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, 1998
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
incorporation or organization) Identification No.)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
(Address of principal executive offices) (Zip Code)
(931) 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, 1998. 2,800,000 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 six months ended June 30, 1998,
are as follows:
Consolidated balance sheets - June 30, 1998, and December 31, 1997.
Consolidated statements of income - For the three months and six
months ended June 30, 1998, and June 30, 1997.
Consolidated statements of cash flows - For the six months ended
June 30, 1998, and June 30, 1997.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 and DECEMBER 31, 1997
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 27,108,301 $ 29,873,333
Federal funds sold 10,800,000 12,800,000
Securities
Available for sale (amortized cost
$74,880,497 and $48,921,020
respectively) 75,354,971 49,521,330
Held to maturity (fair value
$102,306,157 and $98,371,056
respectively) 100,219,448 96,265,967
Total securities 175,574,419 145,787,297
Loans, net of unearned income 325,302,592 331,360,183
Allowance for possible loan losses (3,762,668) (2,943,000)
Net loans 321,539,924 328,417,183
Bank premises and equipment, at
cost less allowance for depreciation 6,611,290 6,413,365
Other assets 14,601,319 14,030,993
TOTAL ASSETS $ 556,235,253 $ 537,322,171
LIABILITIES
Deposits
Noninterest-bearing $ 66,156,222 $ 80,204,767
Interest-bearing (including
certificates of deposit over
$100,000: 1998 - $42,041,181;
1997 - $39,327,957) 420,520,411 390,077,040
Total deposits 486,676,633 470,281,807
Dividends payable 868,000 784,000
Accounts payable and accrued
liabilities 5,794,687 6,113,040
TOTAL LIABILITIES 493,339,320 477,178,847
STOCKHOLDERS' EQUITY
Common stock - $10 par value,
authorized 8,000,000 shares;
2,800,000 shares issued and
outstanding 28,000,000 14,000,000
Retained earnings 34,601,759 45,783,137
Net unrealized gain on available-
for-sale securities, net of tax 294,174 360,187
TOTAL STOCKHOLDERS' EQUITY 62,895,933 60,143,324
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 556,235,253 $ 537,322,171
<FN> UNAUDITED (A)
<F1>
(A) The Consolidated Balance Sheet at December 31, 1997
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 STATEMENTS
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,322,296 $ 7,115,386 $ 14,668,672 $ 13,962,854
Interest on investment securities
Taxable interest 1,841,023 1,815,804 3,286,969 3,609,571
Exempt from federal income tax 645,954 616,047 1,261,135 1,233,576
Dividends 166,046 121,226 208,035 165,404
2,653,023 2,553,077 4,756,139 5,008,551
Other interest income 163,189 37,121 289,623 96,357
TOTAL INTEREST INCOME 10,138,508 9,705,584 19,714,434 19,067,762
INTEREST EXPENSE
Interest on deposits 4,362,652 4,289,096 8,625,265 8,525,068
Interest on other short term
borrowings 7,147 41,075 15,124 63,842
TOTAL INTEREST EXPENSE 4,369,799 4,330,171 8,640,389 8,588,910
NET INTEREST INCOME 5,768,709 5,375,413 11,074,045 10,478,852
PROVISION FOR POSSIBLE LOAN LOSSES 570,000 290,000 1,520,000 740,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,198,709 5,085,413 9,554,045 9,738,852
NONINTEREST INCOME
Trust department income 379,362 345,797 771,209 720,507
Service fees on deposits accounts 919,055 938,217 1,790,531 1,843,456
Other service fees 255,340 184,086 525,628 364,820
Other operating income 104,101 109,530 218,177 234,312
Investment securities gains (losses) 0 0 351,055 (1,137)
TOTAL NONINTEREST INCOME 1,657,858 1,577,630 3,656,600 3,161,958
NONINTEREST EXPENSES
Salaries and employee benefits 1,936,217 1,809,292 3,848,577 3,634,049
Net occupancy expense 327,157 298,187 651,358 614,245
Furniture and equipment expense 368,786 389,164 720,050 782,058
Other operating expenses 1,434,005 1,486,834 2,784,751 2,932,434
TOTAL NONINTEREST EXPENSES 4,066,165 3,983,477 8,004,736 7,962,786
INCOME BEFORE PROVISION FOR INCOME
TAXES 2,790,402 2,679,566 5,205,909 4,938,024
PROVISION FOR INCOME TAXES 841,655 795,731 1,519,289 1,351,865
NET INCOME $ 1,948,747 $ 1,883,835 $ 3,686,620 $ 3,586,159
EARNINGS PER COMMON SHARE
(2,800,000 outstanding shares) $ 0.70 $ 0.67 $ 1.32 $ 1.28
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 3,686,620 $ 3,586,159
Adjustments to reconcile net income to net cash provided
by operating activities
Excess (deficiency) of provision for possible
loan losses over net charge offs 819,668 (68,987)
Provision for depreciation and amortization of
premises and equipment 310,084 334,200
Provision for depreciation of leased equipment 250,320 417,200
Amortization of deposit base intangibles 37,477 101,545
Amortization of investment security premiums,
net of accretion of discounts 240,063 252,483
Increase in cash surrender value of life insurance
contracts (75,186) (50,255)
Deferred income taxes (370,958) 282,700
(Increase) decrease in
Interest receivable (315,568) 33,176
Other asset (36,585) (2,435)
Increase (decrease) in
Interest payable 80,395 269,851
Other liabilities (396,648) 466,533
TOTAL ADJUSTMENTS 543,062 2,036,011
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,229,682 5,622,170
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 10,005,237 0
Proceeds from maturities and calls of held-to-maturity
securities 6,708,000 25,320,475
Purchases of investment securities
Available-for-sale (36,130,328) (4,212,587)
Held-to-maturity (10,735,931) (6,932,270)
Net (increase) decrease in loans 6,057,591 (12,892,795)
Purchases of premises and equipment (508,009) (120,620)
Purchase of single premium life insurance contracts 0 (385,000)
NET CASH USED BY INVESTING ACTIVITIES (24,603,440) 777,203
FINANCING ACTIVITIES
Net increase in noninterest-bearing and interest-bearing
deposits 16,394,826 4,128,287
Net increase (decrease) in short term borrowings (2,100) (4,920,428)
Cash dividends (784,000) (714,000)
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,608,726 (1,506,141)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,765,032) 4,893,232
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,673,333 27,916,507
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,908,301 $ 32,809,739
</TABLE>
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, 1997.
<<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition
Material Changes in Financial Condition
Average earning assets increased 3.3% in the first half of 1998
compared to a 4.3% increase in the first half of 1997. As a
financial institution, the Bank's primary earning asset is
loans. At June 30, 1998, average net loans had grown 3.6% and
represented 66% 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, slowing some in the second quarter.
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 34%
of average earning assets at June 30, 1998, an increase of 2.7%
in the first half of 1998. Average total assets were $541
million at the end of the first six months of 1998 compared to
$528 million at the end of the first six months of 1997.
Period-end assets were $556.2 million compared to $537.3 million
at December 31, 1997.
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, 1998, the Corporation's investment securities
portfolio had $75.4 million available-for-sale securities and
$100.2 million held-to-maturity securities. This compares to
$49.5 available-for-sale securities and $96.2 million
held-to-maturity securities at December 31, 1997.
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 $11.4 million or 3.6% in the first six
<PAGE>
months of 1998 compared to a $14.9 million or 5.1%
increase in the first six months of 1997. Commercial loan
growth was indicative of the slowing loan demand in the second
quarter posting a 3.7% decline, personal loans declined
slightly, but loans secured by real estate posted a 7.1% growth
for the first six months of 1998. 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 1998, loans totaling $3.1 million, 1.0% of the portfolio,
were classified as other assets especially mentioned at June 30,
1998, which is down from the $4.2 million so classified at
March 31, 1998, and December 31, 1997. Loans totaling $10.4
million, 3.2% of the portfolio, were classified as substandard
at June 30, 1998, continuing the downward trend compared to
$10.8 million at March 31, 1998, but is higher than the $5.6
million so classified at December 31, 1997. Loans totaling $.9
million, .3% of the portfolio, were classified as doubtful at
June 30, 1998, compared to $1.2 million and $.9 million at March
31, 1998, and December 31, 1997. 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 $5.6 million, 1.7% of the total
portfolio, were identified as impaired at the end of the first
six months of 1998 compared to $3.0 million at December 31,
1997.
DEPOSITS
The Corporation's subsidiary bank does not have any foreign
offices and all deposits are serviced in its sixteen domestic
offices. The bank's average deposits grew during the first six
months of 1998 reflecting a 2.2% growth compared to a 4.1%
growth in the first half of 1997. Short and medium term rates
remained competitive compared to longer term rates contributing
to a .9% growth in average interest-bearing checking accounts
and a 1.2% decline in certificates of deposits less than
$100,000 during the first quarter of 1998. Savings deposits
with limited transactions increased 5.7% during the first six
months of 1998. Savings deposits have been strong historically
providing a core, low cost, source of funding. Certificates of
deposit over $100,000 increased 15.5% in the first half of 1998.
CAPITAL
Average shareholders' equity remained strong totaling $62.0
million at June 30, 1998, a 7.3% increase from 1997 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
<PAGE>
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) is
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, 1998, the
Bank's total risk-based and core capital ratios were 20.9% and
19.7% respectively. The comparable ratios were 19.5% and 18.6%
at year end, 1997. As of June 30, 1998, the Corporation's
total risk-based and core capital ratios were 21.1% and 19.9%
respectively. The comparable ratios were 19.7% and 18.7% at
year end, 1997. At June 30, 1998, the Bank had a ratio of
average core capital to average total assets of 11.7% compared
to 10.6% at December 31, 1997. At June 30, 1998, the
Corporation had a ratio of average core capital to average total
assets of 11.1% compared to 10.7% at December 31, 1997.
Management believes, as of June 30, 1998, 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.
During the second quarter of 1998, the Corporation amended its
corporate charter to increase the number of authorized shares of
its common stock from 4,000,000 to 8,000,000 shares and on April
21, 1998, the Corporation's stockholders approved a two-for-one
split effected in the form of a 100% stock dividend
distributable July 10, 1998, to shareholders of record on April
21, 1998. In accordance with State corporate legal
requirements, the transaction was recorded by a transfer from
retained earnings to common stock in the amount of $14,000,000
($10 for each additional share issued). All per share and share
data in the accompanying consolidated financial statements and
footnotes have been restated to give retroactive effect to the
transaction.
Material Changes in Results of Operations
Total interest income was 3.4% higher in the first half of 1998
than the first half of 1997. Interest and fees earned on loans
increased 5.1% compared to last year even with the softening
loan demand experienced in the first six months of 1998.
Interest earned on investment securities and other investments
declined 1.2% in the first half of 1998 due to the declining
yield on overnight investments that has increased with softening
loan demand.
Total interest expense posted almost no increase, .6%, in the
first half of 1998 compared to the first half of 1997. The
total cost of interest-bearing deposits has remained steady for
the last two years 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
<PAGE>
acceptable rate risk position. The net interest
margin, on a tax equivalent basis, at June 30, 1998, was 4.7%,
holding steady from 1997 year end but down slightly from 4.9% at
June 30, 1997.
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 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 led to the adoption
of a more conservative methodology for determining the adequacy
of the allowance for loan losses. Additions to the allowance during
the first half of 1998 were significantly higher than during the
first half of 1997 as a result of adopting this new methodology.
It is management's assertion that the allowance was adequate at
June 30, 1998.
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 half of 1998. 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. Any decreases or losses associated with the
properties are 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, 1998, and totaled $420 thousand which
compares to $410 and $392 thousand at December 31, 1997, and
June 30, 1997, respectively.
Noninterest income increased 15.7% during the first half of 1998
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, held steady compared to the first half of 1997
increasing only .5%. Technology communication expenses and
depreciation of leased equipment are the main increases.
Net income increased 2.8% in the first half of 1998 compared to
the first half of 1997. The increase in interest income was
large enough to more than offset the minor increase in interest
expense. The remaining increase in interest income coupled with
the strong increase in noninterest income was sufficient to
cover the small increase in noninterest expense, the larger than
usual increase in additions to the allowance for loan and lease
losses, and the increase in taxes.
<PAGE>
The Corporation adopted Financial Accounting Standards Board
Statement No. 128, "Earnings per Share" on December 31, 1997.
This statement requires a reconciliation of the numerators and
the denominators of the basic and diluted per-share computation
for income from continuing operations. The statement is
effective prospectively for earnings per share computation for
both interim and annual periods ending after December 31, 1997.
Because the Corporation has no potential common stock
outstanding, it is required to present only basic earnings per
share and its presentation of earnings per share did not change.
<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 3, 1998 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date August 3, 1998 /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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,107,029
<INT-BEARING-DEPOSITS> 1,272
<FED-FUNDS-SOLD> 10,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,354,971
<INVESTMENTS-CARRYING> 100,219,448
<INVESTMENTS-MARKET> 102,306,157
<LOANS> 325,302,592
<ALLOWANCE> (3,762,668)
<TOTAL-ASSETS> 556,235,253
<DEPOSITS> 486,676,633
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,662,687
<LONG-TERM> 0
0
0
<COMMON> 28,000,000
<OTHER-SE> 34,895,933
<TOTAL-LIABILITIES-AND-EQUITY> 556,235,253
<INTEREST-LOAN> 14,668,672
<INTEREST-INVEST> 4,756,139
<INTEREST-OTHER> 289,263
<INTEREST-TOTAL> 19,714,434
<INTEREST-DEPOSIT> 8,625,265
<INTEREST-EXPENSE> 8,640,389
<INTEREST-INCOME-NET> 11,074,045
<LOAN-LOSSES> 1,520,000
<SECURITIES-GAINS> 351,055
<EXPENSE-OTHER> 8,004,736
<INCOME-PRETAX> 5,205,909
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,686,620
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.68
<LOANS-NON> 5,627,890
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,943,000
<CHARGE-OFFS> 823,668
<RECOVERIES> 123,336
<ALLOWANCE-CLOSE> 3,762,668
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
