deposit balances increased by $38.950 million while rate-bid public certificates decreased by $37.615 million.
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, a lack of demand for commercial and consumer credit and the trend in nonaccrual loan balances. The yield curve spread between the 3-month and 5-year Treasuries was 42 basis points during December 2007 and 160 basis points during June 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. The spread between short-term and long-term rates increased significantly during the second quarter of 2009 as the longer end of the yield curve began to rise. The 3-month to 5-year Treasury yield spread was 253 basis points in June 2009. Short-term rates drifted lower during the second quarter of 2009 while long-term rates began to move upward. 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 and is expected to keep its target rates low until an economic recovery is evident. 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 February 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. Management reduced the pricing on certain interest-bearing checking account products during the second quarter of 2009 as market rates decreased with the trend in short-term rates. These rate reductions should contribute to a lower cost of deposits going forward. 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 $51.265 million at June 30, 2008 to $80.998 million at June 30, 2009.
FIRST M & F CORPORATION
The following table shows the components of the net interest margin for the
first and second quarters of 2009 and 2008:
Yields/Costs Yields/Costs
2nd Quarter, 2009 1st Quarter, 2009 2nd Quarter, 2008 1st Quarter, 2008
Interest bearing bank balances 0.06 % 0.16 % 1.96 % 3.15 %
Federal funds sold 0.23 0.22 2.72 3.40
Taxable investments 4.00 4.92 5.18 5.03
Tax-exempt investments 6.01 6.07 6.21 6.24
Loans held for sale 2.13 3.56 5.29 5.52
Loans held for investment 5.72 6.03 6.86 7.36
Earning asset yield 5.30 5.63 6.58 6.96
Interest checking 1.42 1.37 1.49 1.46
Money market deposits 1.33 1.70 2.33 2.74
Savings 1.51 1.65 2.32 2.76
Certificates of deposit 2.99 3.04 3.87 4.49
Short-term borrowings 1.08 1.31 2.29 3.30
Other borrowings 4.51 4.60 4.82 4.75
Cost of interest-bearing liabilities 2.46 2.60 3.22 3.69
Net interest spread 2.84 3.03 3.36 3.27
Effect of non-interest bearing deposits .31 .31 .40 .44
Effect of leverage .01 (.01 ) (.03 ) (.05 )
Net interest margin, tax-equivalent 3.16 3.33 3.73 3.66
Less: Tax equivalent adjustments:
Investments .09 .09 .09 .09
Loans .01 .01 .01 .01
Reported book net interest margin 3.06 % 3.23 % 3.63 % 3.56 %
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The following table shows the components of the net interest margin for the first six months of 2009 and 2008:
Yields/Costs
June 2009 June 2008
Interest bearing bank balances 0.12 % 2.72 %
Federal funds sold 0.23 3.13
Taxable investments 4.40 5.11
Tax-exempt investments 6.04 6.22
Loans held for sale 2.93 5.40
Loans held for investment 5.88 7.11
Earning asset yield 5.46 6.77
Interest checking 1.40 1.48
Money market deposits 1.52 2.52
Savings 1.58 2.54
Certificates of deposit 3.02 4.19
Short-term borrowings 1.20 2.59
Other borrowings 4.56 4.78
Cost of interest-bearing liabilities 2.53 3.46
Net interest spread 2.93 3.31
Effect of non-interest bearing deposits .31 .42
Effect of leverage .01 (.04 )
Net interest margin, tax-equivalent 3.25 3.69
Less: Tax equivalent adjustments:
Investments .10 .08
Loans .01 .01
Reported book net interest margin 3.14 % 3.60 %
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FIRST M & F CORPORATION
The following table shows average balance sheets for the first and second
quarters of 2009 and 2008:
(Dollars in thousands)
2nd Quarter, 2009 1st Quarter, 2009 2nd Quarter, 2008 1st Quarter, 2008
Interest bearing bank balances $ 9,339 $ 16,195 $ 5,627 $ 9,893
Federal funds sold 23,959 44,819 6,783 10,463
Taxable investments 250,023 191,111 182,982 188,424
Tax-exempt investments 57,091 59,875 56,376 52,139
Loans held for sale 7,036 8,987 7,406 7,104
Loans held for investment 1,131,370 1,165,086 1,193,703 1,213,121
Earning assets 1,478,818 1,486,073 1,452,877 1,481,144
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