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, 1997
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, 1997. 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, 1997, are as follows:
Consolidated balance sheets - September 30, 1997, and December
31, 1996.
Consolidated statements of income - For the three months and
nine months ended September 30, 1997, and September 30, 1996.
Consolidated statements of cash flows - For the nine months
ended September 30, 1997, and September 30, 1996.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 and DECEMBER 31, 1996
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 27,086,486 $ 27,916,507
Federal funds sold 3,200,000 -
Securities
Available for sale (amortized cost
$54,951,301 and $55,898,299
respectively) 55,885,692 56,141,535
Held to maturity (fair value
$99,613,345 and $119,226,021
respectively) 98,121,552 118,541,750
Total securities 154,007,244 174,683,285
Loans, net of unearned income 328,264,524 303,732,044
Allowance for possible loan losses (2,947,392) (2,926,063)
Net loans 325,317,132 300,805,981
Bank premises and equipment, at cost
less allowance for depreciation
and amortization 6,484,054 6,829,475
Other assets 15,229,641 15,094,426
TOTAL ASSETS $ 531,324,557 $ 525,329,674
LIABILITIES
Deposits
Noninterest-bearing $ 65,035,976 $ 75,589,511
Interest-bearing (including
certificates of deposit over
$100,000: 1997 - $39,174,729;
1996 - $39,129,547) 401,115,636 384,983,050
Total deposits 466,151,612 460,572,561
Federal funds purchased - 5,000,000
Dividends payable - 714,000
Accounts payable and accrued
liabilities 5,955,598 4,641,987
TOTAL LIABILITIES 472,107,210 470,928,548
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 44,656,711 40,255,185
Net unrealized loss on
available-for-sale securities,
net of tax 560,636 145,941
TOTAL STOCKHOLDERS' EQUITY 59,217,347 54,401,126
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 531,324,557 $ 525,329,674
UNAUDITED (A)
<FN>
<F1>
(A) The Consolidated Balance Sheet at December 31, 1996, 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,
1997 1996 1997 1996
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,385,895 $ 6,729,654 $21,348,749 $20,426,321
Interest on investment securities
Taxable interest 1,649,959 1,797,791 5,259,530 5,029,914
Exempt from federal income tax 617,155 599,862 1,850,731 1,750,955
Dividends 49,347 42,683 214,751 206,677
2,316,461 2,440,336 7,325,012 6,987,546
Other interest income 72,499 79,142 168,856 167,793
TOTAL INTEREST INCOME 9,774,855 9,249,132 28,842,617 27,581,660
INTEREST EXPENSE
Interest on deposits 4,348,349 4,244,544 12,873,417 12,329,898
Interest on other short term
borrowings 13,366 15,780 77,208 72,871
TOTAL INTEREST EXPENSE 4,361,715 4,260,324 12,950,625 12,402,769
NET INTEREST INCOME 5,413,140 4,988,808 15,891,992 15,178,891
PROVISION FOR POSSIBLE LOAN LOSSES 550,000 200,000 1,290,000 750,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,863,140 4,788,808 14,601,992 14,428,891
NONINTEREST INCOME
Trust department income 372,711 343,492 1,093,218 1,027,688
Service fees on deposits accounts 948,604 874,502 2,792,060 2,439,084
Other service fees 225,312 198,620 590,132 552,585
Other operating income 76,233 83,914 310,545 286,249
Investment securities gains
(losses) - - (1,137) -
TOTAL NONINTEREST INCOME 1,622,860 1,500,528 4,784,818 4,305,606
NONINTEREST EXPENSES
Salaries and employee benefits 1,799,405 1,763,834 5,433,454 5,275,531
Net occupancy expense 344,343 315,973 958,588 918,020
Furniture and equipment expense 373,658 379,970 1,155,716 1,172,412
Other operating expenses 1,493,614 1,376,099 4,426,048 3,837,101
TOTAL NONINTEREST EXPENSES 4,011,020 3,835,876 11,973,806 11,203,064
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,474,980 2,453,460 7,413,004 7,531,433
PROVISION FOR INCOME TAXES 917,613 694,636 2,269,478 2,248,614
NET INCOME $ 1,557,367 $ 1,758,824 $ 5,143,526 $ 5,282,819
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.11 $ 1.26 $ 3.67 $ 3.77
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 5,143,526 $ 5,282,819
Adjustments to reconcile net income to net
cash provided by operating activities
Excess (deficiency) of provision for possible
loan losses over net charge offs 21,329 187,355
Provision for depreciation and amortization of
premises and equipment 488,871 499,427
Provision for depreciation of leased equipment 625,800 260,750
Amortization of deposit base intangibles 146,438 163,469
Amortization of investment security premiums,
net of accretion of discounts 372,251 427,968
Donation of premises to municipalities - 88,500
Increase in cash surrender value of life insurance
contracts (108,348) (75,382)
Deferred income taxes 244,284 (118,511)
(Increase) decrease in
Interest receivable (467,532) (496,159)
Other assets (467,321) 302,963
Increase (decrease) in
Interest payable 236,915 (317,103)
Other liabilities 997,126 638,139
TOTAL ADJUSTMENTS 2,089,813 1,561,416
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,233,339 6,844,235
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 8,174,197 3,018,058
Proceeds from maturities and calls of
held-to-maturity securities 25,498,811 34,169,000
Purchases of investment securities
Available-for-sale (4,157,187) (42,072,588)
Held-to-maturity (8,520,875) (28,151,942)
Net (increase) decrease in loans (24,532,480) (3,050,024)
Purchases of premises and equipment (143,450) (833,389)
Purchases of deposit base intangibles - (1,124,258)
Purchase of leased equipment - (2,346,750)
Purchase of single premium life insurance contracts (385,000) -
NET CASH USED BY INVESTING ACTIVITIES (4,065,984) (40,391,893)
FINANCING ACTIVITIES
Net increase in noninterest-bearing and
interest-bearing deposits 5,579,051 27,303,826
Assumption of deposit liabilities - 19,863,923
Net increase (decrease) in short term borrowings (4,920,428) (11,353,000)
Cash dividends (1,456,000) (1,288,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES (797,377) 34,526,749
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,369,978 979,091
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,916,507 31,281,706
CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,286,485 $32,260,797
</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. These adjustments were
of a normal, recurring nature and consistent with generally
accepted accounting principles. 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, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
Material Changes in Financial Condition
Average earning assets increased 4.9% in the first nine months
of 1997 compared to a 7.1% increase in the first nine months of
1996. As a financial institution, the Bank's primary earning
asset is loans. At September 30, 1997, average net loans had
grown 6.9% and represented 65% of average earning assets.
Average net loans began a period of growth in the first quarter
of 1996 showing a 4.6% growth that continued throughout last
year and this year. Management believes this growth is
indicative of the strengthening of its presence in the four
county area in middle Tennessee that it serves. Average
investments represented 35% of average earning assets at
September 30, 1997, an increase of 1% in the first nine months
of 1997. Average total assets were $527 million at the end of
the first nine months of 1997 compared to $497 million at the
end of the first nine months of 1996. Period-end assets were
$531.3 million compared to $525.3 million at December 31, 1996.
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
The following sections analyze the average balance sheet and the
major components of the period-end balance sheet.
SECURITIES
Available-for-sale securities are an integral part of the
asset/liability management process. As such, they represent 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.
At September 30, 1997, the Corporation's investment securities
portfolio had $55.9 million available-for-sale securities and
$98.1 million held-to-maturity securities. This compares to
$56.1 available-for-sale securities and $118.5 million
held-to-maturity securities at December 31, 1996.
LOANS
The loan portfolio is the largest component of earning assets
and consequently provides the highest amount of revenues. The
loan portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
average loan portfolio increased $20.1 million or 6.9% in the
first nine months of 1997 compared to a $12.2 million or 4.4%
increase in the first nine months of 1996. This
<PAGE>
growth reflects the consistent loan demand in the service area.
Commercial loans showed strong growth posting over 7% growth,
personal loans declined slightly, but loans secured by real estate
posted a 9% growth for the first nine months of 1997. An
asset/liability strategic decision to keep higher quality bank
customer loans secured by residential real estate in the
portfolio rather than sell them in the secondary market
contributed to the increase in this type of loans.
The Corporation's subsidiary loan review function reviews lines
of credit over $50,000. After this review during the first nine
months of 1997, loans totaling $3.7 million, 1.1% of the
portfolio, were classified as other assets especially mentioned
at September 30, 1997, which is down from the $4.6 million so
classified at June 30, 1997, but up from $3.4 million at
December 31, 1996. Loans totaling $7.4 million, 2.3% of the
portfolio, were classified as substandard at September 30, 1997,
compared to $4.3 million and $8.2 million so classified at June
30, 1997, and December 31, 1996. Loans totaling $1.6 million,
.5% of the portfolio, were classified as doubtful at September
30, 1997, compared to $1.7 million and $1.4 million at June 30,
1997, and December 31, 1996. 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 $6.9 million, 2.1% of the total
portfolio, were identified as impaired at the end of the first
nine months of 1997 compared to $5.5 million and $5.1 million at
June 30, 1997, and December 31, 1996 respectively.
DEPOSITS
The Corporation's subsidiary bank does not have any foreign
offices and all deposits are serviced in its sixteen domestic
offices, the newest of which opened during the first week of
1997. The bank's average deposits grew during the first nine
months of 1997 reflecting a 4.4% growth compared to a 7.3%
growth in the first nine months of 1996, of which over 67% was
due to an acquisition of deposits in the second quarter of 1996.
Short and medium term rates remained competitive compared to
longer term rates contributing to a 5.3% growth in average
interest-bearing transaction accounts and almost no growth in
certificates of deposits less than $100,000 during the first three
quarters of 1997. Savings deposits with limited transactions
increased 15.7% during the first nine months of 1997. Savings
deposits have been strong historically providing a core, low
cost, source of funding. Certificates of deposit over $100,000
increased 8.3% in the first nine months of 1997.
CAPITAL
Average shareholders' equity remained strong totaling $57.0
million at September 30, 1997, a 9.6% increase from 1996 year
end. The Corporation and the Bank are subject to federal
regulatory risk-adjusted capital adequacy standards. Failure to
meet capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
<PAGE>
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital classification
is 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 Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of average Tier I Capital to
average assets. 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 ("total") capital
consists of core capital plus subordinated debt, some types of
preferred stock, and varying amounts of the Allowance for
Possible Loan Losses. 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, 1997, the
Bank's total risk-based and core capital ratios were 19.3% and
18.4% respectively. The comparable ratios were 18.6% and 17.6%
at year end, 1996. As of September 30, 1997, the Corporation's
total risk-based and core capital ratios were 19.5% and 18.6%
respectively. The comparable ratios were 18.7% and 17.7% at
year end, 1996. At September 30, 1997, the Bank and the
Corporation had a ratio of average core capital to average total
assets of 10.5% and 10.5%, respectively, compared to 10.1% and
10.4% at December 31, 1996. Management believes, as of
September 30, 1997, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject. The
Bank's calculated risk-adjusted capital ratios exceeded the
minimum standard for a "well capitalized" bank. Most of the
capital needs of the Bank have historically been financed
through internal growth.
Material Changes in Results of Operations
Total interest income was 4.6% higher in the first nine months
of 1997 than the first nine months of 1996. Interest and fees
earned on loans increased 4.5% despite a fourteen basis point
shortfall in average yield compared to budget. Interest earned
on investment securities and other investments increased 4.7%
during the first nine months of 1997 but is less than budget due
almost entirely to the use of maturing securities to fund the
increased loan volume.
Total interest expense increased 4.4% in the first nine months
of 1997 compared to the first nine months of 1996, but is under
budget due mostly to the lower cost of interest-bearing
deposits than was predicted. The total cost of interest-bearing
deposits has remained steady all last year and this year under
monthly monitoring by the Asset/Liability Committee. As a
policy, budgeted financial goals are monitored on a monthly
basis by the Asset/Liability Committee where the actual dollar
change in net interest income given different interest rate
movements is reviewed. A negative dollar change in net interest
income for a twelve month period of less than 3% of net interest
income given a three hundred basis point shift in interest rates
is considered an acceptable rate risk position. The net
interest margin, on a tax equivalent basis, at September 30,
1997 and 1996 was 4.6% and 4.8%, respectively .
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of
these factors can be controlled by management policies and
<PAGE>
actions. External factors also can have a significant impact
on changes in net interest income from one period to another.
Some examples of such factors are: (1) the strength of credit
demands by customers; (2) Federal Reserve Board monetary policy,
and (3) fiscal and debt management policies of the federal
government, including changes in tax laws.
The analysis and review of asset quality by the Corporation's
subsidiary loan review function and credit administrator also
includes a formal review that is prepared quarterly to assess
the risk in the loan portfolio and to determine the adequacy of
the allowance for loans losses. This review supported
management's assertion that the allowance was adequate at
September 30, 1997. Additions to the allowance during the first
nine months of 1997 were higher than the first nine months of
1996 due almost entirely to a consumer loan underwriting problem
that has been corrected.
There were no write downs of other real estate associated with
declines in real estate values subsequent to foreclosure and
disposition of the properties at less than their carrying value
during the first three quarters of 1997. The carrying value of
Other Real Estate is included in other assets on the face of the
balance sheet and represents real estate acquired through
foreclosure and is stated at the lower of cost or fair value
minus cost to sell. An allowance for other real estate owned is
not maintained. Historically, and at the present time, parcels
have not remained in this category for long periods of time and
any decreases or losses associated with the properties have been
charged to current income. Management evaluates properties
included in this category on a regular basis. Actual
foreclosures were included in the carrying value for Other Real
Estate at September 30, 1997, and totaled $497 thousand which
compares to $462 thousand at September 30, 1996.
Noninterest income increased 11.1% during the first nine months
of 1997 led by the over 14% increase in service fees from new
and acquired customers. Use of the Bank's check card generates
fee income from the clearing agent for the electronic
transaction even though no service fee is charged to Bank
customers for its use. Income from fiduciary services provided
in the Bank's Trust Department remained strong, increasing 6.8%.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.9% in the first nine months of 1997. A new
branch office, opened in the first quarter of 1997, technology
communication expenses, and depreciation of leased equipment are
the main increases.
Net income is 2.6% less for the first nine months of 1997
compared to the first nine months of 1996. The increase in
interest income was large enough to more than offset the
increase in interest expense. The remaining increase in
interest income coupled with the strong increase in noninterest
income was sufficient to cover the increase in noninterest
expense and some of the increase in additions to the allowance for
loan and lease losses.
In February, 1997, the Financial Accounting Standards board
issued Statement No. 128, "Earnings per Share", which is
required to be adopted on December 31, 1997. At that time, the
Corporation will be required to change the method currently used
to compute earnings per share and to restate all prior periods.
As the Corporation has only one class of stock and does not
issue options, warrants, and convertible securities, there will
be no impact on the calculation of earnings per share.
<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 13, 1997 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date November 13, 1997 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,085,359
<INT-BEARING-DEPOSITS> 1,127
<FED-FUNDS-SOLD> 3,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,885,692
<INVESTMENTS-CARRYING> 98,121,552
<INVESTMENTS-MARKET> 99,613,345
<LOANS> 328,264,524
<ALLOWANCE> (2,947,392)
<TOTAL-ASSETS> 531,324,557
<DEPOSITS> 466,151,612
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,955,598
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 45,217,347
<TOTAL-LIABILITIES-AND-EQUITY> 531,324,557
<INTEREST-LOAN> 21,348,749
<INTEREST-INVEST> 7,325,012
<INTEREST-OTHER> 168,856
<INTEREST-TOTAL> 28,842,617
<INTEREST-DEPOSIT> 12,873,417
<INTEREST-EXPENSE> 12,950,625
<INTEREST-INCOME-NET> 15,891,992
<LOAN-LOSSES> 1,290,000
<SECURITIES-GAINS> (1,137)
<EXPENSE-OTHER> 11,973,806
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,143,526
<EPS-PRIMARY> 3.67
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.62
<LOANS-NON> 6,904,365
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,926,063
<CHARGE-OFFS> 1,333,375
<RECOVERIES> 64,704
<ALLOWANCE-CLOSE> 2,947,392
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
