SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1996
Commission file number 0-10972
First Farmers and Merchants Corporation
(Exact name of registrant as specified in its charter)
Tennessee 62-1148660
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
(Address of principal executive offices) (Zip Code)
(615) 388-3145
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's common stock, as of September 30, 1996. 1,400,000 shares
This filing contains 11 pages.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited consolidated financial statements of
the registrant and its subsidiary for the nine months ended
September 30, 1996, are as follows:
Consolidated balance sheets - September 30, 1996, and December 31, 1995
Consolidated statements of income - For the three months and
nine months ended September 30, 1996, and September 30, 1995
Consolidated statements of cash flows - For the nine months
ended September 30, 1996, and September 30, 1995
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 and DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,960,797 $ 31,281,706
Federal funds sold 4,300,000 -
Securities
Available for sale (amortized cost
$49,802,954 and $10,875,527 respectively) 49,389,193 11,269,006
Held to maturity (fair value $121,330,880
and $128,829,961 respectively) 121,344,759 127,662,682
Total securities 170,733,952 138,931,688
Loans, net of unearned income 294,980,335 291,930,311
Allowance for possible loan losses (2,865,741) (2,678,386)
Net loans 292,114,594 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and amortization 6,643,398 6,397,936
Other assets 14,928,769 11,171,993
TOTAL ASSETS $ 516,681,510 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 67,509,695 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $36,086,098 1995 - $30,593,803) 390,436,115 343,357,525
Total deposits 457,945,810 410,778,061
Federal funds purchased - 10,000,000
Dividends payable - 630,000
Accounts payable and accrued liabilities 5,598,748 6,630,712
TOTAL LIABILITIES 463,544,558 428,038,773
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding 14,000,000 14,000,000
Retained earnings 39,385,209 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax (248,257) 236,086
TOTAL STOCKHOLDERS' EQUITY 53,136,952 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 516,681,510 $ 477,035,248
UNAUDITED (A)
<FN>
<F1>
(A) The Consolidated Balance Sheet at December 31, 1995, has
been taken from the audited financial statements at that date.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 6,729,654 $ 6,619,392 $ 20,426,321 $ 19,030,696
Interest on investment securities
Taxable interest 1,797,791 1,511,801 5,029,914 4,739,324
Exempt from federal income tax 599,862 539,137 1,750,955 1,619,024
Dividends 42,683 41,895 206,677 136,080
2,440,336 2,092,833 6,987,546 6,494,428
Other interest income 79,143 7,987 167,793 80,085
TOTAL INTEREST INCOME 9,249,133 8,720,212 27,581,660 25,605,209
INTEREST EXPENSE
Interest on deposits 4,244,544 3,897,170 12,329,898 11,297,793
Interest on other short term borrowings 15,780 41,430 72,871 151,886
TOTAL INTEREST EXPENSE 4,260,324 3,938,600 12,402,769 11,449,679
NET INTEREST INCOME 4,988,809 4,781,612 15,178,891 14,155,530
PROVISION FOR POSSIBLE LOAN LOSSES 200,000 180,000 750,000 465,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,788,809 4,601,612 14,428,891 13,690,530
NONINTEREST INCOME
Trust department income 343,492 256,724 1,027,688 926,143
Service fees on deposits accounts 874,501 682,633 2,439,084 1,949,693
Other service fees 198,621 100,732 552,585 210,305
Other operating income 83,913 83,437 286,249 249,107
Investment securities gains (losses) - 3,530 - 1,182
TOTAL NONINTEREST INCOME 1,500,527 1,127,056 4,305,606 3,336,430
NONINTEREST EXPENSES
Salaries and employee benefits 1,763,834 1,669,796 5,275,531 4,908,260
Net occupancy expense 315,973 316,028 918,020 910,608
Furniture and equipment expense 379,970 324,315 1,172,412 997,937
Loss on other real estate - - - 50,724
Other operating expenses 1,376,099 1,247,383 3,837,101 3,939,467
TOTAL NONINTEREST EXPENSES 3,835,876 3,557,522 11,203,064 10,806,996
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,453,460 2,171,146 7,531,433 6,219,964
PROVISION FOR INCOME TAXES 694,636 680,609 2,248,614 1,783,034
NET INCOME $ 1,758,824 $ 1,490,537 $ 5,282,819 $ 4,436,930
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.26 $ 1.06 $ 3.77 $ 3.17
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
(Unaudited)
<CAPTION>
1996 1995
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 5,282,819 $ 4,436,930
Adjustments to reconcile net income to net
cash provided by operating activities
Excess of provision for possible
loan losses over net charge offs 187,355 270,282
Provision for depreciation and amortization
of premises and equipment 499,427 484,654
Amortization of deposit base intangibles 163,469 126,015
Amortization of investment security premiums,
net of accretion of discounts 427,968 313,505
Donation of premises to municipalities 88,500 -
Increase in cash surrender value of life
insurance contracts (75,382) (50,785)
Deferred income taxes (118,511) (106,248)
(Increase) decrease in
Interest receivable (496,159) (396,882)
Other assets 563,713 1,123,463
Increase (decrease) in
Interest payable (317,103) 260,517
Other liabilities 638,139 698,886
TOTAL ADJUSTMENTS 1,561,416 2,723,407
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,844,235 7,160,337
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 3,018,058 7,210,554
Proceeds from maturities and calls of
held-to-maturity securities 34,169,000 14,748,992
Purchases of investment securities
Available-for-sale (42,072,588) (3,143,100)
Held-to-maturity (28,151,942) (3,251,618)
Net (increase) decrease in loans (3,050,024) (24,458,768)
Purchases of premises and equipment (833,389) (513,529)
Purchases of deposit base intangibles (1,124,258) -
Purchase of leased equipment, net of
depreciation (2,346,750) -
NET CASH USED BY INVESTING ACTIVITIES (40,391,893) (9,407,469)
FINANCING ACTIVITIES
Net increase in noninterest-bearing and
interest-bearing deposits 27,303,826 5,102,509
Assumption of deposit liabilities 19,863,923 -
Net increase (decrease) in short term
borrowings (11,353,000) (5,200,000)
Cash dividends (1,288,000) (1,176,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,526,749 (1,273,491)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 979,091 (3,520,623)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,281,706 26,735,526
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,260,797 $ 23,214,903
</TABLE>
<PAGE>
The unaudited consolidated financial statements have been
prepared on a consistent basis and in accordance with the
instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for
a fair presentation have been included. For further
information, refer to the consolidated financial statements and
footnotes included in the Corporation's annual report on Form
10-K for the year ended December 31, 1995.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition
Material Changes in Financial Condition
Average total assets were $497 million at the end of the first
nine months of 1996 compared to $464 million at the end of the
first nine months of 1995. Period-end assets were $516 million
compared to $477 million at December 31, 1995, and $465 at
September 30, 1995. The bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The following sections analyze the average balance sheet
and the major components of the period-end balance sheet.
SECURITIES
At September 30, 1996, the Corporation's investment securities
portfolio had $49.3 million available-for-sale securities and
$121.3 million held-to-maturity securities. This compares to
$11.2 and $11.0 million available-for-sale securities and $127.6
and $128.6 million held-to-maturity securities at December 31,
1995, and September 30, 1995, respectively. The
available-for-sale securities, at 29% of the current portfolio,
are managed as an integral part of the asset/liability
management process. They are an important source of liquidity
available to fund loans and accommodate asset reallocation
strategies dictated by changes in bank operating and tax plans,
shifting yield spread relationships, and changes in
configuration of the yield curve. Items held for these purposes
were classified as "available-for-sale" after the adoption of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities", and are
reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
stockholders' equity. Net unrealized losses on
available-for-sale securities were $414 thousand at September
30, 1996. The management of the Corporation's subsidiary bank
has the positive intent and ability to hold to maturity the 71%
balance of the portfolio and these securities are reported at
amortized cost. The liquidity portion of the current portfolio
is over three times larger than it was at year end and at the
end of the third quarter last year. The liquidity portion of
the securities portfolio had declined during the first three
quarters of 1995 because those funds were used to fund expanding
loan growth.
LOANS
The average loan portfolio of the Corporation's subsidiary
increased $12 million or 4.4% in the first nine months of 1996
compared to a $25 million or 10.1% increase in the first nine
months of 1995. Loan demand in the service area has declined
during 1996 due in part to the decline in the number of small
businesses in the area. Merger activity and the change in the
type of businesses operating in the area have contributed to the
decline in the number of small businesses in the market.
Personal loans posted the largest increase, 15.5% during the
first three quarters of 1996. Commercial loans increased 9.5%
during the first three quarters of 1996, while loans secured by
real estate actually declined.
<PAGE>
The Corporation's subsidiary loan review function and Special
Assets Committee reviewed approximately 42 % of the average
dollar value of the loan portfolio during the first nine months
of 1996. After this review, loans totaling $3.3 million, 1.2%
of the portfolio, were classified as other assets especially
mentioned at September 30, 1996, which is up from the $2.1
million so classified at December 31, 1995. Loans totaling $8.7
million, 3.0% of the portfolio, were classified as substandard
at September 30, 1996, compared to $10.9 million so classified
at December 31, 1995. Loans totaling $1.6 million, .6% of the
portfolio, were classified as doubtful at September 30, 1996,
compared to $2.7 million at December 31, 1995. Any loans
classified for regulatory purposes as loss, doubtful,
substandard, or special mention do not represent or result from
trends or uncertainties which management reasonably expects will
materially affect operating results, liquidity, or capital
resources. Neither do such loans represent material credits
about which management is aware of any information which causes
management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms. Loans having
recorded investments of $6.3 million, 2.2% of the total
portfolio, have been identified as impaired at the end of the
first nine months of 1996 compared to $5.9 million and $5.5
million at December 31, 1995 and September 30, 1995,
respectively. A loan is considered impaired when it is probable
that all amounts due (principal and interest) according to the
contractual terms of the loan agreement will not be collected.
The extent of impairment is evaluated by the loan review
function and the Special Assets Committee and included in the
appropriate category to monitor.
DEPOSITS
Average deposits of the Corporation's subsidiary were $439.2
million for the first nine months of 1996 compared to $409.5 and
$408.4 for the year ended December 31, 1995 and for the first
nine months of 1995, respectively. Over half of the increase in
the current year came from the purchase and assumption of $19.8
million in deposits from Union Planters Bank of Middle
Tennessee, as discussed in the beginning of this section. Short
and medium term rates were more competitive compared to longer
term rates during the first half of 1996 and some depositors
moved money back into interest-bearing checking accounts, which
increased 4.8% during the first nine months of 1996.
Approximately one fourth of this growth in interest-bearing
checking accounts can be attributed to the purchase and
assumption transaction. Longer term interest-bearing products
like certificates had enjoyed more attractive rates during much
of 1995 when interest-bearing checking accounts had decreased
8.9% during the year ended December 31, 1995. Certificates of
deposit under $100,000 increased 10.8%, certificates of deposit
over $100,000 increased 4.1%, and savings deposits increased
5.6% during the first nine months of 1996. The overall increase
in non-transaction interest-bearing accounts was 8.3% for the
nine months ended September 30, 1996. Over 70% of this increase
can be attributed to the purchase and assumption transaction.
CAPITAL
Average shareholders' equity was $51.2 million at September
30, 1996, compared to $46.7 million at December 31, 1995, an
increase of 9.7% including the equity portion of the net
unrealized loss on available-for-sale securities and 9.9%
without considering the unrealized loss. This compares to an
increase of 10.2% during the first nine months of 1995 both with
and without the related net unrealized gains or losses on
available-for-sale securities. Most of the capital
<PAGE>
needs of the Corporation's subsidiary bank have
historically been financed through internal growth.
At September 30, 1996, the Corporation had an equity capital to
asset ratio of 10.3% compared to a 10.1% ratio at December 31,
1995 and a 10.0% ratio at September 30, 1995. At the close of
the first nine months of 1996, additional dividends of
approximately $13 million to the Corporation could have been
declared by the subsidiary bank without regulatory agency
approval.
Regulatory risk-adjusted capital adequacy standards require
certain levels of capital when compared to total assets weighted
by risk category. Equity capital (net of certain adjustments
for intangible assets and investments in non-consolidated
subsidiaries and certain classes of preferred stock) are
considered Tier 1 ("core") capital. Tier 2 capital consists of
subordinated debt, some types of preferred stock, and varying
amounts of the Allowance for Possible Loan Losses and is added
to core capital to get total capital. The minimum standard for
a "well capitalized" bank is a risk-based core capital ratio of
6%, a risk-based total capital ratio of 10%, and a core capital
to average total assets ratio of 5%. As of September 30, 1996,
the Bank's risk-based core and total capital ratios were 17.3%
and 18.2% respectively. The comparable ratios were 16.8% and
17.7% at year end, 1995. At September 30, 1996, the Bank had a
ratio of average core capital to average total assets of 10.0%
compared to 9.9% at December 31, 1995.
Material Changes in Results of Operations
During the first nine months of 1996, the Corporation's
consolidated income totaled $5.3 million compared to $4.4
million for the first nine months of 1995. The Corporation's
total interest income during the first nine months of 1996 was
$27.6 million compared to $25.6 million during the first nine
months of 1995. This was an increase of 7.7%. Loan income was
up 7.3%, while investment income showed an increase of 8.8%
Interest expense increased 8.3% during the first nine months of
1996. The net interest margin (tax equivalent net interest
income divided by average earning assets annualized) for the
nine months ended September 30, 1996, was 4.8%, compared to 4.8%
at December 31, 1995, and 4.8% for the corresponding period in
1995.
The provision for loan losses was $750,000 for the first nine
months of 1996 compared to $465,000 for the first nine months of
1995, which was a 61.3% increase. The amount of the additions
to the allowance for loan losses charged to operating expenses
is based on the evaluation of the impairment of loans by Loan
Review, the Special Assets Committee, and the Credit
Administrator. Net charge offs for the first nine months of
1996 were $562 thousand compared to net charge offs of $195
thousand for the first nine months of 1995. The ratio of net
charge offs to net average loans outstanding has been less than
.5% for the last five years and below the usual ratio for the
industry.
Other real estate, which is included in other assets, represents
real estate acquired through foreclosure and is stated at the lower
of cost or fair value minus estimated cost to sell. If, at the
time of foreclosure, the fair value of the real estate is less than
the Bank's carrying value of the
<PAGE>
related loan, a write-down is recognized through a charge to the
allowance for possible loan losses, and the fair value becomes
the new cost for subsequent accounting. If the Bank later
determines that the cost of the property cannot be recovered
through sale or use, a write-down is recognized by a charge to
operations. There were no such write downs of other real estate
during the first nine months of 1996 compared to write downs of
$51 thousand during the first nine months of 1995. Management
evaluates properties included in this category on a regular
basis. Actual foreclosures included in the carrying value for
Other Real Estate at September 30, 1996, total $462 thousand
which compares to $483 thousand and $500 thousand at December
31, 1995, and September 30, 1995, respectively.
Non-interest income increased 29.1% during the first nine
months of 1996 compared to the same period of 1995. Other
service fees which includes fee income from sales of mortgage
loans in the secondary market and lease income has more than
doubled. Non-interest expense increased 3.7% during the first
nine months of 1996 compared to the same period of 1995. The
largest increase was in furniture and equipment expense which
increased 17.5%.
<PAGE>
SIGNATURES
Pursuant to the requirements 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 FARMERS AND MERCHANTS CORPORATION
(Registrant)
Date November 14, 1995 /s/ Waymon L. Hickman
Waymon L. Hickman,
President
(Chief Executive Officer)
Date November 14, 1995 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Financial Data Schedule for 3rd Quarter, September, 1996.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 27,960,797
<INT-BEARING-DEPOSITS> 788
<FED-FUNDS-SOLD> 4,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,389,193
<INVESTMENTS-CARRYING> 121,344,759
<INVESTMENTS-MARKET> 121,330,880
<LOANS> 294,980,335
<ALLOWANCE> (2,865,741)
<TOTAL-ASSETS> 516,681,510
<DEPOSITS> 457,945,810
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,598,748
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 39,136,952
<TOTAL-LIABILITIES-AND-EQUITY> 516,681,510
<INTEREST-LOAN> 20,426,321
<INTEREST-INVEST> 6,987,546
<INTEREST-OTHER> 167,793
<INTEREST-TOTAL> 27,581,660
<INTEREST-DEPOSIT> 12,329,898
<INTEREST-EXPENSE> 12,402,769
<INTEREST-INCOME-NET> 15,178,891
<LOAN-LOSSES> 750,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,203,064
<INCOME-PRETAX> 7,531,433
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,282,819
<EPS-PRIMARY> 3.77
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.12
<LOANS-NON> 6,302,082
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,678,386
<CHARGE-OFFS> 880,936
<RECOVERIES> 318,291
<ALLOWANCE-CLOSE> 2,865,741
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
