Annual Report (10-k)


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

FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
 
64-0636653
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
134 West Washington Street,  Kosciusko, Mississippi
 
39090
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  662-289-5121

Securities registered under Section 12(b) of the Act:
Common Stock, $5 par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ¨ Yes    x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   ¨ Yes    x No

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    ¨ No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨             Accelerated filer   ¨             Non-accelerated filer   ¨             Smaller reporting company    x

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

Based on the closing sale price for shares on June 30, 2012, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $39,607,663.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common stock, $5 par value
 
9,230,799 Shares
Title of Class
 
Shares Outstanding at January 31, 2013

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement dated March 8, 2013 , are incorporated by reference into Part III of the Form 10-K report.

FIRST M&F CORPORATION AND SUBSIDIARY

                     



CROSS REFERENCE INDEX
PART I
 
 
Page
 
 
 
 
Item 1
 
Business
3

Item 1A
 
Risk Factors
15

Item 1B
 
Unresolved Staff Comments
19

Item 2
 
Properties
19

Item 3
 
Legal Proceedings
19

Item 4
 
Mine Safety Disclosures
19

 
 
 
 
PART II
 
 
 
 
 
 
 
Item 5
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20

Item 6
 
Selected Financial Data
23

Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24

Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
50

Item 8
 
Financial Statements and Supplementary Data
51

Item 9
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
115

Item 9A
 
Controls and Procedures
115

Item 9B
 
Other Information
115

 
 
 
 
PART III
 
 
 
 
 
 
 
Item 10
 
Directors, Executive Officers and Corporate Governance
116

Item 11
 
Executive Compensation
116

Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
116

Item 13
 
Certain Relationships and Related Transactions and Director Independence
116

Item 14
 
Principal Accounting Fees and Services
116

 
 
 
 
PART IV
 
 
 
 
 
 
 
Item 15
 
Exhibits, Financial Statement Schedules
117


*Information called for by Part III (Items 10 through 14) is incorporated by reference to the Registrant’s Proxy Statement.


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FIRST M&F CORPORATION AND SUBSIDIARY

                     



PART I

BUSINESS

General

First M&F Corporation (the "Company" or "First M&F") 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" or "M&F Bank") in the states of Mississippi, Tennessee, and Alabama.

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 $1.593 billion at December 31, 2012 . 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, Brandon, Bruce, Canton, Cleveland, Clinton, Durant, Flowood, Grenada, Madison, Olive Branch, Oxford, Pearl, Philadelphia, Ridgeland, Southaven, Starkville, and Tupelo. The Bank also has banking locations in southwest Tennessee in Bells and Cordova. The Bank also has banking locations in central Alabama in Chelsea, Columbiana, Inverness and Pelham.

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.

The Bank offers a variety of deposit, investment and credit products to customers. In 2010 the Company and the Bank became certified by the U.S. Treasury Department as a Community Development Financial Institution ("CDFI"). Therefore, the primary mission of the Company and the Bank became the promoting of community development, which means that the activities of the Company and the Bank are purposefully directed toward improving the social and/or economic conditions of underserved people (which may include low-income persons and persons who lack adequate access to capital and/or financial services) and/or residents of economically distressed communities. To maintain certification as a CDFI, the Company and the Bank are required to serve certain investment areas and targeted populations, generally defined by Federal regulations in quantitative terms as low-income or underserved. The Bank provides financial products and development services to these investment areas and targeted populations. These investment areas and target populations are enveloped within the Bank’s current geographical service footprint. Therefore, the Bank will continue to provide full commercial banking products and services to all of its current markets, but will place a special emphasis on providing development services and financial products and services designed for its CDFI-related investment areas and targeted populations. The financial services offered by the Bank include a variety of checking accounts, debit cards, automated teller machine access, an overdraft protection plan, money orders, official checks, check cashing services, safe deposit box services, internet banking and bill paying services, image checking statements, savings accounts, certificates of deposit, Individual Retirement Accounts, business checking, remote deposit capture/imaging services, treasury management services, ACH and direct deposit origination, sweep accounts, letters of credit, and secured and unsecured lines of credit with an emphasis on small business, consumer and agricultural loans. Development services that are offered include financial and credit counseling to individuals to facilitate home ownership, promoting self-employment, providing counseling and assistance with Small Business Administration loan applications, enhancing consumer financial management skills, and technical assistance to borrowers to enhance their business planning, marketing and management skills. Wealth management and trust services are offered through the Kosciusko office in Mississippi and discount brokerage services are offered through the Madison and Tupelo offices in Mississippi.

As of December 31, 2012 , the Company and its subsidiary employed 456 full-time equivalent employees.

Recent Developments

Proposed Merger with Renasant Corporation

On February 6, 2013, Renasant Corporation ("Renasant") and First M&F entered into a definitive merger agreement in which First M&F will merge with and into Renasant, with Renasant the surviving corporation. Concurrently, M&F Bank will merge with and into Renasant Bank, with Renasant the surviving bank. If the merger is completed, holders of First M&F common stock will receive .6425 of a share of Renasant common stock in exchange for each share of First M&F common stock. Completion of the merger is subject to regulatory and both First M&F and Renasant shareholder approval, the redemption, repurchase by the Company or Renasant or exchange for similar shares of Renasant stock of the CDCI Preferred Shares (which is defined herein) and other customary closing conditions.


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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Overview

In the opinion of First M&F Corporation’s management, the Company’s highlights during 2012 were as follows:

Facilities

•
In February 2012 sold the branch building in Wilsonville, Alabama
•
In May 2012 transferred the lease and sold the fixed assets of a full service branch in Niceville, Florida to another financial institution
Earnings

•
Return on assets for 2012 was 0.44% while the return on equity was 6.12% . Return on assets for 2011 was 0.27% while the return on equity was 4.00% .
•
Debit card revenues increased by 10.29% , composing 35.18% of deposit revenues
•
Mortgage banking revenues increased by 191.27% in 2012 after increasing by 15.18% in 2011
•
Mortgage originations were $171.098 million in 2012 as compared to $92.009 million in 2011
•
Property, casualty, life and health insurance commissions decreased from $3.618 million in 2011 to $3.486 million in 2012
Credit

•
Loans held for investment decreased by 2.09% in 2012 due to the continuing effects of the general economic slowdown
•
Net charge offs, as a percentage of average loans, decreased to 0.61% for 2012 compared to 1.05% for 2011
•
Nonaccrual loans as a percentage of loans decreased to 0.75% at the end of 2012 from 1.68% at the end of 2011
•
90 day past due accruing loans as a percentage of loans decreased to 0.03% at the end of 2012 from 0.06% at the end of 2011
•
Foreclosed real estate balances decreased to $25.970 million at the end of 2012 as compared to $36.952 million at the end of 2011
•
Foreclosed real estate of $13.110 million was sold during 2012
•
Expenses related to foreclosed properties were $926 thousand in 2012 while losses incurred on foreclosed properties through sales and write-downs were $4.260 million as compared to expenses of $1.477 million and losses of $5.874 million in 2011
Other

•
As a result of branch closings and other cost-saving initiatives, full-time equivalent employees dropped from 499 at the end of 2010 to 460 at the end of 2011 and 456 at the end of 2012
•
The Company remained well capitalized with a total risk-based capital ratio of 13.30% at the end of 2012 as compared to 12.09% at the end of 2011

CDCI

On September 29, 2010, and pursuant to the terms of the letter agreement (the "Letter Agreement") between the Company and the United States Department of the Treasury (“Treasury”), the Company closed a transaction (the “Exchange”) whereby Treasury exchanged its 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series A, (the “CPP Preferred Shares”) for 30,000 shares of a new series of preferred stock designated Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series CD (the “CDCI Preferred Shares”). As a result of the Exchange, the Company is no longer participating in the TARP Capital Purchase Program being administered by Treasury and is now participating in Treasury’s TARP Community Development Capital Initiative (the “CDCI”). The terms of the Exchange are more fully set forth in the Letter Agreement.
 
The most significant difference in terms between the CDCI Preferred Shares and the CPP Preferred Shares is the dividend rate applicable to each. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% of the liquidation value of the shares, payable quarterly in arrears, whereas the CPP Preferred Shares previously entitled the holder to an annual dividend of 5% of the liquidation value of the shares, payable quarterly in arrears. The terms of the CDCI Preferred Shares are more fully set forth in the Articles of Amendment creating the CDCI Preferred Shares, which Articles of Amendment were filed with the Mississippi Secretary of State on September 27, 2010.

The transaction closed on September 29, 2010 (the “Closing Date”). The exchange of the Preferred Shares was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Under the terms of the Letter Agreement, the Company has agreed to register the Preferred Shares if requested by the Treasury. In addition, the Preferred Shares may be required to be listed on a national exchange if requested by the Treasury.

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock (including with respect to the payment of cash dividends in excess of $0.04 per share annually) and on the Company’s ability to repurchase its common stock, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 ("EESA") as previously disclosed by the Company.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




As a condition to its participation in the CDCI, the Company was required to obtain certification as a Community Development Financial Institution (a “CDFI”) from Treasury’s Community Development Financial Institutions Fund (the “Fund”). On September 28, 2010, the Company was notified that its application for CDFI certification had been approved. The original CDFI certification expires in November 2013. In order to continue participating in the CDCI program, the Company must then apply for and receive recertification as a CDFI. 

In the opinion of management, the challenges and opportunities facing the Company going forward from December 31, 2012 , are as follows:

•
Continue to strengthen credit monitoring systems to provide proactive credit solutions
•
Continue to work on sales of real estate owned as well as to work with customers to dispose of real estate collateral and manage the level of nonperforming loans downward
•
Build the capital strength and funding flexibility of the organization
•
Continue to build core deposits around strong products like Summit Checking that provide a base upon which a portfolio of financial services can be provided
•
Continue to diversify the loan portfolio into consumer and commercial loans that are not real estate dependent
•
Continue to increase the volumes and improve the products and services delivered through the insurance agency offices and focus on branch referrals to enhance agency business
•
Promote low-cost delivery channels such as debit cards and electronic banking that are convenient to customers
•
Continue developing customer-friendly technologies such as deposit image capture for commercial customers, emailing of statements, enhanced internet banking capabilities and mobile banking
•
Encourage customer use of more efficient technologies over labor-intensive processes by tying rates and benefits of deposit products to the use of internet and technology-based applications
•
Enhance product offerings to and develop relationships with small business customers
•
Leverage our CDFI status to improve services and products offered to gain penetration in the Company’s target market
•
Develop corporate banking, especially in the purchased participations and SBA loan portfolios

Pursuant to the definitive merger agreement signed on February 6, 2013 by the Company and Renasant, among others, the CDCI Preferred Shares will be redeemed or repurchased by the Company or Renasant or exchanged for similar shares of Renasant stock prior to closing.

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. We compete primarily on the basis of product and service quality and availability and the pricing of those services and products. The Company’s philosophy is that of a community bank in which personal service and responsiveness are of primary importance.

The Company has been certified as a CDFI and as such attempts to differentiate itself from competitors by providing community development services to a target market within its overall service area, thereby promoting growth in traditionally underserved markets. Community development services include such activities as educational seminars and presentations on financial literacy, banking and credit fundamentals offered to individuals, small businesses and various community groups.

Supervision and Regulation

As a bank holding company, the Company 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, M&F Bank, the Company's banking subsidiary, is subject to regulation, supervision and examination by the Mississippi Department of Banking and Consumer Finance. 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.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The Company is required to file annual reports with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Company is also required to file annual reports with the Treasury and CDFI Fund as part of its obligations under the CDCI program and CDFI program, respectively. The Federal Reserve Board may examine a bank holding company or any of its subsidiaries, and charge the company for the cost of such examination. The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") has removed many limitations on the Federal Reserve Board’s authority to make examinations of banks that are subsidiaries of bank holding companies. Under the Dodd-Frank Act, the Federal Reserve Board will generally be permitted to examine bank holding companies and their subsidiaries, provided that the Federal Reserve Board must rely on reports submitted directly by the institution and examination reports of the appropriate regulators (such as the FDIC and the Mississippi Department of Banking and Consumer Finance) to the fullest extent possible; must provide reasonable notice to, and consult with, the appropriate regulators before commencing an examination of a bank holding company subsidiary; and, to the fullest extent possible, must avoid duplication of examination activities, reporting requirements, and requests for information.

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.

USA Patriot Act

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act") was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. Government to detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution. The Bank has adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations.

Sarbanes-Oxley Act

In July 2002, Congress enacted the Sarbanes-Oxley Act of 2002, which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Section 404 of the Sarbanes-Oxley Act requires the Company to include in its Annual Report, a report stating management’s responsibility to establish and maintain adequate internal control over financial reporting and management’s conclusion on the effectiveness of the internal controls at year end.

Legislative and Regulatory Initiatives to Address Financial and Economic Crises

The Congress, Treasury Department and the federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the U.S. banking system, including the passage of legislation, the provision of other direct and indirect assistance to financial institutions, assistance by the banking authorities in arranging acquisitions of weakened banks and broker-dealers, implementation of programs by the Federal Reserve Board to provide liquidity to the commercial paper markets and expansion of deposit insurance coverage.

In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. The EESA authorized the Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program (“TARP”). The purpose of TARP was to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The Treasury Department allocated $250 billion towards the TARP Capital Purchase Program (“CPP”). Under the CPP, Treasury purchased debt or equity securities from participating institutions. The TARP also included direct purchases or guarantees of troubled assets of financial institutions. Participants in the CPP are subject to executive compensation limits and are encouraged to expand their lending and mortgage loan modifications.

On February 27, 2009, as part of the TARP CPP, the Company entered into a Letter Agreement and Securities Purchase Agreement with the Treasury Department, pursuant to which the Company sold (i) 30,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series A  and (ii) a warrant to purchase 513,113 shares of the Company’s common stock, par value $5.00 per share, for an aggregate purchase price of $30 million in cash.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




On September 29, 2010, as part of the TARP CDCI, the Company entered into a Letter Agreement with the Treasury Department, pursuant to which the Company exchanged 30,000 shares of a new series of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series CD for 30,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Class B Non-Voting, Series A. As a result of the exchange, the Company is no longer participating in the TARP CPP being administered by the Treasury Department and is now participating in the Treasury Department’s TARP CDCI.

The new administration and Congress have pursued a number of initiatives in an effort to stimulate the economy and stabilize the financial markets, including the enactment of the American Recovery and Reinvestment Act of 2009 and the Small Business Jobs Act of 2010, among others, and have altered the terms of some previously announced policies and programs.

Dodd-Frank Act
 
The enactment during 2010 of the Dodd-Frank Act has resulted in increased regulation of the financial services industry. Provisions affecting the activities of the Company and the Bank include, without limitation, the following:
 
•
Asset-based deposit insurance assessments .  FDIC deposit insurance premium assessments will be based on bank assets rather than domestic deposits.
•
Deposit insurance limit increase.   The deposit insurance coverage limit has been permanently increased from $100,000 to $250,000.
•
Establishment of the Bureau of Consumer Financial Protection ("CFPB") .  The CFPB is housed within the Federal Reserve and, in consultation with the Federal banking agencies, makes rules relating to consumer protection. The CFPB has the authority, should it wish to do so, to rewrite virtually all of the consumer protection regulations governing banks, including those implementing the Truth in Lending Act, the Real Estate Settlement Procedures Act (or "RESPA"), the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the S.A.F.E. Mortgage Licensing Act, the Fair Credit Reporting Act (except Sections 615(e) and 628), the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act (sections 502 through 509 relating to privacy), among others.
•
Risk-retention rule .  Banks originating loans for sale on the secondary market or securitization must retain 5 percent of any loan they sell or securitize, except for mortgages that meet low-risk standards to be developed by regulators.
•
Limitation on federal preemption .  Limitations have been imposed on the ability of national bank regulators to preempt state law. Formerly, the national bank and federal thrift regulators possessed preemption powers with regard to transactions, operating subsidiaries and attorney general civil enforcement authority. These preemption requirements have been limited by the Dodd-Frank Act, which will likely impact state banks by affecting activities previously permitted through parity with national banks.
•
Changes to regulation of bank holding companies .  Under Dodd-Frank, bank holding companies must be well-capitalized and well-managed to engage in interstate transactions. In the past, only the subsidiary banks were required to meet those standards. The Federal Reserve Board’s “source of strength doctrine” has now been codified, mandating that bank holding companies such as the Company serve as a source of strength for their subsidiary banks, meaning that the bank holding company must be able to provide financial assistance in the event the subsidiary bank experiences financial distress.
•
Executive compensation limitations .  The Dodd-Frank Act codified executive compensation limitations similar to those previously imposed on TARP recipients.

The information provided herein regarding the effect of the Dodd-Frank Act is intended merely for illustration and is not exhaustive, as the full impact of the legislation on banks and bank holding companies is still being studied and in any event cannot be fully known until the completion of hundreds of new federal agency rulemakings over the next few years. Interested shareholders should refer directly to the Dodd-Frank Act itself for additional information.
 

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




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%. 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, 2012, the Company and the Bank were in compliance with the total capital ratio and the Tier 1 capital ratio requirements. Note 20 - Regulatory Matters of the Notes to Consolidated Financial Statements presents the Company's and the Bank's capital ratios.

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. 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 Federal Deposit Insurance Reform Act of 2005 allowed “eligible insured depository institutions” to share a one-time assessment credit pool of approximately $4.7 billion. Assessment credits were applied to reduce deposit insurance assessments, not to include FICO assessments, payable after the one-time credit regulations became effective. The Bank used up the remainder of its credit during 2008.

The FDIC instituted the Transaction Account Guarantee Program in 2009 to allow financial institutions the option to insure primarily noninterest-bearing accounts for balances in excess of the standard $250 thousand limit. The annual cost of the additional insurance was $0.10 per $100 of the additional deposit balances insured. In an effort to replenish the deposit insurance fund the FDIC instituted a special assessment of $0.05 per $100 of total assets less Tier 1 capital as of June 30, 2009 and payable on September 30, 2009. The Company paid $745 thousand related to this assessment. In a second replenishment action during the fourth quarter of 2009 the FDIC instituted a requirement for banks to prepay their fourth quarter 2009 and full year 2010, 2011 and 2012 estimated assessments. This prepayment was due to be paid on December 30, 2009, with the 2010, 2011 and 2012 prepaid amounts to be recorded as assets and amortized in future quarters as the actual assessments would be due. The Company was granted an exemption by the FDIC, based on its future liquidity and de-leveraging needs, from paying the prepaid assessment of $11.126 million. The Transaction Account Guarantee Program expired on December 31, 2012.

The Dodd-Frank Act changed the method of calculation for FDIC insurance assessments. Under the old system, the assessment base was domestic deposits minus a few allowable exclusions, such as pass-through reserve balances. Under the Dodd-Frank Act, assessments are calculated based on the depository institution’s average consolidated total assets, less its average amount of tangible equity. On February 9, 2011, the FDIC published final regulations implementing these changes. In addition to providing for the required change in assessment base, the FDIC has modified or eliminated the assessment adjustments based on unsecured debt, secured liabilities, and brokered deposits; added a new adjustment for holding unsecured debt issued by another insured depository institution; and lowered the initial base assessment rate schedule in order to collect approximately the same amount of revenue under the new base as under the old base, among other changes. Due to the expanded assessment base the new initial base assessment rates range from 5 to 35 basis points, and total base assessment rates range from 2.5 to 45 basis points after adjustments. These final regulations became effective April 1, 2011.

The enactment of the Emergency Economic Stabilization Act of 2008 temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. However, with the passage of the Dodd-Frank Act, this increase in the basic coverage limit has been made permanent.
 

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Debit Interchange Fees

Effective June 29, 2011, the Federal Reserve issued a final rule to implement the “Durbin Amendment” to the Dodd-Frank Act. The rule included standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Interchange fees, or "swipe" fees, are charges that merchants pay to us and other credit card companies and card-issuing banks for processing electronic payment transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of $0.21 per transaction and 5 basis points multiplied by the value of the transaction. The rule further allows for an upward adjustment of $0.01 to the interchange fee if an issuer certifies that it has implemented policies and procedures reasonably designed to achieve the fraud-prevention standards set forth by the Federal Reserve.

In addition, the legislation prohibits card issuers and networks from entering into exclusive arrangements requiring that debit card transactions be processed on a single network or only two affiliated networks, and allows merchants to determine transaction routing. The limits that the Dodd-Frank Act and Federal Reserve rules place on debit interchange fees may significantly reduce our debit card interchange revenues. The rule became effective October 1, 2011.

Summary

The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of such entities.

Additional bills may be introduced in the future in the United States Congress and state legislatures to alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and what form any of these proposals will be adopted or the extent to which the business of the Company and the Bank may be affected thereby.
 
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 (the "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.

9
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
 
2012
 
2011
 
2010
(Dollars in thousands)
Average Balance
 
Interest
 
Yield/
Cost
 
Average Balance
 
Interest
 
Yield/
Cost
 
Average Balance
 
Interest
 
Yield/
Cost
Interest-bearing bank balances
$
54,808

 
$
146

 
0.27
%
 
$
70,998

 
$
179

 
0.25
%
 
$
60,894

 
$
143

 
0.23
%
Federal funds sold
11,566

 
30

 
0.26

 
25,000

 
63

 
0.25

 
35,642

 
82

 
0.23

Taxable investments
314,889

 
5,682

 
1.80

 
265,446

 
6,745

 
2.54

 
236,046

 
7,616

 
3.23

Tax-exempt investments
37,004

 
2,061

 
5.57

 
33,390

 
1,997

 
5.98

 
41,347

 
2,470

 
5.97

Loans
1,006,407

 
55,873

 
5.55

 
1,040,703

 
60,632

 
5.83

 
1,052,883

 
62,501

 
5.94

Total earning assets
1,424,674

 
63,792

 
4.48

 
1,435,537

 
69,616

 
4.85

 
1,426,812

 
72,812

 
5.10

Nonearning assets
154,333

 
 

 
 

 
158,747

 
 

 
 

 
164,130

 
 

 
 

Total average assets
$
1,579,007

 
 

 
 

 
$
1,594,284

 
 

 
 

 
$
1,590,942

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW & MMDA
618,256

 
2,380

 
0.38

 
562,030

 
3,696

 
0.66

 
473,011

 
5,062

 
1.07

Savings deposits
119,741

 
1,135

 
0.95

 
117,686

 
1,318

 
1.12

 
114,358

 
1,467

 
1.28

Certificates of deposit
401,097

 
5,112

 
1.27

 
489,199

 
8,487

 
1.73

 
544,192

 
12,280

 
2.26

Short-term borrowings
4,017

 
21

 
0.52

 
10,855

 
36

 
0.33

 
19,112

 
66

 
0.35

Other borrowings
70,818

 
2,881

 
4.07

 
76,923

 
3,314

 
4.31

 
102,112

 
5,016

 
4.91

Total interest-bearing liabilities
1,213,929

 
11,529

 
0.95

 
1,256,693

 
16,851

 
1.34

 
1,252,785

 
23,891

 
1.91

Noninterest-bearing deposits
239,402

 
 

 
 

 
220,369

 
 

 
 

 
222,082

 
 

 
 

Noninterest-bearing liabilities
11,592

 
 

 
 

 
7,852

 
 

 
 

 
8,909

 
 

 
 

Capital
114,084

 
 

 
 

 
109,370

 
 

 
 

 
107,166

 
 

 
 

Total avg. liabilities & equity
$
1,579,007

 
 

 
 

 
$
1,594,284

 
 

 
 

 
$
1,590,942

 
 

 
 

Net interest margin
 

 
52,263

 
3.67

 
 

 
52,765

 
3.68

 
 

 
48,921

 
3.43

Less tax equivalent adjustment
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 
Investments
 

 
769

 
0.05

 
 

 
745

 
0.05

 
 

 
921

 
0.06

Loans
 

 
101

 
0.01

 
 

 
156

 
0.02

 
 

 
199

 
0.02

Reported book net interest margin
 

 
$
51,393

 
3.61
%
 
 

 
$
51,864

 
3.61
%
 
 

 
$
47,801

 
3.35
%

Tax equivalent adjustments were made using a blended Federal/State rate of 37.3%.

Nonaccrual loans are included in the average loan balances.

Table 2: RATE/VOLUME VARIANCES
  
2012 Compared To 2011
 
2011 Compared To 2010
 
Increase (Decrease) Due To
 
Increase (Decrease) Due To
(Dollars in thousands)
Volume
 
Yield/Cost
 
Net
 
Volume
 
Yield/Cost
 
Net
Interest earned on:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing bank balances
$
(42
)
 
$
9

 
$
(33
)
 
$
25

 
$
11

 
$
36

Federal funds sold
(34
)
 
1

 
(33
)
 
(26
)
 
7

 
(19
)
Taxable investments
1,074

 
(2,137
)
 
(1,063
)
 
848

 
(1,719
)
 
(871
)
Tax-exempt investments
209

 
(145
)
 
64

 
(476
)
 
3

 
(473
)
Loans
(1,951
)
 
(2,808
)
 
(4,759
)
 
(716
)
 
(1,153
)
 
(1,869
)
Total earning assets
(507
)
 
(5,317
)
 
(5,824
)
 
434

 
(3,630
)
 
(3,196
)
Interest paid on:
 

 
 

 
 

 
 

 
 

 
 
NOW & MMDA
293

 
(1,609
)
 
(1,316
)
 
769

 
(2,135
)
 
(1,366
)
Savings deposits
21

 
(204
)
 
(183
)
 
40

 
(189
)
 
(149
)
Certificates of deposit
(1,326
)
 
(2,049
)
 
(3,375
)
 
(1,098
)
 
(2,695
)
 
(3,793
)
Short-term borrowings
(29
)
 
14

 
(15
)
 
(28
)
 
(2
)
 
(30
)
Other borrowings
(256
)
 
(177
)
 
(433
)
 
(1,161
)
 
(541
)
 
(1,702
)
Total interest-bearing liabilities
(490
)
 
(4,832
)
 
(5,322
)
 
63

 
(7,103
)
 
(7,040
)
Change in net interest income on a tax-equivalent basis
$
(17
)
 
$
(485
)
 
$
(502
)
 
$
371

 
$
3,473

 
$
3,844


The rate/volume variances are computed for each line item and are therefore non-additive.

10
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Table 3: SECURITIES AVAILABLE FOR SALE
 
Carrying Value of Securities
 
December 31
(Dollars in thousands)
2012
 
2011
 
2010
Securities Available For Sale
 
 
 
 
 
U.S. Government sponsored entities
$
72,615

 
$
58,792

 
$
58,611

Mortgage-backed securities
190,563

 
203,686

 
173,921

Obligations of states and political subdivisions
71,461

 
54,142

 
41,828

Other securities
13,923

 
4,154

 
2,569

Total securities available for sale
$
348,562

 
$
320,774

 
$
276,929


 
Amortized Cost of Securities
 
December 31
 
2012
 
2011
 
2010
Securities Available For Sale
 
 
 
 
 
U.S. Government sponsored entities
$
71,645

 
$
58,714

 
$
58,152

Mortgage-backed securities
185,317

 
198,832

 
170,039

Obligations of states and political subdivisions
68,445

 
51,763

 
40,924

Other securities
15,866

 
6,581

 
5,306

Total securities available for sale
$
341,273

 
$
315,890

 
$
274,421



Table 4: MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE
(Dollars in thousands)
Within
One
Year
 
Yield
 
After One But Within
Five
Years
 
Yield
 
After Five
But Within
Ten Years
 
Yield
 
Over
Ten
Years
 
Yield
 
Total
 
Yield
Securities Available For Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government sponsored
 entities
$
7,078

 
1.73
%
 
$
56,228

 
0.88
%
 
$
1,016

 
2.10
%
 
$
8,293

 
2.90
%
 
$
72,615

 
1.21
%
Mortgage-backed securities
79,453

 
2.52

 
94,708

 
2.44

 
8,784

 
2.42

 
7,618

 
2.39

 
190,563

 
2.47

Obligations of states and
 political subdivisions
3,818

 
6.40

 
22,735

 
5.97

 
43,046

 
4.69

 
1,862

 
7.14

 
71,461

 
5.25

Other debt securities
1,020

 
5.53

 
9,970

 
1.64

 
—

 
—

 
2,933

 
0.64

 
13,923

 
1.71

Total debt securities available
 for sale
$
91,369

 
2.65
%
 
$
183,641

 
2.36
%
 
$
52,846

 
4.26
%
 
$
9,277

 
2.77
%
 
$
348,562

 
2.75
%

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 its carrying value.

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.

11
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Table 5: COMPOSITION OF THE LOAN PORTFOLIO
  
2012
 
2011
 
2010
 
2009
 
2008
(Dollars in thousands)
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Held For Investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial, financial
 and agricultural
$
153,550

 
15.74
%
 
$
155,330

 
15.59
%
 
$
133,226

 
12.57
%
 
$
129,571

 
12.24
%
 
$
136,795

 
11.63
%
Non-residential real
 estate
542,859

 
55.65

 
574,505

 
57.66

 
646,731

 
61.00

 
643,804

 
60.83

 
745,699

 
63.38

Residential real estate
238,728

 
24.47

 
223,839

 
22.47

 
235,489

 
22.21

 
239,921

 
22.67

 
255,488

 
21.71

Consumer loans
40,336

 
4.14

 
42,666

 
4.28

 
44,700

 
4.22

 
45,044

 
4.26

 
38,613

 
3.28

Total loans
$
975,473

 
100.00
%
 
$
996,340

 
100.00
%
 
$
1,060,146

 
100.00
%
 
$
1,058,340

 
100.00
%
 
$
1,176,595

 
100.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
21,014

 
 

 
$
26,073

 
 

 
$
6,242

 
 

 
$
10,266

 
 

 
$
7,698

 
 



Table 6: LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Maturity distribution of loans at December 31, 2012
 
 
 
 
 
 
 
(Dollars in thousands)
Within
One Year
 
One to Five
Years
 
After Five
Years
 
Total
Commercial, financial and agricultural
$
67,425

 
$
61,104

 
$
25,021

 
$
153,550

Non-residential real estate
132,148

 
316,100

 
94,611

 
542,859

Residential real estate
25,449

 
84,059

 
129,220

 
238,728

Consumer loans
9,878

 
29,033

 
1,425

 
40,336

Total loans
$
234,900

 
$
490,296

 
$
250,277

 
$
975,473


Rate sensitivity of loans at December 31, 2012
 
 
 
 
 
 
 

 
 
 
One to Five
Years
 
After Five
Years
 
Total
Fixed rate loans
 
 
$
454,300

 
$
215,233

 
$
669,533

Floating rate loans
 
 
35,996

 
35,044

 
71,040

Total
 
 
$
490,296

 
$
250,277

 
$
740,573



Table 7: NONPERFORMING ASSETS AND PAST DUE LOANS
(Dollars in thousands)
2012
 
2011
 
2010
 
2009
 
2008
Nonaccrual loans
$
7,444

 
$
17,177

 
$
33,127

 
$
44,549

 
$
20,564

Other real estate owned
25,970

 
36,952

 
31,125

 
23,578

 
11,061

Investment securities
733

 
599

 
698

 
825

 
—

Total nonperforming assets
$
34,147

 
$
54,728

 
$
64,950

 
$
68,952

 
$
31,625

Accruing loans past due 90 days or more
$
321

 
$
602

 
$
951

 
$
2,479

 
$
5,686

Restructured loans (accruing)
$
21,800

 
$
19,662

 
$
18,052

 
$
4,620

 
$
3,664

Interest income that would have been recorded on
 nonaccrual loans if they had been current and accruing
$
475

 
 

 
 

 
 

 
 

Interest that was recorded in the financial statements for
 loans that were on nonaccrual status
$
137

 
 

 
 

 
 

 
 


12
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Table 8: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
2012
 
2011
 
2010
 
2009
 
2008
Balance at beginning of year
$
14,953

 
$
16,025

 
$
24,014

 
$
24,918

 
$
14,217

Charge offs:
 

 
 

 
 

 
 

 
 

Commercial, financial and agricultural
(786
)
 
(2,534
)
 
(3,617
)
 
(4,605
)
 
(993
)
Real estate – nonresidential
(5,409
)
 
(7,381
)
 
(13,325
)
 
(42,133
)
 
(5,235
)
Real estate – residential
(1,191
)
 
(2,142
)
 
(1,854
)
 
(3,409
)
 
(1,968
)
Consumer
(754
)
 
(952
)
 
(859
)
 
(1,093
)
 
(1,510
)
Total
(8,140
)
 
(13,009
)
 
(19,655
)
 
(51,240
)
 
(9,706
)
Recoveries:
 

 
 

 
 

 
 

 
 

Commercial, financial and agricultural
158

 
468

 
281

 
169

 
75

Real estate – nonresidential
1,391

 
1,413

 
1,798

 
174

 
135

Real estate – residential
403

 
144

 
121

 
47

 
67

Consumer
207

 
192

 
246

 
345

 
396

Total
2,159

 
2,217

 
2,446

 
735

 
673

Net charge-offs
(5,981
)
 
(10,792
)
 
(17,209
)
 
(50,505
)
 
(9,033
)
Provision for loan losses
8,520

 
9,720

 
9,220

 
49,601

 
19,734

Balance at end of year
$
17,492

 
$
14,953

 
$
16,025

 
$
24,014

 
$
24,918

 
 
 
 
 
 
 
 
 
 
Net Charge-Offs To Average Loans
0.61
%
 
1.05
%
 
1.65
%
 
4.50
%
 
0.75
%


Table 9: ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
 
December 31
(Dollars in thousands)
2012
 
2011
 
2010
 
2009
 
2008
Commercial, financial and agricultural
$
3,266

 
$
3,347

 
$
4,442

 
$
5,893

 
$
6,815

Non-residential real estate
10,774

 
8,204

 
6,705

 
13,375

 
13,129

Residential real estate
2,886

 
2,607

 
3,701

 
3,407

 
1,634

Consumer loans
566

 
795

 
1,177

 
1,339

 
3,340

Total loans
$
17,492

 
$
14,953

 
$
16,025

 
$
24,014

 
$
24,918

 
 
 
 
 
 
 
 
 
 
 
December 31
Allowance As A Percentage Of Loan Type
2012
 
2011
 
2010
 
2009
 
2008
Commercial, financial and agricultural
2.13
%
 
2.15
%
 
3.33
%
 
4.55
%
 
4.98
%
Non-residential real estate
1.98

 
1.43

 
1.04

 
2.08

 
1.76

Residential real estate
1.21

 
1.16

 
1.57

 
1.42

 
0.64

Consumer loans
1.40

 
1.86

 
2.63

 
2.97

 
8.65

Total loans
1.79
%
 
1.50
%
 
1.51
%
 
2.27
%
 
2.12
%
 
 
 
 
 
 
 
 
 
 
Net Charge-Offs As A Percent Of Year End
December 31
Loans Outstanding, By Type
2012
 
2011
 
2010
 
2009
 
2008
Commercial, financial and agricultural
0.41
%
 
1.33
%
 
2.50
%
 
3.42
%
 
0.67
%
Non-residential real estate
0.74

 
1.04

 
1.78

 
6.52

 
0.68

Residential real estate
0.33

 
0.89

 
0.74

 
1.40

 
0.74

Consumer loans
1.36

 
1.78

 
1.37

 
1.66

 
2.89

Total loans
0.61
%
 
1.08
%
 
1.62
%
 
4.77
%
 
0.77
%

13
FIRST M&F CORPORATION AND SUBSIDIARY

                     




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, 2012 ( dollars in thousands ):
Three months or less
$
22,033

Over three months through six months
25,424

Over six months through twelve months
34,603

Over one year
96,363

Total
$
178,423



Table 11: SELECTED RATIOS
 
The following table reflects ratios for the Company for the last three years:
 
2012
 
2011
 
2010
Return on average assets
0.44
%
 
0.27
%
 
0.25
%
Return on average equity
6.12

 
4.00

 
3.74

Dividend payout ratio
7.41

 
14.29

 
2.41

Average equity to assets ratio
7.23

 
6.86

 
6.74



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:
(Dollars in thousands)
2012
 
2011
 
2010
Securities sold under agreements to repurchase
 
 
 
 
 
Outstanding at end of period
$
3,720

 
$
4,398

 
$
33,481

Maximum outstanding at any month-end during the period
5,225

 
27,082

 
41,897

Average outstanding during the period
4,017

 
10,855

 
19,112

Interest paid
21

 
36

 
66

Weighted average rate during each period
0.53
%
 
0.33
%
 
0.35
%

14
FIRST M&F CORPORATION AND SUBSIDIARY

                     




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 economic uncertainty.

•
The Company owns $25.970 million in foreclosed other real estate properties. The ability of the Company to dispose of other real estate without incurring severe losses depends on the strength of the economy and especially the strength and liquidity of the real estate market. If the economy remains weak, the Company may not be able to sell some properties. A lack of sales of properties may prompt further write-downs in their values as they become stagnant and less marketable. An inability to sell foreclosed properties also impacts liquidity through a lack of positive cash flows. If properties take longer than expected to sell or become difficult to market, expenses related to the maintenance of those properties may continue or possibly increase.

•
The credit quality of the loan portfolio depends on a strengthened economy, as the primary source of repayment for many loans is sales revenue. If the economy stagnates, then customers will have to turn to secondary sources of repayment which may be limited. This could lead to additional loan impairments and possible increases in loan charge-offs.

•
The Company has a 56% concentration of commercial real estate loans in the loan portfolio. These loans are vulnerable to fluctuations and economic disruptions in the real estate-related sectors of the economy.

•
Within the commercial loan portfolio the Company has a group of asset-based loans, some of which are outside of the Company’s banking markets, representing 3.76% of the Company’s loan portfolio. These loans are secured primarily by inventory and accounts receivable, are dependent on daily sales and accounts receivable collections, and require significant monitoring by the asset-based lending staff. Deterioration in economic conditions could significantly affect the collateral cash flows and result in impairments on these loans.

The Company is exposed to fluctuations in interest rates.

•
Deposits generally reprice faster than loans. If interest rates increase significantly the Company may be vulnerable to interest expenses rising faster than interest revenues.

•
Another effect of rising interest rates is that fixed income securities will decrease in value. This could limit the Company’s ability to raise cash through investment security sales without incurring losses.

•
Increased interest rates may also slow down mortgage origination volumes, as mortgages become less affordable, resulting in lower noninterest revenues from mortgage activities.

The Company is subject to various litigation risks.

•
Shortly after the public announcement of the proposed merger with Renasant, the Company became aware of a threatened legal action on behalf of certain shareholders regarding the Company board of directors' fiduciary duties relating to the proposed merger. Unfavorable judgments, if such action was to actually be brought, or in any other 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 customers’ ability to generate cash flows, causing loan losses and losses of revenues.

•
Unanticipated catastrophic events could result in unusual loss claims 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.

15
FIRST M&F CORPORATION AND SUBSIDIARY

                     




The Company may terminate its pension plan in the near future.

•
Investments in the portfolio of the Company’s pension plan may not provide adequate returns to fund plan termination 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 Global Select Market. The Company depends on the liquidity of the NASDAQ Global Select Market to raise equity capital. If the market should fail to operate, the Company may be severely constrained in raising capital.

•
Due to its recent net operating losses and concentrations in real estate-related assets, the Company may not be able to raise capital on favorable terms. This could prevent the Company from being able to raise additional capital if needed for operating purposes or to repay its preferred stock.

•
The Company has analyst coverage, 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 Commission, the Federal Reserve Board, the FDIC, 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 enactment of the Dodd-Frank Act in 2010 represented a significant overhaul of many aspects of the regulation of the financial services industry, and the implementation of and rulemaking under the Dodd-Frank Act through 2012 and in the future could result in higher compliance costs and lower revenues for the Company.

•
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 was certified in 2010 as a Community Development Financial Institution (CDFI) and participates in the U.S. Treasury’s Community Development Capital Initiative (CDCI) Program.

•
In 2010 the Company redeemed its $30 million in preferred stock issued under the Capital Purchase Program (CPP) with $30 million in preferred stock issued under the CDCI program. Participation in this program constrains the Company’s ability to raise dividends and repurchase equity securities and also places certain constraints on executive compensation arrangements. The new funding, which carries a 2% dividend rate, takes the place of the CPP funding which provided assurance that the Company can maintain its minimum regulatory capital ratios in the face of possible future credit-related losses. The Company will have to repay these funds by raising capital within the next six years to keep its dividend costs from increasing to 9% per annum.

•
The rules that govern the CDCI include restrictions on certain compensation to executive officers and a number of others in the Company. Among other things, these rules preclude golden parachute payments, include prohibitions on providing tax gross-ups and include bonus claw-back provisions. It is possible that compensation restrictions imposed by the CDCI and the American Reinvestment and Recovery Act of 2009 could impede our ability to attract and retain qualified executive officers.

•
Our participation in the CDCI limits our annual dividend to no more than $.04 per share as long as the CDCI preferred stock remains outstanding and up until the eighth anniversary date of its issuance. Beginning on the eighth anniversary date and as long as the CDCI preferred stock is outstanding, the Company may not pay a corporate dividend without the consent of the Treasury Department. Our ability to repurchase our common stock is also restricted.

•
The Company must be re-certified as a CDFI every three years by the Community Development Financial Institution Fund of the U.S. Treasury Department. In the event that the Company is not re-certified, and continues to be uncertified for 180 days, the dividend rate shall increase to 5%. If the Company continues to be uncertified for an additional 90 days, then the dividend rate shall increase to 9% until the Company becomes certified, at which time the dividend rate shall revert to its original 2% per annum.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




•
As a condition to closing the proposed merger with Renasant, the Company's CDCI Preferred Shares must either be redeemed or repurchased by the Company or Renasant or exchanged for similar shares of Renasant stock. This condition includes the redemption, repurchase or exchange of the warrant issued to the United States Treasury Department for common stock of the Company. If the CDCI Preferred Shares and/or the warrant are not redeemed, repurchased or exchanged the proposed merger may be in jeopardy. If the proposed merger is not consummated as intended, the Company may suffer economic and reputational harm that could materially adversely affect the Company.

The Company brought $11.125 million in Federal net operating losses (NOLs) and $18.328 million in Mississippi NOLs forward into 2012 from the 2011 Federal and Mississippi tax returns. The Company estimates that $10.834 million of Federal taxable earnings and $8.511 million of Mississippi taxable earnings will be available from the 2012 tax returns to utilize against the NOLs.

•
The Company has 20 years to generate net taxable earnings sufficient to absorb the Federal and state NOLs and approximately $663 thousand in available general tax credits. If the Company cannot generate sufficient taxable earnings, then the NOLs and tax credits will be lost.

The Company relies on other companies to provide certain key components of its business infrastructure.

•
Third party vendors provide certain key components of the Company's business infrastructure such as core banking applications, internet connections, network access and disaster recovery services. Any problems caused by these third parties, including those which result from their failure to provide services for any reason or their poor performance of services, could adversely affect the Company's ability to deliver products and services to its customers.

The Company depends on information technology and telecommunications networks to sustain the information needs of the Company and its customers.

•
A disruption in the telecommunications network could interrupt the Company’s business for an unforeseeable amount of time in that it depends on these networks, which are outside of its control, to communicate information with its customers.

•
Hackers and others beyond the Company’s control could disrupt the Company’s information systems. The Company's computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft, resulting in legal repercussions and reputational harm. Natural disasters, fires or electrical disasters could disrupt the Company’s information systems for an unforeseen time until its disaster recovery system could be initiated.

The Company is subject to certain debt covenants related to its borrowings from a correspondent bank.

•
If the Company does not meet certain covenants related to capital ratios and asset quality, then it is considered technically in default unless it receives a waiver from the correspondent bank. If the Company were to technically default under the covenants and not receive the waiver then it would be subject to immediate repayment of the debt, potential regulatory scrutiny, the possible loss of financial reputation and negative financial repercussion arising from its inability to perform up to the level of the covenants.

The Standard & Poor's downgrade in the U.S. government's sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and general economic conditions that we are not able to predict.

•
On August 5, 2011, Standard & Poor's downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor's downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Although these downgrades did not have a significant effect on the Company's operations, any future additional downgrades could have a significant effect on the value of the Company's U.S. government-related investments and on lending and other programs that are dependent on the credit standing of the U.S. government.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Risk Factors Related to Pending Merger with Renasant

The Company cannot be sure of the market value of the merger consideration that Company shareholders will receive as a result of the announced merger with Renasant.

•
Upon completion of the merger, each share of Company common stock will be converted into merger consideration consisting of .6425 of a share of Renasant common stock. The market value of the merger consideration will vary from the closing price of Renasant common stock on the date we announced the merger, on the date that the proxy statement/prospectus is mailed to Company shareholders, on the date of the special meeting of the Company shareholders and on the date we complete the merger and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects, and regulatory considerations. Many of these factors are beyond our control.

•
Any change in the market price of Renasant common stock prior to completion of the merger will affect the market value of the merger consideration that Company shareholders will receive upon completion of the merger, and there will be no adjustment to the merger consideration for changes in the market price of either shares of Renasant common stock or shares of Company common stock.

We may fail to realize all of the anticipated benefits of the merger.

•
The success of the merger will depend, in part, on the resulting institution's ability to realize the anticipated benefits and cost savings from combining the businesses of Renasant and the Company. However, to realize these anticipated benefits and cost savings, the businesses of Renasant and the Company must be successfully combined. The anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.

•
The Company has operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources and could result in deposit attrition or other adverse operational results. These integration matters could have an adverse effect on the Company during the pre-merger transition period and on the combined company following the merger.

The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on the combined company following the merger.

•
Before the merger may be completed, various approvals or consents must be obtained from the Federal Reserve Board, the FDIC, and various domestic banking, securities, antitrust, and other regulatory authorities. These government entities may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger.

If the merger is not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the merger.

•
The Company will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger.

The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the market price of the Company's common stock to decline.

•
The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approvals of the Renasant and Company shareholders. If any condition to the merger is not satisfied or waived, to the extent permitted by law, the merger will not be completed. In addition, Renasant and the Company may terminate the merger agreement under certain circumstances, including but not limited to if the merger has not been completed on or before September 30, 2013 or if a tender, exchange or similar offer for 20% or more of the outstanding shares of the Company's common stock is commenced and the Company's board of directors recommends that its shareholders tender their shares or otherwise fails to recommend that their shareholders reject such offering. If Renasant and the Company do not complete the merger, the market price of the Company's common stock may decline to the extent that the current market prices of those shares reflect a market assumption that the merger will be completed. In addition, neither company would realize any of the expected benefits of having completed the merger. If the merger is not completed, additional risks could materialize, which could materially and adversely affect the business, financial results, financial condition and stock price of the Company.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The market price of Renasant common stock after the merger may be affected by factors different from those currently affecting the shares of the Company or Renasant.

•
The businesses of Renasant and the Company differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company's shares of common stock may be affected by factors different from those currently affecting the independent results of operations of Renasant and the Company.
 
The merger agreement limits the Company's ability to pursue an alternative acquisition proposal and requires the Company to pay a termination fee of $5.8 million under limited circumstances relating to alternative acquisition proposals.

•
The merger agreement prohibits the Company from soliciting, initiating, endorsing or knowingly encouraging or facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition. Additionally, the Company is limited in its ability to entertain or accept another offer from an entity that is superior to the offer of Renasant. In the event the Company were to accept such an alternative acquisition proposal, the Company could be required to pay a termination fee of up to $5.8 million, which could materially adversely affect the financial condition of the Company.

The shares of Renasant common stock to be received by the Company's shareholders as a result of the merger will have different rights from the shares of the Company's common stock.

•
Upon completion of the merger, Company shareholders will become Renasant shareholders and their rights as shareholders will be governed by the Renasant articles of incorporation and the Renasant bylaws. The rights associated with Company common stock are different from the rights associated with Renasant common stock.

UNRESOLVED STAFF COMMENTS

Not Applicable.

PROPERTIES

The Company's legal headquarters is a 21,000 square foot, three story, brick building located at 134 West Washington Street, Kosciusko, Mississippi, 39090. This building houses the primary administrative offices of the Bank and Company.

The Bank owns its main office building and 33 of its branch facilities and leases two 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 ten years.

LEGAL PROCEEDINGS

The Company and its subsidiaries are defendants in various lawsuits arising out of the normal course of business. In the opinion of management, the ultimate resolution of these claims should not have a material adverse effect on the Company’s consolidated financial position or results of operations. Additionally, the Company is aware of a threatened legal action on behalf of certain shareholders regarding the Company board of directors' fiduciary duties relating to the proposed merger with Renasant.

MINE SAFETY DISCLOSURES

Not Applicable.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




PART II

MARKET FOR 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. Effective July 1, 2006, the Company was listed on the NASDAQ Global Select Market.

At December 31, 2012, there were 1,149 shareholders of record of the Company's common stock. On December 31, 2012 , the Company's stock closed at $ 6.98 per share.

The following table summarizes the trading ranges and dividend payouts for the two years ended December 31, 2012 :
 
 
Quarterly Closing Common Stock
Price Ranges and Dividends Paid - Common
 
 
First
 
Second
 
Third
 
Fourth
 
2012:
 
 
 
 
 
 
 
 
High
$
5.36

 
$
5.24

 
$
7.49

 
$
8.99

 
Low
2.60

 
3.80

 
5.15

 
6.25

 
Close
4.80

 
5.18

 
7.42

 
6.98

 
Dividend
.01

 
.01

 
.01

 
.01

*
 
 
 
 
 
 
 
 
 
2011:
 

 
 

 
 

 
 

 
High
$
4.48

 
$
4.34

 
$
4.14

 
$
3.00

 
Low
3.52

 
3.42

 
2.99

 
2.49

 
Close
4.08

 
3.78

 
3.16

 
2.84

 
Dividend
.01

 
.01

 
.01

 
.01

*

The following table summarizes common stock and dividend performance ratios for the five years ended December 31, 2012 :
 
 
Common Stock and Dividend Performance
 
2012
 
2011
 
2010
 
2009
 
2008
Price/earnings ratio
12.93x

 
10.14x

 
2.25x

 
—

 
141.00x

Price/book value ratio
0.65x

 
0.28x

 
0.38x

 
0.26x

 
0.56x

Book value/share
$
10.79

 
$
10.05

 
$
9.96

 
$
8.36

 
$
15.00

Dividend payout ratio
7.41
%
 
14.29
%
 
2.41
%
 
—
%
 
866.67
%
Historical dividend yield
1.41
%
 
1.07
%
 
1.81
%
 
1.89
%
 
3.29
%

*The Company entered into a transaction with the Department of the Treasury under the TARP Community Development Capital Initiative discussed in Part I above. Under the terms of the Securities Purchase Agreement, for as long as the CDCI preferred stock is outstanding and up until the eighth anniversary date of its issuance, the Company will not be able to increase dividends above $0.01 per share of common stock on a quarterly basis. Additionally, the Company may not repurchase any of its shares without Treasury approval, with limited exceptions, most significantly purchases in connection with benefit plans. Subsequent to the eighth anniversary of the issuance of the CDCI preferred stock, the Company must receive approval for the payment of its quarterly dividends from the Treasury. Under an informal Memorandum of Understanding entered into in November 2009 with the Federal Reserve Bank of St. Louis the Company must receive approval from the Federal Reserve prior to paying a quarterly dividend. The Memorandum of Understanding was terminated and all restrictions removed in January 2013.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     



   
The following table provides information regarding securities issued under our equity compensation plans that were in effect during 2012 :

 
Plan Name
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
 
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
 
Number of Securities
Remaining Available
for Future Issuance
Equity compensation plans approved by security holders
1999 Stock Option Plan
 
10,800

 
$
17.59

 
—

 
2005 Equity Incentive Plan
 
17,200

 
10.71

 
240,388

 
 
 
 
 
 
 
 
Equity compensation plans not approved by security holders
None
 
—

 
—

 
—

Total
 
 
28,000

 
$
13.36

 
240,388


In April 2005 the 2005 Equity Incentive Plan was approved by a shareholder vote and replaced the 1999 Stock Option Plan.

The maximum number of shares of common stock with respect to which awards may be granted to any participant under the plan shall be 200,000 shares per calendar year, including any awards granted which are subsequently canceled.

The maximum number of shares with respect to which awards other than options and SARs may be granted shall be 500,000 shares.

The maximum number of shares with respect to which Incentive Stock Options may be granted shall be 400,000 shares.

The maximum number of shares with respect to which awards may be granted to directors who are not employees of the Company at the time of grant shall be 100,000.

In 2012, under the 2005 Equity Incentive Plan, there were forfeitures of 7,000 shares and vestings of 46,000 shares of restricted stock.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     



 
Five Year Shareholder Return Comparison


Set forth below is a line graph comparing the yearly percentage change in the cumulative total stockholder return on the Company’s Common Stock against the cumulative total return of the NASDAQ Market US Index and the NASDAQ Bank Index which consists of the period of five (5) years beginning in 2007.



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among First M&F Corporation, the NASDAQ Composite Index, and the NASDAQ Bank Index

    
* $100 invested on 12/31/07 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.




 
12/07

 
12/08

 
12/09

 
12/10

 
12/11

 
12/12

First M&F Corporation
100.00

 
56.15

 
15.17

 
25.96

 
19.95

 
49.39

NASDAQ Composite
100.00

 
59.03

 
82.25

 
97.32

 
98.63

 
110.78

NASDAQ Bank
100.00

 
78.22

 
68.07

 
82.40

 
70.08

 
82.33


The stock price performance included in this graph is not necessarily indicative of future stock price performance.

22
FIRST M&F CORPORATION AND SUBSIDIARY

                     




SELECTED FINANCIAL DATA

(Thousands, except per share data)
2012
 
2011
 
2010
 
2009
 
2008
 
EARNINGS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
62,922

 
$
68,715

 
$
71,692

 
$
78,833

 
$
93,288

 
Interest expense
11,529

 
16,851

 
23,891

 
31,239

 
41,292

 
Net interest income
51,393

 
51,864

 
47,801

 
47,594

 
51,996

 
Provision for loan losses
8,520

 
9,720

 
9,220

 
49,601

 
19,734

 
Noninterest income
22,798

 
21,574

 
20,521

 
19,970

 
21,131

 
Noninterest expense
56,278

 
58,334

 
54,490

 
95,872

 
54,284

 
Income taxes
2,408

 
1,011

 
602

 
(18,104
)
 
(1,436
)
 
Noncontrolling interests
—

 
—

 
(1
)
 
(6
)
 
19

 
Net income (loss)
$
6,985

 
$
4,373

 
$
4,011

 
$
(59,799
)
 
$
526

 
Net interest income, taxable equivalent
$
52,263

 
$
52,764

 
$
48,921

 
$
49,076

 
$
53,469

 
Cash dividends paid on common stock
$
380

 
$
368

 
$
366

 
$
1,466

 
$
4,772

 
Dividends paid and accretion on preferred stock
$
1,901

 
$
1,774

 
$
1,692

 
$
1,464

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
PER COMMON SHARE
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) – basic
$
0.54

 
$
0.28

 
$
1.66

 
$
(6.69
)
 
$
0.06

 
Cash dividends paid – common
.04

 
.04

 
.04

 
.16

 
.52

 
Book value – common
10.79

 
10.05

 
9.96

 
8.36

 
15.00

 
Closing stock price – common
6.98

 
2.84

 
3.74

 
2.21

 
8.46

 
 
 
 
 
 
 
 
 
 
 
 
SELECTED AVERAGE BALANCES
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Assets
$
1,579,007

 
$
1,594,284

 
$
1,590,942

 
$
1,645,160

 
$
1,621,703

 
Earning assets, amortized cost
1,424,674

 
1,435,537

 
1,426,812

 
1,490,413

 
1,455,836

 
Loans held for investment
981,144

 
1,032,137

 
1,045,467

 
1,122,307

 
1,200,628

 
Investments, amortized cost
351,893

 
298,836

 
277,393

 
290,963

 
232,274

 
Total deposits
1,378,496

 
1,389,284

 
1,353,643

 
1,321,470

 
1,270,547

 
Equity
114,084

 
109,370

 
107,166

 
139,156

 
142,024

 
 
 
 
 
 
 
 
 
 
 
 
SELECTED YEAR-END BALANCES
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Assets
$
1,601,683

 
$
1,568,651

 
$
1,603,964

 
$
1,662,968

 
$
1,596,865

 
Earning assets, carrying value
1,449,362

 
1,407,578

 
1,440,420

 
1,507,966

 
1,427,344

 
Loans held for investment
975,473

 
996,340

 
1,060,146

 
1,058,340

 
1,176,595

 
Investments, carrying value
348,562

 
320,774

 
276,929

 
284,550

 
227,145

 
Total deposits
1,402,675

 
1,371,463

 
1,375,412

 
1,388,263

 
1,261,387

 
Equity
118,443

 
109,596

 
107,065

 
104,630

 
135,968

 
 
 
 
 
 
 
 
 
 
 
 
SELECTED RATIOS
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
0.44
%
 
0.27
%
 
0.25
%
 
(3.63
)%
 
0.03
%
 
Return on average equity
6.12

 
4.00

 
3.74

 
(42.97
)
 
0.37

 
Average equity to average assets
7.23

 
6.86

 
6.74

 
8.46

 
8.76

 
Dividend payout ratio
7.41

 
14.29

 
2.41

 
—

 
866.67

 
Price to earnings
12.93x

 
10.14x

 
2.25x

 
—

 
141.00x

 
Price to book
0.65x

 
0.28x

 
0.38x

 
0.26x

 
0.56x

 

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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.

Forward Looking Statements

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. 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
•
The effect of changes in accounting principles pronounced by the Financial Accounting Standards Board and accounting policies, practices and disclosures as prescribed through regulations issued and enforced by the Securities and Exchange Commission and other regulatory agencies
•
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
•
The results of the pending merger with Renasant may vary materially depending on the possibility that competing offers may be made, that various closing conditions may not be satisfied, or that the merger agreement may be terminated.

SUMMARY

The net income for 2012 was $6.985 million , or $0.54 basic and diluted earnings per share as compared to net income of $4.373 million , or $0.28 basic and diluted earnings per share in 2011 and net income of $4.011 million , or $1.66 basic and diluted earnings per share in 2010 . The major factors contributing to the increase in 2012 were (1) an increase of $3.483 million in mortgage revenues, (2) a $1.200 million decrease in the loan loss provisions and (3) a decrease in noninterest expenses highlighted by a decrease of $1.582 million in salaries and employee benefits, a $2.165 million decrease in foreclosure expenses and a $515 thousand decrease in FDIC insurance. The major factors contributing to the increase in 2011 were (1) an increase of $3.563 million in net interest income after provision for loan loss, (2) net gains of approximately $534 thousand on closings and disposals of branch properties and (3) an increase of $4.405 million in foreclosed property expenses.

Earnings per share for 2010 include the effect of a $12.867 million gain on the swap of newly issued $30 million par value preferred stock with an initial coupon of 2% issued in the TARP CDCI program for $30 million par value preferred stock with an initial coupon of 5% that was issued by the Company in the TARP CPP in 2009. In September 2010 the Company received certification by the U.S. Treasury Department as a CDFI. As a CDFI, the Company gained access to a source of funding program for CDFIs within the TARP program. The CDCI program allows CDFIs to issue preferred stock with a coupon of 2% to the U.S. Treasury to fund community development activities. The Company issued the $30 million par value, 2% preferred stock in September 2010 and effectively paid off the $30 million par value, 5% coupon preferred stock that it had issued to the U.S. Treasury in February 2009 in the TARP CPP program. Accounting principles require that the issued preferred stock be recorded at its fair value. The difference between the fair value of the new preferred stock issued and the remaining book value of the preferred stock that was paid off must be recorded in retained earnings as a gain or loss. The fair value of the new preferred stock that was issued was $16.159 million. The book value of the old CPP preferred stock that was paid off was $29.026 million. The difference, a $12.867 million gain, was credited to retained earnings. For purposes of calculating earnings per share, the gain on the exchange of the preferred stock was required to be added to net income in determining the amount of earnings attributable to common stockholders. Therefore, the net income of $4.011 million resulted in $1.66 in basic and diluted earnings per share. Note 19 to the consolidated financial statements shows the calculation of basic and diluted earnings per share.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




In February 2012, the Wilsonville branch property was sold for a gain of $41 thousand. In May 2012, the Company transferred the lease and sold the fixed assets of the Niceville, Florida branch to another financial institution for a gain of $44 thousand.

In December 2011, the Company closed five individual branches in Ridgeland, Jackson, Tupelo and Oxford, Mississippi and in Wilsonville, Alabama and consolidated their operations with other branches in those general markets. The Company also sold the branch properties of the Ridgeland, Tupelo and Oxford branches for a net gain of $534 thousand. The Wilsonville, Alabama property was transferred into other real estate at a value of $98 thousand with no impairment charge required. It was subsequently sold in February 2012. The Jackson office is subject to a lease that expires in April 2013. The Company incurred a $67 thousand exit cost in 2011 for the lease. Since the Company did not fully exit any markets, no discontinued operations were reported.

In January 2010, the Company closed individual branches in the Memphis and Germantown, Tennessee and Birmingham, Alabama markets and consolidated their operations into the remaining branches in each market.

Total assets increased by 2.11% in 2012 , ending the year at $1.602 billion . Total assets decreased by 2.20% in 2011 , ending the year at $1.569 billion . The compounded annual growth rate for total assets for the last five (5) years was a 0.64% decrease, while the compounded growth rate for deposits was 2.13%.


RESULTS OF OPERATIONS

The following table shows performance ratios for the last three years:

 
2012
 
2011
 
2010
Net interest margin
3.67
%
 
3.68
%
 
3.43
%
Efficiency ratio
74.98

 
78.47

 
78.47

Return on assets
0.44

 
0.27

 
0.25

Return on equity
6.12

 
4.00

 
3.74

Noninterest income to avg. assets
1.44

 
1.35

 
1.29

Noninterest income to revenues (1)
30.37

 
29.02

 
29.55

Noninterest expense to avg. assets
3.56

 
3.66

 
3.43

Salaries and benefits to total noninterest expense
47.78

 
48.80

 
50.11

Nonaccrual loans to total loans
0.75

 
1.68

 
3.11

90 day past due loans to total loans
0.03

 
0.06

 
0.09

Net charge-offs as a percent of average loans held for investment
0.61

 
1.05

 
1.65

(1)
Revenues equal tax-equivalent net interest income before loan loss expense, plus noninterest income.

The following table shows revenue related performance statistics for the last three years:

( Dollars in thousands )
2012
 
2011
 
2010
Mortgage originations
$
171,098

 
$
92,009

 
$
80,139

Treasury and electronic banking services revenues
105

 
98

 
100

Trust and retail investment revenues
587

 
584

 
526

Revenues per FTE employee
162

 
150

 
140

Agency commissions per agency FTE employee (2)
92

 
93

 
99

(2)  Agency commissions are property, casualty, life and health commissions produced by the insurance agency personnel.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Net Interest Income

Net interest income before loan loss expenses for 2012 was $51.393 million as compared to $51.864 million for 2011 . For 2012 compared to 2011 : earning asset yields decreased by 37 basis points, liability costs decreased by 39 basis points, the net interest spread increased by 2 basis points and the net interest margin decreased by 1 basis point.

Net interest income before loan loss expenses for 2011 was $51.864 million as compared to $47.801 million for 2010 . For 2011 compared to 2010 : earning asset yields decreased by 25 basis points, liability costs decreased by 57 basis points, the net interest spread increased by 31 basis points and the net interest margin increased by 25 basis points.

Balance sheet dynamics affecting the comparative net interest margins for 2012 compared to 2011 include (1) a decrease of 4.94% in average loans held for investment, (2) a decrease in average loans held for investment as a percentage of earning assets from 71.90% in 2011 to 68.87% in 2012 , (3) a decrease in average certificates of deposits of 18.01% , (4) a decrease in average other borrowings of 7.94% and (5) an increase in average noninterest-bearing deposits as a percentage of total assets from 13.82% in 2011 to 15.16% in 2012 .

Balance sheet dynamics affecting the comparative net interest margins for 2011 compared to 2010 include (1) a decrease of 1.28% in average loans held for investment, (2) a decrease in average loans held for investment as a percentage of earning assets from 73.27% in 2010 to 71.90% in 2011 , (3) a decrease in average certificates of deposits of 10.11% , (4) a decrease in average other borrowings of 24.67% and (5) a decrease in average noninterest-bearing deposits as a percentage of total assets from 13.96% in 2010 to 13.82% in 2011 .

Yield and cost dynamics affecting the comparative net interest margins for 2012 compared to 2011 include (1) a decrease of 28 basis points in yields on loans held for investment and for sale, (2) a decrease of 39 basis points in investment and short-term funds yields, (3) a decrease of 40 basis points in costs of deposits and (4) an increase of 6 basis points in costs of borrowings.

Yield and cost dynamics affecting the comparative net interest margins for 2011 compared to 2010 include (1) a decrease of 11 basis points in yields on loans held for investment and for sale, (2) a decrease of 48 basis points in investment and short-term funds yields, (3) a decrease of 50 basis points in costs of deposits and (4) a decrease of 37 basis points in costs of borrowings.

Net interest income for 2012 as compared to 2011 decreased due to a decline in average earning assets as the net interest margin decreased from 3.68% to 3.67%. Average earning assets declined by $10.863 million while interest-bearing liabilities declined by $42.764 million - producing more financial leverage from noninterest-bearing demand deposits. Earning asset yields declined by 37 basis points from 2011 to 2012 while liability costs declined by 39 basis points. Average total loans as a percentage of average earning assets declined from 72.50% in 2011 to 70.64% in 2012. This change in the earning asset mix contributed to the decline in asset yields in 2012, and a continued reduction of loan volumes, coupled with funding being diverted into lower yielding assets, could cause asset yields to decrease faster than funding costs. The yield curve continued to flatten as the spread between 10-year and 2-year Treasury rates declined from 267 basis points in December 2010 to 172 basis points in December 2011 and to 146 basis points in December 2012. The Federal Reserve's monetary policy actions over the last 12 months have resulted in increased short-term rates and decreased long-term rates. This will eventually result in a slow down in the declining trend of deposit costs and an acceleration in the decline in loan yields. This implies that loan volume growth and pricing discipline will be of growing importance in the management of net interest income going forward. The strength of the economy, especially with respect to how it affects consumer spending and the ability of small businesses to grow, will be the primary driver of loan growth over the next year.

Interest income decreased from 2010 to 2011 as the decrease in earning asset yields out-weighed the increase in average earning assets. The mix of earning assets continued to move more heavily toward investments and other liquid assets as the loan portfolio continued its decreasing trend from 2010. The driving force behind the improvement in net interest margin and net interest income during 2011 was the continued decrease in the cost of deposits, a trend that was carried over from 2010. Deposit costs decreased from 1.66% in 2010 to 1.16% in 2011. Another factor in the improved net interest income in 2011 was the decrease in the cost of other borrowings from 4.91% in 2010 to 4.31% in 2011. The overall borrowing cost decrease resulted primarily from the transition of the Company's subordinated debentures from a fixed rate of 6.44% to a floating rate of three-month LIBOR plus 1.33% beginning in March 2011. Additionally, the Company entered into an interest rate swap in March 2011 to effectively fix the cost of the debentures at 3.795%. The dynamic of liability costs falling faster than earning asset yields resulted in higher net interest income and an improved net interest margin of 3.68% for 2011 over 3.43% for 2010. Market interest rates declined throughout 2011 as three-month Treasury rates fell to .01% in December 2011 from .14% in December 2010. Ten-year Treasury rates fell to 1.98% in December 2011 from 3.29% in December 2010 while AAA corporate bond rates also fell by over 100 basis points during 2011.

Management expects modest loan demand in 2013. Therefore, four challenges for 2013 will be to (1) manage the earning asset mix by utilizing loan purchase opportunities and SBA lending programs to improve overall asset yields, (2) improve interest income quality by continuing to move non-performing assets off of the balance sheet and redeploy funds into earning assets (3) take advantage of opportunities to decrease deposit costs or to leverage new deposit relationships with sales of related fee-based services and (4) manage the funding mix to emphasize checking accounts and interest-bearing deposits and further reduce dependence on borrowed funds.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Provision for Loan Losses

The accrual for the provision for loan losses for 2012 was $8.520 million as compared to $9.720 million for 2011 and $9.220 million for 2010 . Net charge-offs were $5.981 million for 2012 as compared to $10.792 million for 2011 and $17.209 million for 2010 .

The provisions for loan loss accruals have decreased from 2011 to 2012 as net charge-offs have declined, substandard loans have declined and the loan portfolio has decreased. By the end of 2012, nonaccrual loans had returned to their pre-2008 levels. Net charge-offs as a percentage of loans dropped from 4.50% in 2009 to 1.65% in 2010, 1.05% in 2011 and .61% in 2012.

The percentage of allowance for loan loss to total loans held for investment was 1.79% at December 31, 2012 , 1.50% at December 31, 2011 , and 1.51% at December 31, 2010 .

The Credit Risk Management section of this discussion provides further details on the allowance provisioning process.


Noninterest Income

Deposit account revenues have remained relatively flat over the last three years as service charge and overdraft charge revenues have declined but have been somewhat offset by increased debit card revenues. Overdraft revenues tend to be sensitive to economic conditions. The overdraft revenue decreases have been influenced by a decrease in spending by customers as the economy softened beginning in 2008. Numbers of items charged decreased by 15.77% in 2012 and decreased by 12.80% in 2011 .

The following table summarizes the different categories that make up total service charges on deposit accounts:

(Dollars in thousands)
2012
 
2011
 
2010
Service charge revenues
$
1,149

 
$
1,209

 
$
1,282

Debit/ATM card revenues
3,581

 
3,247

 
2,755

Overdraft fee revenues
5,450

 
5,837

 
6,184

Service charges on deposit accounts
$
10,180

 
$
10,293

 
$
10,221


Overdraft fees are per item charges applied to each check or its electronic equivalent paid on an overdrawn account or returned. The per item fee is determined by the Company’s pricing committee and is based primarily on 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 a thirty day period. Overdrafts are considered loans for accounting purposes and therefore are subject to the Company’s loan accounting policies concerning the charging off of accounts to the allowance for loan losses. Interest charged on overdrawn balances, based on the Federal discount rate, is recorded as interest on loans. The overdraft protection program is designed to help customers with their cash flow needs and is not extended to individuals who are poor credit risks.

The Federal Reserve issued a regulatory change, effective July 1, 2010, prohibiting banks from charging fees for paying overdrafts on automated teller machine and one-time debit card transactions unless the customer consents, or opts in, to the overdraft service for those types of transactions. During 2010, approximately 49% of the customers affected by the regulatory change opted in to the fee-paid overdraft protection. The expected resulting revenue losses as well as competitor pricing prompted an increase in the overdraft per item fee by $6 in August 2011.

Debit card revenues have experienced 12.46% compounded annual growth over the last three years. Many of the Company’s deposit products encourage the use of debit cards, online banking and image checking account statements. The Dodd-Frank Act includes measures that allow the Federal Reserve to define limits on large banks for interchange fees that may be charged on debit cards. The Federal Reserve issued a final rule on June 29, 2011, setting the fee cap at $0.21 per transaction plus 5 basis points multiplied by the value of the transaction, with an additional potential fee of $0.01 per transaction as a fraud-prevention reimbursement. The fee caps only apply to banks with $10 billion or more in total assets. The final rule went into effect on October 1, 2011. The Company has not experienced any direct or indirect negative consequences from the implementation of the fee caps.

Management believes that overdraft fee revenues will continue to be the largest component of deposit revenues for the foreseeable future, while debit card revenues should continue to grow. Overdraft fee revenues should remain a dependable source of revenues in 2013 if the economy strengthens and personal spending increases.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Mortgage banking income increased by 191.27% from 2011 to 2012 after increasing by 15.18% from 2010 to 2011 .

The following table summarizes certain performance metrics related to mortgage revenues:
(Dollars in thousands)
 
December 31, 2012
 
December 31, 2011
Non-interest income:
 
 
 
 
Retail revenues
 
$
2,966

 
$
1,741

Selected non-interest expenses: (a)
 
 
 
 
Recourse expenses
 
101

 
5

Closing and shipping expenses
 
902

 
499

Origination-related expenses
 
1,003

 
504

Revenues net of selected expenses
 
$
1,963

 
$
1,237

 
 
 
 
 
Retail originations
 
$
98,597

 
$
73,162

Retail sales
 
$
97,635

 
$
63,566

 
 
 
 
 
Adjusted net revenues / dollar sales
 
2.01
%
 
1.95
 %
 
 
 
 
 
Non-interest income:
 
 
 
 
Wholesale revenues
 
$
2,338

 
$
80

Selected non-interest expenses: (a)
 
 
 
 
Broker fees
 
1,361

 
232

Recourse expenses
 
130

 
—

Closing and shipping expenses
 
425

 
147

Origination-related expenses
 
1,916

 
379

Revenues net of selected expenses
 
$
422

 
$
(299
)
 
 
 
 
 
Wholesale originations
 
$
72,501

 
$
18,744

Wholesale sales
 
$
70,582

 
$
8,256

 
 
 
 
 
Adjusted net revenues / dollar sales
 
0.60
%
 
(3.62
)%
(a) Selected noninterest expenses are those expenses related to mortgage closings, credit risk, and broker fees and discounts. They do not include originator, processor, or underwriter compensation costs.

Origination volumes nearly doubled from 2011 to 2012 as mortgage rates continued on a steady decline and the Company relied more heavily on wholesale sources for originations. Approximately 60% of the originations during 2012 were refinancings. Retail mortgages generated $2.966 million in revenues while wholesale mortgages generated $977 thousand in revenues net of fees paid to brokers. Interest on loans held for sale in 2012 included $423 thousand in interest on retail mortgages and $344 thousand in interest on wholesale mortgages.

Origination volumes in 2011 were evenly balanced between refinancing and purchase mortgages. Mortgage rates on conventional 30-year mortgages fell by 91 basis points to 3.95% in 2011 after declining by 28 basis points in 2010. During 2011 the Company began originating mortgages through mortgage brokers in Alabama. Interest on loans held for sale in 2011 included $208 thousand in interest on retail mortgages and $67 thousand in interest on wholesale mortgages.

Origination volumes slowed to $80.139 million in 2010 from $97.741 million in 2009, with 59.33% being for refinancing purposes, as the refinancing cycle played out.

Management expects mortgage origination volumes to remain steady until the economy strengthens to the point that long-term rates are allowed to move up.

28
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Agency commissions have declined for three consecutive years as certain annuity products and title insurance lines have been discontinued and the traditional property, casualty, life and health lines (traditional agency lines) have experienced decreased pricing margins and lower demand. Average revenues per employee in the traditional agency lines have decreased from $99.457 thousand per employee in 2010 to $92.968 thousand per employee in 2012. The soft economy has hurt demand for insurance products and more intense competition has reduced profit margins for property and casualty products. Insurance commission volumes going forward are expected to be influenced by the strength of the economy, competitive pricing pressures and sales efforts.  

The Company had sales and calls of $35.368 million of U.S. government-sponsored entity (GSE) securities for a net loss of $35 thousand during 2012. The Company also had sales and calls of $17.115 million of mortgage-backed securities for net gains of $595 thousand during 2012. The Company also had sales and calls of $1.948 million of municipal securities for net losses of $3 thousand during 2012. Most of the investment gains for 2012 were generated during the first quarter through sales of mortgage-backed securities and GSE securities. The gains were used to offset losses that were being taken on foreclosed properties. The Company had sales and calls of $63.089 million of GSE securities for a net gain of $614 thousand during 2011. The Company also had sales and calls of $45.177 million of mortgage-backed securities for net gains of $2.037 million during 2011. The Company also had $3.676 million in sales and calls of corporate and municipal securities for net gains of $118 thousand during 2011. Sales of GSE and mortgage-backed securities during 2011 were generated to support earnings and preserve capital.

The Company owns five separate beneficial interests in collateralized debt obligations that own bank trust preferred securities. These beneficial interests are tested for impairment on a quarterly basis. All of the beneficial interests have incurred other-than-temporary impairments since 2008. Three of the beneficial interests - Trapeza I, Trapeza II and Trapeza V - are deferring their interest payments and are in nonaccrual status. The Trapeza V, Tpref Funding II and MM Community Funding IX beneficial interests failed impairment tests during 2011. The Tpref Funding II beneficial interest failed impairment tests during 2012. The total amount of interest that would have been earned by the securities that were in nonaccrual status during 2012 was $58 thousand and for 2011 was $86 thousand.

The Company’s holdings are at risk if enough of the trust preferred securities default so that the beneficial interests senior to and equal to the Company’s owned beneficial interests cannot be fully paid. Impairment tests of these beneficial interests are performed each quarter to determine if losses are expected due to cash flow deficiencies. This is primarily done by projecting cash flows to be received on the Company’s interests owned after determining the effect of expected collateral defaults on the payments made by the interests senior to and equal to the Company’s interests owned. If the cash flows expected to be received by the Company are less than the original contractual cash flows, then an other-than-temporary credit-related impairment, which is charged against current earnings, is assumed. The remaining difference between the fair value of the beneficial interest and its book value is charged against other comprehensive income.

The following table shows the other-than-temporary charges that the Company incurred during 2012:

(Dollars in thousands)
 
Other-Than-Temporary Impairment
Charged Against Earnings
 
Other-Than-Temporary Impairment
Charged To (Reclassified From)
Other Comprehensive Income
Name of Issuer
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
Trapeza I 2002-1A
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Trapeza II 2003-2A
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Tpref Funding II
 
—

 
4

 
25

 
—

 
—

 
4

 
(25
)
 
—

Trapeza V 2003-5A
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

MM Community Funding IX
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
—

 
$
4

 
$
25

 
$
—

 
$
—

 
$
4

 
$
(25
)
 
$
—


The following table shows the other-than-temporary charges that the Company incurred during 2011:

(Dollars in thousands)
 
Other-Than-Temporary Impairment
Charged Against Earnings
 
Other-Than-Temporary Impairment
Charged To (Reclassified From)
Other Comprehensive Income
Name of Issuer
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
Trapeza I 2002-1A
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Trapeza II 2003-2A
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Tpref Funding II
 
69

 
—

 
5

 
50

 
(72
)
 
—

 
1

 
(49
)
Trapeza V 2003-5A
 
224

 
—

 
—

 
—

 
35

 
—

 
—

 
—

MM Community Funding IX
 
3

 
85

 
195

 
—

 
(18
)
 
(87
)
 
(73
)
 
—

Total
 
$
296

 
$
85

 
$
200

 
$
50

 
$
(55
)
 
$
(87
)
 
$
(72
)
 
$
(49
)

29
FIRST M&F CORPORATION AND SUBSIDIARY

                     




The following table shows the other-than-temporary charges that the Company incurred during 2010:

(Dollars in thousands)
 
Other-Than-Temporary Impairment
Charged Against Earnings
 
Other-Than-Temporary Impairment
Charged To (Reclassified From)
Other Comprehensive Income
Name of Issuer
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
 
1 st  Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
Trapeza I 2002-1A
 
$
101

 
$
—

 
$
—

 
$
—

 
$
156

 
$
—

 
$
—

 
$
—

Trapeza II 2003-2A
 
—

 
53

 
8

 
—

 
—

 
(14
)
 
39

 
—

Tpref Funding II
 
—

 
50

 
—

 
—

 
—

 
(17
)
 
—

 
—

MM Community Funding IX
 
101

 
61

 
29

 
—

 
(86
)
 
(36
)
 
(10
)
 
—

Total
 
$
202

 
$
164

 
$
37

 
$
—

 
$
70

 
$
(67
)
 
$
29

 
$
—



The following table summarizes certain financial information about the trust preferred security-backed CDOs at the end of 2012 and 2011 :

As of December 31, 2012
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name of Issuer
 
Class
 
Book
 Value
 
Fair
Value
 
UnrealizedLoss
 
Moody's Credit Rating
 
Number of Banks in Issuance
 
Deferrals and Defaults as a Percent of Collateral
 
Excess Subordination
Trapeza I 2002-1A
 
C1
 
$
474

 
$
167

 
$
307

 
C
 
17

 
46.39
%
 
0.00
%
Trapeza II 2003-2A
 
C1
 
989

 
267

 
722

 
Ca
 
32

 
33.49

 
0.00

Tpref Funding II
 
B
 
684

 
212

 
472

 
Caa3
 
32

 
38.81

 
0.00

Trapeza V 2003-5A
 
C1
 
609

 
164

 
445

 
Ca
 
40

 
30.65

 
0.00

MM Community Funding IX
 
B1
 
352

 
136

 
216

 
Ca
 
29

 
39.29

 
0.00

 
 
 
 
$
3,108

 
$
946

 
$
2,162

 
 
 
 

 
 

 
 


As of December 31, 2011
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name of Issuer
 
Class
 
Book
 Value
 
Fair
Value
 
UnrealizedLoss
 
Moody's Credit Rating
 
Number of Banks in Issuance
 
Deferrals and Defaults as a Percent of Collateral
 
Excess Subordination
Trapeza I 2002-1A
 
C1
 
$
474

 
$
91

 
$
383

 
C
 
22

 
43.33
%
 
0.00
%
Trapeza II 2003-2A
 
C1
 
989

 
273

 
716

 
Ca
 
36

 
30.41

 
0.00

Tpref Funding II
 
B
 
713

 
220

 
493

 
Caa3
 
34

 
38.81

 
0.00

Trapeza V 2003-5A
 
C1
 
609

 
115

 
494

 
Ca
 
42

 
35.45

 
0.00

MM Community Funding IX
 
B1
 
352

 
120

 
232

 
Caa3
 
31

 
50.68

 
0.00

 
 
 
 
$
3,137

 
$
819

 
$
2,318

 
 
 
 

 
 

 
 


The excess subordination percent is an indication of the ability of the collateral, net of expected defaults and deferrals, to cover the payment of the beneficial interests that the Company owns after all senior beneficial interests have been paid off. A positive percent indicates the excess percent of funds available over what is required to pay off the beneficial interests that the Company owns. A percent of zero indicates that the amount of funds available is less than the balance of the beneficial interests that the Company owns.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Significant components of other income for 2010 through 2012 are contained in the following table:

(Dollars in thousands)
2012
 
2011
 
2010
Agency profit-sharing revenues
$
142

 
$
257

 
$
234

Loan fees
433

 
384

 
387

Gains on student loan sales
—

 
—

 
176

All other income
1,442

 
1,823

 
1,068

Other income
$
2,017

 
$
2,464

 
$
1,865


Agency profit-sharing revenues are profit sharing distributions received by M&F Insurance Group, Inc. from its underwriting companies generally based on the amount of business written during the previous year, adjusted for claims incurred. Loan fees include fees other than origination fees, primarily monthly collateral monitoring fees related to asset-based lending arrangements and fees charged for issuing letters of credit. All other income for 2012 includes $44 thousand in net gains on the sale of the Niceville, Florida branch property to another financial institution and $41 thousand in net gains on the sale of the Wilsonville, Alabama branch property. All other income for 2011 includes $534 thousand in net gains on disposals of four branch properties in the Jackson, Oxford, Ridgeland and Tupelo, Mississippi markets and disposal of the furniture and equipment from the branch property in Wilsonville, Alabama.

The Company has a strategy to increase noninterest revenues as a proportion of total revenues over time. Noninterest revenues as a percentage of total revenues decreased from 29.55% for 2010 to 29.02% for 2011 and increased to 30.37% for 2012 . Another metric that the Company monitors is revenues per full-time employee, which were approximately $162 thousand for 2012 as compared to $150 thousand for 2011 and $140 thousand for 2010 . Management's strategic focus is to improve revenues generated per employee while maintaining stability in revenue growth by increasing the mix of noninterest revenues to total revenues.


Noninterest Expense

Salary and benefit expenses, which comprise approximately 48% of noninterest expenses, decreased by 3.52% from 2011 to 2012 and increased by 4.27% from 2010 to 2011. The decrease in salary and benefit expenses for 2012 was influenced primarily by (1) a decrease of $677 thousand in health care costs, (2) a $1.190 million increase in pension expenses, (3) a $258 thousand increase in 401(k) plan expenses, (4) an increase of $329 thousand in employee stock compensation expense, (5) a $2.250 million increase in deferred loan costs and (6) restructuring efforts initiated during the third quarter of 2011. The restructuring project called for the closure of five branches, the sale of up to two branches and a reduction in staffing of approximately 55 positions. Four branches were closed in Mississippi and one was closed in Alabama although no markets were exited. A sale of the Niceville, Florida branch location closed during the second quarter of 2012. Substantially all of the staffing reductions occurred during the third and fourth quarters of 2011 with severance costs of $238 thousand being incurred. The pension expense increase was due to an increase in the amortization of actuarial losses resulting from an increase in the estimated pension liability. Deferred loan costs were up due to an increase in the estimates of commercial and real estate loan origination costs (the deferred costs reduce salary expenses and are capitalized, net of origination fees, to the originated loan and subsequently amortized to loan interest income as a yield adjustment).

During April 2012, restricted stock grants totaling 298,746 shares were issued to employees and grants totaling 81,900 shares were issued to directors. The grants have five-year cliff vesting lives. The employee grants are being recognized over their vesting periods in salary and benefits expenses. The director grants are being recognized over their vesting periods in other expenses.

The increase in salaries and employee benefits for 2011 included $551 thousand in increased salary expenses, $158 thousand in increased severance pay, $232 thousand in increased health care costs and $126 thousand in increased retirement plan costs. The increase in salary expense was due primarily to general raises that were re-instituted during the fourth quarter of 2010 and implemented piecemeal through April 2011 after the elimination of raises for 2009 and 2010.

Health care related costs decreased by 32.85% in 2012 , increased by 12.71% in 2011 and increased by 3.99% in 2010 . Health care costs rise and fall primarily due to claims experience and secondarily by the number of covered employees.

Prior to 2009 the Company matched 75% of participating employees' first 6% of contributions to the Company's 401(k) plan for all employees with three years or more of credited service and 60% of participating employees' first 6% of contributions for all employees with less than three years of credited service. Beginning in 2009, the Company cut the matching percentages in half to 37.5% and 30% respectively. The Company restored the original 75% and 60% matching contributions in September 2011. The change in matching contribution levels was a contributing factor in the increased 401(k) benefit plan expenses for 2012.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The branch closures and related employee severance activities resulted in a decrease in average full-time equivalent employees from 497 in 2010 to 496 in 2011 and 465 in 2012 .

The number of full-time equivalent employees was 456 at the end of 2012 , 460 at the end of 2011 and 499 at the end of 2010 .

Foreclosed property losses and expenses decreased by $2.165 million in 2012 from 2011 and increased by $4.405 million in 2011 from 2010 . Other real estate increased from $31.125 million at the end of 2010 to $36.952 million at the end of 2011 and then decreased to $25.970 million at the end of 2012 . The Company became aggressive in writing down foreclosed properties beginning in 2009, and write-downs continue to dominate foreclosure expenses. The volume of sales of properties exceeded the volume of foreclosures in 2012, indicating an approach to the end of the foreclosure cycle set in motion in 2009. However, vacant and undeveloped properties have been more difficult to sell, generating little investor interest. Management expects the working out of the bulk of the foreclosed property portfolio to occur over the next three to five years.

The components of foreclosed property expenses for the last three years are contained in the following table:

(Dollars in thousands)
2012
 
2011
 
2010
Losses (gains) on sales of other real estate
$
726

 
$
781

 
$
(749
)
Write-downs of other real estate
3,534

 
5,093

 
2,323

Other real estate expenses
1,072

 
1,816

 
1,686

Rental income on other real estate properties
(146
)
 
(339
)
 
(314
)
Total foreclosed property expenses
$
5,186

 
$
7,351

 
$
2,946


FDIC insurance assessment expenses decreased by 21.23% in 2012 and by 25.61% in 2011 due to the change in assessment bases and assessment rates prescribed by the Dodd-Frank Act and an improvement in the Company's assessment rate category. The FDIC, as required by the Dodd-Frank Act, redefined the deposit assessment insurance base effective April 1, 2011. The new assessment base is generally defined as average consolidated assets minus average tangible equity (generally defined as average tier 1 capital) subject to adjustments for unsecured debt and brokered deposits. The new base assessment rate applicable to the adjusted asset base became generally 14 basis points annually for the risk category that the Company was classified in during 2011. The previous base assessment rate applicable to the adjusted deposit base was generally 22 basis points annually for the Company. During the fourth quarter of 2012 the Company was elevated to an improved risk category, resulting in an estimated 5 basis point decrease in the assessment rate.

The Company participated in the Temporary Liquidity Guarantee Program during 2009 and 2010 to insure noninterest-bearing deposits in excess of $250,000. Expenses for these assessments were $33.168 thousand in 2009 and $113.489 thousand in 2010. The Dodd-Frank Act effectively eliminated these provisions in the Temporary Liquidity Guarantee Program, which expired as of December 31, 2010, by legislating that all noninterest-bearing deposits in excess of $250,000 be covered by FDIC insurance through December 31, 2012.

Other expenses increased by 28.32% primarily due to an increase in mortgage processing expenses. The largest component of these expenses is the expense for fees paid to mortgage brokers for referrals which was $1.361 million in 2012 and $232 thousand in 2011.


Income Taxes

The average tax rate was 25.64% for 2012 as compared to 18.78% for 2011 as earnings began to normalize toward pre-crisis levels. The Company incurred net operating losses (NOLs) from 2008 through 2010. The Company had Federal taxable income of $7.896 million in 2011 to utilize against $19.021 million in previous accumulated NOLs. The Company estimates that it generated approximately $10.8 million in Federal taxable income during 2012. The $2.408 million in income tax expenses for 2012 included $2.406 million in deferred tax expenses and $2 thousand in current tax expenses. The deferred tax asset at December 31, 2012 included $1.758 million in Federal tax credits as well as a $715 thousand asset for Federal and state NOL carry-forwards. Management expects that the remaining Federal and state net operating losses will be realized through carry-forwards in the foreseeable future. Management has reviewed its deferred tax assets and determined that it is more likely than not that the deferred tax assets will be realized in the foreseeable future and therefore no valuation allowance has been accrued. The Company expects to utilize the tax benefits implicit in the deferred tax asset in the foreseeable future when (1) current tax benefits increase as losses are realized through loan charge-offs and collateral foreclosures and dispositions and (2) future earnings become sufficient to absorb the deductions.

The Company had no material recognized uncertain tax positions as of December 31, 2011 or 2012 and therefore did not have any tax accruals during 2011 or 2012 related to uncertain positions.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Quarterly Financial Trends (Unaudited)

The following table summarizes components of the Company’s statements of operations by quarter for 2012 and 2011 :
 
2012
(Dollars in thousands)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income
$
16,205

 
$
15,906

 
$
15,625

 
$
15,186

Interest expense
3,241

 
2,990

 
2,753

 
2,545

Net interest income
12,964

 
12,916

 
12,872

 
12,641

Provision for loan losses
2,280

 
2,280

 
1,980

 
1,980

Noninterest income
5,421

 
6,035

 
5,607

 
5,735

Noninterest expense
13,986

 
14,319

 
14,060

 
13,913

Net income before taxes
2,119

 
2,352

 
2,439

 
2,483

Income taxes
512

 
599

 
645

 
652

Net income
$
1,607

 
$
1,753

 
$
1,794

 
$
1,831

 
 
 
 
 
 
 
 
Net income allocated to common shareholders
$
1,139

 
$
1,226

 
$
1,264

 
$
1,290

 
 
 
 
 
 
 
 
Per common share:
 

 
 

 
 

 
 

Net income - basic
$
.12

 
$
.14

 
$
.14

 
$
.14

Net income - diluted
$
.12

 
$
.14

 
$
.14

 
$
.14

Cash dividends
$
.01

 
$
.01

 
$
.01

 
$
.01


 
2011
(Dollars in thousands)
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income
$
17,569

 
$
17,602

 
$
17,239

 
$
16,305

Interest expense
4,844

 
4,331

 
4,014

 
3,662

Net interest income
12,725

 
13,271

 
13,225

 
12,643

Provision for loan losses
2,580

 
2,280

 
2,580

 
2,280

Noninterest income
5,731

 
4,712

 
5,219

 
5,912

Noninterest expense
14,811

 
14,303

 
14,143

 
15,077

Net income before taxes
1,065

 
1,400

 
1,721

 
1,198

Income taxes
115

 
294

 
391

 
211

Net income
$
950

 
$
1,106

 
$
1,330

 
$
987

 
 
 
 
 
 
 
 
Net income allocated to common shareholders
$
515

 
$
661

 
$
878

 
$
530

 
 
 
 
 
 
 
 
Per common share:
 

 
 

 
 

 
 

Net income - basic
$
.06

 
$
.07

 
$
.10

 
$
.05

Net income - diluted
$
.06

 
$
.07

 
$
.10

 
$
.05

Cash dividends
$
.01

 
$
.01

 
$
.01

 
$
.01


Fourth Quarter Earnings

Net income for the fourth quarter of 2012 was up by $37 thousand from the third quarter of 2012 and up by $844 thousand from the fourth quarter of 2011. The primary difference in the fourth quarter performance of 2012 as compared to 2011 was an improvement in credit costs as the provision for loan losses decreased by $300 thousand and foreclosed property expenses decreased by $775 thousand.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




FINANCIAL CONDITION

Earning Assets

The average earning asset mix for 2012 was 70.64% in loans, 24.70% in investments, and 4.66% in short-term funds. The average earning asset mix for 2011 was 72.49% in loans, 20.82% in investments, and 6.69% in short-term funds. The average earning asset mix for 2010 was 73.79% in loans, 19.44% in investments and 6.77% in short-term funds. Loans held for investment decreased by 2.09% in 2012 while deposits increased by 2.28% . Loans held for investment decreased by 6.02% in 2011 while deposits decreased by 0.29% . The following table shows net changes in the major balance sheet categories for the year-to-date periods as of December 31, 2012 and 2011 :

 
 
Year to Date Net Change
(Dollars in thousands)
 
2012
 
2011
Cash and due from banks
 
$
14,835

 
$
(5,123
)
Interest-bearing bank balances and Federal funds sold
 
39,922

 
(32,712
)
Securities available for sale
 
27,788

 
43,845

Loans held for sale
 
(5,059
)
 
19,831

Loans held for investment
 
(20,867
)
 
(63,806
)
Allowance for loan losses
 
(2,539
)
 
1,072

Other real estate
 
(10,982
)
 
5,827

Other assets
 
(10,066
)
 
(4,247
)
Total assets
 
$
33,032

 
$
(35,313
)
Total deposits
 
31,212

 
(3,949
)
Total borrowings
 
(7,672
)
 
(36,498
)
Other liabilities
 
645

 
2,603

Stockholders’ equity
 
8,847

 
2,531

Total liabilities and equity
 
$
33,032

 
$
(35,313
)

Assets increased by 2.11% from December 31, 2011 to December 31, 2012 , and decreased by 2.20% from December 31, 2010 to December 31, 2011 . Investments increased by 8.66% in 2012 after increasing by 15.83% in 2011 . Deposit growth funded the asset increase for 2012, with most of the funds being deployed into interest bearing bank balances and investment securities. As the loan portfolio continued its decrease through 2012, loan cash flows were primarily used to purchase investment securities. Approximately $47.798 million in U.S. government entity securities, $81.646 million in mortgage-backed securities and $31.491 million in corporate and municipal securities were purchased in 2012. Mortgage-backed security purchases were funded primarily through sales and principal payments as the Company reduced mortgage-backed holdings in favor of further diversifying into municipal and corporate securities which presented better yield opportunities with manageable credit risk. The Company began a diversification strategy in 2011 with initial purchases of $10.472 million in taxable municipal securities. The mortgage-backed securities portfolio grew by $28.765 million in 2011 as $135.180 million of securities were purchased using reinvested proceeds from $44.924 million of sold securities, $58.144 million from monthly payment activity and funds from loan pay-downs for the remainder. Included in the 2011 purchases were $63.999 million of collateralized mortgage obligations which have attractive payment structures and protections against interest rate risks.

The following table shows loans held for investment by type as of December 31, 2012 , 2011 and 2010 :

(Dollars in thousands)
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Commercial real estate
$
542,859

 
$
574,505

 
$
646,731

Residential real estate
200,992

 
186,815

 
195,184

Home equity lines
37,736

 
37,024

 
40,305

Commercial, financial and agricultural
116,871

 
117,790

 
105,094

Asset-based loans
36,679

 
37,540

 
28,132

Consumer
40,336

 
42,666

 
44,700

Total
$
975,473

 
$
996,340

 
$
1,060,146

 
 
 
 
 
 
Mortgages held for sale
$
21,014

 
$
26,073

 
$
6,242


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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The diversification of the entire loan portfolio was a continuing effort in 2011 and 2012 as management re-emphasized small business lending and agricultural lending, adding lenders with SBA and timberland expertise. A commercial products division was started during the third quarter of 2011 to acquire loan participations, build the asset-based lending portfolio and grow the commercial and industrial and commercial real estate loan portfolios.

Within the commercial real estate loan portfolio, construction loans declined by $10.580 million in 2012 after declining by $19.768 million in 2011. Other commercial real estate loans decreased by $21.066 million in 2012 and by $52.458 million in 2011 primarily due to foreclosure activity and payment activity as demand remained weak and problem loans were worked out. Foreclosure activity represented $7.846 million of the decrease in construction and other real estate-secured loans in 2012 as compared to $25.724 million for 2011. A portfolio of acquired participations in loans secured by church properties declined by $5.221 million during 2012 and by $7.469 million during 2011 as the Company slowed down an acquisition program that was begun in 2010.

Commercial, financial and agricultural loans declined by less than 1% during 2012, increased by 12.08% in 2011 and increased by 2.94% in 2010. The growth for 2011 was driven by participations purchased. Agricultural loans decreased by $8.596 million in 2012 driven primarily by the seasonal payoff of a group of crop production loan participations purchased in 2011. SBA loans grew from $3.044 million at the end of 2011 to $11.835 million at the end of 2012 as the Company focused resources on SBA opportunities. The asset-based lending operation portfolio in Memphis, M&F Business Credit, Inc. (MFBC), remained flat in 2012 after growing by 33.44% in 2011 and by 2.38% in 2010. MFBC provides working capital lines of credit to companies that generally do not have the necessary capital base to support a traditional working capital line unless the line of credit is monitored on a daily or weekly basis. These companies would not qualify for a traditional bank line of credit and MFBC mitigates this risk through very tight monitoring of all accounts receivable and inventory (at least weekly), accounts payable and monthly reporting of financial statements. These loans are generally collateralized by inventory and accounts receivable and paid from the cash flows received from sales of inventory and collections of accounts receivable. The cash flows are managed through a lock box arrangement under the control of MFBC and collateral is monitored through daily, weekly or monthly procedures. The target market area for the asset-based lending operation is the southeastern U.S., but for the right opportunity, the group can service a loan anywhere in the U.S. The average balance per customer relationship was $2.054 million at the end of 2012.

Residential loans grew by 7.59% in 2012 with 56% of that growth due to transfers of held-for-sale originated mortgages into the primary loan portfolio. The growth indicates some recovery of home values in the local housing markets and an emerging willingness of consumers to resume borrowing.


Liability Management

Deposits increased by 2.28% during 2012 and decreased by 0.29% during 2011 . The following table shows the breakdown by deposit category of core deposit and public funds deposit growth from December 31, 2011 to December 31, 2012 :

 
Core Customers
Increase (Decrease)
 
Public Funds
Increase (Decrease)
 
Total Deposits
Increase (Decrease)
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Noninterest-bearing
$
42,512

 
18.93
 %
 
$
2,065

 
29.00
 %
 
$
44,577

 
19.24
 %
NOW
15,497

 
6.90

 
17,708

 
10.69

 
33,205

 
8.51

MMDA
15,317

 
8.59

 
925

 
4.75

 
16,242

 
8.21

Savings
(1,484
)
 
(1.24
)
 
(86
)
 
(25.60
)
 
(1,570
)
 
(1.31
)
Customer CDs
(57,524
)
 
(14.34
)
 
(3,144
)
 
(21.96
)
 
(60,668
)
 
(14.61
)
Brokered CDs
252

 
2.34

 
(826
)
 
(14.28
)
 
(574
)
 
(3.46
)
Total
$
14,570

 
1.26
 %
 
$
16,642

 
7.82
 %
 
$
31,212

 
2.28
 %

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Noninterest-bearing core customer balances increased by $42.512 million in 2012 after increasing by $18.572 million in 2011. Accounts with balances in excess of $250 thousand increased by $36.551 million in 2012 and by $7.580 million in 2011 with the rest of the growth occurring across the deposit base. Public funds noninterest-bearing balances increased by $947 thousand in 2011 and subsequently increased by $2.065 million in 2012.

NOW account growth in 2012 was evenly distributed between public sector and non-public sector sources. Core NOW accounts in excess of $250 thousand grew by $9.378 million while public funds accounts in excess of $250 thousand increased by $17.378 million. NOW account growth in 2011 was dominated by the public funds sector. Although public balances grew by 15.25% in 2011, the number of accounts grew by only 2.76%, indicating that the growth occurred primarily in established accounts.

Core money market balances grew by $25.730 million in 2011 and by $15.317 million in 2012. During 2012 core money market deposits in excess of $250 thousand increased by $15.699 million in balances and by 7.08% in numbers of accounts. Core money market balances showed 16.86% growth in 2011 with most of that growth occurring across the customer base. Money market deposits with balances in excess of $250 thousand increased by $4.109 million. The number of core money market accounts grew by 3.30% in 2011. The money market public funds growth in 2011 occurred almost exclusively in accounts with balances in excess of $250 thousand.

The Company has had a philosophy of pricing certificates of deposits in the middle to low range of market rates since 2009 as management focused on limiting overall balance sheet growth and continued to improve its capital ratios. Certificate of deposit balances have dropped steadily since 2009 as the rate environment became less conducive to time deposits. Market rates for one year certificates fell by over 100 basis points from the end of 2008 to the end of 2011. Since 2010, the Summit NOW account and certain tiers of money market deposit accounts offered better customer yields than long-term certificates of deposits. The dynamics of the Company's deposit base have shown evidence of movement of funds from certificates into NOW and money market accounts since 2009. The Company has worked since 2008 to build the core customer deposit base as a primary source of liquidity and reduce balances of borrowed funds. The Company's capital requirements have limited the amount of balance sheet growth available to it since 2009, thus resulting in a flat to small trend upward in total deposits. Strategies for deposit growth have been replaced by strategies toward a more quality core deposit mix. The numbers of core demand, NOW and money market deposit accounts have decreased by less than 1% since the end of 2010.

Sources of deposits available to the Company are the traditional brokered CD market, which may be used when funding is needed within a short period of time, and reciprocal brokered CD markets which are used to provide enhanced FDIC coverage for customers with large certificate of deposit balances. Additionally, the Company uses repurchase agreements with certain commercial customers in an effort to provide them with better cash management tools.

The following table shows the deposit mix for the last three year ends:

(Dollars in thousands)
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Noninterest-bearing demand
$
276,295

 
$
231,718

 
$
212,199

NOW deposits
423,461

 
390,256

 
364,209

Money market deposits
214,091

 
197,849

 
166,455

Savings deposits
118,123

 
119,693

 
114,769

Certificates of deposit
354,712

 
415,380

 
502,772

Brokered certificates of deposit
15,993

 
16,567

 
15,008

Total
$
1,402,675

 
$
1,371,463

 
$
1,375,412


The following table shows the mix of public funds deposits as of the last three year ends:

(Dollars in thousands)
December 31, 2012
 
December 31, 2011
 
December 31, 2010
Noninterest-bearing demand
$
9,186

 
$
7,121

 
$
6,174

NOW deposits
183,419

 
165,711

 
143,781

Money market deposits
20,403

 
19,478

 
13,814

Savings deposits
250

 
336

 
335

Certificates of deposit
11,171

 
14,315

 
21,076

Brokered certificates of deposit
4,957

 
5,783

 
5,610

Total
$
229,386

 
$
212,744

 
$
190,790


36
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Other borrowings decreased by 16.26% in 2012 , decreased by 14.71% in 2011 and decreased by 58.85% in 2010 . The decreases in borrowings were primarily funded through liquidity provided by correspondent bank balances and loan portfolio paydowns. Management intends to allow its Federal Home Loan Bank borrowings to decrease as they mature while deposits are used as a primary source of funding.

Prior to January 2013 the Company was required to seek prior approval from the Federal Reserve Bank of St. Louis to pay the interest on the subordinated debentures as well as to pay dividends on its preferred stock.


Fair Value

The Company uses fair value accounting within a mixed-attribute accounting environment in which (1) certain items are accounted for at fair value with net changes being recorded in earnings, (2) certain items are accounted for at fair value with net changes being recorded in other comprehensive income (in other words, being charged directly to stockholders’ equity), (3) certain items are accounted for at the lower of fair value or amortized cost with net changes being recorded in earnings, (4) certain items are accounted for at the lower of an adjusted fair value or amortized cost and (5) certain items are accounted for at amortized cost. Fair value is defined in the accounting standards as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

The Company has investments in five asset-backed securities also known as collateralized debt obligations (CDOs) that are beneficial interests. These beneficial interests were issued by vehicles that used the proceeds to invest in trust preferred securities of commercial banks. Trust preferred securities are a long-term form of capital that were used by commercial banks during the past decade to fund acquisitions of other banks, repurchases of common stock and denovo expansion efforts. Some of the trust preferred securities in these trusts were issued by banks that incurred significant losses on sub-prime mortgages and other real estate-related loans, resulting in defaults on the trust preferred securities. As defaults and deferrals of dividend payments on these securities have increased, covenants have been triggered within these trusts to divert incoming cash flows toward the payment of the most senior securities issued by the trusts. As this occurred, the trusts began to defer interest payments on the less senior instruments. The financial troubles beginning in 2008 which led to deferrals of payments by the issuing banks led to a re-evaluation of the credit quality of the beneficial interests, secured by the issuing bank trust preferred securities, issued by the trusts. These reviews resulted in downgrades by Moody’s in late 2008 and early 2009 of the five CDOs that the Company owns to below investment grade. Since observable transactions in these securities are extremely rare, the Company uses assumptions that a market participant would use in valuing these instruments. These assumptions primarily include cash flow estimates and market discount rates. The cash flow estimates are sensitive to the assumptions related to the ability of the issuers to pay the underlying trust preferred securities according to their terms. The market discount rates depend on transactions, which are rare given the lack of interest of investors in these types of beneficial interests. As of the end of 2012, the Company carried these investments at 30.44% of amortized cost, with the unrealized losses of approximately $2.162 million recorded in stockholders’ equity, net of tax, as a component of other comprehensive income. As of the end of 2011, the Company carried these investments at 26.11% of amortized cost, with the unrealized losses of approximately $2.318 million recorded in stockholders’ equity, net of tax, as a component of other comprehensive income.

The Company recorded $29 thousand in 2012 and $631 thousand in 2011 of other-than-temporary impairment losses through earnings on these securities. The credit downgrades at the end of 2008 and in the first quarter of 2009 were the first indicator that an other-than-temporary impairment may be present in some of these beneficial interests. Impairment tests are performed quarterly and consist of estimating the cash flows that are available to pay the beneficial interests and discounting those cash flows using the Company’s initial yield at purchase as the discount rate. Any deficit of the discounted value below the book value of the beneficial interest is considered a credit-related other-than-temporary impairment and is charged against current earnings. The remainder of the difference between the fair value and the book value of the beneficial interest is considered an other-than-temporary impairment charged separately to other comprehensive income. The 2012 tests resulted in a $29 thousand credit-related impairment charge against earnings and $21 thousand of impairment charges reclassified from other comprehensive income on three of the beneficial interests.The 2011 tests resulted in a $631 thousand credit-related impairment charge against earnings and $263 thousand of impairment charges reclassified from other comprehensive income on three of the beneficial interests.

An economic by-product of the sub-prime mortgage crisis has been the slow-down in the housing markets. Lack of demand in housing, an over-supply of homes on the market, a tightening of available credit by banks and a general deterioration in the economy have affected the Company’s ability to dispose of foreclosed properties and to arrive at values of real estate collateral for loan impairment testing. As real estate values have steadily fallen since 2008, losses and write-downs of other real estate have increased. The Company experienced losses on sales and write downs of foreclosed real estate of $4.260 million in 2012 as compared to $5.874 million in 2011 . Real estate-related loan impairment calculations became more severe after 2008, resulting in $8.296 million in loan loss accruals related to real estate secured loans individually reviewed for impairments in 2012 and $6.971 million in 2011. The Company estimates that fair values of properties related to land development and construction and commercial real estate could remain under pressure through 2013, and may result in additional loan loss accruals for loan impairments.

37
FIRST M&F CORPORATION AND SUBSIDIARY

                     




In November 2010 the Company entered into an interest rate swap designed to hedge its exposure to rising interest rates on its $30 million of junior subordinated debentures, which converted from a fixed rate of interest to a floating rate effective March 15, 2011. The interest rate swap is designed for the Company to receive floating rate interest amounts and to make fixed rate payments in a net settlement arrangement with the swap counterparty. The swap is expected to be highly effective. Therefore, the net change in fair value of the swap is being recorded in other comprehensive income. On each interest settlement date the balance in accumulated other comprehensive income is reclassified into interest expense. Any ineffective portion of the change in the fair value of the swap, which is valued on a monthly basis, is recorded in earnings rather than into other comprehensive income. The fair value of the swap at the end of 2012 was $2.484 million, classified as a liability. The fair value, net of deferred taxes of $927 thousand, was recorded in other comprehensive income. The fair value of the swap at the end of 2011 was $1.834 million, classified as a liability. The fair value, net of deferred taxes of $684 thousand, was recorded in other comprehensive income.

The Company accounts for mortgages held for sale at the lower of cost or fair value. Fair values of mortgages are primarily influenced by market rates. The Company also uses credit spreads in valuing mortgages held for sale. Since these loans are originated to conform to FNMA underwriting standards, their values are not influenced by the sub-prime mortgage market. These mortgages are generally sold within 90 days of origination and retention of these mortgages in the Company’s loan portfolio is rare. The Company also issues rate locks related to loan originations and receives purchase commitments from correspondent bank investors to purchase the loans when they are originated. These commitments to originate and purchase are accounted for as derivatives and are therefore marked to fair value every month with changes being recorded in mortgage banking income. Fair value adjustments for origination derivatives resulted in $662 thousand in revenues credited to mortgage banking income during 2012 and $188 thousand in losses charged to mortgage banking income during 2011. Fair value adjustments for forward sale derivatives contributed $137 thousand in revenues to mortgage banking income during 2012 and increased mortgage banking revenues by $188 thousand during 2011.


Credit Risk Management

The Company measures and monitors credit quality on an ongoing basis through credit committees and the loan review process. Credit standards are approved by the Board with their adherence monitored during the lending process as well as through subsequent loan reviews. The Company strives to minimize risk through the diversification of the portfolio geographically as well as by loan purpose and collateral. Maximum exposure guidelines by loan class are reviewed monthly. The Company’s credit standards are enforced within the Bank as well as within all of its wholly-owned subsidiaries.

Loans that are not fully collateralized are generally placed into nonaccrual status when they become past due in excess of ninety days. Loans that are fully collateralized may remain in accrual status as long as management believes that the loan will eventually be collected in full. When collateral values are not sufficient to repay a loan and there are not sufficient other resources for repayment, management will write the carrying amount of the loan down to the expected collateral net proceeds by establishing an allowance through a charge to the provision for loan losses. When management determines that a loan is not recoverable the balance is charged off to the allowance for loan losses. Any subsequent recoveries are added back to the allowance for loan losses. Overdrawn deposit accounts are treated as loans and therefore are subject to the Company’s loan policies. Deposit accounts that are not in the Company’s overdraft protection program and are overdrawn in excess of thirty days are generally charged-off. Deposits in the overdraft protection program that have been overdrawn continuously for sixty days are funded through the offering of a “fresh start” loan with overdraft privileges being removed. Any fresh start loan that becomes thirty days past due is charged off to the allowance for loan losses.

The adequacy of the allowance for loan losses is evaluated quarterly with provision accruals approved by the Board. Allowance adequacy is dependent on loan classifications by internal and external loan review personnel, past due status, collateral reviews, loan growth and loss history. As part of the allowance evaluation, certain impaired loans are tested to determine if individual impairment allowances are required. A loan is considered to be impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Impairment review meetings are held monthly to review existing and new impairments. Loans with high risk grades, generally implying a substandard classification, are considered impaired and therefore are selected for individual impairment allowance tests. Loan grades are a significant indicator in determining which loans to individually test for impairment amounts because the loan grading process incorporates past due status, payment history, customer financial condition and collateral value in assigning individual grades to loans. Nonaccrual loans are also generally selected for individual impairment allowance tests. Loans that have been modified in a troubled debt restructuring are also selected for individual impairment allowance tests. For collateral-dependent loans, those for which the repayment is expected to be provided solely by the underlying collateral, the impairment allowance is primarily based on the value of the related collateral. Otherwise, impairment allowance calculations are based on the estimated present value of expected cash flows discounted at the effective interest rate of the loan. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. The material estimates necessary in this process make it inherently subjective and make the estimates subject to significant changes and may add volatility to earnings as provisions are adjusted.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Loans not individually tested for impairment allowances are grouped into risk-rated pools and evaluated based on historical loss experience. Additionally, in determining the allowances for pools of loans, management considers specific qualitative external credit risk factors (“environmental factors”) that may not be reflected in historical loss rates such as: (1) potential disruptions in the real estate market and their effect on real estate concentrations; (2) trends in loan to value exception rates; (3) general economic conditions, including extending or worsening recessionary pressures; (4) past due rates; and (5) reviews of underwriting standards in our various markets. These and other environmental factors are reviewed on a quarterly basis. During the third quarter of 2011 the Company changed the number of periods included in the historical loss rate from thirteen years to five years. The thirteen year average previously used was also adjusted by two standard deviations to capture a higher percentage of probable losses. Given the higher variation and wider distribution of losses that can occur during any thirteen year historical period, two standard deviations were added to the mean to capture the potential losses that may have been distributed further from the mean but resulted from conditions that could reasonably re-occur. The five year average calculation includes more recent loss history, which management believes reflects current conditions better than the thirteen year calculation. The change in calculation, given the previous statistical adjustments to the thirteen year average, resulted in an immaterial difference.

At the end of 2011, the average loss rates applied to pools of commercial loans and for real estate secured commercial and construction loans were adjusted for economic condition environmental factors related to (1) the lack of economic growth impacting small businesses in the Company's markets and (2) the lack of liquidity in the market for commercial real estate, especially concerning undeveloped properties. The loss rate applied to commercial real estate loans was adjusted upward by 10 basis points. The loss rate applied to commercial, agricultural and municipal loans was adjusted upward by 50 basis points. At December 31, 2012 the Company added environmental factors of approximately 15 basis points to the five-year average loss rate for commercial real estate loans and 35 basis points to the five-year average loss rate for commercial loans to reflect sales growth uncertainty in the small business markets.

The Company experienced a large increase in the amount of past due and nonaccrual real estate-secured construction and commercial loans during 2008. The trend in nonaccrual and past due loans stabilized in the fourth quarter of 2009 and began its decline in 2011. Management addressed the problem of liquidating nonperforming loans by creating a special problem asset group within the organization in 2009, separate from the ongoing credit operations and lending activities of the Company. Problem loans, including large nonaccrual loans, have been assigned to this group of specialists with the intent of liquidating the loans or their collateral in an orderly fashion. Nonaccrual loans have moved downward from their high of $74.420 million in the second quarter of 2009 and fallen to $7.444 million at December 31, 2012. Management has made much progress recently in improving the credit quality of the portfolio as substandard and loss loans have fallen from 6.90% of loans held for investment at December 31, 2011 to 4.80% at December 31, 2012. Construction and development substandard and loss loans decreased from 26.19% of their outstanding balances to 17.60% and other commercial real estate substandard and loss loans decreased from 8.07% of their outstanding balances to 5.54% during the same period. The allowances for loans individually tested for impairment increased to $5.238 million at December 31, 2012 from $3.729 million at December 31, 2011, primarily due to (1) an increase in the impairment allowance in one construction loan and (2) an increase in the number of commercial real estate loans with impairment allowances as appraisals were updated during 2012. Moving forward, as old years are removed and recent years are added, the allowances related to risk pools of loans should decline as the historical five year average loss rates decline, assuming that recent trends continue. The portfolio clean-up since 2008 came at the expense of higher net charge-offs. However, during 2012 net charge-offs were $5.981 million as compared to $10.792 million for 2011. Approximately 42.07% of the net charge-off activity in 2012 was related to foreclosure transactions. Approximately 45.33% of the net charge-offs for all of 2011 were related to foreclosure transactions. Foreclosure volume increased every quarter during 2011, accelerating to $8.186 million for the fourth quarter. During 2012, $5.330 million of properties were foreclosed on.

The primary challenge during 2013 and beyond will be the liquidation of foreclosed properties. The Company sold $13.110 million of foreclosed properties for $12.384 million during 2012. During 2011, $10.510 million of properties were sold for $9.729 million. As sales have outpaced foreclosure activity in 2012, the Company faces the challenge of selling the remaining properties, with the most difficult task being the disposition of construction and land development properties which make up approximately 74% of the balance of other real estate owned.






 


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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The following table shows the nonaccrual loan balance trend since 2009, indicating a significant drop in numbers of nonaccrual loans as well as a reduction in the number and balances of large nonaccrual loans:

(Dollars in thousands)
 
12/31/12
 
12/31/11
 
12/31/10
 
12/31/09
Construction and land development:
 
 
 
 
 
 
 
 
Total number
 
2

 
10

 
22

 
54

Total balance
 
$
817

 
$
4,398

 
$
13,993

 
$
25,655

Number, $500 thousand or more
 
1

 
3

 
7

 
13

Balance, $500 thousand or more
 
$
600

 
$
2,989

 
$
10,553

 
$
19,297

 
 
 
 
 
 
 
 
 
Other commercial real estate:
 
 
 
 
 
 
 
 
Total number
 
12

 
14

 
26

 
18

Total balance
 
$
4,244

 
$
9,937

 
$
13,027

 
$
9,789

Number, $500 thousand or more
 
1

 
4

 
6

 
2

Balance, $500 thousand or more
 
$
2,322

 
$
8,185

 
$
10,152

 
$
3,496

 
 
 
 
 
 
 
 
 
1-4 family residential:
 
 
 
 
 
 
 
 
Total number
 
21

 
28

 
40

 
57

Total balance
 
$
1,596

 
$
1,896

 
$
3,863

 
$
4,490

Number, $500 thousand or more
 
—

 
—

 
1

 
1

Balance, $500 thousand or more
 
$
—

 
$
—

 
$
941

 
$
1,024

 
 
 
 
 
 
 
 
 
Total real estate:
 
 
 
 
 
 
 
 
Total number
 
35

 
52

 
88

 
129

Total balance
 
$
6,657

 
$
16,231

 
$
30,883

 
$
39,934

Number, $500 thousand or more
 
2

 
7

 
14

 
16

Balance, $500 thousand or more
 
$
2,922

 
$
11,174

 
$
21,646

 
$
23,817

 
 
 
 
 
 
 
 
 
Commercial, financial & agricultural:
 
 
 
 
 
 
 
 
Total number
 
14

 
17

 
23

 
33

Total balance
 
$
775

 
$
913

 
$
2,151

 
$
4,459

Number, $500 thousand or more
 
—

 
—

 
1

 
2

Balance, $500 thousand or more
 
$
—

 
$
—

 
$
784

 
$
2,411

 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
Total number
 
3

 
5

 
10

 
10

Total balance
 
$
12

 
$
33

 
$
93

 
$
156

Number, $500 thousand or more
 
—

 
—

 
—

 
—

Balance, $500 thousand or more
 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Total portfolio:
 
 
 
 
 
 
 
 
Total number
 
52

 
74

 
121

 
172

Total balance
 
$
7,444

 
$
17,177

 
$
33,127

 
$
44,549

Number, $500 thousand or more
 
2

 
7

 
15

 
18

Balance, $500 thousand or more
 
$
2,922

 
$
11,174

 
$
22,430

 
$
26,228


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FIRST M&F CORPORATION AND SUBSIDIARY

                     




As the trend in nonaccrual real estate-secured loans has declined, individual impairment allowances have also declined since 2009. The following table shows a distribution of the totals for construction loans evaluated for impairment and the impairment allowances allocated to those loans at December 31, 2012 and December 31, 2011.

 
December 31, 2012
 
December 31, 2011
(Dollars in thousands)
Loan
Balance
 
Impairment
Allowance
 
Loan
Balance
 
Impairment
Allowance
Nonaccrual loans
$
817

 
$
—

 
$
4,398

 
$
400

Accruing loans with an allowance
3,435

 
2,036

 
7,155

 
1,350

Accruing loans without an allowance
6,086

 
—

 
6,606

 
—

Total
$
10,338

 
$
2,036

 
$
18,159

 
$
1,750


The following table shows a distribution of the totals for commercial real estate loans evaluated for impairment and the impairment allowances allocated to those loans at December 31, 2012 and December 31, 2011.

 
December 31, 2012
 
December 31, 2011
(Dollars in thousands)
Loan
Balance
 
Impairment
Allowance
 
Loan
Balance
 
Impairment
Allowance
Nonaccrual loans
$
4,244

 
$
443

 
$
9,937

 
$
477

Accruing loans with an allowance
11,711

 
1,978

 
4,495

 
417

Accruing loans without an allowance
25,967

 
—

 
26,338

 
—

Total
$
41,922

 
$
2,421

 
$
40,770

 
$
894


The following table shows the trend in credit quality related to the largest segments of the real estate loan portfolio.

(Dollars in thousands)
Outstanding
Balances
 
Past Due
30 - 89
Days
And Still
Accruing
 
Past Due
90 Days
Or More
And Still
Accruing
 
Nonaccrual
 
Year-To-
Date Net
Charge-Offs
Construction and development loans:
 
 
 

 
 
 
 
 
 
12/31/2012
$
58,745

 
$
395

 
$
—

 
$
817

 
$
1,117

9/30/2012
57,613

 
166

 
—

 
1,465

 
840

6/30/2012
67,814

 
325

 
—

 
1,373

 
918

3/31/2012
70,087

 
254

 
23

 
4,519

 
(263
)
12/31/2011
69,325

 
603

 
72

 
4,398

 
1,970

 
 
 
 
 
 
 
 
 
 
Loans secured by 1-4 family properties:
 

 
 

 
 

 
 

 
 

12/31/2012
$
238,728

 
$
1,962

 
$
168

 
$
1,596

 
$
788

9/30/2012
234,825

 
2,275

 
77

 
1,467

 
241

6/30/2012
226,110

 
2,232

 
81

 
1,864

 
241

3/31/2012
224,989

 
2,810

 
87

 
2,352

 
(81
)
12/31/2011
223,839

 
3,288

 
174

 
1,896

 
1,998

 
 
 
 
 
 
 
 
 
 
Commercial real estate-secured loans:
 

 
 

 
 

 
 

 
 

12/31/2012
$
484,114

 
$
1,549

 
$
66

 
$
4,244

 
$
2,901

9/30/2012
496,862

 
15,569

 
172

 
2,658

 
2,522

6/30/2012
499,370

 
1,177

 
1,368

 
2,557

 
2,443

3/31/2012
498,724

 
3,061

 
75

 
7,125

 
1,239

12/31/2011
505,180

 
2,952

 
279

 
9,937

 
3,998

  

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




The following table shows overall statistics for non-performing loans and other assets of the Company:

( Dollars in thousands )
December 31,
2012
 
December 31,
2011
 
December 31,
2010
Nonaccrual loans
$
7,444

 
$
17,177

 
$
33,127

Other real estate
25,970

 
36,952

 
31,125

Investment securities
733

 
599

 
698

Total non-performing assets
$
34,147

 
$
54,728

 
$
64,950

 
 
 
 
 
 
Past due 90 days or more and still accruing interest
$
321

 
$
602

 
$
951

Restructured loans (accruing)
21,800

 
19,662

 
18,052

 
 
 
 
 
 
Ratios:
 

 
 

 
 

Nonaccrual loans to loans
.75
%
 
1.68
%
 
3.11
%
Past due 90 day loans to loans
.03
%
 
.06
%
 
.09
%
Non-performing credit assets to loans and other real estate
3.27
%
 
5.11
%
 
5.85
%
Non-performing assets to assets
2.13
%
 
3.49
%
 
4.05
%

The Company has not been negatively affected to date by the deterioration of credit quality in the sub-prime mortgage sector. Substantially all of originated mortgages are sold to mortgage investors and must meet potential investors’ underwriting guidelines. Mortgages retained by the Company must meet the Company’s underwriting guidelines. The Company does not offer a subprime product. Accordingly, the Company has virtually no direct sub-prime exposure. Loans with features that increase credit risk, such as high loan to value ratios, must meet minimum credit score, income and employment guidelines in order to mitigate the increased risk.

As the Company has worked to reduce nonaccrual loan balances, a natural byproduct has been an increase in real estate foreclosures. The slow economy and stagnant real estate markets have combined to impede the process of disposing of foreclosed properties. During 2012 more properties were sold than were foreclosed on. The following table shows the activity in the other real estate properties and the progress to date:

(Dollars in thousands)
 
December 31, 2012
 
December 31, 2011
Balance at beginning of period
 
$
36,952

 
$
31,125

Foreclosures
 
5,330

 
20,870

Third-party lien pay-offs
 
—

 
448

Improvements
 
332

 
77

Write downs
 
(3,534
)
 
(5,093
)
Properties sold
 
(13,110
)
 
(10,510
)
Transfers of fixed assets to ORE
 
—

 
139

Transfers of ORE to fixed assets
 
—

 
(104
)
Balance at end of period
 
$
25,970

 
$
36,952


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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Construction properties are the largest segment of other real estate. These properties have been slow to move, as undeveloped properties have attracted very few interested buyers. The following table shows foreclosed real estate balances by type as of December 31, 2012 and December 31, 2011 :

( Dollars  i n thousands )
December 31,
2012
 
December 31,
2011
Construction and land development
$
19,189

 
$
22,773

Farmland
2,263

 
2,618

1-4 family residential
326

 
2,136

Five plus residential
864

 
950

Nonfarm nonresidential
3,328

 
8,475

 
$
25,970

 
$
36,952


The Company is still in the process, begun in 2008, of working through the negative effects of the real estate downturn. The length and depth of any further deterioration will depend on the strength of the economy and of the housing and commercial real estate sectors. A sustained deterioration in real estate values, especially if in the commercial real estate sector, could result in additional write-downs of loans and subsequently additional foreclosures. Management does not know of any additional material contingencies that could negatively affect the remainder of the loan portfolio during 2013.


Defined Benefit Pension Plan

The Company has a defined benefit pension plan that it froze in September 2001. For accounting purposes, the plan’s funded status was a net liability of $2.330 million at the end of 2012 and $2.564 million at the end of 2011. The plan had an unamortized actuarial loss of $2.364 million at the end of 2012 and $4.272 million at the end of 2011 that was recorded in stockholders’ equity within other comprehensive income. The actuarial loss balance is being amortized against earnings on a straight-line basis through 2013. The Company expects to terminate the plan in five to seven years.

During 2012, the plan experienced gains in its investment portfolio of $1.011 million. The plan also experienced actuarial losses of $677 thousand related to the change in present value of the pension obligation. The actuarial loss was triggered by a decline in the discount rate from 4.00% at the end of 2011 to 3.50% at the end of 2012. The amortization expense component of pension expense was $2.136 million in 2012 and $984 thousand in 2011. It is expected to be $2.364 million for 2013.

Two significant issues for the Company going forward are (1) how to adjust planned contributions to the pension plan since it experienced a net funded deficit at the ends of 2011 and 2012 and (2) working with the higher expense level brought about by the unamortized actuarial loss and the shortening of the time frame for amortizing that loss against earnings. Management expects to manage pension contributions with the desire to terminate the plan within the next five to seven years. Contributions of $168 thousand were made in 2011 and of $344 thousand were made in 2012. If interest rates increase over the next three to five years, then the discounted value of the benefit obligations will decrease, thus reducing the actuarial loss further or producing a net actuarial gain. However, during 2013 the Company will experience pension plan expenses of approximately $2.163 million.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

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. The Company used Federal Home Loan Bank borrowings in the past to fund loan growth when deposit volumes were insufficient. The Company’s strategy is to balance the use of deposits and short-term liquid assets as funding sources for future loan growth.

The asset/liability committee further establishes guidelines, approved by appropriate board action, by which the current liquidity position of the Company is monitored to ensure adequate funding capacity. The Company monitors liquid assets such as cash equivalents and unpledged marketable securities to assure that there is sufficient liquidity available to cover deposit maturities over a one month horizon plus other potential volatile deposit movements. The Company also runs longer-term sensitivity tests on the earning asset and liability cash flows under simulated conditions with interest rates moving up 200 basis points and down 100 basis points. Strategies are implemented to mitigate any indicated weaknesses. Accessibility to local, regional and other funding sources is also maintained in order to actively manage the funding structure that supports the earning assets of the Company. The Company and the Bank maintain secured lines of credit with correspondent banks, the Federal Home Loan Bank and the Federal Reserve.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Prior to January 2013, the Company was required to obtain prior approval from the Federal Reserve Bank of St. Louis to obtain new borrowings. The bank subsidiary was not subject to the Federal Reserve approval requirement.

Interest Rate Sensitivity

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. Responsibility for managing the Company’s program for controlling and monitoring interest rate risk and liquidity risk and for maintaining income stability, given the Company’s exposure to changes in interest rates, is vested in the asset/liability committee. Appropriate policy and guidelines, approved by the board of directors, govern these actions. Monitoring is primarily accomplished through monthly reviews and analysis of asset and liability repricing opportunities, market conditions and expectations for the economy. In addition to these monthly reviews, a quarterly sensitivity analysis is performed to determine the potential effects of changes in interest rates on the Company’s net interest margin, net interest income and market value of equity. The Company generally designs strategies to keep the one-year change in net interest income at a floor of no more than 10% lower than current levels based on interest rate shocks of 100 basis points down and 200 basis points up. The Committee also monitors all loan originations, excluding residential mortgages, with maturities of greater than five years. Management believes that at December 31, 2012, there is adequate flexibility to alter the current rate and maturity structures as necessary to minimize the exposure to changes in interest rates, should they occur. Although the Company has hedged its floating rate subordinated debt, most interest rate risk mitigation strategies are carried out through pricing and product structures.

The Company is currently in a positive gap position for assets and liabilities repricing within the next year. This generally means that for assets and liabilities maturing and repricing within the next 12 months, the Company is positioned for more assets to reprice than the amount of liabilities repricing. At the end of 2012, the one-year repricing gap stood at +2.65% as compared to -2.44% at the end of 2011. The primary factors influencing the change in the one-year repricing gap to a positive percentage were (1) an increase in short-term earning assets, (2) more price sensitivity introduced into the loan portfolio and (3) lower volumes of funding from time deposits. According to interest-rate sensitivity analysis, the Company has low-to-moderate interest rate risk.

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 increased its capital position during 2012 and 2011 primarily through the retention of earnings. The Company reduced the quarterly dividend rate to $0.01 per share beginning in the second quarter of 2009 after maintaining a $0.13 per share quarterly dividend rate from the second quarter of 2005 through the first quarter of 2009. The Company is restricted from increasing the dividend rate until its Community Development Capital Initiative (CDCI) preferred stock is redeemed.

On September 29, 2010 the Company issued 30,000 shares of Class B, Series CD Preferred Stock to the U. S. Treasury to redeem its Class B, Series A Preferred Stock. The Class B, Series CD shares were issued through the U. S. Treasury’s CDCI, which is available to CDFIs. M&F Bank, was certified by the U. S. Treasury as a CDFI on September 28, 2010.

Cumulative dividends on the Class B, Series CD Preferred Stock accrue on the $1,000 liquidation preference at a rate of 2% per annum for the first eight years, and at a rate of 9% per annum thereafter but will be paid only if, as, and when declared by the Company’s Board of Directors. The rate may increase to 5% in the event that the Company fails to re-qualify as a CDFI three years after the initial certification, and that re-qualifying failure remains uncured for 180 days. If the Company continues to fail to re-qualify for an additional 90 days, the rate increases to 9% until the Company is once again re-qualified as a CDFI. The Class B, Series CD Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Class B, Series CD Preferred Stock is generally non-voting.

The Company may redeem the Class B, Series CD Preferred Stock in whole or in part at $1,000 per share at any time, subject to the consent of the Federal Reserve Bank of St. Louis, which is the Company’s primary Federal banking regulator, and the U.S. Treasury Department.

The terms of the Exchange agreement with the U. S. Treasury specify that the Company may not pay common dividends in excess of the aggregate per share dividends for the immediately prior fiscal year. This will limit future common dividends while the preferred stock is outstanding to the current rate of $0.01 per share per quarter or $0.04 per share per year.

The Company used funding of $30.000 million through an issuance of trust preferred securities in early 2006 to acquire Columbiana Bancshares, Inc. in Columbiana, Alabama. The Company issued debentures to an off-balance-sheet trust that purchased the debentures with funds raised from issuing trust preferred securities. The debentures have a 30-year life, pay interest quarterly and are callable beginning five years after issuance. The debentures pay a fixed rate of interest for the first five years and pay a floating rate based on LIBOR thereafter. The debentures, net of the Company’s equity interest in the trust, are considered Tier 1 capital for risk-based capital ratio purposes. The Company may elect to defer up to 20 consecutive quarterly payments of interest on the junior subordinated debentures. During an extension period the Company may not declare or pay dividends on its common stock, repurchase common stock or repay any debt that has equal rank or is subordinate to the debentures. The Company is prohibited from issuing any class of common or preferred stock that is senior to the junior subordinated debentures during the term of the debentures.

44
FIRST M&F CORPORATION AND SUBSIDIARY

                     




On November 11, 2009, the Company entered into an informal agreement with the Federal Reserve Bank of St. Louis (the “Federal Reserve”). The agreement requires prior approval by the Federal Reserve of (1) the declaration or payment by the Company of dividends to shareholders and (2) the payment of interest on outstanding trust preferred securities and the payment of dividends on outstanding TARP preferred stock and (3) the incurrence of additional debt by the Company. The agreement is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended. In January 2013 the Company was notified by the Federal Reserve that the informal agreement had been terminated and the Company was no longer subject to its restrictions.

Average year-to-date equity to assets was 7.23% for 2012 and 6.86% for 2011. Total asset growth has been constrained by a weak economy, decreasing by $61.285 million since 2009. Capital has been rebuilt primarily through earnings retention over time, increasing by $13.813 million since 2009. Corporate strategies have been dominated primarily by capital growth and preservation and secondarily by asset and deposit growth strategies.

The Company has a capital plan that includes monthly monitoring of capital adequacy and projects capital needs out eighteen months. The projections include assumptions made about earnings, dividends and balance sheet growth and are adjusted as needed each month. A capital contingency plan is also maintained as part of the Company’s Strategic Plan and is reviewed with the board of directors periodically. This plan details steps to be taken in the event of a critical capital need.

The Company registered 37.800 million shares in April 2012 to allow it the flexibility of raising capital sufficient to pay off its CDCI obligations and for other capital and liquidity management needs. Management does not have any immediate plans to raise additional capital through a common stock offering.

On February 6, 2013 the Company entered into a merger agreement with Renasant in which the Company would merge with and into Renasant. Each share of the Company's common stock will be converted into .6425 of a share of Renasant common stock. The merger is subject to regulatory and shareholder approval and is expected to be completed during the third quarter of 2013.

The Company’s stock is publicly traded on the NASDAQ Global Select Market, also providing an avenue for additional capital if it is needed. The Company’s shares traded at a rate of approximately 10,500 shares per day during 2012. The stock’s closing price was $6.98 per share on December 31, 2012.

The Company’s and Bank’s regulatory capital ratios at December 31, 2012 were in excess of the minimum requirements and qualify the institution as “well capitalized” under the risk-based capital regulations.

The following table highlights certain regulatory capital ratios for the Company:

(Dollars in thousands)
 
December 31, 2012
 
December 31, 2011
Tier 1 capital
 
$
140,471

 
$
126,810

Total risk-based capital
 
155,088

 
141,434

Risk-weighted assets
 
1,166,489

 
1,169,553

 
 
 
 
 
Risk-based ratios:
 
 
 
 
Tier 1 capital
 
12.04
%
 
10.84
%
Total risk-based capital
 
13.30
%
 
12.09
%
Tier 1 leverage
 
8.91
%
 
8.17
%
 
 
 
 
 
Total capital to assets ratio
 
7.39
%
 
6.99
%

The Company’s and Bank's regulatory capital ratios for 2012 and 2011 are summarized in Note 20 – Regulatory Matters of the audited financial statements included in Item 8, Financial Statements and Supplementary Data, in this Form 10-K.

45
FIRST M&F CORPORATION AND SUBSIDIARY

                     




OFF-BALANCE SHEET ARRANGEMENTS

The Company’s primary off-balance sheet arrangements are in the form of loan commitments, operating lease commitments and an interest rate swap. At December 31, 2012 , the Company had $137.102 million in unused loan commitments outstanding. Of these commitments, $89.864 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 used to facilitate a 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. At December 31, 2012 , the Company had $4.784 million in financial standby letters of credit issued and outstanding. At December 31, 2011 , the Company had $1.580 million in financial standby letters of credit issued and outstanding.

Liabilities of $3 thousand at December 31, 2012 , and $4 thousand at December 31, 2011 , are recognized in other liabilities 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 $11.928 million at December 31, 2012 . These commitments are accounted for as derivatives and are marked to fair value with changes in fair value recorded in mortgage banking income. At December 31, 2012 , mortgage origination-related derivatives with positive fair values of $149 thousand were included in other assets and derivatives with negative fair values of $63 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, 2012 , the Company had $32.813 million in locked forward sales agreements in place. Forward sale-related derivatives with positive fair values of $168 thousand were included in other assets and derivatives with negative fair values of $63 thousand were included in other liabilities.

Mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Company may also be required to repurchase mortgages that do not conform to FNMA or FHA underwriting standards or that contain critical documentation errors or fraud. The Company only originates for sale mortgages that conform to FNMA and FHA underwriting guidelines. The Company incurred two recourse losses totaling $9 thousand in 2012 and one recourse loss of $4 thousand in 2011 . No recourse losses were incurred in 2010 . Mortgages sold that were still in the recourse period were $81.407 million at December 31, 2012 . A recourse liability of $223 thousand was recorded for these mortgages at December 31, 2012 .

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 space.

The Company is a guarantor of the First M&F Statutory Trust I to the extent that if at any time the Trust is required to pay taxes, duties, assessments or governmental charges of any kind, then the Company is required to pay to the Trust additional sums to cover the required payments.

The Company irrevocably and unconditionally guarantees, with respect to the capital securities of the First M&F Statutory Trust I, and to the extent not paid by the Trust, accrued and unpaid distributions on the capital securities and the redemption price payable to the holders of the capital securities.

In November 2010 the Company entered into a forward-starting interest rate swap designed to hedge the variability of cash flows on the quarterly interest payments of the junior subordinated debentures, issued in relation to a trust preferred security financing in 2006, that switched in March 2011 from a fixed-rate of 6.44% to a floating rate of 3-month LIBOR plus 1.33%. The interest rate swap has a notional value of $30 million which is equivalent to the principal balance of the junior subordinated debentures. The effective date of the swap was March 15, 2011 with an expiration date of March 15, 2018.

46
FIRST M&F CORPORATION AND SUBSIDIARY

                     




TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes the obligations of the Company:

(Dollars in thousands)
Payments Due by Period
Contractual Obligations
Total
 
Less
Than 1
Year
 
1 - 3
Years
 
3 - 5
Years
 
More
Than 5
Years
Time deposits
$
370,705

 
$
183,354

 
$
172,911

 
$
10,004

 
$
4,436

Short-term borrowings
3,720

 
3,720

 
—

 
—

 
—

Other borrowings
36,007

 
22,280

 
4,606

 
8,526

 
595

Junior subordinated debentures
30,928

 
—

 
—

 
—

 
30,928

Capital lease obligations
—

 
—

 
—

 
—

 
—

Operating leases
1,259

 
403

 
548

 
284

 
24

Purchase obligations
—

 
—

 
—

 
—

 
—

Other long-term liabilities
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total
$
442,619

 
$
209,757

 
$
178,065

 
$
18,814

 
$
35,983


Long-term debt obligations primarily represent borrowings from the Federal Home Loan Bank. The junior subordinated debentures were redeemable beginning in March 2011. Operating leases are primarily leases on office space. Leases on office space range from those that are month-to-month to 120-month leases. Most leases have options to renew for periods equal to the original term of the lease. There are no bargain purchase options in any of the current leases.


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)
Fair value
(3)
Contingent liabilities
(4)
Income taxes

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.


47
FIRST M&F CORPORATION AND SUBSIDIARY

                     




Management of the Company evaluates many factors in determining the estimate for the allowance for loan losses. Management reviews loan quality on an ongoing basis to determine the collectability of individual loans and reflects that collectability by assigning loan grades to individual credits. The grades 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. Such information is used to determine if individual loans are impaired and to group remaining loans into risk pools. A loan is impaired if management estimates that it is probable that the Company will be unable to collect all contractual payments due. Generally, all loans (1) risk-rated as substandard, doubtful or loss, (2) in nonaccrual status or (3) classified as troubled debt restructurings are considered to be impaired and are therefore individually tested for impairment allowances. Impairment estimates may be based on discounted cash flows or collateral values. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. Historical loan losses by loan type and loan grade are also a significant factor in estimating future losses when applied to the risk pools of loans not individually tested for impairment allowances. Various external environmental factors are also considered in estimating the allowance for pools of loans. Concentrations of credit by loan type and collateral type are also reviewed to estimate exposures and risks of loss for loans aggregately evaluated in risk pools. 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 pools of loans to economic fluctuations. The Company 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.

Fair Value

Certain of the Company’s assets and liabilities are financial instruments carried at fair value. This includes securities available for sale, mortgage-related derivatives and interest rate swaps. Most of the assets and liabilities carried at fair value are based on either quoted market prices, market prices for similar instruments or market data for the instruments being valued. At December 31, 2012 , approximately 1.1% of assets and liabilities measured at fair value were based on significant unobservable inputs.

The fair values of available-for-sale securities are generally based upon quoted market prices or observable market data related to those securities. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain instruments, the valuation of the security is subjective and may involve substantial judgment. This is the case for certain trust-preferred-backed collateralized debt obligations that are held in the investment portfolio.

The Company reviews the investment securities portfolio to identify and evaluate securities that have unrealized losses for other-than-temporary impairment. An impairment exists when the current fair value of an individual security is less than its amortized cost basis. The primary factors that the Company considers in determining whether an impairment is other-than-temporary are the financial condition and projected performance of the issuer, the length of time and extent to which the security has had an unrealized loss, and the Company’s intent to sell and assessment of the likelihood that the Company would be required to sell the security before it could recover its cost. For beneficial interests such as collateralized debt obligations the Company uses the prescribed expected cash flow analysis as well as its intent related to the disposition of its investment to determine whether an other-than-temporary impairment exists.

The Company enters into interest rate lock agreements with customers during the mortgage origination process. These interest rate lock agreements are considered written options and are accounted for as free-standing derivatives. The Company also enters into forward sale agreements with investors who purchase originated mortgages. These forward sale agreements are also considered free-standing derivatives. Free-standing derivatives are accounted for at fair value with changes flowing through current earnings. The Company values interest rate lock agreements using the current 30-year and 15-year mortgage rates as a discount rate and adjusts cash flows based on dealer quoted pricing adjustments for certain credit characteristics of the commitments and estimated pull-through rates. The Company values forward sale agreements based on an average of investor quotes for mortgage commitments with similar characteristics with adjustments made for estimated servicing values.

The Company enters into interest rate swaps. Interest rate swaps are 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 rates derived from the forward swap curve, with the resulting fair value being classified as a Level 3 valuation.

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FIRST M&F CORPORATION AND SUBSIDIARY

                     





Other real estate acquired through partial or total satisfaction of loans is carried at the lower of fair value, net of estimated costs to sell, or cost. The original cost of other real estate is recognized as the fair value of the property, net of estimated costs to sell, at the date of acquisition. Any loss incurred at the date of acquisition is charged to the allowance for loan losses. The fair values of other real estate are usually based on appraisals by third parties. These fair values may also be adjusted for other market data that the Company becomes aware of.

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.

Income Taxes

The Company, the Bank and the Bank's wholly owned subsidiaries file consolidated Federal and state income tax returns. The estimates that pertain to the income tax expense or benefit and the related current and deferred tax assets and liabilities involve a high degree of judgment related to the ultimate measurement and resolution of tax-related matters. Management determines the appropriate tax treatment of transactions and filing positions based on reviews of tax laws and regulations, court actions and other relevant information. These judgments enter into the estimates of current and deferred tax expenses or benefits and the related current and deferred tax assets and liabilities. Changes in these estimates occur as tax rates, tax laws or regulations change, as court decisions change the merits of certain tax treatments and as examinations by taxing authorities change our treatments of tax items. These changes impact tax accruals and can materially affect our operating results. Management regularly evaluates our uncertain tax positions and estimates the appropriate level of tax accrual adjustments based on these evaluations.

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 expenses (benefits) result from changes in deferred tax assets and liabilities between reporting periods. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and the recoverability of taxes paid in prior years. In determining whether a valuation allowance is needed, management considers (1) the amount of taxable income from prior years that may be used for carrybacks, (2) estimated future taxable earnings and (3) the effects of tax planning strategies.

Interest and penalties assessed by the taxing authorities are classified as income tax expense in the statement of operations.


49
FIRST M&F CORPORATION AND SUBSIDIARY

                     




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 being performed on net interest income and the economic value of equity. The following table shows the gap position of the Company at December 31, 2012 , placing variable-rate instruments in the earliest repricing category and including estimated prepayment activity for certain loans and mortgage-backed securities. The gap positioning for deposits without maturities are estimated using a combination of factors that include deposit product price sensitivity estimates for increasing and decreasing rate periods. As the assumptions made regarding non-maturity deposits heavily influence the interest rate sensitivity analysis of the Company’s balance sheet, management frequently reviews these inputs to best reflect current deposit market forces and industry standards for monitoring these risk factors.

Rate Sensitivity Gap Report
As of December 31, 2012
(Dollars in thousands)
0-12 months
 
1-5 years
 
Over 5 years
 
Total
Short-term funds
$
102,813

 
$
1,500

 
$
—

 
$
104,313

Investments
92,362

 
178,715

 
77,485

 
348,562

Loans
508,547

 
432,772

 
55,168

 
996,487

Total earning assets
$
703,722

 
$
612,987

 
$
132,653

 
$
1,449,362

 
 
 
 
 
 
 
 
NOW, MMDA & savings deposits
$
449,053

 
$
35,785

 
$
270,837

 
$
755,675

Time deposits
183,359

 
182,914

 
4,432

 
370,705

Short-term borrowings
3,720

 
—

 
—

 
3,720

Other borrowings
55,125

 
11,222

 
588

 
66,935

Interest rate swap
(30,000
)
 
—

 
30,000

 
—

Total int. bearing liabilities
$
661,257

 
$
229,921

 
$
305,857

 
$
1,197,035

 
 
 
 
 
 
 
 
Rate sensitive gap
$
42,465

 
$
383,066

 
$
(173,204
)
 
 

 
 
 
 
 
 
 
 
Cumulative gap
$
42,465

 
$
425,531

 
$
252,327

 
 

Cumulative % of assets
2.65
%
 
26.57
%
 
15.75
%
 
 


Interest rate shock analysis shows that the Company will experience a 1.81% decrease over 12 months in its net interest income with a gradual (12 month ramp) and sustained 100 basis point decrease in interest rates. A gradual and sustained increase in interest rates of 200 basis points will result in a 3.22% increase in net interest income.

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 19.41% with an immediate and sustained increase in interest rates of 200 basis points. The market value of equity will decrease by 14.87% with an immediate and sustained decrease in interest rates of 100 basis points.


50
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 generally accepted in the United States of America 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, 2012.

/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

51
FIRST M&F CORPORATION AND SUBSIDIARY

                     




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
Audit Committee, 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 as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2012. The Company’s management is responsible for these financial statements. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First M&F Corporation as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.


/s/ BKD, LLP
Jackson, Mississippi
March 8, 2013

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FIRST M&F CORPORATION AND SUBSIDIARY

                     




Consolidated Statements of Condition
December 31, 2012 and 2011
(In Thousands, Except Share Data)
 
 
2012
 
2011
Assets
 
 
 
 
Cash and due from banks
 
$
54,811

 
$
39,976

Interest-bearing bank balances
 
94,313

 
39,391

Federal funds sold
 
10,000

 
25,000

Securities available for sale, amortized cost of $341,273 and $315,890
 
348,562

 
320,774

Loans held for sale
 
21,014

 
26,073

Loans, net of unearned income
 
975,473

 
996,340

Allowance for loan losses
 
(17,492
)
 
(14,953
)
Net loans
 
957,981

 
981,387

Bank premises and equipment
 
37,264

 
37,989

Accrued interest receivable
 
5,683

 
6,122

Other real estate
 
25,970

 
36,952

Other intangible assets
 
4,159

 
4,586

Bank owned life insurance
 
23,222

 
22,477

Other assets
 
18,704

 
27,924

 
 
$
1,601,683

 
$
1,568,651

Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities:
 
 

 
 

Noninterest-bearing deposits
 
$
276,295

 
$
231,718

Interest-bearing deposits
 
1,126,380

 
1,139,745

Total deposits
 
1,402,675

 
1,371,463

Federal funds purchased and repurchase agreements
 
3,720

 
4,398

Other borrowings
 
36,007

 
43,001

Junior subordinated debt
 
30,928

 
30,928

Accrued interest payable
 
661

 
1,023

Other liabilities
 
9,249

 
8,242

Total liabilities
 
1,483,240

 
1,459,055

Commitments and contingencies (Note 12)
 


 


Stockholders’ equity:
 
 

 
 

Preferred stock; 2,000,000 shares authorized; 30,000 shares issued and outstanding
 
18,865

 
17,564

Common stock of $5.00 par value; 50,000,000 shares authorized: 9,230,799 and 9,154,936 shares
 issued and outstanding
 
46,154

 
45,775

Additional paid-in capital
 
32,469

 
31,895

Nonvested restricted stock awards
 
244

 
674

Retained earnings
 
19,180

 
14,456

Accumulated other comprehensive income (loss)
 
1,531

 
(768
)
Total equity
 
118,443

 
109,596

 
 
$
1,601,683

 
$
1,568,651


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

53
FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations
Years Ended December 31, 2012, 2011 and 2010
(In Thousands, Except Share Data)
 
 
2012
 
2011
 
2010
Interest income: 
 
 
 
 
 
 
Interest and fees on loans
 
$
55,005

 
$
60,201

 
$
62,070

Interest on loans held for sale
 
767

 
275

 
232

Taxable investments
 
5,682

 
6,745

 
7,616

Tax-exempt investments
 
1,292

 
1,252

 
1,549

Federal funds sold
 
30

 
63

 
82

Interest bearing bank balances
 
146

 
179

 
143

Total interest income
 
62,922

 
68,715

 
71,692

Interest expense:
 
 

 
 

 
 

Deposits
 
8,627

 
13,501

 
18,809

Federal funds purchased and repurchase agreements
 
21

 
36

 
66

Other borrowings
 
1,704

 
1,979

 
3,024

Junior subordinated debt
 
1,177

 
1,335

 
1,992

Total interest expense
 
11,529

 
16,851

 
23,891

Net interest income
 
51,393

 
51,864

 
47,801

Provision for loan losses
 
8,520

 
9,720

 
9,220

Net interest income after provision for loan losses
 
42,873

 
42,144

 
38,581

Noninterest income:
 
 

 
 

 
 

Deposit account income
 
10,180

 
10,293

 
10,221

Mortgage banking income
 
5,304

 
1,821

 
1,581

Agency commission income
 
3,486

 
3,636

 
3,809

Trust and brokerage income
 
587

 
584

 
526

Bank owned life insurance income
 
696

 
638

 
667

Other income
 
2,017

 
2,464

 
1,865

Securities gains, net
 
557

 
2,769

 
2,255

Total investment other-than-temporary impairment losses
 
(8
)
 
(368
)
 
(435
)
Portion of loss recognized in (reclassified from) other comprehensive income
 (before taxes)
 
(21
)
 
(263
)
 
32

Net investment impairment losses recognized
 
(29
)
 
(631
)
 
(403
)
Total noninterest income
 
22,798

 
21,574

 
20,521

Noninterest expenses:
 
 

 
 

 
 

Salaries and employee benefits
 
26,887

 
28,469

 
27,303

Net occupancy expenses
 
3,554

 
3,935

 
3,937

Equipment expenses
 
1,726

 
1,871

 
2,382

Software and processing expenses
 
1,428

 
1,540

 
1,627

Telecommunication expenses
 
913

 
909

 
980

Marketing and business development expenses
 
1,071

 
1,139

 
1,014

Foreclosed property expenses
 
5,186

 
7,351

 
2,946

FDIC insurance assessments
 
1,911

 
2,426

 
3,261

Intangible asset amortization
 
427

 
427

 
426

Other expenses
 
13,175

 
10,267

 
10,614

Total noninterest expenses
 
56,278

 
58,334

 
54,490

Income before income taxes
 
9,393

 
5,384

 
4,612

Income tax expense
 
2,408

 
1,011

 
602

Net income
 
$
6,985

 
$
4,373

 
$
4,010

Net loss attributable to noncontrolling interests
 
—

 
—

 
(1
)
Net income attributable to First M&F Corporation
 
$
6,985

 
$
4,373

 
$
4,011

Dividends and accretion on preferred stock
 
1,901

 
1,774

 
1,692

Gain on exchange of preferred stock
 
—

 
—

 
12,867

Net income applicable to common stock
 
$
5,084

 
$
2,599

 
$
15,186

Net income allocated to common shareholders
 
$
4,919

 
$
2,584

 
$
15,071

Earnings per share:
 
 

 
 

 
 

Basic
 
$
0.54

 
$
0.28

 
$
1.66

Diluted
 
$
0.54

 
$
0.28

 
$
1.66


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

54
FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income
Years Ended December 31, 2012, 2011 and 2010
(In Thousands)

 
2012
 
2011
 
2010
Net income
$
6,985

 
$
4,373

 
$
4,010

Other comprehensive income (loss):
 

 
 

 
 

Unrealized gains (losses) on securities: 
 

 
 

 
 

Unrealized gains on securities available for sale arising during the period, net of tax of $1,045, $1,728 and $159
1,761

 
2,901

 
267

Unrealized gains (losses) on other-than-temporarily impaired securities available for sale arising during the period, net of tax of $48, $43 and $54
79

 
(72
)
 
(92
)
Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $208, $1,033 and $841
(349
)
 
(1,736
)
 
(1,414
)
Reclassification adjustment for credit related other-than-temporary impairment losses on securities available for sale included in net income, net of tax of $11, $235 and $150
18

 
396

 
253

Unrealized gains (losses) net of settlements on cash flow hedge arising during the period, net of tax of $243, $989 and $305
(407
)
 
(1,662
)
 
512

Defined benefit pension plans:
 

 
 

 
 

Net actuarial losses arising during the period, net of tax of $86, $859 and $111
(142
)
 
(1,445
)
 
(187
)
Amortization of prior service cost, net of tax of $0, $9 and $14
—

 
(16
)
 
(23
)
Amortization of actuarial loss, net of tax of $797, $367 and $330
1,339

 
617

 
554

Other comprehensive income (loss)
2,299

 
(1,017
)
 
(130
)
Total comprehensive income
9,284

 
3,356

 
3,880

Comprehensive loss attributable to noncontrolling interests
—

 
—

 
(1
)
Comprehensive income of First M&F Corp
$
9,284

 
$
3,356

 
$
3,881


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

55
FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2012, 2011 and 2010
(In Thousands, Except Share Data)

 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Nonvested Restricted Stock Awards
 
Retained Earnings(Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling
Interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2010
 
$
28,838

 
$
45,347

 
$
31,926

 
$
734

 
$
(2,595
)
 
$
379

 
$
1

 
$
104,630

Net income
 
—

 
—

 
—

 
—

 
4,011

 
—

 
(1
)
 
4,010

Cash dividends - common ($.04 per
 share)
 
—

 
—

 
—

 
—

 
(366
)
 
—

 
—

 
(366
)
37,457 shares issued to directors
 
—

 
187

 
(54
)
 
—

 
—

 
—

 
—

 
133

Dividends and accretion on
 preferred stock
 
419

 
—

 
—

 
—

 
(1,692
)
 
—

 
—

 
(1,273
)
Gain on exchange of preferred stock
 
(12,867
)
 
—

 
—

 
—

 
12,867

 
—

 
—

 
—

Share-based compensation expense
 recognized
 
—

 
—

 
11

 
50

 
—

 
—

 
—

 
61

Net change
 
—

 
—

 
—

 
—

 
—

 
(130
)
 
—

 
(130
)
December 31, 2010
 
$
16,390

 
$
45,534

 
$
31,883

 
$
784

 
$
12,225

 
$
249

 
$
—

 
$
107,065

Net income
 
—

 
—

 
—

 
—

 
4,373

 
—

 
—

 
4,373

Cash dividends - common ($.04 per
 share)
 
—

 
—

 
—

 
—

 
(368
)
 
—

 
—

 
(368
)
42,133 shares issued to directors
 
—

 
211

 
(68
)
 
—

 
—

 


 
—

 
143

Dividends and accretion on
 preferred stock
 
1,174

 
—

 
—

 
—

 
(1,774
)
 
—

 
—

 
(600
)
6,000 restricted share awards vested
 
—

 
30

 
71

 
(101
)
 
—

 
—

 
—

 
—

Share-based compensation expense
 recognized
 
—

 
—

 
7

 
(9
)
 
—

 
—

 
—

 
(2
)
Tax benefits on restricted stock
 dividends paid
 
—

 
—

 
2

 
—

 
—

 
—

 
—

 
2

Net change
 
—

 
—

 
—

 
—

 
—

 
(1,017
)
 
—

 
(1,017
)
December 31, 2011
 
$
17,564

 
$
45,775

 
$
31,895

 
$
674

 
$
14,456

 
$
(768
)
 
$
—

 
$
109,596

Net income
 
—

 
—

 
—

 
—

 
6,985

 
—

 
—

 
6,985

Cash dividends - common ($.04 per
 share)
 
—

 
—

 
—

 
—

 
(380
)
 
—

 
—

 
(380
)
29,863 shares issued to directors
 
—

 
149

 
14

 
—

 
—

 
—

 
—

 
163

Dividends and accretion on
 preferred stock
 
1,301

 
—

 
—

 
—

 
(1,901
)
 
—

 
—

 
(600
)
46,000 restricted share awards
 vested
 
—

 
230

 
554

 
(784
)
 
—

 
—

 
—

 
—

Share-based compensation expense
 recognized
 
—

 
—

 
6

 
354

 
20

 
—

 
—

 
380

Net change
 
—

 
—

 
—

 
—

 
—

 
2,299

 
—

 
2,299

December 31, 2012
 
$
18,865

 
$
46,154

 
$
32,469

 
$
244

 
$
19,180

 
$
1,531

 
$
—

 
$
118,443


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

56
FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
(In Thousands)
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income
$
6,985

 
$
4,373

 
$
4,010

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

 
 

 
 
Share-based compensation
543

 
141

 
194

Amortization of pension costs
2,019

 
844

 
787

Depreciation and amortization
2,340

 
2,517

 
2,736

Provision for loan losses
8,520

 
9,720

 
9,220

Net investment amortization
4,499

 
2,515

 
2,090

Net change in unearned fees/deferred costs on loans
(1,593
)
 
(109
)
 
44

Capitalized dividends on FHLB stock
(25
)
 
(27
)
 
(27
)
Gain on securities available for sale
(557
)
 
(2,769
)
 
(2,255
)
Impairment loss on securities available for sale
29

 
631

 
403

Gain on loans held for sale
(4,073
)
 
(1,377
)
 
(1,285
)
Other real estate losses
4,260

 
5,874

 
1,574

Other asset sales (gains) losses
240

 
(317
)
 
225

Deferred income taxes
2,406

 
1,007

 
735

Originations of loans held for sale, net of repayments
(171,098
)
 
(92,009
)
 
(83,200
)
Sales proceeds of loans held for sale
172,290

 
73,071

 
88,277

(Increase) decrease in:
 

 
 

 
 
Accrued interest receivable
439

 
258

 
1,218

Cash surrender value of bank owned life insurance
(696
)
 
(638
)
 
(667
)
Other assets
(430
)
 
(1,683
)
 
(1,800
)
Increase (decrease) in:
 

 
 

 
 
Accrued interest payable
(362
)
 
(447
)
 
(1,463
)
Other liabilities
893

 
631

 
8,392

Net cash provided by operating activities
26,629

 
2,206

 
29,208

 
 
 
 
 
 
Cash flows from investing activities:
 

 
 

 
 
Purchases of securities available for sale
(160,936
)
 
(220,235
)
 
(170,862
)
Sales of securities available for sale
54,988

 
114,711

 
89,164

Maturities of securities available for sale
76,594

 
63,678

 
87,509

Purchases of loans held for investment
(26,720
)
 
(42,118
)
 
(43,667
)
Net decrease in other loans held for investment
45,585

 
75,124

 
397

Net (increase) decrease in:
 

 
 

 
 
Interest-bearing bank balances
(54,922
)
 
32,712

 
12,707

Federal funds sold
15,000

 
—

 
45,000

Bank premises and equipment
(1,141
)
 
1,119

 
(226
)
Net purchases of bank owned life insurance
(49
)
 
(49
)
 
(41
)
Proceeds from sales of other real estate and other repossessed assets
12,055

 
9,166

 
15,350

Net redemptions of FHLB stock
5,204

 
—

 
—

Net cash provided by (used in) investing activities
(34,342
)
 
34,108

 
35,331









57
FIRST M&F CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years Ended December 31, 2012, 2011 and 2010
(In Thousands)
 
2012
 
2011
 
2010
Cash flows from financing activities:
 
 
 
 
 
Net increase (decrease) in deposits
$
31,200

 
$
(3,973
)
 
$
(12,880
)
Net increase (decrease) in short-term borrowings
(678
)
 
(29,083
)
 
24,839

Proceeds from other borrowings
—

 
686

 
2,872

Repayments of other borrowings
(6,994
)
 
(8,101
)
 
(74,966
)
Common dividends paid
(380
)
 
(368
)
 
(366
)
Preferred dividends paid
(600
)
 
(600
)
 
(1,385
)
Tax benefits related to share-based compensation
—

 
2

 
—

Net cash provided by (used in) financing activities
22,548

 
(41,437
)
 
(61,886
)
Net increase (decrease) in cash and due from banks
14,835

 
(5,123
)
 
2,653

Cash and due from banks at January 1
39,976

 
45,099

 
42,446

Cash and due from banks at December 31
$
54,811

 
$
39,976

 
$
45,099

 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures:
 

 
 

 
 
Total interest paid
$
11,893

 
$
17,311

 
$
25,373

Total income taxes paid
192

 
3

 
232

Income tax refunds received
—

 
—

 
8,735

 
 
 
 
 
 
Transfers of loans from held for sale to held for investment
8,003

 
454

 
—

Transfers of loans to foreclosed property
5,330

 
20,870

 
24,192

Transfers of buildings to foreclosed property
—

 
139

 
180

Gain on exchange of Class B preferred stock
—

 
—

 
12,867

U. S. Treasury preferred dividend accrued but unpaid
75

 
75

 
75

Accretion on U. S. Treasury preferred stock
1,301

 
1,174

 
419


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


58
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, Alabama and Tennessee. The Bank provides brokerage and insurance 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 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. All significant intercompany balances and transactions have been eliminated in consolidation.

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 immaterial items within the accompanying financial statements for previous years have been reclassified to conform to the 2012 presentation. These reclassifications had no effect on net earnings or stockholders' equity.

Comprehensive Income

Comprehensive income includes net income reported in the statements of operations and net changes in stockholders’ equity arising from activity with non-owners. Components of accumulated other comprehensive income (loss) for the Company are: (1) changes in unrealized gains (losses) on securities available for sale, (2) changes in unrealized gains (losses) on cash flow hedges and (3) actuarial and other changes in net unamortized pension costs.

Fair Value Measurements

Fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that use observable market information as well as unobservable estimates and adjustments based upon the inputs that management believes that market participants would use. Certain assets and liabilities are accounted for at fair value on a recurring basis. Changes in fair value for these assets and liabilities are recorded in the statement of operations or in other comprehensive income as prescribed by applicable accounting standards.

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. Securities for which interest payments are past due are placed in nonaccrual status with interest income being recognized as interest payments are received.

59
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  (Continued)

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. When the fair values of available-for-sale securities fall below their amortized cost basis they are considered to be impaired. For debt securities, if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the debt security before the recovery of its amortized cost basis then the full impairment is recognized in earnings as a realized loss. However, if the Company does not have the intent to sell the debt security and it is more likely than not that it will not be required to sell the debt security before recovery of its amortized cost basis, then only the amount of the unrealized loss that is determined to be a credit loss is reflected in earnings. The remaining unrealized loss that is due to non-credit factors is reflected in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows, (4) changes in credit ratings of the issuers and (5) the Company’s intent to sell and assessment of the likelihood that the Company would be required to sell the security before it could recover its cost. For beneficial interests such as collateralized debt obligations the Company uses the expected cash flow analysis prescribed by applicable accounting standards as well as its intent related to the disposition of its investment to determine whether an other-than-temporary impairment exists.

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.

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.

60
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  (Continued)

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 select loans for individual impairment allowance testing and estimate 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. The Company measures individually impaired loans at the fair value of collateral, less costs to sell, if the loan is collateral dependent. Real estate collateral is primarily valued using appraisals based on sales of comparable properties in the same or similar markets. Updated appraisals or internally prepared evaluations are obtained for individually tested loans as management deems appropriate based on the date of the latest appraisal, the current status of the loan, known market conditions, current negotiations with borrowers and the outlook for action against the borrower. Other extenuating circumstances that may affect this frequency are judicial foreclosure delays, sales contracts, settlement agreements and lawsuits. Subsequent adjustments may be made to appraised values for current conditions that were not in existence at the time of the appraisal. The Company uses a database of information by market and real estate type that is updated quarterly in preparing evaluations and updating appraisal values. Management also uses this database of information along with other relevant information such as collateral sales negotiations or foreclosed property sales to adjust collateral values. 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 December 31, 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.

61
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  (Continued)

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 and subsequently depreciated over their estimated useful lives. 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, net of estimated costs to sell, or cost. The original cost of other real estate is recognized as the fair value of the property, net of estimated costs to sell, at the date of acquisition (foreclosure or transfer). 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.

Intangible Assets

Intangible assets with determinable useful lives such as core deposit intangibles, customer renewal lists and noncompete agreements are amortized over their estimated respective useful lives. Intangible assets with determinable useful lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, these intangible assets are recorded at fair value.

Income Taxes

The Company, the Bank and the Bank's wholly owned subsidiaries 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 expenses (benefits) result from changes in deferred tax assets and liabilities between reporting periods. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Interest and penalties assessed by the taxing authorities are classified as income tax expense in the statement of operations.

Contingent Liabilities

Contingent liabilities, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Derivative Financial Instruments

All contracts that satisfy the definition of a derivative are carried at fair value. Interest rate swaps are used to hedge the Company’s exposure to changes in interest rates. The Company maintains written documentation for these derivatives which hedge forecasted transactions and are therefore considered cash flow hedges. This documentation identifies the hedging objective and strategy, the hedging instrument, the instrument being hedged, the reasoning behind the assertion that the hedge is highly effective and the methodology for measuring ongoing hedge effectiveness and ineffectiveness. Changes in the fair value of a derivative that is highly effective and that has been designated and qualifies as a cash flow hedge are initially recorded in other comprehensive income, and subsequently reclassified to earnings in the same period that the hedged item impacts earnings. Any ineffective portion is recorded in current period earnings. Assessments of hedge effectiveness are performed monthly, and hedge accounting ceases on transactions that are no longer deemed effective. For discontinued cash flow hedges where the hedged transaction remains probable to occur as originally designated, the unrealized gains and losses recorded in accumulated other comprehensive income would be reclassified to earnings in the period when the previously designated hedged cash flows occur. If the previously designated transaction were no longer probable of occurring, any unrealized gains and losses would be immediately reclassified to earnings.

The Company enters into interest rate lock and forward sale agreements on mortgage loans that are held for sale. These agreements are accounted for as freestanding derivatives with all changes in fair value recorded in mortgage banking income.

62
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  (Continued)

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 $ 1.973 million at December 31, 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 December 31, 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.

Recent Pronouncements

Accounting Standards Update No. 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements." ASU 2011-03 provides guidance related to the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 clarifies the guidance related to whether an entity has maintained effective control over transferred assets and therefore must treat the transaction as a financing rather than as a sale. ASU 2011-03 provides that the criterion pertaining to an exchange of collateral should not be a determining factor in assessing effective control. The assessment of effective control must focus on a transferor's contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. Therefore, the amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 became effective for the Company as of January 1, 2012. Adoption of ASU 2011-03 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." ASU 2011-04 clarifies how fair values should be measured for instruments classified in stockholders' equity and under what circumstances premiums and discounts should be applied in fair value measurements. The guidance also permits entities to measure fair value on a net basis for financial instruments that are managed based on net exposure to market risks or counterparty credit risks. Required new disclosures for financial instruments classified as Level 3 fair values include (1) quantitative information about unobservable inputs used in measuring fair values, (2) qualitative discussion of the sensitivity of fair value measurements to changes in unobservable inputs and (3) a description of the valuation processes used. ASU 2011-04 also requires disclosure of fair value levels for financial instruments that are not recorded at fair value but for which fair value is required to be disclosed. ASU 2011-04 became effective for the Company prospectively for interim and annual periods beginning on January 1, 2012. Adoption of ASU 2011-04 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income." ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU 2011-05 became effective for the Company retrospectively for interim and annual periods beginning on January 1, 2012. Certain provisions related to the presentation of reclassification adjustments were deferred by ASU 2011-12 as noted below. Adoption of ASU 2011-05 did not have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 requires the disclosure of both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for interim and annual periods beginning on January 1, 2013. ASU 2013-01, " Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities " clarifies that ordinary trade receivables and accounts receivable are not within the scope of ASU 2011-11. Adoption of ASU 2011-11 and ASU 2013-01 are not expected to have a material impact on the Company's financial position or results of operations.

Accounting Standards Update No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 became effective concurrent with the effective date of ASU 2011-05.

63
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 1:  (Continued)

Recent Pronouncements: (Continued)

Accounting Standards Update No. 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income in their entirety, by component, on the face of the statement of operations or in the notes to the financial statements. Amounts that are not required to be classified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. ASU 2013-02 is effective prospectively for fiscal years and interim periods beginning after January 1, 2013. Adoption of ASU 2013-02 is not expected to have a material impact on the Company's financial position or results of operations.


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.

64
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 2:  (Continued)

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 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
December 31, 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)
 
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
U.S. Government sponsored entities
 
$
72,615

 
$
—

 
$
72,615

 
$
—

Mortgage-backed investments
 
190,563

 
—

 
190,563

 
—

Obligations of states and political subdivisions
 
71,461

 
—

 
71,461

 
—

Collateralized debt obligations
 
946

 
—

 
—

 
946

Other debt securities
 
12,977

 
—

 
12,977

 
—

Total securities available for sale
 
$
348,562

 
$
—

 
$
347,616

 
$
946

Mortgage derivative assets
 
317

 
—

 
—

 
317

 
 
$
348,879

 
$
—

 
$
347,616

 
$
1,263

 
 
 
 
 
 
 
 
 
Interest rate swap liability
 
$
2,484

 
$
—

 
$
—

 
$
2,484

Mortgage derivative liabilities
 
126

 
—

 
—

 
126

 
 
$
2,610

 
$
—

 
$
—

 
$
2,610


 
 
 
 
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


65
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



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.

66
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 2:  (Continued)

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

 
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
(Dollars in thousands)
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
Beginning Balance
 
$
819

 
$
(22
)
 
$
(1,834
)
 
$
934

 
$
218

 
$
817

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

 
 

 
 

 
 

Other-than-temporary impairment included in earnings
 
(29
)
 
—

 
—

 
(631
)
 
—

 
—

Other-than-temporary impairment (included in) transferred from other comprehensive income
 
21

 
—

 
—

 
263

 
—

 
—

Other gains/losses included in other comprehensive income
 
135

 
—

 
(1,263
)
 
253

 
—

 
(3,171
)
Net swap settlement recorded
 
—

 
—

 
613

 
—

 
—

 
520

IRLC and FSA issuances
 
—

 
1,365

 
—

 
—

 
398

 
—

IRLC and FSA expirations and fair value changes included in earnings
 
—

 
(566
)
 
—

 
—

 
(398
)
 
—

IRLC transfers into closed loans/FSA transferred on sales
 
—

 
(586
)
 
—

 
—

 
(240
)
 
—

Ending Balance
 
$
946

 
$
191

 
$
(2,484
)
 
$
819

 
$
(22
)
 
$
(1,834
)
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
 
$
(29
)
 
$
—

 
$
(613
)
 
$
(631
)
 
$
—

 
$
(520
)

The following table reports the activity for 2010 in assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs.
 
 
Year Ended December 31, 2010
(Dollars in thousands)
 
Collateralized Debt Obligations
 
Mortgage Derivatives
 
Interest Rate Swap
Beginning Balance
 
$
1,080

 
$
84

 
$
—

Total gains or losses (realized/unrealized):
 
 

 
 

 
 

Other-than-temporary impairment included in earnings
 
(403
)
 
—

 
—

Other-than-temporary impairment included in other comprehensive income
 
(32
)
 
—

 
—

Other gains/losses included in other comprehensive income
 
289

 
—

 
817

Net swap settlement recorded
 
—

 
—

 
—

IRLC and FSA issuances
 
—

 
702

 
—

IRLC and FSA expirations and fair value changes included in earnings
 
—

 
(188
)
 
—

IRLC transfers into closed loans/FSA transferred on sales
 
—

 
(380
)
 
—

Ending Balance
 
$
934

 
$
218

 
$
817

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
 
$
(403
)
 
$
—

 
$
—


67
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



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)
 
December 31, 2012
 
Techniques
 
Inputs
 
Range
 
Average
Collateralized debt obligations
 
$
946

 
Discounted cash flow
 
Discount margin
Default rates
 
15.00% - 20.00%
0.25% - 0.98%

 
17.30%
0.45%

Mortgage interest rate lock agreements
 
86

 
Discounted cash flow
 
Pull-through rates
 
85.00
%
 
85.00
%
Mortgage forward sale agreements
 
105

 
Consensus pricing
 
Pull-through rates
 
85.00
%
 
85.00
%
Interest rate swap
 
(2,484
)
 
Discounted cash flow
 
Discount rate
 
0.31% - 0.83%

 
0.52
%

Collateralized debt obligations: The discount margins for the collateralized debt obligations are the margins 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 December 31, 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)
 
12/31/12 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
 
$
20,815

 
$
—

 
$
—

 
$
20,815

Loan foreclosures
 
2,562

 
—

 
—

 
2,562

Other real estate
 
12,771

 
—

 
—

 
12,771

(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.




68
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



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 tables summarize assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010 , 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)
 
12/31/10 (a)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Impaired loans
 
$
27,335

 
$
—

 
$
—

 
$
27,335

Loan foreclosures
 
5,013

 
—

 
—

 
5,013

Other real estate
 
12,498

 
—

 
—

 
12,498


(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.

69
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 2:  (Continued)

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)
 
December 31, 2012
 
Techniques
 
Inputs
 
Range
 
Average
Impaired loans
 
$
20,815

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$1 thousand -
$956 thousand
 
$96 thousand
Loan foreclosures
 
2,562

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$2 thousand - $292 thousand
 
$97 thousand
Other real estate
 
12,771

 
Appraisals from comparable properties
 
Adjustments for market conditions since appraisal
 
$1 thousand - $631 thousand
 
$95 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.

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

(Dollars in thousands)
2012
 
2011
 
2010
Impaired loans (a)
$
9,259

 
$
8,303

 
$
6,550

Loan foreclosures (b)
2,516

 
4,892

 
4,080

Other real estate (c)
3,534

 
5,093

 
2,323


(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.

70
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



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 December 31, 2012 and December 31, 2011 :
 
 
 
 
 
 
Fair Value Measurements at
December 31, 2012, Using
 
 
 
 
Quoted Prices In Active Markets For Identical Assets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
 
December 31, 2012
 
 
 
(Dollars in thousands)
 
Carrying
 
Estimated
 
 
 
 
 
Amount
 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments
 
$
159,124

 
$
159,124

 
$
159,124

 
$
—

 
$
—

Securities available for sale
 
348,562

 
348,562

 
—

 
347,616

 
946

Loans held for sale
 
21,014

 
21,398

 
—

 
—

 
21,398

Loans held for investment
 
957,981

 
860,071

 
—

 
—

 
860,071

Agency accounts receivable
 
151

 
151

 
151

 
—

 
—

Accrued interest receivable
 
5,683

 
5,683

 
7

 
1,682

 
3,994

Nonmarketable equity investments
 
2,201

 
2,201

 
—

 
—

 
2,201

Investments in unconsolidated VIEs
 
3,136

 
3,136

 
—

 
—

 
3,136

Mortgage derivative assets
 
317

 
317

 
—

 
—

 
317

Financial liabilities:
 
 

 
 

 
 
 
 
 
 
Noninterest-bearing deposits
 
276,295

 
276,295

 
276,295

 
—

 
—

NOW, MMDA and savings deposits
 
755,675

 
755,674

 
755,674

 
—

 
—

Certificates of deposit
 
370,705

 
377,459

 
—

 
—

 
377,459

Short-term borrowings
 
3,720

 
3,720

 
3,720

 
—

 
—

Other borrowings
 
36,007

 
37,441

 
—

 
—

 
37,441

Junior subordinated debt
 
30,928

 
25,795

 
—

 
—

 
25,795

Agency accounts payable
 
612

 
612

 
612

 
—

 
—

Accrued interest payable
 
661

 
661

 
23

 
—

 
638

Mortgage derivative liabilities
 
126

 
126

 
—

 
—

 
126

Other financial instruments:
 
 

 
 

 
 
 
 
 
 
Commitments to extend credit and letters of credit
 
(3
)
 
(346
)
 
—

 
—

 
(346
)
Interest rate swap
 
(2,484
)
 
(2,484
)
 
—

 
—

 
(2,484
)

















71
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 2:  (Continued)
 
 
December 31, 2011
(Dollars in thousands)
 
Carrying Amount
 
Estimated Fair Value
Financial assets:
 
 
 
 
Cash and short-term investments
 
$
104,367

 
$
104,367

Securities available for sale
 
320,774

 
320,774

Loans held for sale
 
26,073

 
27,053

Loans held for investment
 
981,387

 
921,351

Agency accounts receivable
 
217

 
217

Accrued interest receivable
 
6,122

 
6,122

Nonmarketable equity investments
 
7,380

 
7,380

Investments in unconsolidated VIEs
 
3,425

 
3,425

Mortgage derivative assets
 
269

 
269

Financial liabilities:
 
 
 
 
Noninterest-bearing deposits
 
231,718

 
231,718

NOW, MMDA and savings deposits
 
707,798

 
707,798

Certificates of deposit
 
431,947

 
439,518

Short-term borrowings
 
4,398

 
4,398

Other borrowings
 
43,001

 
45,193

Junior subordinated debt
 
30,928

 
25,204

Agency accounts payable
 
641

 
641

Accrued interest payable
 
1,023

 
1,023

Mortgage derivative liabilities
 
291

 
291

Other financial instruments:
 
 
 
 
Commitments to extend credit and letters of credit
 
(4
)
 
(320
)
Interest rate swap
 
(1,834
)
 
(1,834
)

The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:

Cash and due from banks, interest-bearing deposits with banks and Federal funds sold are valued at their carrying amounts which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments.

Securities available for sale are predominantly valued based on prices obtained from an independent nationally recognized pricing service and market yield matrices. An external pricing service is used to electronically provide prices by CUSIP number. These prices include exchange quoted prices, dealer quoted prices and prices derived from market yields published by specialized financial database providers. The price per instrument provided by the pricing service is used and not adjusted. Typically, all securities except for some small municipal issues and the collateralized debt obligations are priced by the primary external provider. For issues that are not priced by the primary provider, we use a third-party value provided by a broker-dealer affiliate of a correspondent bank. The broker-dealer’s valuation system uses prices provided by (1) the same external pricing service that the Company uses, (2) Standard & Poor’s, (3) matrix pricing with market yield inputs provided by Bloomberg and a municipal securities market data provider and (4) the broker-dealer’s trading staff. Any quotes provided by a broker-dealer are usually non-binding. However, the Company rarely uses solicited broker-dealer quotes to price any of its securities. The broker-dealer prices all municipal securities through its pricing matrix. At December 31, 2012 , the only securities that were not priced by the primary provider were 10 municipal bonds representing 5 issuers and the collateralized debt obligations. The broker-dealer’s matrix prices were used for the municipal securities and a third-party provider’s modeled prices were used for the collateralized debt obligations (CDOs).

CDOs are valued by an external party using a model. The model inputs are (1) discount margins based on current market activity and (2) cash flows based upon contractual amounts adjusted for expected defaults, expected deferrals and expected prepayments. Expected defaults and deferrals are determined through a credit analysis of and risk rating assignment to each obligor of the collateral that funds the investment vehicles. Most of these inputs are not directly observable in the market, resulting in the fair values being classified as Level 3 valuations within the fair value accounting hierarchy.

The primary method of validation of investment security values is the comparison of the prices that are received from the primary pricing service provider with the prices that are used in the broker-dealer’s valuation system. The fair values used for selected agency, mortgage-backed and corporate securities are also periodically checked by comparing them to prices obtained from Bloomberg. The CDOs are validated by comparing the fair values with market activity of similar instruments. Management reviews the documentation provided with the CDO pricing and impairment models to assure that sound valuation methodologies are used and to determine whether or not the significant inputs are reasonable.

72
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 2:  (Continued)

Loans held for sale are valued by discounting the estimated cash flows using current market rates for instruments with similar credit ratings and maturities and adjusting those rates using dealer pricing adjustments for characteristics unique to the borrower’s circumstances or the structuring of the credit.

Loans held for investment are valued by discounting the estimated future cash flows, using rates at which these loans would currently be made to borrowers with similar credit ratings and similar maturities.

Agency accounts receivable are trade receivables of M&F Insurance Group, Inc. These receivables are short-term in nature and therefore the fair value is assumed to be the carrying value. These receivables are carried in other assets in the statement of condition.

Accrued interest receivable is short-term in nature and therefore the fair value is assumed to be the carrying value.

Nonmarketable equity securities are primarily securities of the Federal Home Loan Banks for which the carrying value is estimated to be an accurate approximation of fair value. These equity securities are carried in other assets in the statement of condition.

Investments in unconsolidated VIEs are the Company’s investment in the First M&F Statutory Trust I, which acquired the Company’s junior subordinated debt through funding provided by the issuance of trust preferred securities, and an investment in a low income housing tax credit entity. The investment in the statutory trust depends on the Company’s own cash flows and therefore, the carrying value is an accurate approximation of fair value. The low income housing tax credit investment is a limited partnership interest for which the carrying value is assumed to be a reasonable estimate of its fair value. These investments are carried in other assets in the statement of condition.

Noninterest-bearing deposits do not pay interest and do not have defined maturity dates. Therefore, the carrying value is estimated to be equivalent to fair value for these deposits.

NOW, MMDA and savings deposits pay interest and generally do not have defined maturity dates. Although there are some restrictions on access to certain savings deposits, these restrictions are not expected to have a material effect on the value of the deposits. Therefore, the fair value for NOW, MMDA and savings deposits is estimated to be their carrying value.

Certificates of deposit pay interest and do have defined maturity dates. The fair value of certificates of deposit is estimated by discounting the future cash flows, using current market rates for certificates of deposit of similar maturities.

Short-term borrowings are highly liquid and therefore the net book value of the majority of these financial instruments approximates fair value due to the short term nature of these items.

The fair value of other borrowings, which consist of Federal Home Loan Bank advances and borrowings from correspondent banks is estimated by discounting the future cash flows, using current market rates for borrowings of similar terms and maturities.

Junior subordinated debt is valued by discounting the expected cash flows using a current market rate for similar instruments.

Agency accounts payable are trade payables of M&F Insurance Group, Inc. due to insurance companies. These payables are very short term in nature and therefore the fair value of the payables is estimated to be their carrying value. These payables are carried in other liabilities in the statement of condition.

Accrued interest payable is short term in nature and therefore the fair value is estimated to be the carrying value.

Commitments to extend credit and letters of credit are valued based on the fees charged to enter into similar credit arrangements.

Mortgage origination and sale commitments are considered derivatives and are therefore carried at fair value with the changes in fair value recorded in mortgage banking income. Mortgage-related commitments with positive values are carried in other assets and those with negative values are carried in other liabilities in the statement of condition. Mortgage derivatives are valued using a combination of market discount rates, dealer quotes, estimated servicing values and pull-through rates.

The interest rate swap is being used to hedge the interest cash flows on the Company’s junior subordinated debentures. It is valued using a discounted cash flow methodology with cash flows being estimated from the 3-month LIBOR curve and discount rates derived from the swap curve.

73
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 3:  Investment Securities

The following is a summary of the amortized cost and fair value of securities available for sale at December 31, 2012 and December 31, 2011 :

 
 
 
 
Gross Unrealized
 
 
(Dollars in thousands)
 
Amortized Cost
 
Gains
 
Losses
 
Fair Value
December 31, 2012:
 
 
 
 
 
 
 
 
U.S. Government sponsored entities
 
$
71,645

 
$
993

 
$
23

 
$
72,615

Mortgage-backed investments
 
185,317

 
5,324

 
78

 
190,563

Obligations of states and political subdivisions
 
68,445

 
3,170

 
154

 
71,461

Collateralized debt obligations
 
3,108

 
—

 
2,162

 
946

Other debt securities
 
12,758

 
219

 
—

 
12,977

 
 
$
341,273

 
$
9,706

 
$
2,417

 
$
348,562

December 31, 2011:
 
 

 
 

 
 

 
 

U.S. Government sponsored entities
 
$
58,714

 
$
174

 
$
96

 
$
58,792

Mortgage-backed investments
 
198,832

 
5,016

 
162

 
203,686

Obligations of states and political subdivisions
 
51,763

 
2,459

 
80

 
54,142

Collateralized debt obligations
 
3,137

 
—

 
2,318

 
819

Other debt securities
 
3,444

 
25

 
134

 
3,335

 
 
$
315,890

 
$
7,674

 
$
2,790

 
$
320,774


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, 2012 and December 31, 2011 . Securities on which we have taken only credit-related other-than-temporary-impairment (OTTI) write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the amortized cost basis and not the period of time since the OTTI write-down.

(Dollars in thousands)
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
December 31, 2012:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored entities
 
$
5,478

 
$
23

 
$
—

 
$
—

 
$
5,478

 
$
23

Mortgage-backed investments
 
13,866

 
77

 
880

 
1

 
14,746

 
78

Obligations of states and political subdivisions
 
11,015

 
154

 
—

 
—

 
11,015

 
154

Collateralized debt obligations
 
—

 
—

 
946

 
2,162

 
946

 
2,162

Other debt securities
 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
30,359

 
$
254

 
$
1,826

 
$
2,163

 
$
32,185

 
$
2,417

December 31, 2011:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored entities
 
$
23,734

 
$
96

 
$
—

 
$
—

 
$
23,734

 
$
96

Mortgage-backed investments
 
32,280

 
162

 
—

 
—

 
32,280

 
162

Obligations of states and political subdivisions
 
7,613

 
80

 
—

 
—

 
7,613

 
80

Collateralized debt obligations
 
—

 
—

 
819

 
2,318

 
819

 
2,318

Other debt securities
 
2,317

 
134

 
—

 
—

 
2,317

 
134

 
 
$
65,944

 
$
472

 
$
819

 
$
2,318

 
$
66,763

 
$
2,790


74
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 3:  (Continued)

At December 31, 2012 , there were 4 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 8 mortgage-backed securities with unrealized losses less than 12 months and one mortgage-backed security with unrealized losses more than 12 months. There were 30 municipal securities with unrealized losses less than 12 months. The unrealized losses associated with the U.S. government sponsored entity and mortgage-backed securities were primarily driven by changes in market rates and not due to the credit quality of the securities. The mortgage-backed security with an unrealized loss in excess of 12 months is expected to fully recover without being sold. The municipal securities that were in unrealized loss positions for less than a year were in unrealized loss positions due primarily to fluctuations in interest rates and market liquidity. A review of the municipal securities portfolio did not indicate any credit deterioration.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. Management has evaluated these instruments for impairment as of each quarter end within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required management to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. Credit downgrades of the beneficial interests are also factored in when determining whether the impairments in these securities are other-than-temporary. The discounted cash flow estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities (the CDO collateral) of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations is determined based on an analysis of the financial condition of the banks. Generally, the same factors that result in credit rating downgrades of the beneficial interests also result in negative adjustments to the expected cash flows of the underlying collateral. This analysis results in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests if certain collateral coverage ratios are not maintained, with the remaining amounts eventually flowing through to the interests owned by the Company. Based on this type of analysis for each beneficial interest issuer, the cash flows of each of the five beneficial interests owned by the Company are projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis has resulted in other-than-temporary impairment (OTTI) conditions for all five of the securities since 2008. During 2011 , three of the securities incurred other-than-temporary impairments that resulted in $ 631 thousand in credit-related losses being charged against earnings with the remaining non-credit-related losses being charged to other comprehensive income. During 2012 , one of the securities incurred an other-than-temporary impairment that resulted in $29 thousand in credit-related losses. Management believes that as the economy improves, the deferrals related to the CDO collateral will cure and provide enough cash flows to the CDOs for the Company to recover its adjusted book values.

Management does not intend to sell any investment securities that have unrealized losses before the time that those losses could be recovered. Management has evaluated the investment securities that have unrealized losses within the framework of the Company’s liquidity and capital needs as well as its ability to hold those securities over an extended recovery period. Management’s evaluation involved (1) assessing whether significant future cash outflows would occur that would require the liquidation of securities and (2) determining if the balance sheet would need to be managed or reduced in a way that would require the liquidation of securities to meet regulatory capital ratio requirements. This analysis was performed to determine if it was more likely than not that the investments would have to be sold before their anticipated recoveries. Management determined that it was not more likely than not that the investments would have to be disposed of prior to their anticipated recoveries. In estimating whether there are other-than-temporary impairment losses on debt securities management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows and (4) changes in credit ratings of the issuers.

The following table provides a roll forward of the cumulative activity related to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 
 
 
 
 
Year Ended December 31
(Dollars in thousands)
2012
 
2011
 
2010
Beginning balance
$
1,863

 
$
1,232

 
$
829

OTTI credit losses on previously impaired securities
29

 
631

 
403

Ending balance
$
1,892

 
$
1,863

 
$
1,232


The fair values of our CDOs could decline in the future if the underlying performance of the collateral for the trust preferred CDOs deteriorates and credit enhancements in the form of seniority in the cash flow waterfalls do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that additional OTTI may occur in the future if the economy deteriorates.

75
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 3:  (Continued)

The amortized cost and fair values of debt securities available for sale at December 31, 2012 , 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. Mortgage-backed securities receive monthly payments based on the cash flows of the underlying collateral. Therefore, their stated maturities do not represent the timing of principal amounts received and no maturity distributions are shown for these securities.

(Dollars in thousands )
 
Amortized Cost
 
Fair Value
One year or less
 
$
14,083

 
$
14,187

After one through five years
 
84,622

 
86,754

After five through ten years
 
42,283

 
43,750

After ten years
 
14,968

 
13,308

 
 
155,956

 
157,999

Mortgage-backed investments
 
185,317

 
190,563

 
 
$
341,273

 
$
348,562


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:

 
2012
 
2011
 
Amortized
 
Fair
 
Amortized
 
Fair
(Dollars in thousands)
Cost
 
Value
 
Cost
 
Value
Pledged to secure public and tax deposits
$
181,817

 
$
186,070

 
$
184,739

 
$
188,445

Pledged for Trust account deposits
4,582

 
4,741

 
3,902

 
4,084

Pledged for non-public repurchase agreements
6,565

 
6,981

 
8,049

 
8,458

Pledged for Fed funds purchased lines of credit
1,249

 
1,348

 
1,008

 
1,006

Pledged for interest rate swap
1,496

 
1,520

 
1,500

 
1,505

Pledged for letter of credit obtained
5,733

 
5,876

 
7,837

 
7,924

Pledged to an insurance commissioner
550

 
552

 
548

 
566

Total securities pledged
$
201,992

 
$
207,088

 
$
207,583

 
$
211,988


The following is a summary of gains and losses on securities available for sale:

(Dollars in thousands)
2012
 
2011
 
2010
Proceeds from sales
$
54,988

 
$
114,711

 
$
89,164

 
 
 
 
 
 
Gross realized gains
694

 
2,838

 
2,346

Gross realized losses
(137
)
 
(69
)
 
(91
)
Net gains from sales
$
557

 
$
2,769

 
$
2,255

Gross recognized losses related to the credit component of other-than-temporary impairments
$
29

 
$
631

 
$
403


76
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $736 thousand at December 31, 2012 and $2.045 million at December 31, 2011 :

(Dollars in thousands)
 
December 31,
2012
 
December 31,
2011
Construction and land development loans
 
$
58,745

 
$
69,325

Other commercial real estate loans
 
484,114

 
505,180

Asset-based loans
 
36,679

 
37,540

Other commercial loans
 
116,871

 
117,790

Home equity loans
 
37,736

 
37,024

Other 1-4 family residential loans
 
200,992

 
186,815

Consumer loans
 
40,336

 
42,666

Total loans
 
$
975,473

 
$
996,340


The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $16.703 million and $18.005 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at December 31, 2012 and December 31, 2011 respectively. Approximately $145.064 million and $216.201 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at December 31, 2012 and December 31, 2011 , respectively.

During 2012 the Company purchased $4.849 million in agricultural loan participations, $ 5.871 million in commercial real estate participations and $ 16.000 million in commercial loan participations. During 2011 the Company purchased $ 31.144 million in commercial loan participations, $ 10.154 million in agricultural loan participations and $ 820 thousand in commercial real estate loan participations.

During 2012 the Company transferred $ 8.003 million of mortgage loans from held-for-sale status into the portfolio of loans held for investment. During 2011 the Company transferred $454 thousand of mortgage loans from held-for-sale status into the portfolio of loans held for investment.

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 collectiblity at the time of the transaction.  A summary of such outstanding loans follows:

(Dollars in thousands)
2012
 
2011
Loans outstanding at January 1
$
1,791

 
$
4,485

New loans and advances
92

 
13,341

Repayments
(1,285
)
 
(15,879
)
Retirements
(18
)
 
(156
)
Loans outstanding at December 31
$
580

 
$
1,791


77
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2012 :

(Dollars in thousands)
 
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
Construction and land development loans
 
$
369

 
$
26

 
$
817

 
$
1,212

 
$
57,533

 
$
58,745

 
$
—

Other commercial real estate loans
 
1,255

 
294

 
3,647

 
5,196

 
478,918

 
484,114

 
66

Asset based loans
 
—

 
—

 
—

 
—

 
36,679

 
36,679

 
—

Other commercial loans
 
366

 
50

 
489

 
905

 
115,966

 
116,871

 
64

Home equity loans
 
49

 
—

 
31

 
80

 
37,656

 
37,736

 
31

Other 1-4 family residential loans
 
1,329

 
584

 
791

 
2,704

 
198,288

 
200,992

 
137

Consumer loans
 
217

 
60

 
23

 
300

 
40,036

 
40,336

 
23

Total
 
$
3,585

 
$
1,014

 
$
5,798

 
$
10,397

 
$
965,076

 
$
975,473

 
$
321


The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2011 :

(Dollars in thousands)
 
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
Construction and land development loans
 
$
603

 
$
—

 
$
4,172

 
$
4,775

 
$
64,550

 
$
69,325

 
$
72

Other commercial real estate loans
 
2,194

 
679

 
9,792

 
12,665

 
492,515

 
505,180

 
279

Asset based loans
 
—

 
—

 
—

 
—

 
37,540

 
37,540

 
—

Other commercial loans
 
546

 
442

 
419

 
1,407

 
116,383

 
117,790

 
50

Home equity loans
 
121

 
37

 
141

 
299

 
36,725

 
37,024

 
—

Other 1-4 family residential loans
 
2,978

 
303

 
981

 
4,262

 
182,553

 
186,815

 
174

Consumer loans
 
214

 
67

 
41

 
322

 
42,344

 
42,666

 
27

Total
 
$
6,656

 
$
1,528

 
$
15,546

 
$
23,730

 
$
972,610

 
$
996,340

 
$
602


78
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

Loans are placed into nonaccrual status when, in management's opinion, the borrowers may be unable to meet their payment obligations, which typically occurs when principal or interest payments are more than 90 days past due. The following table presents a summary of the nonaccrual status of loans by type at December 31, 2012 and December 31, 2011 and other nonperforming assets:

(Dollars in thousands)
 
December 31,
2012
 
December 31, 
2011
Construction and land development loans
 
$
817

 
$
4,398

Other commercial real estate loans
 
4,244

 
9,937

Asset based loans
 
81

 
—

Other commercial loans
 
694

 
913

Home equity loans
 
72

 
474

Other 1-4 family residential loans
 
1,524

 
1,422

Consumer loans
 
12

 
33

Total nonaccrual loans
 
$
7,444

 
$
17,177

Other real estate owned
 
25,970

 
36,952

Total nonperforming credit-related assets
 
$
33,414

 
$
54,129

 
 
 
 
 
Accruing loans past due 90 days or more
 
$
321

 
$
602

Loans restructured and in compliance with modified terms
 
$
21,800

 
$
19,662


The Company applies internal risk ratings to all loans. The risk ratings range from 10, which is the highest quality rating, to 70, which indicates an impending charge-off. The following definitions apply to the internal risk ratings:

Risk rating 10 – Excellent:

Commercial – Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

Consumer – This grade is reserved for loans secured by cash collateral on deposit at the Bank with no risk of principal deterioration.

Risk rating 20 – Strong:

Commercial and Consumer – This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

Risk rating 30 – Good:

Commercial – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and they: (1) conform to Bank policy, (2) conform to underwriting standards and (3) conform to product guidelines.

79
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

Risk rating 31 – Moderate:

Commercial – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions – any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors, (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Consumer loans exhibiting this grade may have up to two mitigated guideline tolerances or exceptions.

Risk rating 32 – Fair:

Commercial – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics: (1) additional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank – although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors, (2) unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time – repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance and (3) marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Consumer loans exhibiting this grade generally have three or more mitigated guideline tolerances or exceptions.

Risk rating 40 – Special Mention:

Commercial – Special Mention loans include the following characteristics: (1) loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Consumer - Special Mention loans include the following characteristics: (1) loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Risk rating 50 – Substandard:

Commercial and Consumer – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower’s declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

80
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

Risk rating 60 – Doubtful:

Commercial and Consumer – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: (1) injection of capital, (2) alternative financing and (3) liquidation of assets or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been considered for non-accrual status, and the repayment schedule is questionable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

Risk rating 70 – Loss:

Commercial and Consumer – Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets should be charged against the Reserve for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

The following table presents a summary of loans by credit risk rating at December 31, 2012 .

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Construction
 
Other Commercial Real Estate
 
Asset-Based
 
Other Commercial
10 and 20
 
$
—

 
$
—

 
$
—

 
$
10,329

30-32
 
41,560

 
394,904

 
25,830

 
101,937

40
 
6,847

 
62,387

 
10,572

 
3,253

50
 
9,738

 
26,823

 
277

 
1,280

60
 
600

 
—

 
—

 
72

Total
 
$
58,745

 
$
484,114

 
$
36,679

 
$
116,871


(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Home Equity
 
Other 1-4 
Family
 
Consumer
 
Total
10 and 20
 
$
—

 
$
58

 
$
13,161

 
$
23,548

30-32
 
35,848

 
184,703

 
26,439

 
811,221

40
 
733

 
9,529

 
602

 
93,923

50
 
1,155

 
6,613

 
132

 
46,018

60
 
—

 
89

 
2

 
763

Total
 
$
37,736

 
$
200,992

 
$
40,336

 
$
975,473

 

81
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table presents a summary of loans by credit risk rating at December 31, 2011 .

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Construction
 
Other Commercial Real Estate
 
Asset-Based
 
Other Commercial
10 and 20
 
$
—

 
$
—

 
$
—

 
$
11,085

30-32
 
45,982

 
406,498

 
29,296

 
103,359

40
 
5,185

 
57,912

 
7,096

 
1,802

50
 
13,059

 
40,770

 
1,148

 
1,466

60
 
5,099

 
—

 
—

 
78

Total
 
$
69,325

 
$
505,180

 
$
37,540

 
$
117,790


(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Home Equity
 
Other 1-4 
Family
 
Consumer
 
Total
10 and 20
 
$
—

 
$
119

 
$
13,486

 
$
24,690

30-32
 
35,824

 
172,182

 
28,471

 
821,612

40
 
585

 
8,205

 
544

 
81,329

50
 
615

 
6,216

 
162

 
63,436

60
 
—

 
93

 
3

 
5,273

Total
 
$
37,024

 
$
186,815

 
$
42,666

 
$
996,340


Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of the collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

During 2011 the Company changed the way that it calculated the historical loss rates that were applied to the various risk pools of loans in determining the allowance for loan losses for loans not individually tested for impairment. Loss rates are calculated by loan type including the major categories of construction and land development, 1-4 family residential, commercial real estate secured, commercial and industrial and consumer loans. The Company has historically used a conservatively adjusted thirteen year historical period for loss rates, believing that this time frame incorporated a broader range of economic and business cycles than a shorter time frame and gave a better estimate of expected losses. In September 2011 , management began using a shorter historical period of five years, calculating a five year average loss rate by class of loan. This change was prompted by management and regulatory concerns about the current economic environment, observed industry changes and trends as well as management's view of the current business cycle and environment. Because of a conservative treatment of the former longer historic loss rate period - primarily by adjusting the thirteen year average loss rate by two standard deviations in an attempt to include low probability events in the loss rate - there was no material difference between it and the new five year convention. The five year convention is a straight historical average which naturally includes recent high-loss years. Given the immaterial difference in the two calculations, no adjustment was required to the provision for loan losses. Management does believe that going forward the five year historical loss calculation will better reflect the risks inherent in the recent and current credit environment and that it is more appropriate than an even shorter historical period (e.g., three years) because a shorter period would too heavily weight improved periods and too quickly remove recent periods that included larger losses caused by factors that could still reasonably exist latent in the makeup of the loan class.

The Company uses environmental factors to adjust loss rates to reflect economic conditions and other circumstances that imply risk of loss in the current environment that is not necessarily reflected in the historical loss rates. At December 31, 2011 the Company adjusted the five year loss rates by an economic environmental factor based on recessionary conditions and an illiquid market for undeveloped real estate collateral. The loss rate applied to commercial real estate loans was adjusted upward by 10 basis points. The loss rate applied to commercial, agricultural and municipal loans was adjusted upward by 50 basis points given their dependency on cash flows which are at risk absent a growing economy.

82
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

At December 31, 2012 the Company added environmental factors of approximately 15 basis points to commercial real estate loans and 35 basis points to commercial loans for economic uncertainty in the small business environment, reflective of slow sales growth in the Company's small business markets.

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2012 :

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Construction and land development loans
$
6,903

 
$
9,257

 
$
—

 
$
10,510

 
$
401

Other commercial real estate loans
27,156

 
27,353

 
—

 
30,478

 
1,506

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
1,093

 
1,254

 
—

 
1,254

 
54

Home equity loans
1,084

 
1,084

 
—

 
1,141

 
43

Other 1-4 family residential loans
6,577

 
6,687

 
—

 
6,498

 
292

Consumer loans
94

 
97

 
—

 
155

 
12

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Construction and land development loans
$
3,435

 
$
3,435

 
$
2,036

 
$
3,354

 
$
162

Other commercial real estate loans
14,766

 
16,177

 
2,421

 
14,906

 
590

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
259

 
259

 
209

 
457

 
16

Home equity loans
72

 
72

 
36

 
75

 
10

Other 1-4 family residential loans
1,920

 
1,920

 
496

 
1,740

 
70

Consumer loans
40

 
40

 
40

 
67

 
3

Total:
 

 
 

 
 

 
 

 
 

Construction and land development loans
$
10,338

 
$
12,692

 
$
2,036

 
$
13,864

 
$
563

Other commercial real estate loans
41,922

 
43,530

 
2,421

 
45,384

 
2,096

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
1,352

 
1,513

 
209

 
1,711

 
70

Home equity loans
1,156

 
1,156

 
36

 
1,216

 
53

Other 1-4 family residential loans
8,497

 
8,607

 
496

 
8,238

 
362

Consumer loans
134

 
137

 
40

 
222

 
15



83
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2011 :

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Construction and land development loans
$
9,539

 
$
13,915

 
$
—

 
$
10,665

 
$
419

Other commercial real estate loans
33,048

 
36,117

 
—

 
33,597

 
1,361

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
433

 
460

 
—

 
1,920

 
83

Home equity loans
159

 
159

 
—

 
291

 
4

Other 1-4 family residential loans
4,466

 
4,732

 
—

 
4,476

 
229

Consumer loans
128

 
154

 
—

 
147

 
14

Loans with a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Construction and land development loans
$
8,620

 
$
11,294

 
$
1,750

 
$
10,991

 
$
356

Other commercial real estate loans
7,722

 
8,471

 
894

 
10,005

 
314

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
1,111

 
1,111

 
485

 
2,099

 
91

Home equity loans
456

 
456

 
166

 
457

 
7

Other 1-4 family residential loans
1,843

 
1,843

 
397

 
1,848

 
93

Consumer loans
37

 
37

 
37

 
50

 
3

Total:
 
 
 
 
 
 
 
 
 
Construction and land development loans
$
18,159

 
$
25,209

 
$
1,750

 
$
21,656

 
$
775

Other commercial real estate loans
40,770

 
44,588

 
894

 
43,602

 
1,675

Asset based loans
—

 
—

 
—

 
—

 
—

Other commercial loans
1,544

 
1,571

 
485

 
4,019

 
174

Home equity loans
615

 
615

 
166

 
748

 
11

Other 1-4 family residential loans
6,309

 
6,575

 
397

 
6,324

 
322

Consumer loans
165

 
191

 
37

 
197

 
17


84
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2010 :

(Dollars in thousands)
 
 
 
 
 
 
 
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
Construction and land development loans
$
20,531

 
$
29,004

 
$
—

 
$
20,641

Other commercial real estate loans
45,611

 
49,868

 
—

 
46,488

Asset based loans
—

 
—

 
—

 
—

Other commercial loans
7,028

 
8,049

 
—

 
7,288

Home equity loans
508

 
508

 
—

 
513

Other 1-4 family residential loans
4,695

 
4,961

 
—

 
4,721

Consumer loans
474

 
485

 
—

 
505

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

Construction and land development loans
$
12,900

 
$
13,921

 
$
2,871

 
$
12,936

Other commercial real estate loans
8,716

 
8,716

 
1,582

 
8,940

Asset based loans
—

 
—

 
—

 
—

Other commercial loans
1,268

 
1,419

 
809

 
1,387

Home equity loans
45

 
45

 
45

 
45

Other 1-4 family residential loans
2,304

 
2,304

 
765

 
2,317

Consumer loans
129

 
129

 
60

 
138

Total:
 

 
 

 
 

 
 
Construction and land development loans
$
33,431

 
$
42,925

 
$
2,871

 
$
33,577

Other commercial real estate loans
54,327

 
58,584

 
1,582

 
55,428

Asset based loans
—

 
—

 
—

 
—

Other commercial loans
8,296

 
9,468

 
809

 
8,675

Home equity loans
553

 
553

 
45

 
558

Other 1-4 family residential loans
6,999

 
7,265

 
765

 
7,038

Consumer loans
603

 
614

 
60

 
643


85
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for 2012 by loan category:

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
Other CRE
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
 
$
4,131

 
$
4,073

 
$
3,347

 
$
2,607

 
$
795

 
$
—

 
$
14,953

Provision charged to expense
 
1,895

 
4,693

 
547

 
1,067

 
318

 
—

 
8,520

Losses charged off
 
(2,052
)
 
(3,357
)
 
(786
)
 
(1,191
)
 
(754
)
 
—

 
(8,140
)
Recoveries
 
935

 
456

 
158

 
403

 
207

 
—

 
2,159

Balance, end of year
 
$
4,909

 
$
5,865

 
$
3,266

 
$
2,886

 
$
566

 
$
—

 
$
17,492

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
2,036

 
$
2,421

 
$
209

 
$
532

 
$
40

 
$
—

 
$
5,238

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
2,873

 
$
3,444

 
$
3,057

 
$
2,354

 
$
526

 
$
—

 
$
12,254

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
58,745

 
$
484,114

 
$
153,550

 
$
238,728

 
$
40,336

 
$
—

 
$
975,473

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
10,338

 
$
41,922

 
$
1,352

 
$
9,653

 
$
134

 
$
—

 
$
63,399

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
48,407

 
$
442,192

 
$
152,198

 
$
229,075

 
$
40,202

 
$
—

 
$
912,074

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—






86
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes activity in the allowance for loan losses for 2011 by loan category:

(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
Other CRE
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
 
$
3,942

 
$
2,763

 
$
4,442

 
$
3,701

 
$
1,177

 
$
—

 
$
16,025

Provision charged to expense
 
2,159

 
5,308

 
971

 
904

 
378

 
—

 
9,720

Losses charged off
 
(2,935
)
 
(4,446
)
 
(2,534
)
 
(2,142
)
 
(952
)
 
—

 
(13,009
)
Recoveries
 
965

 
448

 
468

 
144

 
192

 
—

 
2,217

Balance, end of year
 
$
4,131

 
$
4,073

 
$
3,347

 
$
2,607

 
$
795

 
$
—

 
$
14,953

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
1,750

 
$
894

 
$
485

 
$
563

 
$
37

 
$
—

 
$
3,729

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
2,381

 
$
3,179

 
$
2,862

 
$
2,044

 
$
758

 
$
—

 
$
11,224

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
69,325

 
$
505,180

 
$
155,330

 
$
223,839

 
$
42,666

 
$
—

 
$
996,340

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
18,159

 
$
40,770

 
$
1,544

 
$
6,924

 
$
165

 
$
—

 
$
67,562

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
51,166

 
$
464,410

 
$
153,786

 
$
216,915

 
$
42,501

 
$
—

 
$
928,778

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—





87
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes the balance in the allowance for 2010 by loan category:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
Other CRE
 
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
 
$
7,416

 
$
5,959

 
$
5,893

 
$
3,407

 
$
1,339

 
$
—

 
$
24,014

Provision charged to expense
 
693

 
4,164

 
1,885

 
2,027

 
451

 
—

 
9,220

Losses charged off
 
(5,471
)
 
(7,854
)
 
(3,617
)
 
(1,854
)
 
(859
)
 
—

 
(19,655
)
Recoveries
 
1,304

 
494

 
281

 
121

 
246

 
—

 
2,446

Balance, end of year
 
$
3,942

 
$
2,763

 
$
4,442

 
$
3,701

 
$
1,177

 
$
—

 
$
16,025

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
2,871

 
$
1,582

 
$
809

 
$
810

 
$
60

 
$
—

 
$
6,132

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
1,071

 
$
1,181

 
$
3,633

 
$
2,891

 
$
1,117

 
$
—

 
$
9,893

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending balance
 
$
89,093

 
$
557,638

 
$
133,226

 
$
235,489

 
$
44,700

 
$
—

 
$
1,060,146

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
 
$
33,431

 
$
54,327

 
$
8,296

 
$
7,552

 
$
603

 
$
—

 
$
104,209

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
55,662

 
$
503,311

 
$
124,930

 
$
227,937

 
$
44,097

 
$
—

 
$
955,937

Ending balance:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans acquired with deteriorated credit quality
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—


Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s restructured loan portfolio as of December 31, 2012 and 2011 :

(Dollars in thousands )
 
December 31, 2012
 
December 31, 2011
 
 
Recorded Balance
 
Allowance
 
Recorded Balance
 
Allowance
Restructured loans with an allowance:
 
 
 
 
 
 
 
 
Construction and land development loans
 
$
—

 
$
—

 
$
136

 
$
61

Other commercial real estate loans
 
11,038

 
1,082

 
4,018

 
320

Other commercial loans
 
—

 
—

 
387

 
117

Other 1-4 family residential loans
 
59

 
12

 
199

 
76

Restructured loans without an allowance:
 
 

 
 

 
 

 
 

Construction and land development loans
 
1,719

 
—

 
2,725

 
—

Other commercial real estate loans
 
11,115

 
—

 
17,002

 
—

Other commercial loans
 
308

 
—

 
119

 
—

Other 1-4 family residential loans
 
571

 
—

 
1,194

 
—

Total restructured loans
 
$
24,810

 
$
1,094

 
$
25,780

 
$
574


At December 31, 2012 , there were no available credit commitments for restructured loans. At December 31, 2011 , there were $ 356 thousand in available credit commitments for construction and land development restructured loans.

88
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table summarizes the activity for troubled debt restructurings that occurred during 2012 .

(Dollars in thousands )
 
Number of Loans Modified
 
 Pre Modification Balance
 
Post Modification Balance
Interest Rate Modifications:
 
 
 
 
 
 
Other 1-4 family residential loans
 
1
 
$
45

 
$
44

 
 
 
 
 
 
 
Principal Forgiveness:
 
 
 
 
 
 
Other commercial real estate loans
 
1
 
$
8,724

 
$
7,313

 
 

 

 

Total loans restructured
 
2
 
$
8,769

 
$
7,357


The following table summarizes the activity for troubled debt restructurings that occurred during 2011 .

(Dollars in thousands )
 
Number of Loans Modified
 
 Pre Modification Balance
 
Post Modification Balance
Interest Rate Modifications:
 
 
 
 
 
 
Construction and land development loans
 
3
 
$
1,125

 
$
1,125

Other commercial real estate loans
 
3
 
674

 
672

Other commercial loans
 
1
 
10

 
10

Other 1-4 family residential loans
 
3
 
157

 
157

Total rate modifications
 
10
 
$
1,966

 
$
1,964

 
 
 
 
 
 
 
Term Extensions and Renewals:
 
 
 
 
 
 
Construction and land development loans
 
6
 
$
3,685

 
$
3,483

Other commercial real estate loans
 
7
 
9,694

 
9,663

Other commercial loans
 
1
 
1,797

 
1,747

Other 1-4 family residential loans
 
3
 
537

 
536

Total extensions and renewals
 
17
 
$
15,713

 
$
15,429

Total loans restructured
 
27
 
$
17,679

 
$
17,393


89
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 4:  (Continued)

The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during 2012 , that were initially restructured within the prior twelve months.

(Dollars in thousands )
Number of Loans
 
Amortized Cost
Construction and land development loans
1

 
$
295

Other commercial loans
1

 
335

Other 1-4 family residential loans
3

 
342

Total subsequent defaults
5

 
$
972


The construction and land development loan for 2012 was a foreclosure. Approximately $152 thousand of other 1-4 family residential loans for 2012 were foreclosures. The remaining defaults were 90 day delinquencies and all defaults were term extensions and renewals.

The following table presents loans modified under the terms of a TDR that became 90 days or more delinquent or were foreclosed on during 2011 , that were initially restructured within the prior twelve months.

(Dollars in thousands )
Number of Loans
 
Amortized Cost
Construction and land development loans
2

 
$
1,951

Other commercial real estate loans
5

 
6,655

Other 1-4 family residential loans
4

 
306

Total subsequent defaults
11

 
$
8,912


The defaults for construction and land development loans for 2011 defaults were foreclosures. Approximately $1.118 million of the defaults for other commercial real estate loans for 2011 were foreclosures. The remaining balances were subsequent 90 day delinquencies.


Note 5:  Bank Premises and Equipment

The following is a summary of bank premises and equipment at December 31, 2012 and 2011 :

(Dollars in thousands)
2012
 
2011
Land
$
12,365

 
$
12,365

Buildings
36,415

 
36,293

Furniture, fixtures and equipment
20,786

 
19,901

Leasehold improvements
604

 
842

Construction in progress
131

 
131

 
70,301

 
69,532

Less accumulated depreciation and amortization
33,037

 
31,543

 
$
37,264

 
$
37,989


Amounts charged to operating expenses for depreciation and amortization of bank premises and equipment were $ 1.913 million in 2012 , $ 2.090 million in 2011 , and $ 2.310 million in 2010 .

90
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 5:  (Continued)

Rent expense applicable to operating leases was as follows for the years ended December 31:

(Dollars   in thousands )
2012
 
2011
 
2010
Buildings and office space
$
486

 
$
665

 
$
581

Computer equipment
—

 
13

 
284

Other equipment and autos
167

 
163

 
184

 
653

 
841

 
1,049

Rental income
(46
)
 
(41
)
 
(42
)
Net rent expense
$
607

 
$
800

 
$
1,007


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, 2012 , are as follows:

(Dollars   in thousands )
 
2014
$
403

2015
310

2016
238

2017
174

2018
110

After 2018
24

Total minimum lease payments
$
1,259



Note 6:  Other Intangible Assets

Following is a summary of intangible assets, net of accumulated amortization, included in the consolidated statements of condition:

Core Deposit Intangible
 
Twelve Months Ended
(Dollars in thousands)
December 31
 
2012
 
2011
Beginning Balance
$
4,586

 
$
5,013

Amortization expense
(427
)
 
(427
)
Ending Balance
$
4,159

 
$
4,586

 
 
 
 
Estimated future amortization expense
 

 
 

2013
$
427

 
 
2014
427

 
 
2015
427

 
 
2016
427

 
 
2017
427

 
 

91
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 6:  (Continued)

The following table summarizes the gross carrying amounts and accumulated amortization balances of amortizing intangible assets as of December 31, 2012 , and 2011 :

 
 
Core Deposit Intangible
 
 
December 31
(Dollars in thousands)
 
2012
 
2011
Gross carrying amount
 
$
7,060

 
$
7,060

Accumulated amortization
 
(2,901
)
 
(2,474
)
Net carrying amount
 
$
4,159

 
$
4,586


Intangible assets with a determinable useful life are amortized over their respective useful lives. Core deposit intangibles have lives of 16 to 20 years with a remaining average life of 10.0 years at December 31, 2012 .

Amortization expense for intangible assets having determinable useful lives amounted to $ 427 thousand in 2012 , $ 427 thousand in 2011 , and $ 426 thousand in 2010 .


Note 7:  Other Assets

The following is a summary of other assets at December 31, 2012 , and 2011 :

( Dollars  i n thousands )
2012
 
2011
Federal Home Loan Bank stock
$
2,201

 
$
7,380

Income taxes receivable
175

 
175

Deferred income tax
10,533

 
14,115

Investment in First M&F Statutory Trust I
928

 
928

Investment in low income housing tax credit entities
2,208

 
2,497

Other
2,659

 
2,829

 
$
18,704

 
$
27,924


As a condition to borrowing funds from the Federal Home Loan Bank (FHLB) of Dallas, the Bank is required to purchase stock in the FHLB. No ready market exists for the stock, and it has no quoted market price. The investment in FHLB stock can only be redeemed by the FHLB at face value.
 

Note 8:  Deposits

The following is a summary of deposits at December 31, 2012 , and 2011 :

(Dollars in thousands )
2012
 
2011
Noninterest-bearing
$
276,295

 
$
231,718

Interest-bearing:
 

 
 

NOW and money market deposits
637,552

 
588,105

Savings deposits
118,123

 
119,693

Core certificates of deposit of $100 thousand or more
165,979

 
187,513

Other core certificates of deposit
188,733

 
227,867

Brokered certificates of deposit of $100 thousand or more
12,444

 
13,028

Other brokered certificates of deposit
3,549

 
3,539

Total interest-bearing
1,126,380

 
1,139,745

Total deposits
$
1,402,675

 
$
1,371,463


92
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 8:  (Continued)

Interest expense on certificates of deposit of $100 thousand or more amounted to $ 2.632 million in 2012 , $ 4.265 million in 2011 and $ 5.942 million in 2010 .

The amount of overdrawn demand and savings deposits that were reclassified as loans held for investment were $ 403 thousand at December 31, 2012 , and $ 492 thousand at December 31, 2011 .

At December 31, 2012 , the scheduled maturities of certificates of deposit are as follows:

(Dollars   in thousands )
 
2013
$
183,354

2014
99,290

2015
73,621

2016
4,240

2017
5,764

After 2017
4,436

 
$
370,705


The amount of deposits of directors and executive officers and their related interests were $ 16.458 million at December 31, 2012 , and $ 15.820 million at December 31, 2011 .


Note 9:  Short-Term Borrowings

The following is a summary of information related to short-term borrowings:

 
Balance Outstanding
 
Weighted
Average Rate
(Dollars in thousands )
Maximum Month End
 
Average Daily
 
At
Year End
 
During
Year
 
At
Year End
2012:
 
 
 
 
 
 
 
 
 
Federal funds purchased
$
—

 
$
—

 
$
—

 
—
%
 
—
%
Securities sold under agreements to repurchase
5,225

 
4,017

 
3,720

 
0.53
%
 
0.47
%
 
$
5,225

 
$
4,017

 
$
3,720

 
 

 
 

2011:
 

 
 

 
 

 
 

 
 

Federal funds purchased
$
—

 
$
—

 
$
—

 
—
%
 
—
%
Securities sold under agreements to repurchase
27,082

 
10,855

 
4,398

 
0.33
%
 
0.70
%
 
$
27,082

 
$
10,855

 
$
4,398

 
 

 
 

2010:
 

 
 

 
 

 
 

 
 

Federal funds purchased
$
—

 
$
—

 
$
—

 
—
%
 
—
%
Securities sold under agreements to repurchase
41,897

 
19,112

 
33,481

 
0.35
%
 
0.17
%
 
$
41,897

 
$
19,112

 
$
33,481

 
 

 
 


Federal funds purchased represent primarily overnight borrowings through relationships with correspondent banks. Federal funds purchased may be obtained through secured or unsecured lines. The Company had $ 37.000 million in available Federal funds purchased lines with its correspondent banks. The Company has pledged $ 1.348 million in investment securities to secure certain Federal funds lines. 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 sponsored entities. The Company has pledged $ 6.981 million in investment securities to secure repurchase agreements. The amounts of repurchase agreement obligations due to directors and their related interests were $ 1.798 million at December 31, 2012 and $ 2.919 million at December 31, 2011 .

93
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 10:  Other Borrowings

The following is a summary of other borrowings at December 31, 2012 and December 31, 2011 :

(Dollars in thousands)
 
December 31
2012
 
December 31
2011
Company’s line of credit in the amount of $5,000,000, maturing in March 2013; secured by approximately 51% of the Bank’s common stock; interest payable quarterly at the prime rate with a floor of 3.50%
 
$
2,792

 
$
3,292

Bank’s advances from Federal Home Loan Banks
 
33,215

 
39,709

 
 
$
36,007

 
$
43,001

Company’s junior subordinated debentures, interest payable quarterly at 90-day LIBOR plus 1.33% through March 2036; currently redeemable
 
$
30,928

 
$
30,928


The Company’s revolving correspondent line of credit, as modified in March 2012, required three principal payments of at least $ 125 thousand each – one during the second, third and fourth quarters of 2012. The line of credit contains certain restrictive covenants related to capital ratios, asset quality, returns on average assets, dividends and supervisory actions by the Company’s regulators. The Company was in compliance with the covenants at December 31, 2012 .

The Bank has advances and letters of credit from the Federal Home Loan Bank of Dallas (FHLB) collateralized by real estate-secured loans. The Bank must pledge collateral to obtain advances from the FHLB. Based on the amount of collateral pledged as of December 31, 2012 the Bank had approximately $44.679 million in available credit.

The Bank has a line of credit with the Federal Reserve Discount Window collateralized by commercial and consumer loans. The bank had a line of credit of approximately $10.857 million at December 31, 2012 , all of which was available.

In February 2006, the Company issued $ 30.928 million in fixed/floating rate junior subordinated deferrable interest debentures to First M&F Statutory Trust I. The Company received $ 30.000 million in cash and $ 928 thousand of common securities from the Trust. The debentures mature in March 2036 and interest is payable quarterly .

The Company may elect to defer up to 20 consecutive quarterly payments of interest on the junior subordinated debentures. During an extension period the Company may not declare or pay dividends on its common stock, repurchase common stock or repay any debt that has equal rank or is subordinate to the debentures. The Company is prohibited from issuing any class of common or preferred stock that is senior to the junior subordinated debentures during the term of the debentures.

In November 2010 the Company entered into a forward-starting, pay-fixed, receive-floating interest rate swap with a notional value of $ 30 million designed to hedge the variability of interest payments when the junior subordinated debentures reset from a fixed rate of interest to a floating rate of interest on March 15, 2011. The interest rate swap payments became effective on March 15, 2011, and it terminates on March 15, 2018. The terms of the interest rate swap include fixed interest paid by the Company at a rate of 3.795% and floating interest paid based on 90-day LIBOR plus 1.33% . Based on its analysis, the Company determined the hedge to be highly effective.

The following is a summary of FHLB advances at December 31, 2012 , and 2011 :

(Dollars in thousands )
2012
 
2011
Amortizing advances:
 

 
 

Balance
$
33,215

 
$
39,709

Monthly payment amount
1,624

 
541

Range of rates
3.17% - 7.76%

 
3.17% - 7.83%

Range of maturities
2013 - 2020

 
2012 - 2020


94
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 10:  (Continued)

Scheduled principal payments on FHLB advances at December 31, 2012 , are as follows:

(Dollars in thousands )
 
2013
$
19,488

2014
2,260

2015
2,346

2016
8,339

2017
187

After 2017
595

 
$
33,215



Note 11:  Variable Interest Entities

In February 2006, the Company issued $ 30.928 million in fixed/floating rate junior subordinated deferrable interest debentures to First M&F Statutory Trust I. The Company received $ 30.000 million in cash and $ 928 thousand of common securities from the Trust. The debentures mature in March 2036, and interest is payable quarterly. The subordinated debentures are redeemable at par. The subordinated debentures are the only asset of the Trust. The Trust issued $ 30.000 million in capital securities through a placement and issued $ 928 thousand of common securities to the Company.

First M&F Statutory Trust I, which is a wholly owned financing subsidiary of the Company for regulatory and legal purposes, is a variable interest entity. A determination has been made that the Company, since its equity interest is not at risk, is not the primary beneficiary and therefore, the Trust is not consolidated with the Company’s financial statements.

The Company is involved as a limited partner in two low income housing tax credit entities. The Company has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the entity – primarily construction, renovation and property management – that most significantly impact the entity’s economic performance. The Company had a total investment and a total exposure of $ 2.208 million in these entities at December 31, 2012 and $ 2.497 million at December 31, 2011 . The low income housing tax credit partnership investments are evaluated for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.


Note 12:  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.

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.

95
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 12:  (Continued)

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 $ 3 thousand is recognized at December 31, 2012 , and a liability of $ 4 thousand is recognized at December 31, 2011 , 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, 2012 , and 2011 follows:

(Dollars in thousands)
2012
 
2011
Commitments to extend credit
$
137,102

 
$
126,455

Standby letters of credit
4,784

 
1,580


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 $ 11.928 million at December 31, 2012 , and $ 11.246 million at December 31, 2011 . These commitments are accounted for as derivatives and marked to fair value through mortgage banking income. At December 31, 2012 , mortgage origination-related derivatives with positive fair values of $ 149 thousand were included in other assets and derivatives with negative fair values of $ 63 thousand were included in other liabilities. At December 31, 2011 , mortgage origination-related derivatives with positive fair values of $ 134 thousand were included in other assets and derivatives with negative fair values of $ 167 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, 2012 and 2011 , the Company had $ 32.813 million and $ 37.507 million in locked forward sales agreements in place. At December 31, 2012 , forward sale-related derivatives with positive fair values of $ 168 thousand were included in other assets and derivatives with negative fair values of $ 63 thousand were included in other liabilities. At December 31, 2011 , forward sale-related derivatives with positive fair values of $ 135 thousand were included in other assets and derivatives with negative fair values of $ 124 thousand were included in other liabilities.

Mortgages that are sold generally have recourse obligations if any of the first four payments become past due over 30 days under certain investor contracts and over 90 days under other investor contracts. The Company may also be required to repurchase mortgages that do not conform to FNMA or FHA underwriting standards or that contain critical documentation errors or fraud. The Company only originates for sale mortgages that conform to FNMA and FHA underwriting guidelines. The Company incurred two recourse losses totaling $9 thousand in 2012 and one recourse loss of $4 thousand in 2011 . No recourse losses were incurred in 2010 . Mortgages sold that were still in the recourse period were $ 81.407 million at December 31, 2012 , and $ 42.146 million at December 31, 2011 . The Company had a recourse liability of $ 223 thousand recorded at December 31, 2012 and had no recourse liability accrued at December 31, 2011 .

The Company is a guarantor of the First M&F Statutory Trust I to the extent that if at any time the Trust is required to pay taxes, duties, assessments or governmental charges of any kind, then the Company is required to pay to the Trust additional sums to cover the required payments.

The Company irrevocably and unconditionally guarantees, with respect to the Capital Securities of the First M&F Statutory Trust I, and to the extent not paid by the Trust, accrued and unpaid distributions on the Capital Securities and the redemption price payable to the holders of the Capital Securities.

96
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 13:  Accumulated Other Comprehensive Income (Loss)

The following is a summary of the gross amounts of accumulated other comprehensive income (loss) and the related income tax effects:

(Dollars in thousands )
 
Gross
 
Tax
 
Net
December 31, 2012:
 
 
 
 
 
 
Net unrealized gain on securities available for sale
 
$
9,451

 
$
3,525

 
$
5,926

Net unrealized loss on other-than-temporarily impaired securities available for sale
 
(2,162
)
 
(806
)
 
(1,356
)
Net unamortized pension costs
 
(2,364
)
 
(882
)
 
(1,482
)
Net unrealized loss on cash flow hedge
 
(2,484
)
 
(927
)
 
(1,557
)
 
 
$
2,441

 
$
910

 
$
1,531

December 31, 2011:
 
 

 
 

 
 

Net unrealized gain on securities available for sale
 
$
7,202

 
$
2,688

 
$
4,514

Net unrealized loss on other-than-temporarily impaired securities available for sale
 
(2,318
)
 
(865
)
 
(1,453
)
Net unamortized pension costs
 
(4,272
)
 
(1,593
)
 
(2,679
)
Net unrealized loss on cash flow hedge
 
(1,834
)
 
(684
)
 
(1,150
)
 
 
$
(1,222
)
 
$
(454
)
 
$
(768
)
December 31, 2010:
 
 

 
 

 
 

Net unrealized gain on securities available for sale
 
$
5,342

 
$
1,993

 
$
3,349

Net unrealized loss on other-than-temporarily impaired securities available for sale
 
(2,834
)
 
(1,057
)
 
(1,777
)
Net unamortized pension costs
 
(2,927
)
 
(1,092
)
 
(1,835
)
Net unrealized gain on cash flow hedge
 
817

 
305

 
512

 
 
$
398

 
$
149

 
$
249



Note 14:  Stockholders' Equity

Preferred Stock

On February 27, 2009, the Company issued 30,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Class B Nonvoting, Series A (no par) to the U. S. Treasury as part of its participation in the Capital Purchase Program. Concurrent with the issuance of the preferred stock, the Company also issued a ten-year warrant to purchase up to 513,113 shares of the Company’s common stock at an exercise price of $ 8.77 per share to the U. S. Treasury. The Company received $ 30.000 million from the U. S. Treasury in exchange for the preferred stock and common stock warrant. Approximately $ 28.637 million of the proceeds were allocated to the preferred stock with the remaining $ 1.363 million being allocated to additional paid-in capital for the common stock warrant. Cumulative dividends on the Class B, Series A Preferred Stock accrued on the $ 1,000 liquidation preference at a rate of 5% per annum.

On September 29, 2010 the Company redeemed the Class B, Series A Preferred Stock by issuing 30,000 shares of Class B, Series CD Preferred Stock issued pursuant to the U. S. Treasury Community Development Capital Initiative. The book value of the Class B, Series A Preferred Stock on the exchange date was $ 29.026 million . The fair value of the Class B, Series CD Preferred Stock issued on the exchange date was $ 16.159 million , resulting in a gain of $12.867 million which was recorded as a credit to retained earnings. The Company’s banking subsidiary, M&F Bank, was certified by the U. S. Treasury as a Community Development Financial Institution (CDFI) on September 28, 2010.

Cumulative dividends on the Class B, Series CD Preferred Stock accrue on the $ 1,000 liquidation preference at a rate of 2% per annum for the first eight years , and at a rate of 9% per annum thereafter but are paid only if, as, and when declared by the Company’s Board of Directors. The Company’s banking subsidiary must be re-certified as a Community Development Financial Institution (CDFI) by the Community Development Financial Institution Fund of the U. S. Treasury Department at three-year intervals. In the event that the banking subsidiary continues to be uncertified for 180 days, the dividend rate shall increase to 5% . If the banking subsidiary continues to be uncertified for an additional 90 days, then the dividend rate shall increase to 9% until the subsidiary becomes certified, at which time the dividend rate shall revert to its original 2% per annum. The Class B, Series CD Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Class B, Series CD Preferred Stock is generally non-voting.

97
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 14:  (Continued)

The Company may redeem the Class B, Series CD Preferred Stock in whole or in part at $ 1,000 per share at any time, subject to the consent of the Federal Reserve Bank of St. Louis, which is the Company’s primary Federal banking regulator, and the U.S. Treasury Department.

The fair value of the Class B, Series CD Preferred Stock was determined using a discounted cash flow analysis. Cash flows under scenarios of continuing CDFI certification and loss of CDFI certification, weighted by estimated probabilities, were used. Terminal values were calculated as perpetuities on the dates that the dividend rates would accelerate to 9% under the different scenarios. All cash flows were discounted at a market rate of 10% .

Accretion of the discount associated with the preferred stock is recognized as an increase to preferred stock dividends in determining net income available to common shareholders. The discount on the Class B, Series A Preferred Stock was being accreted over a five -year period using the effective yield method. The discount on the Class B, Series CD Preferred Stock is being accreted over an eight -year period. The discount accretion recognized on the Class B, Series A Preferred Stock was $188 thousand during 2010 . The discount accretion recognized on the Class B, Series CD Preferred Stock was $231 thousand during 2010 . The discount accretion recognized on the Class B, Series CD Preferred Stock was $1.174 million during 2011 and was $1.301 million during 2012 .

The following table summarizes preferred stock of the Company:

(Dollars in thousands)
 
 
 
Shares at
 
Shares at
 
Carrying Value
 
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 
 
Rate
 
Authorized
 
Outstanding
 
Authorized
 
Outstanding
 
 
Class A
 
—

 
1,000,000

 
—

 
1,000,000

 
—

 
$
—

 
$
—

Class B:
 
 

 
1,000,000

 
 

 
1,000,000

 
 

 
 

 
 

Series A
 
5
%
 
 

 
—

 
 

 
—

 
—

 
—

Series CD
 
2
%
 
 

 
30,000

 
 

 
30,000

 
18,865

 
17,564

 
 
 

 
 

 
 

 
 

 
 

 
$
18,865

 
$
17,564


Dividend Reinvestment and Stock Purchase Plan

The Dividend Reinvestment and Stock Purchase Plan authorizes the sale of up to 200,000 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.

Dividend Restrictions

The Company and the Bank are subject to certain restrictions related to the payment of dividends. These restrictions are discussed in Note 20 – Regulatory Matters.


Note 15:  Stock Compensation Plan

The Company's 2005 Equity Incentive 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 700,000 . 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 400,000 . The maximum number of shares that may be awarded in forms other than options and stock appreciation rights is 500,000 . The maximum number of shares that may be awarded to Directors is 100,000 .

The Company uses the fair value method of accounting for stock-based compensation. Stock options generally vest evenly over a five year period. Stock grants fully vest on certain dates (cliff vesting), for generally five or seven year terms. The fair values of stock options and restricted stock grants are accrued to salary and benefits expenses over their vesting periods. The amounts accrued are equal to the fair values less an estimate for expected forfeitures. These accruals are subsequently adjusted for differences between estimated forfeiture rates and the actual experienced forfeiture rates.

98
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 15:  (Continued)

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 2011 and 2010 : expected dividend yields of 1.00% and 1.00% ; expected volatility of 31.66% and 31.45% ; risk-free interest rates of 2.84% and 3.28% ; and expected lives of 7 years. Expected dividends are based on current dividend rates at the grant date. Expected volatility is estimated using the Company’s historical price variances over the prior ten years. The expected lives are calculated as the average of the contractual life and the vesting period, which approximates the Company’s historical experience. The estimated fair values of stock options at their grant date were $1.44 in 2011 and $1.74 in 2010 . In determining the amounts of compensation expense to record for unvested 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 plan.

The following table shows the amounts of stock-based compensation that were included in salary and employee benefits expenses:

(Dollars in thousands, except share data )
2012
 
2011
 
2010
Stock option expense recognized, gross
$
6

 
$
7

 
$
11

Adjustment for actual vs expected forfeitures
—

 
—

 
—

Stock option expense recognized, net
6

 
7

 
11

Restricted stock award expenses recognized, gross
378

 
136

 
170

Adjustment for actual vs expected forfeitures
(4
)
 
(145
)
 
(120
)
Restricted stock award expenses recognized, net
374

 
(9
)
 
50

Total stock-based compensation
380

 
(2
)
 
61

Income tax benefits
(134
)
 
1

 
(23
)
Net stock-based compensation recognized
$
246

 
$
(1
)
 
$
38


The following table is a summary of stock awards activity:

 
 
2005 Plan
 
1999 Plan
 
 
 
 
Restricted Stock
 
Stock Options
 
Stock Options
 
 
Shares
Available
For
Grant
 
Number
of
Shares
 
Weighted
Average
Grant
Date
Fair
Value
 
Number
Of
Shares
 
Weighted
Average
Exercise
Price
 
Number
Of
Shares
 
Weighted
Average
Exercise
Price
January 1, 2010
 
590,234

 
77,000

 
$
16.841

 
16,000

 
$
13.288

 
21,600

 
$
15.087

Awards Granted
 
(2,000
)
 
—

 
—

 
2,000

 
4.890

 
—

 
—

Vested
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Forfeitures
 
15,400

 
(14,000
)
 
16.278

 
(1,400
)
 
16.051

 
(200
)
 
17.000

Expired
 
—

 
—

 
—

 
—

 
—

 
(5,600
)
 
12.127

December 31, 2010
 
603,634

 
63,000

 
16.995

 
16,600

 
12.043

 
15,800

 
16.018

Awards Granted
 
(3,000
)
 
—

 
—

 
3,000

 
4.120

 
—

 
—

Vested
 
—

 
(6,000
)
 
16.855

 
—

 
—

 
—

 
—

Forfeitures
 
12,800

 
(11,000
)
 
16.915

 
(1,800
)
 
13.840

 
—

 
—

Expired
 
—

 
—

 
—

 
—

 
—

 
—

 
—

December 31, 2011
 
613,434

 
46,000

 
17.032

 
17,800

 
10.526

 
15,800

 
16.018

Awards Granted
 
(380,646
)
 
380,646

 
4.510

 
—

 
—

 
—

 
—

Vested
 
—

 
(46,000
)
 
17.032

 
—

 
—

 
—

 
—

Forfeitures
 
7,600

 
(7,000
)
 
4.510

 
(600
)
 
5.140

 
—

 
—

Expired
 
—

 
—

 
—

 
—

 
—

 
(5,000
)
 
12.625

December 31, 2012
 
240,388

 
373,646

 
$
4.510

 
17,200

 
$
10.714

 
10,800

 
$
17.590


99
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 15:  (Continued)

The following is a summary of stock options outstanding at December 31, 2012 :

Exercise Price Range
 
Options Outstanding
 
Weighted
Average
Remaining
Contractual
Life
(Years)
 
Weighted
Average
Exercise
Price-
Options
Outstanding
 
Options Exercisable
 
Weighted
Average
Exercise
Price-
Options
Exercisable
  $4.12 - 5.14
 
8,400

 
7.09
 
$
4.72

 
3,600

 
$
4.91

13.84 - 19.06
 
19,600

 
2.22
 
17.07

 
19,000

 
17.18

 
 
28,000

 
3.68
 
$
13.37

 
22,600

 
$
15.22


There were $7 thousand in aggregate intrinsic value of options exercisable at December 31, 2012 and no aggregate intrinsic value of options exercisable at December 31, 2011. At December 31, 2012 , there were $7 thousand in unrecognized compensation costs related to stock options expected to be recognized over a weighted-average period of 1.89 years.

The Company issues restricted stock awards to certain executives and other key employees. The awards vest over periods of one to seven years and are forfeited in their entirety if the officer leaves the Company before the end of the vesting term. Dividends are paid quarterly to restricted stock grantees. In April 2012 the Company granted 298,746 shares of restricted stock to certain officers and other employees. Also during April 2012 the Company granted 81,900 shares of restricted stock to the directors of the Company who are not members of management. As a sublimit under the plan, there are 100,000 shares available for awards to directors who are not employees of the Company at the time of the grant. The April grants vest over a 5 year period and may be forfeited if the employee or director leaves before the completion of the vesting period. The 2012 stock grants do not contain any performance conditions. At December 31, 2012 , there were $1.617 million in unrecognized compensation costs for all restricted stock grants. The unrecognized costs at December 31, 2012 , are expected to be recognized over a weighted-average period of 4.22 years. The Company estimates that 4.00% ( 0.80% annual rate) of the employee shares and 2.00% ( 0.40% annual rate) of the director shares will be forfeited in determining net compensation expenses recognized.

In July 2010 the Board of Directors approved the reservation of 1,000,000 shares of authorized, unissued shares for issuance in lieu of cash for directors’ fees earned for 2010 and beyond. All shares are issued at market value and provide a convenient way for directors to receive shares of the Company based on the amount of directors’ fees that would otherwise be paid. Directors individually elect a percentage of their compensation, not less than 50% , to be received in common stock with the balance of the fees being paid in cash each quarter. The Company recognized $163 thousand in other expense in 2012 for the fair value of 29,863 shares of stock issued to directors in lieu of quarterly fees. The Company recognized $143 thousand in other expense in 2011 for the fair value of 42,133 shares of stock issued to directors in lieu of quarterly fees. The Company recognized $133 thousand in other expense in 2010 for the fair value of 37,457 shares of stock issued to Directors in lieu of quarterly fees.


Note 16:  Other Expenses

Significant components of other expenses are summarized as follows:

(Dollars   in thousands )
2012
 
2011
 
2010
Postage and shipping
$
905

 
$
896

 
$
875

Stationery and supplies
755

 
775

 
696

Accounting, legal and professional fees
2,356

 
2,053

 
2,324

Insurance expense
983

 
911

 
836

Mortgage processing and broker fee expenses
2,919

 
883

 
538

Other
5,257

 
4,749

 
5,345

 
$
13,175

 
$
10,267

 
$
10,614


100
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements


 
Note 17:  Income Taxes

The components of income tax expense (benefit) are as follows:

(Dollars in thousands)
Federal
 
State
 
Total
2012:
 
 
 
 
 
Current
$
—

 
$
2

 
$
2

Deferred
2,071

 
335

 
2,406

Total
$
2,071

 
$
337

 
$
2,408

2011:
 
 
 
 
 
Current
$
4

 
$
—

 
$
4

Deferred
864

 
143

 
1,007

Total
$
868

 
$
143

 
$
1,011

2010:
 
 
 
 
 
Current
$
4

 
$
(137
)
 
$
(133
)
Deferred
417

 
318

 
735

Total
$
421

 
$
181

 
$
602


The differences between actual income tax expense and expected income tax expense are summarized as follows:

(Dollars in thousands)
2012
 
2011
 
2010
Amount computed using the Federal statutory rates on income before taxes
$
3,193

 
$
1,831

 
$
1,568

Increase (decrease) resulting from:
 

 
 

 
 

Tax exempt income, net of disallowed interest deduction
(479
)
 
(488
)
 
(594
)
State income tax expense, net of Federal effect
223

 
95

 
207

Life insurance income
(237
)
 
(217
)
 
(227
)
Low income housing tax credits
(330
)
 
(248
)
 
(330
)
Other, net
38

 
38

 
(22
)
 
$
2,408

 
$
1,011

 
$
602


101
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 17:  (Continued)

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 , 2012 , and 2011 consist of the following:

(Dollars in thousands)
2012
 
2011
Allowance for loan losses
$
6,525

 
$
5,566

Loan fees
126

 
518

Purchase accounting adjustments
140

 
187

Nonperforming assets
4,074

 
4,432

Accrued expenses
99

 
148

Share-based compensation
120

 
277

Employee benefit plans
235

 
185

Net pension liability and unamortized pension costs
869

 
956

Unrealized loss on cash flow hedge
926

 
684

Net operating loss carry forward
715

 
5,606

Tax credit carry forward
1,758

 
982

Other
399

 
52

Total deferred tax assets
15,986

 
19,593

Fixed assets and depreciation
(1,026
)
 
(1,460
)
Federal Home Loan Bank stock dividends
(147
)
 
(478
)
Intangible assets
(1,139
)
 
(1,290
)
Prepaid expenses
(405
)
 
(393
)
Unrealized gain on securities available for sale
(2,719
)
 
(1,823
)
Other
(17
)
 
(34
)
Total deferred tax liabilities
(5,453
)
 
(5,478
)
 
$
10,533

 
$
14,115


Management has reviewed its deferred tax assets and determined that it is more likely than not that the deferred tax assets will be realized in the foreseeable future and therefore no valuation allowance has been accrued.

102
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 17:  (Continued)

In connection with its previous net operating loss carryforwards and estimated $10.834 million in Federal taxable earnings for 2012, the Company had the following net operating losses and tax credits available for carryover for Federal income tax purposes at December 31, 2012 :

(Dollars in thousands)
 
 
 
 
 
 
Amount
 
Expiration 
Dates
Federal net operating loss from 2010
 
$
291

 
2030
Mississippi net operating loss from 2009
 
5,110

 
2029
Mississippi net operating loss from 2010
 
4,707

 
2030
Alabama net operating loss from 2009
 
177

 
2029
Tennessee net operating loss for 2009
 
908

 
2029
Tennessee net operating loss for 2010
 
93

 
2030
Florida net operating loss for 2009
 
511

 
2029
Florida net operating loss for 2010
 
20

 
2030
Tax credits from 2008
 
26

 
2028
Tax credits from 2009
 
57

 
2029
Tax credits from 2010
 
203

 
2030
Tax credits from 2011
 
377

 
2031
Tax credits from 2012
 
356

 
2032
Alternative minimum tax credits from all years
 
739

 
indefinite lived

Federal tax credits for 2011 include a $ 120 thousand credit related to an adjustment to the amended tax returns for 2006 and 2007 . The Company carried back more than the allowable net operating losses for alternative minimum tax purposes and therefore, owed approximately $ 184 thousand in alternative minimum tax for 2007 . The tax due was accrued during the fourth quarter of 2011 and paid during the first quarter of 2012 . The taxes paid, net of $ 64 thousand in credits that were available but not taken in the amended 2006 return, are available to be carried forward as tax credits.

The Company was audited for the tax years of 2008 through 2010 by the Mississippi State Tax Commission during the current year. The audit was concluded in 2012 with additional taxes of $ 3 thousand owed.

The Company had no material recognized uncertain tax positions as of December 31, 2012 or December 31, 2011 and therefore did not have any tax accruals in 2012 or 2011 related to uncertain positions. The Company is no longer subject to Federal income tax examinations of tax returns filed for years before 2009 .

103
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 18:  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.

On December 31, 2008, the Company transitioned to a calendar year-end measurement date. The following is a summary of the plan's funded status:

(Dollars in thousands)
2012
 
2011
Change in benefit obligation:
 
 
 
Projected benefit obligation at beginning of year
$
10,545

 
$
9,182

Interest cost
410

 
448

Actuarial loss
677

 
1,478

Benefit payments
(575
)
 
(563
)
Projected benefit obligation at end of year
11,057

 
10,545

Change in plan assets:
 

 
 

Fair value of plan assets at beginning of year
7,981

 
8,640

Actual return on plan assets
1,011

 
(235
)
Employer contributions
344

 
168

Benefit payments
(575
)
 
(563
)
Expenses
(34
)
 
(29
)
Fair value of plan assets at end of year
8,727

 
7,981

Funded status at measurement date
$
(2,330
)
 
$
(2,564
)

The following is a summary of amounts recorded in the consolidated statements of condition:

(Dollars in thousands)
2012
 
2011
Net pension asset
$
—

 
$
—

 
 
 
 
Net pension liability
$
(2,330
)
 
$
(2,564
)
 
 
 
 
Accumulated other comprehensive income, before income taxes
$
2,364

 
$
4,272


The following is a summary of information related to benefit obligations and plan assets:

(Dollars in thousands)
2012
 
2011
Projected benefit obligation
$
11,057

 
$
10,545

Accumulated benefit obligation
11,057

 
10,545

Fair value of plan assets
8,727

 
7,981


The following is a summary of the components of accumulated other comprehensive income:

(Dollars in thousands)
2012
 
2011
Unamortized prior service credit
$
—

 
$
—

Unamortized actuarial loss
2,364

 
4,272

Accumulated other comprehensive income
$
2,364

 
$
4,272


104
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 18:  (Continued)

The following is a summary of the components of net periodic benefit costs and other amounts recognized in other comprehensive income:

(Dollars in thousands)
2012
 
2011
 
2010
Net Periodic Benefit Cost:
 
 
 
 
 
Interest cost
$
410

 
$
448

 
$
468

Expected return on plan assets
(527
)
 
(563
)
 
(529
)
Amortization of prior service credit
—

 
(25
)
 
(37
)
Recognized actuarial loss
2,136

 
984

 
885

Net periodic benefit cost
$
2,019

 
$
844

 
$
787

Other Changes in Plan Assets and Benefit Obligations Recognized in Other
  Comprehensive Income:
 
 
 
 
 
Net loss
$
228

 
$
2,304

 
$
299

Amortization of actuarial net loss
(2,136
)
 
(984
)
 
(885
)
Amortization of prior service credit
—

 
25

 
37

Total recognized in other comprehensive income
$
(1,908
)
 
$
1,345

 
$
(549
)
Total recognized in net periodic benefit cost and other comprehensive income
$
111

 
$
2,189

 
$
238


The Company elected to amortize the unrecognized net gain or loss over a seven year period on a straight-line basis starting in 2007 . For plan years up through 2006 , the unrecognized gain or loss was amortized based on the average remaining service period of participants.

The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2013 is $2.364 million .

Total expenses recorded in the accompanying consolidated statements of operations related to the pension plan included the following components:

(Dollars in thousands)
2012
 
2011
 
2010
Net pension cost
$
2,019

 
$
844

 
$
787

Payments for expenses made on behalf of the plan
37

 
32

 
43

Payments to PBGC for premiums
21

 
11

 
16

 
$
2,077

 
$
887

 
$
846


The following is a summary of weighted average assumptions:

 
2012
 
2011
 
2010
Discount rate for determining current year’s costs
4.00
%
 
5.05
%
 
5.60
%
Discount rate for determining year end benefit obligation
3.50
%
 
4.00
%
 
5.05
%
Expected return on plan assets for determining current year’s costs
6.75
%
 
6.75
%
 
6.75
%
Rate of compensation increase (plan is frozen)
—
%
 
—
%
 
—
%

The discount rate used to determine the present value of the pension benefit obligation has decreased in recent years as the Federal Reserve has acted to reduce market rates in its economic stimulation efforts. The decreases in the discount rate for 2010 , 2011 and 2012 resulted in actuarial losses as the present values of the liabilities increased. The Company bases the discount rate on general corporate rates prevalent in the market on the actuarial measurement date.

The credit market disruptions and a severely slowing economy resulted in stock market losses in excess of 35% in 2008. The markets have slowly recovered, while also experiencing bouts of high volatility, since 2008. Plan returns have been positive since 2008 with the exception of 2011. A reversal of the market recovery would increase pension expense, which is dominated by the amortization of deferred actuarial gains and losses. Plan returns or losses that negatively deviate from expected returns result in increases in these actuarial deferred losses. Returns in excess of expectations would reduce the deferred actuarial loss and therefore would reduce pension expenses going forward.

105
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 18:  (Continued)

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 normally ranged from losses of approximately 10% to gains in excess of 15% . The short-term volatility of these returns makes them unreliable as a sole indicator of future long-term returns. Therefore, the historical plan rate of return is used merely as a guideline in determining the plan assumption for returns. The plan return was a 12.67% profit in 2012 , a 2.72% loss in 2011 and a 10.77% profit in 2010 . The mix of invested assets has remained relatively stable over the last five years with equity holdings representing between 45% and 60% of plan assets. The equity securities have brought more return volatility and higher expected returns to the portfolio. Management has operated under the general assumption that the long-term equity market returns will approximate the past 50 years, which provided an average 10% return, based upon stock market historical data. Current and expected economic conditions have also been considered in determining 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. Management believes that the economy and the markets will sustain their recovery enough over the next 5 to 7 years to allow the Company to achieve an expectation of 6.75% in annual returns over those periods. Management intends to terminate the Plan within the next 5 to 7 years.

The plan’s asset allocations at December 31, 2012 , and 2011 by asset category were as follows:

 
2012
 
2011
Interest-bearing bank balances
5
%
 
7
%
Debt securities
28
%
 
26
%
Equity securities
67
%
 
67
%
 
100
%
 
100
%

Equity securities included 18,868 shares of the Company’s common stock at December 31, 2012 , and 2011 .

The following table summarizes the fair values of pension plan assets at December 31, 2012 by asset category:

 
 
 
Fair Value Measurements at
December 31, 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)
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
$
433

 
$
433

 
$
—

 
$
—

Equity securities – domestic
4,735

 
4,735

 
—

 
—

Equity securities – international
1,144

 
1,144

 
—

 
—

Mutual funds (bond funds)
320

 
320

 
—

 
—

Government debt securities
232

 
—

 
232

 
—

Corporate debt securities - domestic
1,496

 
—

 
1,496

 
—

Corporate debt securities - international
367

 
—

 
367

 
—

Total assets
$
8,727

 
$
6,632

 
$
2,095

 
$
—



106
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 18:  (Continued)

The following table summarizes the fair values of pension plan assets at December 31, 2011 by asset category:

 
 
 
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)
Cash and cash equivalents
$
548

 
$
548

 
$
—

 
$
—

Equity securities – domestic
3,965

 
3,965

 
—

 
—

Equity securities – international
1,142

 
1,142

 
—

 
—

Mutual funds (bond funds)
214

 
214

 
—

 
—

Government debt securities
239

 
—

 
239

 
—

Corporate debt securities - domestic
1,528

 
—

 
1,528

 
—

Corporate debt securities - international
345

 
—

 
345

 
—

Total assets
$
7,981

 
$
5,869

 
$
2,112

 
$
—


Cash and cash equivalents – Cash and cash equivalents are funds held in commercial banks with the book value equal to the market value.

Equity securities – Equity securities are stocks traded on organized exchanges. The closing price as disclosed by the exchange is used as the fair value.

Mutual funds – Mutual funds are primarily fixed-income funds. Fair values for these are the net asset values (NAV) reported by the mutual fund sponsors.

Government, corporate and mortgage-backed debt securities – Fair values for these debt securities are provided by an independent third party pricing service that primarily uses trading activity in the dealer market to determine market prices.

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
%

107
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 18:  (Continued)

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, assuming no plan termination, that future benefit payments for the plan will be as follows.

(Dollars in thousands)
 
Year
Expected payments
 
 
2013
$
667

2014
699

2015
688

2016
689

2017
691

2018 – 2022
3,355


The Company expects to make a contribution within a range of $150 thousand to $250 thousand to the pension plan in 2012.

Profit and Savings Plan

The Bank has a profit and savings plan which includes features such as an Employee Stock Ownership Plan (ESOP) 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. Effective in May 2006, the Company began matching 60% of an employee’s first 6% of salary deferral for all employees with less than three years of credited service. Concurrently, the Company began matching 75% of an employee’s first 6% of salary deferral for all employees with three years or more of credited service. In March 2009 the Company cut the matching percentages in half. In September 2011 the Company returned the matching percentages to 60% of an employee's first 6% of salary deferral for employees with less than three years of credited service and 75% for all employees with three years or more of credited service. Total matching contributions for this plan were $660 thousand in 2012 , $402 thousand in 2011 and $317 thousand in 2010 . 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 2012 , 2011 and 2010 . ESOP shares are considered outstanding for basic earnings per share calculations. Dividends on ESOP shares are deducted from retained earnings when declared. The plan was amended in 2011 to allow employees to borrow from the plan. As of December 31, 2012 , the plan had $293 thousand in loans receivable from employees and at December 31, 2011 , the plan had $ 142 thousand in loans receivable from employees.

At December 31, 2012 , and 2011 , the profit and savings plan owned 382,943 and 288,586 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 participants’ 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. Participants deferred $78 thousand of compensation during 2012 , $52 thousand during 2011 and $51 thousand during 2010 . The Company did not make any profit sharing contributions to the plan in 2012 , 2011 or 2010 . The plan also had distributions of $20 thousand in 2012 , $14 thousand in 2011 and $23 thousand in 2010 . Included in salaries and employee benefit expenses are charges for earnings increases of $85 thousand for 2012 , credits for earnings declines of $2 thousand for 2011 , and charges for earnings increases of $40 thousand in 2010 . Also included in salaries and employee benefit expenses are administrative expenses of $2 thousand in 2012 , $4 thousand in 2011 and $2 thousand in 2010 .


108
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 19:  Earnings Per Share

The Company calculates basic earnings per share using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share separately for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that its outstanding non-vested restricted stock awards are participating securities. Diluted earnings per share are calculated using the more dilutive of the two-class method and the treasury stock method.

The calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share were as follows:

(Dollars in thousands, except per share data)
 
2012
 
2011
 
2010
Net income
 
$
6,985

 
$
4,373

 
$
4,011

Less: Preferred dividends
 
1,901

 
1,774

 
1,692

Add: Gain on exchange of preferred stock
 
—

 
—

 
12,867

Net income attributable to common stock
 
$
5,084

 
$
2,599

 
$
15,186

Net income allocated to common stockholders:
 
 

 
 

 
 

Distributed
 
367

 
366

 
363

Undistributed
 
4,552

 
2,218

 
14,708

 
 
$
4,919

 
$
2,584

 
$
15,071

Weighted-average basic common and participating shares outstanding
 
9,489,725

 
9,180,997

 
9,150,980

Less: weighted average participating restricted shares outstanding
 
308,713

 
54,392

 
69,293

Weighted-average basic shares outstanding
 
9,181,012

 
9,126,605

 
9,081,687

Basic net income per share
 
$
0.54

 
$
0.28

 
$
1.66

Weighted-average basic common and participating shares outstanding
 
9,489,725

 
9,180,997

 
9,150,980

Add: share-based options and stock warrant
 
1,022

 
—

 
—

 
 
9,490,747

 
9,180,997

 
9,150,980

Less: weighted average participating restricted shares outstanding
 
308,713

 
54,392

 
69,293

Weighted-average dilutive shares outstanding
 
9,182,034

 
9,126,605

 
9,081,687

Dilutive net income per share
 
$
0.54

 
$
0.28

 
$
1.66

Weighted-average shares of potentially dilutive instruments that are not included in the dilutive share calculation due to anti-dilutive effect:
 
 

 
 

 
 

Compensation plan-related stock options
 
21,253

 
33,117

 
38,942

Common stock warrant
 
513,113

 
513,113

 
513,113



Note 20:  Regulatory Matters

Federal banking regulations require that the Bank maintain certain cash reserves based on a percent of deposits. This requirement was $ 3.053 million at December 31, 2012 and $ 2.258 million at December 31, 2011 . The reserve requirements were covered by vault cash of $ 11.543 million at December 31, 2012 and $ 12.311 million at December 31, 2011 .

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, 2012 , that all capital adequacy requirements have been met.

As of December 31, 2012 , 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.

109
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 20:  (Continued)

The Company's and Bank's actual capital amounts and ratios as of December 31, 2012 , and December 31, 2011 , are also presented in the table:

(Dollars in thousands)
 
Actual
 
Minimum Capital
 
Well Capitalized
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
$
155,088

 
13.30
%
 
$
93,319

 
8.00
%
 
$
—

 
—
%
Bank
 
153,091

 
13.15
%
 
93,168

 
8.00
%
 
116,459

 
10.00
%
Tier I capital (to risk weighted assets):
 
 

 
 

 
 

 
 

 
 

 
 

Company
 
140,471

 
12.04
%
 
46,660

 
4.00
%
 
—

 
—
%
Bank
 
138,497

 
11.89
%
 
46,584

 
4.00
%
 
69,876

 
6.00
%
Tier I capital (to average assets):
 
 

 
 

 
 

 
 

 
 

 
 

Company
 
140,471

 
8.91
%
 
63,087

 
4.00
%
 
—

 
—
%
Bank
 
138,497

 
8.83
%
 
62,768

 
4.00
%
 
78,460

 
5.00
%
December 31, 2011:
 
 

 
 

 
 

 
 

 
 

 
 

Total capital (to risk weighted assets):
 
 

 
 

 
 

 
 

 
 

 
 

Company
 
$
141,434

 
12.09
%
 
$
93,564

 
8.00
%
 
$
—

 
—
%
Bank
 
141,088

 
12.08
%
 
93,410

 
8.00
%
 
116,762

 
10.00
%
Tier I capital (to risk weighted assets):
 
 

 
 

 
 

 
 

 
 

 
 

Company
 
126,810

 
10.84
%
 
46,782

 
4.00
%
 
—

 
—
%
Bank
 
126,488

 
10.83
%
 
46,705

 
4.00
%
 
70,057

 
6.00
%
Tier I capital (to average assets):
 
 

 
 

 
 

 
 

 
 

 
 

Company
 
126,810

 
8.17
%
 
62,072

 
4.00
%
 
—

 
—
%
Bank
 
126,488

 
8.17
%
 
61,933

 
4.00
%
 
77,416

 
5.00
%

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. The Bank may also be restricted in its ability to pay dividends due to regulatory violations cited in an examination. In addition to the formal statutes and regulations, regulatory authorities also consider the Bank’s ability to produce current earnings and 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.

The Bank is required to obtain prior approval from its primary regulators – the Federal Deposit Insurance Corporation and the State of Mississippi Department of Banking and Consumer Finance – to pay dividends to the Company.

In November 2009, the Company entered into an informal agreement with the Federal Reserve Bank of St. Louis (the “Federal Reserve”). The agreement requires prior approval by the Federal Reserve of (1) the declaration or payment by the Company of dividends to shareholders and (2) the payment of interest on outstanding trust preferred securities and the payment of dividends on outstanding TARP preferred stock and (3) the incurrence of additional debt. The agreement is not a “written agreement” for purposes of Section 8 of the Federal Deposit Insurance Act, as amended. The Federal Reserve approved, pursuant to the informal agreement, the common dividends payable to shareholders, the interest payment on the trust preferred securities and the dividends payable on the TARP preferred stock for 2011 and 2012 . In January 2013 the Company was notified by the Federal Reserve that the informal agreement had been terminated.

Under the terms of the Exchange Agreement related to the Company's participation in the TARP Community Development Capital Initiative, the Company may not pay common dividends in excess of the current rate of $.01 per share per quarter ( $.04 per share per year) through the earlier of September 2018 or the date the preferred stock is redeemed.

110
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 21:  Derivative Financial Instruments

In November 2010 the Company entered into an interest rate swap designed to hedge the interest cash flows of its junior subordinated debentures. The swap became effective on March 15, 2011, which is the date on which the junior subordinated debentures switched from a fixed interest rate to a floating interest rate. The maturity date of the swap is March 15, 2018. The Company expects the hedge to be highly effective and it is being accounted for as a cash flow hedge. The unrealized gains and losses of the interest rate swap are being recorded in accumulated other comprehensive income until the interest payment due dates when the balance remaining in other comprehensive income is removed and charged or credited to interest expense. The swap is designed to make fixed rate payments at 3.795% to the counterparty and receive floating rate payments at three month LIBOR plus 1.33% from the counterparty. Government sponsored entity securities with a fair value of $ 1.520 million and cash of $ 1.973 million were pledged as collateral on the swap at December 31, 2012 . Government sponsored entity securities with a fair value of $ 1.505 million and cash of $ 1.861 million were pledged as collateral on the swap at December 31, 2011 .

The Company enters into interest rate lock agreements related to mortgage loan originations with customers. The Company also enters into forward sale agreements with mortgage investors. The interest rate lock agreements, which are written options, and the forward sale agreements are free-standing derivatives and are carried at fair value on the consolidated statements of condition with changes in fair value being recorded in earnings for the period.

The following tables summarize the Company’s derivative positions:

   
 
As of December 31, 2012
 
 
Asset Derivatives
 
Liability Derivatives
(Dollars in thousands)
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
Derivatives designated in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
$
—

 
$
—

 
Other liabilities
 
$
30,000

 
$
2,484

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

 
 
 
 

 
 

Forward sale agreements
 
Other assets
 
21,925

 
168

 
Other liabilities
 
10,888

 
63

Written interest rate options (locks)
 
Other assets
 
8,641

 
149

 
Other liabilities
 
3,287

 
63

Total derivatives
 
 
 
$
30,566

 
$
317

 
 
 
$
44,175

 
$
2,610

 
 
 
As of December 31, 2011
 
 
Asset Derivatives
 
Liability Derivatives
(Dollars in thousands)
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
 
Balance Sheet Classification
 
Notional Amount
 
Fair Value
Derivatives designated in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Other assets
 
$
—

 
$
—

 
Other liabilities
 
$
30,000

 
$
1,834

Derivatives not designated as hedging instruments:
 
 
 
 

 
 

 
 
 
 

 
 

Forward sale agreements
 
Other assets
 
22,220

 
135

 
Other liabilities
 
15,287

 
124

Written interest rate options (locks)
 
Other assets
 
4,225

 
134

 
Other liabilities
 
7,021

 
167

Total derivatives
 
 
 
$
26,445

 
$
269

 
 
 
$
52,308

 
$
2,125


111
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 21:  (Continued)

Amounts included in the consolidated statements of operations and in other comprehensive income (OCI) in 2012 , 2011 and 2010 are summarized in the following tables:

   
 
Year Ended December 31, 2012
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$
(1,263
)
 
Interest on junior subordinated debt
 
$
(613
)
 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
137

Written interest rate options (locks)
 
Mortgage banking income
 
662

Total
 
 

 
 
 
$
799


   
 
Year Ended December 31, 2011
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$
(3,171
)
 
Interest on junior subordinated debt
 
$
(520
)
 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
188

Written interest rate options (locks)
 
Mortgage banking income
 
(188
)
Total
 
 

 
 
 
$
—


 
 
Year Ended December 31, 2010
(Dollars in thousands)
 
Amount of pre-tax gain (loss) recognized in OCI (Effective Portion)
 
Classification of gain (loss) reclassified from AOCI into earnings (Effective Portion)
 
Amount of pre-tax gain (loss) reclassified from AOCI into earnings (Effective Portion)
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate swap
 
$
817

 
Interest on junior subordinated debt
 
$
—

 
 
Classification of gain (loss) recognized in earnings
 
Amount of pre-tax gain (loss) recognized in earnings
Derivatives not designated as hedging instruments:
 
 

 
 
 
 

Forward sale agreements
 
Mortgage banking income
 
$
502

Written interest rate options (locks)
 
Mortgage banking income
 
12

Total
 
 

 
 
 
$
514


Net settlement payments of $ 612 thousand were made in 2012 and $ 496 thousand were made in 2011 to the swap counterparty. The Company estimates that approximately $ 167 thousand will be recognized as a charge to interest expense during the first quarter of 2013 related to the swap. The Company expects approximately $ 656 thousand related to future swap settlements to be recognized as a charge to interest expense over the next twelve months.


112
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 22:  Summarized Financial Information of First M & F Corporation

Summarized financial information of First M & F Corporation (parent company only) is as follows:

STATEMENTS OF CONDITION

(Dollars in thousands)
2012
 
2011
Assets
 
 
 
 
 
 
 
Cash
$
2,309

 
$
976

Restricted interest bearing balances
1,973

 
1,861

Securities available for sale
1,520

 
1,505

Investment in banking subsidiary
144,179

 
137,470

Investment in statutory trust
928

 
928

Other assets
3,859

 
3,035

 
$
154,768

 
$
145,775

Liabilities and Stockholders’ Equity
 

 
 

 
 
 
 
Note payable
$
2,792

 
$
3,292

Junior subordinated debt
30,928

 
30,928

Other liabilities
2,605

 
1,959

Stockholders’ equity
118,443

 
109,596

 
$
154,768

 
$
145,775

 
STATEMENTS OF OPERATIONS

(Dollars in thousands)
2012
 
2011
 
2010
Income:
 
 
 
 
 
Dividends received from banking subsidiary
$
4,500

 
$
2,650

 
$
2,200

Dividends received from statutory trust
17

 
27

 
60

Equity in undistributed earnings of banking subsidiary
3,492

 
2,738

 
3,215

Interest on investment securities
19

 
45

 
—

Other income
4

 
5

 
10

Total income
8,032

 
5,465

 
5,485

Expenses:
 

 
 

 
 

Interest on other borrowings
124

 
146

 
84

Interest on junior subordinated debentures
1,177

 
1,335

 
1,992

Other expenses
336

 
206

 
224

Total expenses
1,637

 
1,687

 
2,300

Income before income taxes
6,395

 
3,778

 
3,185

Income tax benefit
590

 
595

 
826

Net income
$
6,985

 
$
4,373

 
$
4,011


113
FIRST M&F CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 22:  (Continued)

STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)
2012
 
2011
 
2010
Net income
$
6,985

 
$
4,373

 
$
4,011

Other comprehensive income (loss):
 

 
 

 
 

Unrealized gains on securities available for sale
12

 
2

 
—

Unrealized gains (losses) on cash flow hedges
(407
)
 
(1,662
)
 
512

Equity in other comprehensive income of subsidiary
2,694

 
643

 
(642
)
Other comprehensive income (loss)
2,299

 
(1,017
)
 
(130
)
Total comprehensive income
$
9,284

 
$
3,356

 
$
3,881


STATEMENTS OF CASH FLOWS

(Dollars in thousands)
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income
$
6,985

 
$
4,373

 
$
4,011

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

 
 

 
 

Equity in undistributed earnings of banking subsidiary
(3,492
)
 
(2,738
)
 
(3,215
)
Other, net
(572
)
 
(608
)
 
(879
)
Net cash provided by (used in) operating activities
2,921

 
1,027

 
(83
)
Cash flows from investing activities:
 

 
 

 
 

Purchases of securities available for sale
(1,496
)
 
(1,500
)
 
—

Sales of securities available for sale
1,500

 
—

 
—

Net cash provided by (used in) investing activities
4

 
(1,500
)
 
—

Cash flows from financing activities:
 

 
 

 
 

Increase (decrease) in note payable
(500
)
 
(125
)
 
1,500

Cash dividends
(980
)
 
(968
)
 
(1,751
)
Tax benefits on share-based transactions
—

 
2

 
—

Net cash used in financing activities
(1,480
)
 
(1,091
)
 
(251
)
Net increase (decrease) in cash
1,445

 
(1,564
)
 
(334
)
Cash at January 1
2,837

 
4,401

 
4,735

Cash at December 31
$
4,282

 
$
2,837

 
$
4,401



Note 23:  Subsequent Event

On February 6, 2013, First M&F Corporation (First M&F) and Renasant Corporation (Renasant) entered into an Agreement and Plan of Merger providing for the merger of First M&F with and into Renasant, with Renasant the surviving corporation in the merger, and the merger of Merchants and Farmers Bank with and into Renasant Bank, with Renasant Bank the surviving banking corporation. If the merger is completed, holders of First M&F's common stock will receive 0.6425 of a share of Renasant common stock in exchange for each share of First M&F common stock held immediately prior to the merger, subject to the payment of cash in lieu of fractional shares. First M&F will hold a special shareholder meeting in which holders of First M&F common stock will be asked to vote to adopt and approve the merger agreement. Consummation of the merger is contingent upon regulatory and both First M&F and Renasant shareholder approval and other closing conditions.

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FIRST M&F CORPORATION AND SUBSIDIARY


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.


CONTROLS AND PROCEDURES
  
Disclosure Controls and Procedures

The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company conducted an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act). As of December 31, 2012 the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, on a timely basis.

There have been no changes to the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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, 2012. Management’s report is included on page 51 in the section, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, under the heading “Management’s Annual Report on Internal Control Over Financial Reporting” and is hereby incorporated by reference.


OTHER INFORMATION

None.

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FIRST M&F CORPORATION AND SUBSIDIARY


PART III

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning directors, executive officers and corporate governance of the registrant is incorporated by reference and contained in the proxy material on Page 3 and following.

The following information concerns the employment history of executive officers for the last five (5) years.

Name
 
Five Year Employment History
Hugh S. Potts, Jr. (age 68)
 
Chairman of the Board and CEO, First M&F Corporation and M&F Bank since 1994
John G. Copeland (age 60)
 
EVP & Chief Financial Officer, First M&F Corporation and M&F Bank since May 2004
Jeffrey B. Lacey (age 50)
 
President & Chief Banking Officer, M&F Bank since December 2008; Branch President, M&F Bank from March 2002 through December 2008
Eric K. Hanbury (age 40)
 
EVP & Chief Credit Officer, M&F Bank since August 30, 2011; Senior Vice President - Regional Credit Officer of Northern Mississippi, Alabama and Florida from December 2008 to August 2011; Branch President, M&F Bank from July 2005 to December 2008
Barry S. Winford (age 46)
 
EVP - Corporate Banking, M&F Bank since August 30, 2011; EVP & Chief Credit Officer, M&F Bank from February 17, 2009 to August 30, 2011; President, Community Church Capital from May 2008 through December 2008; President, Therizo Capital from October 2006 through December 2008
Grover C. Kinney, III (age 52)
 
EVP - Retail Banking, M&F Bank since September 2011; EVP - Region I, M&F Bank from December 2008 to August 2011; EVP - Chief Deposit Officer, M&F Bank prior to December 2008
Samuel B. Potts (age 34)
 
Senior Vice President - Corporate Planning, Performance & Risk Management, M&F Bank since March 2012; Vice President - Corporate Planning, Performance & Risk Management, M&F Bank from July 2008 to March 2012; Vice President - Commercial Lending, M&F Bank from March 2004 to July 2008

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 investor relations website at the Code of Ethics listing at http://www.fmfcinvestor.com/governance-documents. 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 website within five business days following such amendment or waiver. The information contained on or connected to the Company's 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.
 
As a CDCI/TARP recipient the Company is required to have an Excessive Expenditure Policy. Such a policy was adopted by the Company’s Board of Directors on October 5, 2009 and is posted on the Company's investor relations website at the FMFC Excessive Expenditures Policy listing at http://www.fmfcinvestor.com/governance-documents.

EXECUTIVE COMPENSATION
 
Information concerning executive compensation is incorporated by reference and contained in the proxy material on Page 18 and following.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Information concerning security ownership of certain beneficial owners and management is incorporated by reference and contained in the proxy material on Page 12 and following.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
Information concerning certain relationships and related transactions and director independence is incorporated by reference and contained in the proxy material on Pages 14 and 15.

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 16.

116
FIRST M&F CORPORATION AND SUBSIDIARY


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
(c)
Consolidated Statements of Condition – December 31, 2012 and 2011
(d)
Consolidated Statements of Operations – Years Ended December 31, 2012, 2011 and 2010
(e)
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2012, 2011 and 2010
(f)
Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2012, 2011 and 2010
(g)
Consolidated Statements of Cash Flows – Years Ended December 31, 2012, 2011 and 2010
(h)
Notes to Consolidated Financial Statements

The following exhibits have been filed with the Securities and Exchange Commission and are available upon written request:
2.1
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, First M&F Corporation and Merchants and Farmers Bank dated as of February 6, 2013. Incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 11, 2013.
 
 
 
3.1
 
Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 to the Company’s Form S-1 (File No. 33-08751) September 15, 1986.
 
 
 
3.2
 
Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
3.3
 
By-laws of the Registrant, 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.
 
 
 
3.4
 
Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
4.1
 
Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.1
 
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.
 
 
 
10.2
 
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.
 
 
 
10.3
 
Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.4
 
Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.5
 
Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.6
 
CDCI Letter Agreement dated September 29, 2010.  Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
 
 
 
10.7
 
Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
11
 
Computation of Earnings per Share. Filed herewith as Note 19 to the consolidated financial statements.
 
 
 
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.
 
 
 
99
 
Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.

117
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.
 
 
Hugh S. Potts, Jr.
 
 
Chairman of the Board and
 
 
Chief Executive Officer
 
 
 
 
DATE:   
March 8, 2013
 

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, 2013
Hugh S. Potts, Jr., Director
 
 
Chairman of the Board
 
 
Chief Executive Officer
 
 
(principal executive officer)
 
 
 
 
 
/s/ Eddie J. Briggs
DATE:   
March 8, 2013
Eddie J. Briggs, Director
 
 
 
 
 
/s/ Hollis C. Cheek
DATE:   
March 8, 2013
Hollis C. Cheek, Director
 
 
 
 
 
/s/ Jon A. Crocker
DATE:   
March 8, 2013
Jon A. Crocker, Director
 
 
 
 
 
/s/ James D. Frerer
DATE:   
March 8, 2013
James D. Frerer, Director
 
 
 
 
 
/s/ K. Michael Heidelberg
DATE:   
March 8, 2013
K. Michael Heidelberg, Director
 
 
 
 
 
/s/ Jeffrey B. Lacey
DATE:   
March 8, 2013
Jeffrey B. Lacey, Director
 
 
President &
 
 
Chief Banking Officer
 
 
 
 
 
/s/ John Clark Love, III
DATE:   
March 8, 2013
John Clark Love, III, Director
 
 
 
 
 
/s/ Michael L. Nelson
DATE:   
March 8, 2013
Michael L. Nelson, Director
 
 
 
 
 
/s/ Otho E. Pettit, Jr.
DATE:   
March 8, 2013
Otho E. Pettit, Jr., Director
 
 
 
 
 
/s/ Samuel B. Potts
DATE:   
March 8, 2013
Samuel B. Potts, Director
 
 
Senior Vice President
 
 
 
 
 
/s/ Julie B. Taylor
DATE:   
March 8, 2013
Julie B. Taylor, Director

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FIRST M&F CORPORATION AND SUBSIDIARY


 
 
/s/ Lawrence D. Terrell
DATE:   
March 8, 2013
Lawrence D. Terrell, Director
 
 
 
 
 
/s/ Lawrence D. Terrell, Jr.
DATE:   
March 8, 2013
Lawrence D. Terrell, Jr., Director
 
 
 
 
 
/s/ James I. Tims
DATE:   
March 8, 2013
James I. Tims, Director
 
 
 
 
 
/s/ Scott M. Wiggers
DATE:   
March 8, 2013
Scott M. Wiggers, Director
 
 
 
 
 
/s/ John G. Copeland
DATE:   
March 8, 2013
John G. Copeland
 
 
EVP & Chief Financial Officer
 
 
(principal financial officer)
 
 
 
 
 
/s/ Robert C. Thompson, III
DATE:   
March 8, 2013
Robert C. Thompson, III
 
 
VP – Accounting Policy
 
 
(principal accounting officer)

119
FIRST M&F CORPORATION AND SUBSIDIARY


EXHIBIT INDEX

2.1
 
Agreement and Plan of Merger by and among Renasant Corporation, Renasant Bank, First M&F Corporation and Merchants and Farmers Bank dated as of February 6, 2013. Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on February 11, 2013.
 
 
 
3.1
 
Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3 to the Company's Form S-1 (File No. 33-08751) September 15, 1986.
 
 
 
3.2
 
Amended and Restated Articles of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
3.3
 
By-laws of the Registrant, 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.
 
 
 
3.4
 
Amended and Restated Bylaws of the Registrant. Incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
4.1
 
Warrant to Purchase up to 513,113 Shares of Common Stock of the Registrant. Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.1
 
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.
 
 
 
10.2
 
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.
 
 
 
10.3
 
Letter Agreement, including as Exhibit A thereto, Securities Purchase Agreement. Incorporated herein by reference to Exhibit A to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.4
 
Form of Preferred Stock Certificate. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.5
 
Side Letter Agreement. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on March 5, 2009.
 
 
 
10.6
 
CDCI Letter Agreement dated September 29, 2010. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 5, 2010.
 
 
 
10.7
 
Form of Change in Control Agreement between the Company and John G. Copeland, effective May 3, 2004. Incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 14, 2012.
 
 
 
11
 
Computation of Earnings per Share. Filed herewith as Note 19 to the consolidated financial statements.
 
 
 
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.
 
 
 
99
 
Certification pursuant to the Emergency Economic Stability Act of 2008 of Hugh S. Potts, Jr., Chief Executive Officer and Certification pursuant to the Emergency Stability Act of 2008 of John G. Copeland, Chief Financial Officer.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.



120