XNAS:FMFC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

FMFC-2012.6.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
Or
 
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
 

Commission File Number 000-09424

FIRST M&F CORPORATION
(Exact name of registrant as specified in its charter)
MISSISSIPPI
(State or other jurisdiction of
Incorporation or organization)
64-0636653
(I.R.S. Employer Identification Number)
 
 
134 West Washington Street,  Kosciusko, Mississippi
(Address of principal executive offices)
39090
(Zip Code)

662-289-5121
(Registrant’s telephone number, including area code)

No Change
(Former name, former address and former fiscal year,
if changed since the last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes   o No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes   o No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer  o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   x No   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
Common stock, $5 par value
 
9,172,098 Shares
Title of Class
 
Shares Outstanding at July 31, 2012



FIRST M&F CORPORATION

FORM 10-Q

INDEX

 
 
Page
PART I:
FINANCIAL INFORMATION
 
 
 
 
Item 1
Financial Statements (unaudited):
3
 
Consolidated Statements of Condition
3
 
Consolidated Statements of Operations
4
 
Consolidated Statements of Comprehensive Income
5
 
Consolidated Statements of Stockholders’ Equity
6
 
Consolidated Statements of Cash Flows
7
 
Notes to Consolidated Financial Statements
9
 
 
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operation
50
 
 
 
Item 3
Quantitative and Qualitative Disclosures About Market Risk
76
 
 
 
Item 4
Controls and Procedures
77
 
 
 
PART II:
OTHER INFORMATION
 
 
 
 
Item 1
Legal Proceedings
78
 
 
 
Item 1A
Risk Factors
78
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
78
 
 
 
Item 3
Defaults upon Senior Securities
78
 
 
 
Item 4
Mine Safety Disclosures
78
 
 
 
Item 5
Other Information
78
 
 
 
Item 6
Exhibits
79
 
 
 
SIGNATURES
 
80
 
 
 
EXHIBIT INDEX
 
81
 
 
 
CERTIFICATIONS
 
 

2


FIRST M & F CORPORATION AND SUBSIDIARY

PART I: FINANCIAL INFORMATION

Item 1 – Financial Statements (Unaudited)

Consolidated Statements of Condition
(Dollars in thousands)
 
 
 
 
 
 
June 30,
2012
 
December 31,
2011
 
 
 
 
 
(Unaudited)
 
(Note 1)
Assets
 
 
 
 
Cash and due from banks
 
$
37,147

 
$
39,976

Interest bearing bank balances
 
20,708

 
39,391

Federal funds sold
 
6,750

 
25,000

Securities available for sale, amortized cost of $371,424 and $315,890
 
377,670

 
320,774

Loans held for sale
 
22,291

 
26,073

Loans, net of unearned income
 
982,596

 
996,340

Allowance for loan losses
 
(15,310
)
 
(14,953
)
Net loans
 
967,286

 
981,387

Bank premises and equipment
 
37,529

 
37,989

Accrued interest receivable
 
6,060

 
6,122

Other real estate
 
31,077

 
36,952

Other intangible assets
 
4,373

 
4,586

Bank owned life insurance
 
22,866

 
22,477

Other assets
 
27,739

 
27,924

 
 
$
1,561,496

 
$
1,568,651

Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Noninterest-bearing deposits
 
$
236,145

 
$
231,718

Interest-bearing deposits
 
1,125,193

 
1,139,745

Total deposits
 
1,361,338

 
1,371,463

Federal funds purchased and repurchase agreements
 
3,224

 
4,398

Other borrowings
 
40,333

 
43,001

Junior subordinated debt
 
30,928

 
30,928

Accrued interest payable
 
844

 
1,023

Other liabilities
 
10,912

 
8,242

Total liabilities
 
1,447,579

 
1,459,055

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Preferred stock; 2,000,000 shares authorized; 30,000 shares issued and outstanding
 
18,198

 
17,564

Common stock of $5.00 par value; 50,000,000 shares authorized: 9,172,098 and 9,154,936 shares issued and outstanding
 
45,860

 
45,775

Additional paid-in capital
 
31,890

 
31,895

Nonvested restricted stock awards
 
836

 
674

Retained earnings
 
16,699

 
14,456

Accumulated other comprehensive income (loss)
 
434

 
(768
)
Total equity
 
113,917

 
109,596

 
 
$
1,561,496

 
$
1,568,651


The accompanying notes are an integral part of these financial statements.

3


FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2012
 
2011
 
2012
 
2011
Interest income: 
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
13,741

 
$
15,281

 
$
27,899

 
$
30,656

Interest on loans held for sale
 
244

 
27

 
417

 
68

Taxable investments
 
1,563

 
1,931

 
3,053

 
3,702

Tax-exempt investments
 
319

 
302

 
637

 
616

Federal funds sold
 
11

 
15

 
26

 
31

Interest bearing bank balances
 
28

 
46

 
79

 
98

Total interest income
 
15,906

 
17,602

 
32,111

 
35,171

Interest expense:
 
 

 
 

 
 

 
 

Deposits
 
2,233

 
3,523

 
4,746

 
7,370

Federal funds purchased and repurchase agreements
 
5

 
7

 
11

 
22

Other borrowings
 
437

 
509

 
888

 
1,033

Junior subordinated debt
 
315

 
292

 
586

 
750

Total interest expense
 
2,990

 
4,331

 
6,231

 
9,175

Net interest income
 
12,916

 
13,271

 
25,880

 
25,996

Provision for loan losses
 
2,280

 
2,280

 
4,560

 
4,860

Net interest income after provision for loan losses
 
10,636

 
10,991

 
21,320

 
21,136

Noninterest income:
 
 

 
 
 
 

 
 

Deposit account income
 
2,548

 
2,473

 
5,005

 
4,931

Mortgage banking income
 
1,806

 
323

 
2,373

 
679

Agency commission income
 
848

 
936

 
1,677

 
1,828

Trust and brokerage income
 
163

 
152

 
303

 
285

Bank owned life insurance income
 
182

 
176

 
369

 
359

Other income
 
491

 
396

 
1,141

 
1,052

Securities gains, net
 
1

 
341

 
592

 
1,690

Total investment other-than-temporary impairment losses
 
(8
)
 
2

 
(8
)
 
(239
)
Portion of loss recognized in (reclassified from) other comprehensive income (before taxes)
 
4

 
(87
)
 
4

 
(142
)
Net investment impairment losses recognized
 
(4
)
 
(85
)
 
(4
)
 
(381
)
Total noninterest income
 
6,035

 
4,712

 
11,456

 
10,443

Noninterest expenses:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
6,737

 
7,157

 
13,600

 
14,113

Net occupancy expenses
 
932

 
951

 
1,840

 
1,940

Equipment expenses
 
423

 
451

 
886

 
916

Software and processing expenses
 
346

 
395

 
708

 
794

Telecommunication expenses
 
221

 
229

 
466

 
454

Marketing and business development expenses
 
267

 
272

 
504

 
477

Foreclosed property expenses
 
1,282

 
1,468

 
2,738

 
3,821

FDIC insurance assessments
 
553

 
577

 
1,067

 
1,351

Intangible asset amortization
 
106

 
107

 
213

 
214

Other expenses
 
3,452

 
2,696

 
6,283

 
5,034

Total noninterest expenses
 
14,319

 
14,303

 
28,305

 
29,114

Income before income taxes
 
2,352

 
1,400

 
4,471

 
2,465

Income tax expense
 
599

 
294

 
1,111

 
409

Net income
 
1,753

 
1,106

 
$
3,360

 
$
2,056

Dividends and accretion on preferred stock
 
471

 
440

 
934

 
872

Net income applicable to common stock
 
$
1,282

 
$
666

 
$
2,426

 
$
1,184

Net income allocated to common shareholders
 
$
1,226

 
$
661

 
$
2,365

 
$
1,176

Earnings per share:
 
 

 
 

 
 

 
 

Basic
 
0.14

 
0.07

 
$
0.26

 
$
0.13

Diluted
 
0.14

 
0.07

 
$
0.26

 
$
0.13


The accompanying notes are an integral part of these financial statements.

4


FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income
(Unaudited)

(Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
1,753

 
$
1,106

 
$
3,360

 
$
2,056

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gains (losses) on securities: 
 
 

 
 

 
 

 
 

Unrealized gains on securities available for sale arising during the period, net of tax of $557 and $1,161 for the three months ended June 30 and $713 and $1,349 for the six months ended June 30
 
936

 
1,953

 
1,205

 
2,269

Unrealized gains (losses) on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $7 and $30 for the three months ended June 30 and $13 and $5 for the six months ended June 30
 
(14
)
 
50

 
19

 
7

Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $0 and $127 for the three months ended June 30 and $220 and $630 for the six months ended June 30
 
(1
)
 
(214
)
 
(372
)
 
(1,060
)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $1 and $32 for the three months ended June 30 and $1 and $142 for the six months ended June 30
 
3

 
53

 
3

 
239

Unrealized losses net of settlements on cash flow hedge arising during the period, net of tax of $232 and $330 for the three months ended June 30 and $192 and $266 for the six months ended June 30
 
(389
)
 
(555
)
 
(323
)
 
(448
)
Defined benefit pension plans:
 
 

 
 

 
 

 
 

Amortization of prior service cost, net of tax of $0 and $2 for the three months ended June 30 and $0 and $4 for the six months ended June 30
 

 
(4
)
 

 
(8
)
Amortization of actuarial loss, net of tax of $199 and $92 for the three months ended June 30 and $398 and $183 for the six months ended June 30
 
335

 
154

 
670

 
309

Other comprehensive income
 
870

 
1,437

 
1,202

 
1,308

Total comprehensive income
 
$
2,623

 
$
2,543

 
$
4,562

 
$
3,364


The accompanying notes are an integral part of these financial statements.

5


FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 2012 and 2011
(Unaudited)

(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Nonvested Restricted Stock Awards
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
January 1, 2011
 
$
16,390

 
$
45,534

 
$
31,883

 
$
784

 
$
12,225

 
$
249

 
$
107,065

Net income
 

 

 

 

 
2,056

 

 
2,056

Cash dividends ($.02 per share)
 

 

 

 

 
(185
)
 

 
(185
)
18,584 shares granted to directors
 

 
93

 
(23
)
 

 

 


 
70

Dividends and accretion on preferred stock
 
572

 

 

 

 
(872
)
 

 
(300
)
6,000 restricted share awards vested
 

 
30

 
71

 
(101
)
 

 

 

Share-based compensation expense recognized
 

 

 
4

 
35

 

 

 
39

Net change
 

 

 

 

 

 
1,308

 
1,308

June 30, 2011
 
$
16,962

 
$
45,657

 
$
31,935

 
$
718

 
$
13,224

 
$
1,557

 
$
110,053

January 1, 2012
 
$
17,564

 
$
45,775

 
$
31,895

 
$
674

 
$
14,456

 
$
(768
)
 
$
109,596

Net income
 

 

 

 

 
3,360

 

 
3,360

Cash dividends ($.02 per share)
 

 

 

 

 
(189
)
 

 
(189
)
17,162 shares granted to directors
 

 
85

 
(8
)
 

 

 

 
77

Dividends and accretion on preferred stock
 
634

 

 

 

 
(934
)
 

 
(300
)
Share-based compensation expense recognized
 

 

 
3

 
162

 
6

 

 
171

Net change
 

 

 

 

 

 
1,202

 
1,202

June 30, 2012
 
$
18,198

 
$
45,860

 
$
31,890

 
$
836

 
$
16,699

 
$
434

 
$
113,917


The accompanying notes are an integral part of these financial statements.

6


FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
(Unaudited)

(Dollars in thousands)
 
Six Months Ended
 
 
June 30
 
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
Net income
 
$
3,360

 
$
2,056

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Share-based compensation
 
248

 
109

Amortization of pension costs
 
901

 
366

Depreciation and amortization
 
1,170

 
1,290

Provision for loan losses
 
4,560

 
4,860

Net investment amortization
 
2,112

 
1,017

Net change in unearned fees/deferred costs on loans
 
(992
)
 
(421
)
Capitalized dividends on FHLB stock
 
(14
)
 
(14
)
Gain on securities available for sale
 
(592
)
 
(1,690
)
Impairment loss on securities available for sale
 
4

 
381

Gain on loans held for sale
 
(1,497
)
 
(438
)
Other real estate losses
 
2,254

 
3,195

Other asset sales losses
 
95

 
140

Deferred income taxes
 
1,109

 
407

Originations of loans held for sale, net of repayments
 
(69,201
)
 
(24,746
)
Sales proceeds of loans held for sale
 
70,376

 
29,132

(Increase) decrease in:
 
 

 
 

Accrued interest receivable
 
62

 
410

Cash surrender value of bank owned life insurance
 
(369
)
 
(359
)
Other assets
 
(1,785
)
 
(655
)
Increase (decrease) in:
 
 

 
 

Accrued interest payable
 
(180
)
 
(164
)
Other liabilities
 
2,649

 
718

Net cash provided by operating activities
 
14,270

 
15,594

Cash flows from investing activities:
 
 

 
 

Purchases of securities available for sale
 
(136,027
)
 
(101,320
)
Sales of securities available for sale
 
42,837

 
61,074

Maturities of securities available for sale
 
36,131

 
26,655

Purchases of loans held for investment
 
(2,259
)
 
(821
)
Net decrease in other loans held for investment
 
13,534

 
7,483

Net (increase) decrease in:
 
 

 
 

Interest bearing bank balances
 
18,682

 
(31,744
)
Federal funds sold
 
18,250

 

Bank premises and equipment
 
(449
)
 
(944
)
Net purchases of bank owned life insurance
 
(19
)
 
(25
)
Proceeds from sales of other real estate and other repossessed assets
 
6,688

 
4,863

Net cash used in investing activities
 
(2,632
)
 
(34,779
)

7


FIRST M & F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
(Unaudited)

(Dollars in thousands)
 
Six Months Ended
 
 
June 30
 
 
2012
 
2011
Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
$
(10,136
)
 
$
49,075

Net decrease in short-term borrowings
 
(1,174
)
 
(28,434
)
Proceeds from other borrowings
 

 
686

Repayments of other borrowings
 
(2,668
)
 
(5,610
)
Common dividends paid
 
(189
)
 
(185
)
Preferred dividends paid
 
(300
)
 
(300
)
Net cash provided by (used in) financing activities
 
(14,467
)
 
15,232

Net decrease in cash and due from banks
 
(2,829
)
 
(3,953
)
Cash and due from banks at January 1
 
39,976

 
45,099

Cash and due from banks at June 30
 
$
37,147

 
$
41,146

Supplemental disclosures:
 
 

 
 

Total interest paid
 
$
6,417

 
$
9,346

Total income taxes paid
 
192

 
3

 
 
 
 
 
Transfers of loans from held for sale to held for investment
 
4,199

 
454

Transfers of loans to foreclosed property
 
3,182

 
7,618

U. S. Treasury preferred dividend accrued but unpaid
 
75

 
75

Accretion on U. S. Treasury preferred stock
 
634

 
572


The accompanying notes are an integral part of these financial statements.


8

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)





Note 1:  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The condensed balance sheet as of December 31, 2011, has been derived from audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include all entities in which the Company has a controlling financial interest. Therefore, the condensed consolidated financial statements of First M & F Corporation include the financial statements of Merchants and Farmers Bank, a wholly owned subsidiary, and the Bank’s wholly owned subsidiaries, First M & F Insurance Company, Inc., M & F Financial Services, Inc., M & F Bank Securities Corporation, M & F Insurance Agency, Inc., M & F Insurance Group, Inc., and M & F Business Credit, Inc. The consolidated financial statements also include the Bank’s 55% ownership in MS Statewide Title, LLC, a title insurance agency. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

The Company is substantially in the business of community banking and therefore is considered a banking operation with no separately reportable segments.

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 about future economic and market conditions 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. Although our estimates and assumptions contemplate current economic conditions and how we expect them to change in the future, it is reasonably possible that in future months actual conditions could be worse than those anticipated, which could materially affect our financial condition and results of operations. The allowance for loan losses, the fair value of financial instruments, the fair value of other real estate, the valuation of deferred tax assets and other-than-temporary investment impairments represent significant estimates.

Reclassifications

Certain reclassifications have been made to the 2011 financial statements to be consistent with the 2012 presentation.

Loans Held for Sale

Loans held for sale, consisting primarily of mortgages, are accounted for at the lower of cost or fair value applied on an individual loan basis. Valuation changes are recorded in mortgage banking income.

Loans Held for Investment

Loans that management has the ability and intent to hold for the foreseeable future or until maturity or payoff are considered 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, as well as purchase premiums and discounts, are deferred and recognized over the life of the related loans as adjustments to interest income using the level yield method.

The Bank discontinues the accrual of interest on loans and recognizes income only as received (places the loans in nonaccrual status) when, in the judgment of management, the collection of interest, but not necessarily principal, is doubtful. Unpaid accrued interest is charged against interest income on loans when they are placed in nonaccrual status. Payments received on loans in nonaccrual status are generally applied as a reduction to principal until such time that the Company expects to collect the remaining contractual principal. When a borrower of a loan that is in nonaccrual status can demonstrate the ability to repay the loan in accordance with its contractual terms, then the loan may be returned to accruing status. The Company determines past due status on all loans based on their contractual repayment terms. Loans are considered past due if either an interest or principal payment is past due in accordance with the loan’s contractual repayment terms.

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. Interest on impaired loans is recorded on a cash basis if the loans are in nonaccrual status.

9

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 1:  (Continued)

Allowance and Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against earnings. Loans are considered uncollectible when available information confirms that the loan can’t be collected in full. 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 impaired loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio based primarily on historical loss rates. Several asset quality metrics, both quantitative and qualitative, are considered in estimating both specific impairments and in the application of historical loss rates. The fundamental tool used by management to estimate individual impairment allowances and contingency allowances is the individual loan risk rate. For the purpose of determining allowances, management segregates the loan portfolio primarily by risk rating and secondarily by whether the loan is collateral dependent. Management considers a number of factors in assigning risk rates to individual loans and in determining impairment allowances and in the application of historical loss rates, including: past due trends, current trends, current economic conditions, industry exposure, internal and external loan reviews, loan performance, the estimated value of underlying collateral, evaluation of a borrower’s financial condition and other factors considered relevant. Loans not reviewed for specific impairment allowances are grouped into risk pools with similar traits and subjected to historical loss rates to estimate losses in each pool. Troubled debt restructurings are considered to be impaired loans and are included with the loans that are individually reviewed for impairment allowances. Troubled debt restructurings are loans in which the Company has granted a concession to the borrower which would not otherwise be considered due to the borrower’s financial difficulties.

Certain risk characteristics are common to all real estate lending, whether it be construction and land development, commercial real estate or residential real estate. Real property values can fall, creating loan to value problems that can be exacerbated by over supply and falling demand. General economic conditions including increasing or stagnant unemployment rates can have a negative effect on normally credit-worthy borrowers in each real estate segment. Debt service ratios can weaken if real estate sales fall off or have not fully recovered. Commercial and asset-based lending credits are directly affected by swings in the economy and the inherent risks from lower retail sales, due to lower consumer and commercial demand, falling rental prices and rental vacancies. Unemployment also can weigh heavily on business credits and put additional strain on commercial cash flows. Consumer lending is most directly affected by unemployment issues and consumer confidence in the economy and jobs market. Retail lending volumes and credit-worthiness can come under strain as prices rise and income opportunities decline. The Company considers all of these qualitative risks in its determination of not only individual loan risk grading but also decisions about individual loan impairments and the need for any overall environmental factor or any adjustment of historical loss rates.

The Company monitors available credit on large lines to identify any off-balance sheet credit risks that may arise. Available credit lines are also taken into consideration for loans that are individually tested for impairment amounts. Any lines for which there is insufficient collateral or other sources of repayment will have impairment amounts accrued for deficiencies above the amount of the outstanding loan balance. The Company generally has the contractual right to suspend available credit on a commitment when a contractual default occurs. Available lines are generally suspended, except for the completion of construction projects, when loans are restructured. The Company did not have a liability accrued for any off-balance sheet credit risks at June 30, 2012 or December 31, 2011.

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.

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 4, 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.

Restricted Cash Balances

The Company has entered into an interest rate swap agreement designed to convert floating rate interest payments on subordinated debentures into fixed rate payments. The Company had pledged interest bearing bank balances as collateral to the interest rate swap counterparty in the amounts of $1.752 million at June 30, 2012 and $1.861 million at December 31, 2011.

The Company held $100 thousand in certificates of deposit and $401 thousand in other interest bearing bank balances at June 30, 2012 and $100 thousand in certificates of deposit and $100 thousand in other interest bearing bank balances at December 31, 2011 in commercial banks as compensating balances for a third party credit card originator and a third party debit card processor. The amounts are included in interest-bearing bank balances.

10

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Valuation techniques use certain inputs to arrive at fair value. Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. They may be observable or unobservable. Applicable accounting principles establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds or credit risks) or inputs that are derived principally from or corroborated by market data.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

11

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
 
Fair Value Measurements at
June 30, 2012, Using
 
 
 
Assets/Liabilities
Measured at 
Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
 
June 30, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
U.S. Government sponsored entities
 
$
79,269

 
$

 
$
79,269

 
$

Mortgage-backed investments
 
221,589

 

 
223,560

 

Obligations of states and political subdivisions
 
63,180

 

 
63,180

 

Collateralized debt obligations
 
850

 

 

 
850

Other debt securities
 
12,782

 

 
10,811

 

Total securities available for sale
 
$
377,670

 
$

 
$
376,820

 
$
850

Mortgage derivative assets
 
576

 

 

 
576

 
 
$
378,246

 
$

 
$
376,820

 
$
1,426

 
 
 
 
 
 
 
 
 
Interest rate swap liability
 
$
2,349

 
$

 
$

 
$
2,349

Mortgage derivative liabilities
 
304

 

 

 
304

 
 
$
2,653

 
$

 
$

 
$
2,653


 
 
 
 
Fair Value Measurements at
December 31, 2011, Using
 
 
 
Assets/Liabilities
Measured at 
Fair
Value
 
Quoted
Prices In
Active
Markets
For
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
 
December 31,
2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
U.S. Government sponsored entities
 
$
58,792

 
$

 
$
58,792

 
$

Mortgage-backed investments
 
203,686

 

 
203,686

 

Obligations of states and political subdivisions
 
54,142

 

 
54,142

 

Collateralized debt obligations
 
819

 

 

 
819

Other debt securities
 
3,335

 

 
3,335

 

Total available for sale securities
 
$
320,774

 
$

 
$
319,955

 
$
819

Mortgage derivative assets
 
269

 

 

 
269

 
 
$
321,043

 
$

 
$
319,955

 
$
1,088

 
 
 
 
 
 
 
 
 
Interest rate swap liability
 
$
1,834

 
$

 
$

 
$
1,834

Mortgage derivative liabilities
 
291

 

 

 
291

 
 
$
2,125

 
$

 
$

 
$
2,125


12

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

U.S. Treasury, Government sponsored entity and mortgage-backed securities. Securities issued by the U.S. Treasury and Government sponsored entities and mortgage-backed securities are traded in a dealer market and are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service that primarily uses trading activity in the dealer market to determine market prices.

Obligations of states and political subdivisions. Municipal securities include investments that are traded in a dealer market and investments that trade infrequently and are reported using Level 2 inputs. The fair value measurements are obtained from both an independent pricing service and from a pricing matrix that considers observable inputs such as dealer quotes, market yield curves, credit information (including observable default rates) and the instrument’s contractual terms and conditions, obtained from a municipal security data provider.

Other debt securities. Other debt securities trade in a dealer market and are reported using Level 2 inputs. The fair value measurements are provided by an independent pricing service and are derived from trading activity in the dealer market.

Collateralized debt obligations. The Company owns certain beneficial interests in collateralized debt obligations secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Company utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes.

Mortgage Derivatives. Mortgage derivative assets and liabilities represent the fair values of the interest rate lock commitments (IRLCs) of the Company to originate mortgages at certain rates as well as the commitments, or forward sale agreements (FSAs), to sell the mortgages to investors at locked prices within a specified period of time. The Company uses an internal valuation model with observable market data inputs consisting primarily of dealer quotes, market yield curves and estimated servicing values, and non-observable inputs such as credit-related adjustments and estimated pull-through rates. These instruments are classified as Level 3 fair values. Mortgage derivative assets are included in other assets and mortgage derivative liabilities are included in other liabilities in the Company’s statement of condition.

Interest rate swap. The interest rate swap is valued using a discounted cash flow model. Future net cash flows are estimated based on the forward LIBOR rate curve, the payment terms of the swap and potential credit events. These cash flows are discounted using a rate derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

13

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

The following table reports the activity for the second quarter and first six months of 2012 and 2011 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.

(Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2012
 
June 30, 2012
 
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
Beginning Balance
 
$
872

 
$
81

 
$
(1,728
)
 
$
819

 
$
(22
)
 
$
(1,834
)
Total gains or losses (realized/unrealized):
 
 

 
 

 
 

 
 

 
 

 
 

Other-than-temporary impairment included in earnings
 
(4
)
 

 

 
(4
)
 

 

Other-than-temporary impairment (included in) transferred from other comprehensive income
 
(4
)
 

 

 
(4
)
 

 

Other gains/losses included in other comprehensive income
 
(14
)
 

 
(772
)
 
39

 

 
(812
)
Net swap settlement recorded
 

 

 
151

 

 

 
297

IRLC and FSA issuances
 

 
448

 

 

 
95

 

IRLC and FSA expirations and fair value changes included in earnings
 

 
(180
)
 

 

 
50

 

IRLC transfers into closed loans/FSA transferred on sales
 

 
(77
)
 

 

 
149

 

Ending Balance
 
$
850

 
$
272

 
$
(2,349
)
 
$
850

 
$
272

 
$
(2,349
)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
 
$
(4
)
 
$

 
$
(151
)
 
$

 
$

 
$
(297
)

 
 
Three Months Ended
 
Six Months Ended
(Dollars in thousands)
 
June 30, 2011
 
June 30, 2011
 
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
Beginning Balance
 
$
866

 
$
31

 
$
988

 
$
934

 
218

 
$
817

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

 
 

 
 

 
 

Other-than-temporary impairment included in earnings
 
(85
)
 

 

 
(381
)
 

 

Other-than-temporary impairment (included in) transferred from other comprehensive income
 
87

 

 

 
143

 

 

Other gains/losses included in other comprehensive income
 
78

 

 
(1,049
)
 
250

 

 
(907
)
Net swap settlement recorded
 

 

 
164

 

 

 
193

IRLC and FSA issuances
 

 
39

 

 

 
206

 

IRLC and FSA expirations and fair value changes included in earnings
 

 
(22
)
 

 

 
(65
)
 

IRLC transfers into closed loans/FSA transferred on sales
 

 
(14
)
 

 

 
(325
)
 

Ending Balance
 
$
946

 
$
34

 
$
103

 
$
946

 
34

 
$
103

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date
 
$
(85
)
 
$

 
$
(164
)
 
$

 

 
$
(193
)

14

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 fair value measurements.

 
 
Fair Value at
 
Valuation
 
Unobservable
 
 
 
Weighted
(Dollars in thousands)
 
June 30, 2012
 
Techniques
 
Inputs
 
Range
 
Average
Collateralized debt obligations
 
$
850

 
Discounted cash flow
 
Discount margin
Default rates
 
15.00% - 25.00%
0.25% - 1.76%

 
18.63%
.74%

Mortgage interest rate lock agreements
 
309

 
Discounted cash flow
 
Pull-through rates
 
85.00
%
 
85.00
%
Mortgage forward sale agreements
 
(37
)
 
Consensus pricing
 
Pull-through rates
 
85.00
%
 
85.00
%
Interest rate swap
 
(2,349
)
 
Discounted cash flow
 
Discount rate
 
.52% - 1.10%

 
0.68
%

Collateralized debt obligations: The discount margins for the collateralized debt obligations is the margin added to the libor yield curve. The margins are based on averages of observed market transactions for similar preferred securities and adjusted to reflect the lack of liquidity in the trust preferred CDO market. The default rates are annual rates based on a credit scoring analysis of the underlying collateral issuers. The default rates are used in estimating the timing and amounts of expected cash flows.

Mortgage interest rate lock agreements: The pull-through rate is estimated based on closing activity from a sample time period. The pull-though rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Mortgage forward sale agreements: The pull-through rate is estimated based on data provided by mortgage investors. The pull-through rate is applied as a probability estimate that is multiplied by the estimated price in arriving at an expected price.

Interest rate swap: A LIBOR swap yield curve is used to discount the expected cash flows. The yield curve is constructed from swap quotes derived by a third party.

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
 
Fair Value Measurements Using
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
 
06/30/12 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
 
$
8,245

 
$

 
$

 
$
8,245

Loan foreclosures
 
1,855

 

 

 
1,855

Other real estate
 
8,732

 

 

 
8,732


15

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

The following tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
 
 
 
Fair Value Measurements Using
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
(Dollars in thousands)
 
12/31/11 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
 
$
15,533

 
$

 
$

 
$
15,533

Loan foreclosures
 
11,304

 

 

 
11,304

Other real estate
 
13,788

 

 

 
13,788


(a)
These amounts represent the resulting carrying amounts on the consolidated statement of condition for impaired real estate-secured loans and other real estate for which fair value re-measurements took place during the period. Loan foreclosures represent the fair value portion of the carrying amounts of other real estate properties that were re-measured at the point of foreclosure during the period.

The following table summarizes certain quantitative information about valuation techniques and significant unobservable inputs used in determining Level 3 nonrecurring fair value measurements.

 
 
Fair Value at
 
Valuation
 
Unobservable
 
 
 
Weighted
(Dollars in thousands)
 
June 30, 2012
 
Techniques
 
Inputs
 
Range
 
Average
Impaired loans
 
$
8,245

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$1 thousand -
$559 thousand
 
$51 thousand
Loan foreclosures
 
1,855

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$1 thousand - $68 thousand
 
$25 thousand
Other real estate
 
8,732

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$9 thousand - $116 thousand
 
$55 thousand

Collateral dependent loans and foreclosed properties are primarily valued using appraisals based on sales of comparable properties in the same or similar markets. These valuations are updated by appraisal staff using an internal database of factors. The values of foreclosed properties may also be revised when sale discussions indicate or when sale contracts are negotiated that require an additional write-down to the buyers' expectations.





















16

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(Dollars in thousands)
 
2012
 
2011
 
2012
 
2011
Impaired loans (a)
 
$
2,595

 
$
2,356

 
$
5,442

 
$
4,416

Loan foreclosures (b)
 
1,124

 
345

 
1,503

 
817

Other real estate (c)
 
536

 
1,053

 
1,636

 
3,107


(a)
Represents additional impairments on loans which are based on the appraised value of the collateral. These impairments are accrued in the allowance for loan losses and charged to provision for loan loss expense.
(b)
Represents foreclosures of loans secured by real estate when the foreclosed value is lower than the carrying value of the loan. These amounts are charged to the allowance for loan losses with the fair value of the foreclosed property being recorded in other real estate.
(c)
Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Impaired Loans. Collateral dependent loans, which are loans for which the repayment is expected to be provided solely by the underlying collateral, are valued for impairment purposes by using the fair value of the underlying collateral. For collateral dependent loans, collateral values are estimated using Level 3 inputs based on observable market data and other internal estimates.

Loan Foreclosures. Certain foreclosed assets, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 3 inputs based on appraisals, observable market data and other internal estimates.

Other real estate. Other real estate consists primarily of real estate from loans that have been foreclosed on. It is carried at the lower of cost or fair value less costs to sell. Subsequent to foreclosure, these properties may experience further market declines. When this occurs, the Company writes the property down to management’s best estimate of what the market may be willing to pay. Management considers recent appraisals when available, what other properties have sold for, how long properties have been on the market, the condition of the property, the availability of liquid buyers and other assumptions that market participants may use in determining a price at which they would acquire the property. Since certain significant inputs to these estimates are management-derived and unobservable, fair values are reported as using Level 3 inputs.

17

FIRST M & F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)




Note 2:  (Continued)

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011:
 
 
 
 
 
 
Fair Value Measurements at
June 30, 2012, Using
 
 
June 30, 2012
 
Quoted Prices In Active Markets For Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(Dollars in thousands)
 
Carrying
 
Estimated
 
 
 
 
 
Amount
 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments
 
$
64,605

 
$
64,605

 
$
64,605

 
$

 
$

Securities available for sale
 
377,670

 
377,670

 

 
376,820

 
850

Loans held for sale
 
22,291

 
22,893

 

 

 
22,893

Loans held for investment
 
967,286

 
909,021

 

 

 
909,021

Agency accounts receivable
 
201

 
201

 
201

 

 

Accrued interest receivable
 
6,060

 
6,060

 
6

 
1,745

 
4,309

Nonmarketable equity investments
 
7,394

 
7,394

 

 

 
7,394

Investments in unconsolidated VIEs
 
3,281

 
3,281

 

 

 
3,281

Mortgage derivative assets
 
576

 
576

 

 

 
576

Financial liabilities:
 
 

 
 

 
 
 
 
 
 
Noninterest-bearing deposits
 
236,145

 
236,145

 
236,145

 

 

NOW, MMDA and savings deposits
 
719,771

XNAS:FMFC Quarterly Report 10-Q Filling

XNAS:FMFC Stock - Get Quarterly Report SEC Filing of XNAS:FMFC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:FMFC Quarterly Report 10-Q Filing - 6/30/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices |  Most Recent Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:FMFC Quarterly Report 10-Q Filing - 3/31/2012  |  Next: XNAS:FMFC Quarterly Report 10-Q/A Filing - 6/30/2012