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 June 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 June 30, 1996. 1,400,000 shares
This filing contains 10 pages.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited consolidated financial statements of
the registrant and its subsidiary for the six months ended June
30, 1996, are as follows:
Consolidated balance sheets - June 30, 1996, and December 31, 1995.
Consolidated statements of income - For the three months and
six months ended June 30, 1996, and June 30, 1995.
Consolidated statements of cash flows - For the six months
ended June 30, 1996, and June 30, 1995.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 and DECEMBER 31, 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,870,022 $ 31,281,706
Federal funds sold 1,900,000 -
Securities
Available for sale (amortized cost
$49,846,368 and $10,875,527 respectively) 49,201,402 11,269,006
Held to maturity (fair value $116,363,528
and $128,829,961 respectively) 116,632,936 127,662,682
Total securities 165,834,338 138,931,688
Loans, net of unearned income 291,527,060 291,930,311
Allowance for possible loan losses (2,941,692) (2,678,386)
Net loans 288,585,368 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and amortization 6,768,068 6,397,936
Other assets 15,712,975 11,171,993
TOTAL ASSETS $ 506,670,771 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 61,888,886 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $36,635,187; 1995 - $30,593,803) 387,414,289 343,357,525
Total deposits 449,303,175 410,778,061
Federal funds purchased - 10,000,000
Dividends payable 658,000 630,000
Accounts payable and accrued liabilities 5,470,190 6,630,712
TOTAL LIABILITIES 455,431,365 428,038,773
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 37,626,384 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax (386,978) 236,086
TOTAL STOCKHOLDERS' EQUITY 51,239,406 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 506,670,771 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 6,765,396 $ 6,415,087 $ 13,696,667 $ 12,411,304
Interest on investment securities
Taxable interest 1,753,259 1,591,396 3,232,123 3,227,523
Exempt from federal income tax 570,910 535,627 1,151,093 1,079,887
Dividends 126,043 59,098 163,994 94,185
2,450,212 2,186,121 4,547,210 4,401,595
Other interest income 64,695 39,561 88,650 72,098
TOTAL INTEREST INCOME 9,280,303 8,640,769 18,332,527 16,884,997
INTEREST EXPENSE
Interest on deposits 4,136,585 3,802,293 8,085,354 7,400,623
Interest on other short term borrowings 16,474 54,301 57,091 110,456
TOTAL INTEREST EXPENSE 4,153,059 3,856,594 8,142,445 7,511,079
NET INTEREST INCOME 5,127,244 4,784,175 10,190,082 9,373,918
PROVISION FOR POSSIBLE LOAN LOSSES 300,000 140,000 550,000 285,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,827,244 4,644,175 9,640,082 9,088,918
NONINTEREST INCOME
Trust department income 348,989 310,747 684,197 669,419
Service fees on deposits accounts 821,486 667,212 1,564,582 1,267,060
Other service fees 204,228 55,518 353,964 109,573
Other operating income 110,731 73,519 202,336 165,670
Investment securities gains (losses) - - - (2,348)
TOTAL NONINTEREST INCOME 1,485,434 1,106,996 2,805,079 2,209,374
NONINTEREST EXPENSES
Salaries and employee benefits 1,759,213 1,633,842 3,511,697 3,238,464
Net occupancy expense 330,153 291,736 602,047 594,580
Furniture and equipment expense 422,019 395,437 792,442 673,622
Loss on other real estate - 50,724 - 50,724
Other operating expenses 1,208,554 1,282,852 2,461,002 2,692,084
TOTAL NONINTEREST EXPENSES 3,719,939 3,654,591 7,367,188 7,249,474
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,592,739 2,096,580 5,077,973 4,048,818
PROVISION FOR INCOME TAXES 776,659 589,977 1,553,978 1,102,425
NET INCOME $ 1,816,080 $ 1,506,603 $ 3,523,995 $ 2,946,393
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.30 $ 1.08 $ 2.52 $ 2.10
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 and 1995
(Unaudited)
<CAPTION>
1996 1995
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,523,995 $ 2,946,393
Adjustments to reconcile net income to net cash
provided by operating activities
Excess of provision for possible
loan losses over net charge offs 263,306 288,175
Provision for depreciation and amortization of
premises and equipment 332,007 298,962
Amortization of deposit base intangibles 102,726 84,010
Amortization of investment security premiums,
net of accretion of discounts 282,602 181,912
Donation of premises to municipalities 88,500 -
Increase in cash surrender value of life
insurance contracts (50,255) (33,857)
Deferred income taxes (152,609) (95,434)
(Increase) decrease in
Interest receivable (333,595) (15,648)
Other assets (301,216) 1,115,315
Increase (decrease) in
Interest payable (215,807) 407,310
Other liabilities 408,285 265,160
TOTAL ADJUSTMENTS 423,944 2,495,905
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,947,939 5,442,298
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 1,016,672 7,044,872
Proceeds from maturities and calls of
held-to-maturity securities 26,506,000 10,751,992
Purchases of investment securities
Available-for-sale (40,061,888) (3,118,400)
Held-to-maturity (15,684,481) (1,947,244)
Net (increase) decrease in loans 403,251 (17,594,016)
Purchases of premises and equipment (790,639) (299,776)
Purchases of deposit base intangibles (1,124,258) -
Purchase of leased equipment (2,266,394) -
NET CASH USED BY INVESTING ACTIVITIES (32,001,737) (5,162,572)
FINANCING ACTIVITIES
Net increase in noninterest-bearing and
interest-bearing deposits 18,661,191 1,503,888
Assumption of deposit liabilities 19,863,923 -
Net increase (decrease) in short term borrowings (11,353,000) (4,600,000)
Cash dividends (630,000) (574,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,542,114 (3,670,112)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,511,684) (3,390,386)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 31,281,706 26,735,526
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,770,022 $ 23,345,140
</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.
Item 2. Management's Discussion and Analysis of Financial
Condition
Material Changes in Financial Condition
Average total assets were $490 million at the end of the first
six months of 1996 compared to $462 million at the end of the
first six months of 1995. Period-end assets were $506.6 million
compared to $477.0 million at December 31, 1995, and $460.8 at
June 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
indicating the effect of the purchase and assumption transaction.
SECURITIES
At June 30, 1996, the Corporation's investment securities
portfolio had $49.2 million available-for-sale securities and
$116.6 million held-to-maturity securities. This compares to
$11.2 and $11.1 million available-for-sale securities and $127.6
and $131.5 million held-to-maturity securities at December 31,
1995, and June 30, 1995, respectively. The available-for-sale
portion or 29.7% of the current portfolio, is an integral part of
the asset/liability management process providing a source of
liquidity if needed 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. Available-for-sale securities 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 $645 thousand at
June 30, 1996. The management of the Corporation's subsidiary
bank has the positive intent and ability to hold to maturity the
70.3% balance of the portfolio and these securities are reported
at amortized cost. The 29.7% liquidity portion of the current
portfolio is a larger portion than it was at year end, 8.1%,
and the second quarter last year, 7.8%. The liquidity portion
of the current securities portfolio was increased in part
using some of the cash flow resulting from the acquisition. The other
source of increase was portfolio calls and maturities that replaced
securities sold during the first two quarters of 1995 to fund expanding
loan growth that remained strong throughout 1995.
LOANS
The average loan portfolio of the Corporation's subsidiary
increased $12.1 million or 4.4% in the first six months of 1996
compared to a $20.9 million or 8.5% increase in the first six
months of 1995. Personal loans posted the largest increase,
13.9% during the first two quarters of 1996 and 19.4% since June
30, 1995. Commercial loans increased 10.4% during the first two
quarters of 1996 and 15.7% since June 30, 1995, while loans
secured by real estate posted only a .8% growth for the first
six months of 1996 and a 1.7% growth since June 30, 1995.
The Corporation's subsidiary loan review function and Special
Assets Committee reviewed approximately one third of the average
dollar value of the loan portfolio during the first six months
of 1996. After this review, loans totaling $3.2 million, 1.1%
of the portfolio, were classified as other assets especially
mentioned at June 30, 1996, which is up from the $2.1 million so
classified at December 31, 1995. Loans totaling $10.3 million,
3.6% of the portfolio, were classified as substandard at June
30, 1996, compared to $10.9 million so classified at December
31, 1995. Loans
<PAGE>
totaling $1.1 million, .4% of the portfolio,
were classified as doubtful at June 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. Management is not aware of any known
trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on the corporation's
liquidity, capital resources or operations. Loans having
recorded investments of $4.9 million, 1.7% of the total
portfolio, have been identified as impaired at the end of the
first six months of 1996 compared to $5.9 million and $5.3
million at December 31, 1995 and June 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.
DEPOSITS
Average deposits of the Corporation's subsidiary were $433.1
million for the first six months of 1996 which was an increase
of 5.8% or $23.6 million from the beginning of the year. During
the same period in 1995, average deposits increased .3%. 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 not as attractive compared to longer term
rates during the first half of 1996 and some depositors moved money
back into interest-bearing checking accounts, which increased
4.0% during the first half of 1996. Approximately 1% 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 2.6% at December 31, 1995 and
5.2% at June 30, 1995. Certificates of deposit under $100,000
increased 9.3%, certificates of deposit over $100,000 increased
2.1%, and savings deposits increased 2.9% during the first half
of 1996 for an overall increase of 7.1%. Approximately 3.4% of
this increase can be attributed to the purchase and assumption
transaction.
CAPITAL
Average shareholders' equity was $50.6 million at June 30,
1996, compared to $45.5 million at June 30, 1995, an increase of
11.3%. Average shareholders' equity increased 8.3% during the
first six months of 1996 compared to an increase of 8.8% during
the first six months of 1995. Most of the capital needs of the
Corporation's subsidiary bank have historically been financed
through internal growth.
At June 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 9.9% ratio at June 30, 1995. At the close of the
first six months of 1996, additional dividends of approximately
$12 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
<PAGE>
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
June 30, 1996, the Bank's risk-based core and total capital
ratios were 16.9% and 17.9% respectively. The comparable ratios
were 16.8% and 17.7% at year end, 1995. At June 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 six months of 1996, the Corporation's
consolidated income totaled $3.5 million compared to $2.9
million for the first six months of 1995. The Corporation's
total interest income during the first six months of 1996 was
$18.3 million compared to $16.9 million during the first six
months of 1995. This was an increase of 8.6%. Loan income was
up 10.4% which is indicative of the strong loan demand in 1995,
while investment income was up 3.6%.
Interest expense increased 8.4% during the first six months of
1996. The net interest margin (tax equivalent net interest
income divided by average earning assets annualized) for the six
months ended June 30, 1996, was 4.9%, compared to 4.8% for the
corresponding period in 1995.
The provision for loan losses was $550,000 for the first six
months of 1996 compared to $285,000 for the first six months of
1995, which was a 93% 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 six months of 1996
were $287 thousand compared to net recoveries of $10 thousand
for the first six 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
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 half of 1996 compared to write downs of $51
thousand during the first half 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 June 30, 1996, total $462 thousand which compares to
$483 thousand and $534 thousand at December 31, 1995, and June
30, 1995, respectively.
Non-interest income increased 26.9% during the first six 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 had more than doubled.
Non-interest expense increased 1.6% during the first six months
of 1996 compared to the same period of 1995. The largest
increase was in furniture and equipment expense which increased
17.6%.
<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 August 12, 1996 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman
(Chief Executive Officer)
Date August 12, 1996 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 27,870,022
<INT-BEARING-DEPOSITS> 741
<FED-FUNDS-SOLD> 1,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,201,402
<INVESTMENTS-CARRYING> 116,632,936
<INVESTMENTS-MARKET> 116,363,528
<LOANS> 291,527,060
<ALLOWANCE> (2,941,692)
<TOTAL-ASSETS> 506,670,771
<DEPOSITS> 449,303,175
<SHORT-TERM> 602,000
<LIABILITIES-OTHER> 4,868,190
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 37,239,406
<TOTAL-LIABILITIES-AND-EQUITY> 506,670,771
<INTEREST-LOAN> 13,696,667
<INTEREST-INVEST> 4,547,210
<INTEREST-OTHER> 88,650
<INTEREST-TOTAL> 18,332,527
<INTEREST-DEPOSIT> 8,085,354
<INTEREST-EXPENSE> 8,142,445
<INTEREST-INCOME-NET> 10,190,082
<LOAN-LOSSES> 550,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,367,188
<INCOME-PRETAX> 5,077,973
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,523,995
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.35
<LOANS-NON> 4,992,525
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,678,386
<CHARGE-OFFS> 444,709
<RECOVERIES> 158,015
<ALLOWANCE-CLOSE> 2,941,692
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
