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 March 31, 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 March 31, 1997. 1,400,000 shares
This filing contains 12 pages.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
The following unaudited consolidated financial statements of
the registrant and its subsidiary for the three months ended
March 31, 1997, are as follows:
Consolidated balance sheets - March 31, 1997, and December 31, 1996.
Consolidated statements of income - For the three months ended
March 31, 1997, and March 31, 1996.
Consolidated statements of cash flows - For the three months
ended March 31, 1997, and March 31, 1996.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 and DECEMBER 31, 1996
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 28,303,144 $ 27,916,507
Federal funds sold 10,800,000 -
Securities
Available for sale (amortized cost $60,023,095
and $55,898,299 respectively) 59,796,800 56,141,535
Held to maturity (fair value $106,122,758 and
$119,226,021 respectively) 106,247,220 118,541,750
Total securities 166,044,020 174,683,285
Loans, net of unearned income 306,270,015 303,732,044
Allowance for possible loan losses (2,865,782) (2,926,063)
Net loans 303,404,233 300,805,981
Bank premises and equipment, at cost less
allowance for depreciation and amortization 6,752,016 6,829,475
Other assets 15,038,857 15,094,426
TOTAL ASSETS $ 530,342,270 $ 525,329,674
LIABILITIES
Deposits
Noninterest-bearing $ 66,658,555 $ 75,589,511
Interest-bearing (including certificates of
deposit over $100,000: 1997 - $38,316,328;
1996 - $39,129,547) 402,542,020 384,983,050
Total deposits 469,200,575 460,572,561
Federal funds purchased - 5,000,000
Dividends payable - 714,000
Accounts payable and accrued liabilities 5,319,964 4,641,987
TOTAL LIABILITIES 474,520,539 470,928,548
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 41,957,509 40,255,185
Net unrealized gain (loss) on available-for-sale
securities, net of tax (135,778) 145,941
TOTAL STOCKHOLDERS' EQUITY 55,821,731 54,401,126
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 530,342,270 $ 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>
March 31,
1997 1996
INTEREST INCOME
<S> <C> <C>
Interest and fees on loans $ 6,847,468 $ 6,931,271
Interest on investment securities
Taxable interest 1,793,767 1,478,864
Exempt from federal income tax 617,529 580,183
Dividends 44,178 37,951
2,455,474 2,096,998
Other interest income 59,236 23,956
TOTAL INTEREST INCOME 9,362,178 9,052,225
INTEREST EXPENSE
Interest on deposits 4,235,972 3,948,769
Interest on other short term borrowings 22,767 40,617
TOTAL INTEREST EXPENSE 4,258,739 3,989,386
NET INTEREST INCOME 5,103,439 5,062,839
PROVISION FOR POSSIBLE LOAN LOSSES 450,000 250,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,653,439 4,812,839
NONINTEREST INCOME
Trust department income 374,710 335,208
Service fees on deposit accounts 905,239 743,096
Other service fees and commissions 180,734 149,736
Other operating income 124,782 91,604
Investment securities gains (losses) (1,137) -
TOTAL NONINTEREST INCOME 1,584,328 1,319,644
NONINTEREST EXPENSES
Salaries and employee benefits 1,824,757 1,752,484
Net occupancy expense 316,058 271,894
Furniture and equipment expense 392,894 370,423
Other operating expenses 1,445,600 1,252,448
TOTAL NONINTEREST EXPENSES 3,979,309 3,647,249
INCOME BEFORE PROVISION FOR INCOME TAXES 2,258,458 2,485,234
PROVISION FOR INCOME TAXES 556,134 777,319
NET INCOME $ 1,702,324 $ 1,707,915
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.22 $ 1.22
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 and 1996
(Unaudited)
<CAPTION>
1997 1996
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,702,324 $ 1,707,915
Adjustments to reconcile net income to net cash provided
by operating activities
Excess (deficiency) of provision for possible
loan losses over net charge offs (60,281) (624)
Provision for depreciation and amortization of
premises and equipment 172,593 163,911
Provision for depreciation of leased equipment 208,600 -
Amortization of deposit base intangibles 60,743 42,005
Amortization of investment security premiums,
net of accretion of discounts 136,972 135,993
Increase in cash surrender value of life insurance
contracts (25,127) (25,128)
Deferred income taxes 184,824 (19,815)
(Increase) decrease in
Interest receivable (268,431) (458,746)
Other assets 82,772 (412,031)
Increase (decrease) in
Interest payable 264,207 35,345
Other liabilities 334,699 750,284
TOTAL ADJUSTMENTS 1,091,571 211,194
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,793,895 1,919,109
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 2,510 15,405
Proceeds from maturities and calls of held-to-maturity
securities 13,101,031 14,298,000
Purchases of investment securities
Available-for-sale (4,183,988) (29,356,073)
Held-to-maturity (886,793) (3,214,341)
Net (increase) decrease in loans (2,537,971) 2,242,215
Purchases of premises and equipment (95,134) (307,082)
NET CASH USED BY INVESTING ACTIVITIES 5,399,655 (16,321,876)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing
and interest-bearing deposits 8,628,014 18,606,541
Net increase (decrease) in short term borrowings (4,920,927) (11,352,500)
Cash dividends (714,000) (630,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,993,087 6,624,041
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,186,637 (7,778,726)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,916,507 31,281,706
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,103,144 $ 23,502,980
</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 3.9% in the first quarter of
1997 compared to a 3.3% increase in the first quarter of 1996.
As a financial institution, the Bank's primary earning asset is
loans. At March 31, 1997, average net loans had grown 3.9% and
represented 63.6% 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 quarter 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 36.4% of average earning assets at March
31, 1997, an increase of 3.8% in the first quarter of 1997.
Average total assets were $523 million at the end of the first
three months of 1997 compared to $478 million at the end of the
first three months of 1996. Period-end assets were $530.3
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 March 31, 1997, the Corporation's investment securities
portfolio had $59.8 million available-for-sale securities and
$106.2 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 $11.3 million or 3.9%
in the first three months of 1997 compared to a $12.6 million or 4.6%
increase in the first three months of 1996. This growth reflects the
consistent loan demand in the service area. Commercial loans remained stable
<PAGE>
posting a 1.0% growth, personal loans remained steady, but loans secured
by real estate posted a 6.1% growth for the first three 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 and Special Assets
Committee reviews lines of credit over $50,000. After this review
during the first quarter of 1997, loans totaling $3.2 million, 1.1% of
the portfolio, were classified as other assets especially mentioned at
March 31, 1997, which is down from the $3.4 million so classified at
December 31, 1996. Loans totaling $5.4 million, 1.8% of the portfolio,
were classified as substandard at March 31, 1997, compared to $8.2 million
so classified at December 31, 1996. Loans totaling $1.6 million,
.5% of the portfolio, were classified as doubtful at March 31,
1997, compared to $1.4 million at 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 $5.7 million,
1.9% of the total portfolio, were identified as impaired at the
end of the first three months of 1997 compared to $5.1 million
at December 31, 1996.
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in those particular financial
instruments.
The total outstanding loan commitments and stand-by letters of credit in
the normal course of business at March 31, 1997, were $24,068,000 and
$2,461,000, respectively. Loan commitments are agreements to lend to a
customer as long as there is not a violation of any condition established
in the contract. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in making a loan.
The loan portfolio is well diversified with loans generally secured by
tangible personal property, real property, or stock. The loans are expected
to be repaid from cash flow or proceeds from the sale of selected assets of
the borrowers. Collateral requirements for the loan portfolio are based on
credit evaluation of the customer. It is management's opinion that there
is not a concentration of credit risk in the portfolio.
<PAGE>
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 three months of 1997 reflecting a 4.0% growth compared
to a 2.6% growth in the first quarter of 1996. Short and medium term
rates remained competitive compared to longer term rates contributing to
a 4.0% 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 14.9%
during the first three months of 1997. Savings deposits have been strong
historically providing a core, low cost, source of funding. Certificates of
deposit over $100,000 increased 12.1% in the first quarter of 1997.
CAPITAL
Average shareholders' equity remained strong totaling $55.5 million at
March 31, 1997, a 6.5% 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 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 March 31, 1997, the Bank's total risk-based and core capital ratios were
19.1% and 18.1% respectively. The comparable ratios were 18.6% and 17.6%
at year end, 1996. As of March 31, 1997, the Corporation's total risk-based
and core capital ratios were 19.2% and 18.3% respectively. The comparable
ratios were 18.7% and 17.7% at year end, 1996. At March 31, 1997, the Bank
and the Corporation had a ratio of average core capital to average total
assets of 10.4% and 10.1%, respectively, compared to 10.4% and 10.1% at
December 31, 1996. Management believes, as of March 31, 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.
<PAGE>
Material Changes in Results of Operations
Total interest income was 3.4% higher in the first quarter of 1997 than
the first quarter of 1996. Interest and fees earned on loans remained
stable decreasing only 1.2% despite a five 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 18.6% in the first quarter of 1997 due entirely
to increased volume as the average tax equivalent yield held steady at 6.5%.
Total interest expense increased 6.8% in the first quarter of 1997
compared to the first quarter 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 quarter 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 March 31, 1997 and 1996
was 4.6% and 4.9% 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 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 Special Assets Committee 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
March 31, 1997. Additions to the allowance during the first quarter of 1997
were 80% higher than the first quarter 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
March 31, 1997, and totaled $400 thousand which compares to $462 thousand
at March 31, 1996.
<PAGE>
Noninterest income increased 20.1% during the first quarter 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 9.1% in the first quarter of 1997. A new branch office was opened
in the first quarter of 1997 contributing to a 16.2% increase in net
occupancy expense.
Net income remained stable in the first quarter of 1997 coming in under the
first quarter of 1996 only .4%. The increase in interest income was large
enough to offset most of the volume related increase in interest expense.
The strong increase in noninterest income was sufficient to cover the
increase in noninterest expense; but, the increase in additions to the
allowance for loan and lease losses was only partially offset by a reduction
in taxes. The current year tax reduction resulted from the sale of
repossessed property in other real estate that had unrecognized tax benefits.
<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 May 8, 1997 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date May 8, 1997 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
1997 QTR 1 FINANCIAL DATA SCHEDULE
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 28,302,156
<INT-BEARING-DEPOSITS> 988
<FED-FUNDS-SOLD> 10,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 59,796,800
<INVESTMENTS-CARRYING> 106,247,220
<INVESTMENTS-MARKET> 106,122,758
<LOANS> 306,270,015
<ALLOWANCE> (2,865,782)
<TOTAL-ASSETS> 530,342,270
<DEPOSITS> 469,200,575
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,319,964
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 55,821,731
<TOTAL-LIABILITIES-AND-EQUITY> 530,342,270
<INTEREST-LOAN> 6,847,468
<INTEREST-INVEST> 2,455,474
<INTEREST-OTHER> 59,236
<INTEREST-TOTAL> 9,362,178
<INTEREST-DEPOSIT> 4,235,972
<INTEREST-EXPENSE> 4,258,739
<INTEREST-INCOME-NET> 5,103,439
<LOAN-LOSSES> 450,000
<SECURITIES-GAINS> (1,137)
<EXPENSE-OTHER> 3,979,310
<INCOME-PRETAX> 2,258,458
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,702,324
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.57
<LOANS-NON> 5,712,614
<LOANS-PAST> 121,987
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,926,063
<CHARGE-OFFS> 532,045
<RECOVERIES> 21,764
<ALLOWANCE-CLOSE> 2,865,782
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
