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, 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 Identification No.)
incorporation or organization)
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 March 31, 1998. 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, 1998, are as follows:
Consolidated balance sheets - March 31, 1998, and December 31,
1997.
Consolidated statements of income - For the three months ended
March 31, 1998, and March 31, 1997.
Consolidated statements of cash flows - For the three months
ended March 31, 1998, and March 31, 1997.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 and DECEMBER 31, 1997
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 27,890,821 $ 29,873,333
Federal funds sold 8,100,000 12,800,000
Securities
Available for sale (amortized
cost $64,231,661 and $48,921,020
respectively) 64,639,272 49,521,330
Held to maturity (fair value
$102,190,022 and $98,371,056
respectively) 100,034,704 96,265,967
Total securities 164,673,976 145,787,297
Loans, net of unearned income 329,170,253 331,360,183
Allowance for possible loan losses (3,433,222) (2,943,000)
Net loans 325,737,031 328,417,183
Bank premises and equipment, at
cost less allowance for
depreciation 6,667,312 6,413,365
Other assets 15,117,462 14,030,993
TOTAL ASSETS $ 548,186,602 $ 537,322,171
LIABILITIES
Deposits
Noninterest-bearing $ 67,128,778 $ 80,204,767
Interest-bearing (including
certificates of deposit over
$100,000: 1998 - $45,580,451;
1997 - $39,327,957) 413,282,019 390,077,040
Total deposits 480,410,797 470,281,807
Dividends payable - 784,000
Other short term liabilities 600,000 602,100
Accounts payable and accrued
liabilities 5,402,076 5,510,940
TOTAL LIABILITIES 486,412,873 477,178,847
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 47,521,010 45,783,137
Net unrealized gain on
available-for-sale securities,
net of tax 252,719 360,187
TOTAL STOCKHOLDERS' EQUITY 61,773,729 60,143,324
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 548,186,602 $ 537,322,171
UNAUDITED (A)
<FN>
<F1>
(A) The Consolidated Balance Sheet
at December 31, 1997. has been
taken from the audited
financial statements at that
date.
</FN>
</TABLE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,346,376 $ 6,847,468
Income on investment securities
Taxable interest 1,445,946 1,793,767
Exempt from federal income tax 615,181 617,529
Dividends 41,989 44,178
2,103,116 2,455,473
Other interest income 126,434 59,236
TOTAL INTEREST INCOME 9,575,926 9,362,177
INTEREST EXPENSE
Interest on deposits 4,262,613 4,235,973
Interest on other short term
borrowings 7,977 22,767
TOTAL INTEREST EXPENSE 4,270,590 4,258,740
NET INTEREST INCOME 5,305,336 5,103,438
PROVISION FOR POSSIBLE LOAN LOSSES 950,000 450,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,355,336 4,653,438
NONINTEREST INCOME
Trust department income 391,847 374,710
Service fees on deposit accounts 871,476 905,239
Other service fees, commissions,
and fees 270,288 180,734
Other operating income 114,076 124,782
Securities gains (losses) 351,055 (1,137)
TOTAL NONINTEREST INCOME 1,998,742 1,584,328
NONINTEREST EXPENSES
Salaries and employee benefits 1,912,360 1,824,757
Net occupancy expense 324,201 316,058
Furniture and equipment expense 351,264 392,894
Deposit insurance 57,004 6,549
Other operating expenses 1,293,742 1,439,050
TOTAL NONINTEREST EXPENSES 3,938,571 3,979,308
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,415,507 2,258,458
PROVISION FOR INCOME TAXES 677,634 558,135
NET INCOME $ 1,737,873 $ 1,700,323
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 1.24 $ 1.21
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,737,873 $ 1,702,324
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess of provision for possible
loan losses over net charge offs 490,222 (60,281)
Provision for depreciation and
amortization of premises and
equipment 158,166 172,593
Provision for depreciation of leased
equipment 125,160 208,600
Amortization of deposit base intangibles 18,738 60,743
Amortization of investment security premiums,
net of accretion of discounts 106,159 136,972
Increase in cash surrender value of life
insurance contracts (73,279) (25,127)
Deferred income taxes (215,722) 184,824
(Increase) decrease in
Interest receivable (454,307) (268,431)
Other assets (401,828) 82,772
Increase (decrease) in
Interest payable 9,219 264,207
Other liabilities (118,083) 334,699
TOTAL ADJUSTMENTS (355,555) 1,091,571
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,382,318 2,793,895
INVESTING ACTIVITIES
Proceeds from maturities, calls, and sales of
available-for-sale securities 4,000,000 2,510
Proceeds from maturities and calls of
held-to-maturity securities 3,467,031 13,101,031
Purchases of investment securities
Available-for-sale (19,364,375) (4,183,988)
Held-to-maturity (7,288,193) (886,793)
Net (increase) decrease in loans 2,189,930 (2,537,971)
Purchases of premises and equipment (412,113) (95,134)
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (17,407,720) 5,399,655
FINANCING ACTIVITIES
Net increase in noninterest-bearing and
interest-bearing deposits 10,128,990 8,268,014
Net increase (decrease) in short term
borrowings (2,100) (4,920,927)
Cash dividends (784,000) (714,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 9,342,890 2,633,087
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,682,512) 10,826,637
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 42,673,333 27,916,507
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 35,990,821 $ 38,743,144
</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, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
Material Changes in Financial Condition
Average earning assets increased 1.6% in the first quarter of
1998 compared to a 3.7% increase in the first quarter of 1997.
As a financial institution, the Bank's primary earning asset is
loans. At March 31, 1998, average net loans had grown 4.3% and
represented 67.4% 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 32.6% of average earning assets at March
31, 1998, declining 3.8% in the first quarter of 1998. Average
total assets were $535 million at the end of the first three
months of 1998 compared to $523 million at the end of the first
three months of 1997. Period-end assets were $548.2 million
compared to $537.3 million at December 31, 1997. The following
sections analyze the average balance sheet and the major
components of the period-end balance sheet.
SECURITIES
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.
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, 1998, the Corporation's investment securities
portfolio had $64.6 million available-for-sale securities and
$100.0 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 $13.9 million or 4.4% in the
first three months of 1998 compared to a $11.0 million or 3.8%
increase in the first
<PAGE>
three months of 1997. This growth reflects the consistent
loan demand in the service area. Commercial loans grew 2.4%,
personal loans remained stable posting negligible growth,
but loans secured by real estate posted a 6.1% growth for the first
three months of 1998. An asset/liability strategic decision
to keep higher quality bank customer loans 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
quarter of 1998, loans totaling $4.2 million, 1.3% of the
portfolio, were classified as other assets especially mentioned
at March 31, 1998, which is up from the $3.4 million so
classified at December 31, 1997. Loans totaling $10.8 million,
3.3% of the portfolio, were classified as substandard at March
31, 1998, compared to $5.6 million so classified at December 31,
1997. Loans totaling $1.2 million, .4% of the portfolio, were
classified as doubtful at March 31, 1998, compared to $.9
million at 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 $5.3 million, 1.6% of the total
portfolio, were identified as impaired at the end of the first
three months of 1998 compared to $2.9 million at December 31,
1997.
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, 1998, were
$26,985,000 and $1,900,000, 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 bank's average deposits grew during the first
three months of 1998 reflecting a 1.0% growth compared to a 4.0%
growth in the first quarter of 1997. Short and medium term
rates were lowered slightly, near the beginning of the first
quarter, reducing their competitive edge compared to longer term
rates. This was a contributing factor to no growth in average
interest-bearing checking accounts and 2.0% growth in
certificates of deposits during the first quarter of 1998.
Savings deposits with limited transactions increased 2.8% during
the first three months of 1998. Savings deposits have been
strong historically providing a core, low cost, source of
funding. Certificates of deposit over $100,000 increased 14.4%
in the first quarter of 1998.
CAPITAL
Average shareholders' equity remained strong totaling $61.2
million at March 31, 1998, a 5.9% 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 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. As of March 31, 1998, the Bank's total
risk-based and core capital ratios were 20.4% and 19.3%
respectively. The comparable ratios were 19.5% and 18.6% at
year end, 1997. As of March 31, 1998, the Corporation's total
risk-based and core capital ratios were 20.5% and 19.4%
respectively. The comparable ratios were 19.7% and 18.7% at
year end, 1997. As of March 31, 1998, the Bank and the
Corporation had a ratio of average core capital to average total
assets of 11.1% and 11.2% respectively, compared to 10.6% and
10.7% at December 31, 1997. Management believes, as of March
31, 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. The approval of the Comptroller of the
Currency is required before the Bank's dividends in a given
year may exceed the total of its net profit (as defined) for
the year combined with retained net profits of the preceding
two years. As of March 31, 1998,
<PAGE>
additional dividends of approximately $11,500,000 could have been
declared by the Bank to the Corporation without regulatory agency
approval.
Material Changes in Results of Operations
Total interest income was 2.3% higher in the first three months
of 1998 than the first three months of 1997. Interest and fees
earned on loans increased 2.3% despite a shortfall in the volume
of average loans compared to budget. Interest earned on
investment securities and other investments was down compared to
the first three months of 1997 due almost entirely to the use of
maturing securities to fund the increased loan volume.
Total interest expense showed almost no change in the first
three months of 1998 compared to the first three months of 1997
and 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 March 31, 1998, 1997, and December, 31, 1997 was 4.54%,
4.57%, and 4.65% 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 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 March
31, 1998. Additions to the allowance during the first three
months of 1998 were higher than the first three months of 1997
due almost entirely to a consumer loan underwriting problem that
has been corrected. Net charge offs of $398 thousand for the
first three months of 1998 are declining from prior quarters as
the loan underwriting problem is resolved. The ratio of net
charge offs to net average loans outstanding is .1% as of March
31, 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 quarter 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
<PAGE>
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, 1998, and December 31, 1997, and totaled
$411 thousand which compares to $400 thousand at March 31, 1997.
Noninterest income increased 26.2% during the first three
months of 1998 led by increasing fees from the Bank's check
card that generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. Noninterest income was also
supported by gains on securities sales. Income from fiduciary
services provided in the Bank's Trust Department remained
strong, increasing 4.7%.
Noninterest expenses, excluding the provision for possible loan
losses, were 1.0% less in the first three months of 1998 than in
the first three months of 1997. Operating efficiencies
contributed to this cost containment.
Net income is 2.2% higher for the first three months of 1998
compared to the first three months of 1997. The increase in
interest income coupled with the strong increase in noninterest
income and cost containment was sufficient to cover the
increased additions to the allowance for loan and lease losses
and the tax expense increase.
<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 15, 1998 /s/ Waymon L. Hickman
Waymon L. Hickman,
Chairman of the Board
(Chief Executive Officer)
Date May 15, 1998 /s/ Patricia N. McClanahan
Patricia N. McClanahan,
Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 27,889,654
<INT-BEARING-DEPOSITS> 1,167
<FED-FUNDS-SOLD> 8,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 64,639,272
<INVESTMENTS-CARRYING> 100,034,704
<INVESTMENTS-MARKET> 102,190,022
<LOANS> 329,170,253
<ALLOWANCE> (3,433,222)
<TOTAL-ASSETS> 548,186,602
<DEPOSITS> 480,410,797
<SHORT-TERM> 600,000
<LIABILITIES-OTHER> 5,402,076
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 47,773,729
<TOTAL-LIABILITIES-AND-EQUITY> 548,186,602
<INTEREST-LOAN> 7,346,376
<INTEREST-INVEST> 2,103,116
<INTEREST-OTHER> 126,434
<INTEREST-TOTAL> 9,575,926
<INTEREST-DEPOSIT> 4,262,613
<INTEREST-EXPENSE> 4,270,590
<INTEREST-INCOME-NET> 5,305,336
<LOAN-LOSSES> 950,000
<SECURITIES-GAINS> 351,055
<EXPENSE-OTHER> 3,938,571
<INCOME-PRETAX> 2,415,507
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,737,873
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.54
<LOANS-NON> 5,256,210
<LOANS-PAST> 1,463,961
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,943,000
<CHARGE-OFFS> 503,994
<RECOVERIES> 44,216
<ALLOWANCE-CLOSE> 3,433,222
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
