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, 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 (I.R.S. Employer
or organization) 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 June 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 six months ended June
30, 1997, are as follows:
Consolidated balance sheets - June 30, 1997, and December 31, 1996.
Consolidated statements of income - For the three months and
six months ended June 30, 1997, and June 30, 1996.
Consolidated statements of cash flows - For the six months ended
June 30, 1997, and June 30, 1996.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 and DECEMBER 31, 1996
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 32,009,739 $ 27,916,507
Federal funds sold 800,000 -
Securities
Available for sale (amortized cost $59,985,635
and $55,898,299 respectively) 60,416,447 56,141,535
Held to maturity (fair value $100,856,527 and
$119,226,021 respectively) 100,026,315 118,541,750
Total securities 160,442,762 174,683,285
Loans, net of unearned income 316,624,839 303,732,044
Allowance for possible loan losses (2,857,076) (2,926,063)
Net loans 313,767,763 300,805,981
Bank premises and equipment, at cost less
allowance for depreciation and amortization 6,615,895 6,829,475
Other assets 14,622,462 15,094,426
TOTAL ASSETS $ 528,258,621 $ 525,329,674
LIABILITIES
Deposits
Noninterest-bearing $ 65,033,317 $ 75,589,511
Interest-bearing (including certificates of
deposit over $100,000: 1997 - $38,026,724;
1996 - $39,129,547) 399,667,531 384,983,050
Total deposits 464,700,848 460,572,561
Federal funds purchased - 5,000,000
Dividends payable 742,000 714,000
Accounts payable and accrued liabilities 5,457,943 4,641,987
TOTAL LIABILITIES 470,900,791 470,928,548
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 43,099,342 40,255,185
Net unrealized loss on available-for-sale
securities, net of tax 258,488 145,941
TOTAL STOCKHOLDERS' EQUITY 57,357,830 54,401,126
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 528,258,621 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,115,386 $ 6,765,396 $13,962,854 $13,696,667
Interest on investment securities
Taxable interest 1,815,804 1,753,259 3,609,571 3,232,123
Exempt from federal income tax 616,047 570,910 1,233,576 1,151,093
Dividends 121,226 126,043 165,404 163,994
2,553,077 2,450,212 5,008,551 4,547,210
Other interest income 37,121 64,695 96,357 88,651
TOTAL INTEREST INCOME 9,705,584 9,280,303 19,067,762 18,332,528
INTEREST EXPENSE
Interest on deposits 4,289,096 4,136,585 8,525,068 8,085,354
Interest on other short term
borrowings 41,075 16,474 63,842 57,091
TOTAL INTEREST EXPENSE 4,330,171 4,153,059 8,588,910 8,142,445
NET INTEREST INCOME 5,375,413 5,127,244 10,478,852 10,190,083
PROVISION FOR POSSIBLE LOAN LOSSES 290,000 300,000 740,000 550,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,085,413 4,827,244 9,738,852 9,640,083
NONINTEREST INCOME
Trust department income 345,797 348,988 720,507 684,196
Service fees on deposits accounts 938,217 821,486 1,843,456 1,564,582
Other service fees 184,086 204,229 364,820 353,965
Other operating income 109,530 110,731 234,312 202,335
Investment securities gains (losses) - - (1,137) -
TOTAL NONINTEREST INCOME 1,577,630 1,485,434 3,161,958 2,805,078
NONINTEREST EXPENSES
Salaries and employee benefits 1,809,292 1,759,213 3,634,049 3,511,697
Net occupancy expense 298,187 330,153 614,245 602,047
Furniture and equipment expense 389,164 422,019 782,058 792,442
Other operating expenses 1,486,834 1,208,554 2,932,434 2,461,002
TOTAL NONINTEREST EXPENSES 3,983,477 3,719,939 7,962,786 7,367,188
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,679,566 2,592,739 4,938,024 5,077,973
PROVISION FOR INCOME TAXES 795,731 776,659 1,351,865 1,553,978
NET INCOME $ 1,883,835 $ 1,816,080 $ 3,586,159 $ 3,523,995
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.34 $ 1.30 $ 2.56 $ 2.52
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,586,159 $ 3,523,995
Adjustments to reconcile net income to net
cash provided by operating activities
Excess (deficiency) of provision for possible
loan losses over net charge offs (68,987) 263,306
Provision for depreciation and amortization of
premises and equipment 334,200 332,007
Provision for depreciation of leased equipment 417,200 -
Amortization of deposit base intangibles 101,545 102,726
Amortization of investment security premiums,
net of accretion of discounts 252,483 282,602
Donation of premises to municipalities - 88,500
Increase in cash surrender value of life
insurance contracts (50,255) (50,255)
Deferred income taxes 282,700 (152,609)
(Increase) decrease in
Interest receivable 33,176 (333,595)
Other assets (2,435) (301,216)
Increase (decrease) in
Interest payable 269,851 (215,807)
Other liabilities 466,533 408,285
TOTAL ADJUSTMENTS 2,036,011 423,944
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,622,170 3,947,939
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities - 1,016,672
Proceeds from maturities and calls of
held-to-maturity securities 25,320,475 26,506,000
Purchases of investment securities
Available-for-sale (4,212,587) (40,061,888)
Held-to-maturity (6,932,270) (15,684,481)
Net (increase) decrease in loans (12,892,795) 403,251
Purchases of premises and equipment (120,620) (790,639)
Purchases of deposit base intangibles - (1,124,258)
Purchase of leased equipment - (2,266,394)
Purchase of single premium life insurance
contracts (385,000) -
NET CASH USED BY INVESTING ACTIVITIES 777,203 (32,001,737)
FINANCING ACTIVITIES
Net increase in noninterest-bearing and
interest-bearing deposits 4,128,287 18,661,191
Assumption of deposit liabilities - 19,863,923
Net increase (decrease) in short term borrowings (4,920,428) (11,353,000)
Cash dividends (714,000) (630,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,506,141) 26,542,114
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,893,232 (1,511,684)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,916,507 31,281,706
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,809,739 $ 29,770,022
</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 4.4% in the first half of 1997
compared to a 5.8% increase in the first half of 1996. As a
financial institution, the Bank's primary earning asset is
loans. At June 30, 1997, average net loans had grown 5.2% and
represented 64% 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 the first
half of 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 36% of average earning assets at June
30, 1997, an increase of 2.8% in the first half of 1997.
Average total assets were $525 million at the end of the first
six months of 1997 compared to $502 million at the end of the
first six months of 1996. Period-end assets were $528.2 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 June 30, 1997, the Corporation's investment securities
portfolio had $60.4 million available-for-sale securities and
$100.0 million held-to-maturity securities. This compares to
$56.1 and 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 $15.1 million or 5.2% in the first six months of
1997 compared to a $12.1 million or 4.4% increase in the first six
months of 1996. This growth reflects the consistent loan demand in
the service area. Commercial loans showed strong growth
<PAGE>
posting almost 4.0% growth, personal loans declined slightly, but
loans secured by real estate posted a 7.6% growth for the first six
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 half
of 1997, loans totaling $4.6 million, 1.5% of the portfolio,
were classified as other assets especially mentioned at June 30,
1997, which is up from the $3.2 million and $3.4 million so
classified at March 31, 1997, and December 31, 1996. Loans
totaling $4.3 million, 1.4% of the portfolio, were classified as
substandard at June 30, 1997, continuing the downward trend
compared to $5.4 million and $8.2 million so classified at March
31, 1997, and December 31, 1996. Loans totaling $1.7 million,
.5% of the portfolio, were classified as doubtful at June 30,
1997, compared to $1.6 million and $1.4 million at March 31,
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 $5.5 million, 1.7% of the total
portfolio, were identified as impaired at the end of the first
six months of 1997 compared to $5.1 million at December 31,
1996.
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 six
months of 1997 reflecting a 4.2% growth compared to a 5.5%
growth in the first half of 1996, of which over 75% 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 4.9% growth in average
interest-bearing checking accounts and almost no growth in
certificates of deposits less than $100,000 during the first
quarter of 1997. Savings deposits with limited transactions
increased 16.2% during the first six months of 1997. Savings
deposits have been strong historically providing a core, low
cost, source of funding. Certificates of deposit over $100,000
increased 7.4% in the first half of 1997.
CAPITAL
Average shareholders' equity remained strong totaling $56.2 million at
June 30, 1997, an 8.0% 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 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
<PAGE>
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 June 30, 1997, the
Bank's total risk-based and core capital ratios were 19.5% and
18.7% respectively. The comparable ratios were 18.6% and 17.6%
at year end, 1996. As of June 30, 1997, the Corporation's
total risk-based and core capital ratios were 19.7% and 18.7%
respectively. The comparable ratios were 18.7% and 17.7% at
year end, 1996. At June 30, 1997, the Bank and the Corporation
had a ratio of average core capital to average total assets of
10.6% and 10.7%, respectively, compared to 10.1% and 10.4% at
December 31, 1996. Management believes, as of June 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 4.0% higher in the first half of
1997 than the first half of 1996. Interest and fees earned on
loans increased 1.9% despite a four basis point decline in
average yield that was influenced some by a large collection of
non-accrual income in the first quarter of 1996. Interest
earned on investment securities and other investments increased
10.1% in the first half of 1997 due entirely to increased volume
as the average tax equivalent yield held steady at slightly over
6.5%.
Total interest expense increased 5.5% in the first half of 1997
compared to the first half of 1996 due mostly to the increase in
interest-bearing deposits, part of which can be attributed to an
acquisition in the second quarter of 1996. However, the total
cost of interest-bearing deposits remained steady all last year
and the first half of 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 June 30, 1997 and 1996 was 4.9%.
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 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
<PAGE>
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 June
30, 1997. Additions to the allowance during the first half of
1997 were 35% higher than the first half of 1996.
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 quarter 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 June 30, 1997, and totaled $392 thousand which
compares to $462 thousand at June 30, 1996.
Noninterest income increased 12.7% during the first half of
1997 led by the increase in service charges 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.
Noninterest expenses, excluding the provision for possible loan
losses, increased 8.1% in the first half 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 increased 1.8% in the first half of 1997 compared to
the first half of 1996. The increase in interest income was
large enough to more than offset the volume related 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. The
increase in additions to the allowance for loan and lease losses
was offset by the reduction in taxes. The current year tax
reduction resulted from the sale of repossessed property in
other real estate that had unrecognized tax benefits.
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.
The shareholders of the Corporation at the annual meeting held
April 15, 1997, approved the recommendation to retain and use
the certified public accounting firm, Kraft Bros.,Esstman,
Patton & Harrell, PLLC, as auditors for the ensuing year.<PAGE>
SIGNATURES
<PAGE>
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 13, 1997 /s/Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date August 13, 1997 /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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 32,008,715
<INT-BEARING-DEPOSITS> 1,024
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,416,447
<INVESTMENTS-CARRYING> 100,026,315
<INVESTMENTS-MARKET> 100,856,527
<LOANS> 316,624,839
<ALLOWANCE> (2,857,076)
<TOTAL-ASSETS> 528,258,621
<DEPOSITS> 464,700,848
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,199,943
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 43,357,830
<TOTAL-LIABILITIES-AND-EQUITY> 528,258,621
<INTEREST-LOAN> 13,962,854
<INTEREST-INVEST> 5,008,551
<INTEREST-OTHER> 96,357
<INTEREST-TOTAL> 19,067,762
<INTEREST-DEPOSIT> 8,525,068
<INTEREST-EXPENSE> 8,588,910
<INTEREST-INCOME-NET> 10,478,852
<LOAN-LOSSES> 740,000
<SECURITIES-GAINS> (1,137)
<EXPENSE-OTHER> 7,962,786
<INCOME-PRETAX> 4,938,024
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,586,159
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.91
<LOANS-NON> 5,476,007
<LOANS-PAST> 654,029
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,926,063
<CHARGE-OFFS> 841,265
<RECOVERIES> 32,278
<ALLOWANCE-CLOSE> 2,857,076
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
