Net Income Rises 18% to $4.8 Million

Net Interest Income Increases 7.3% to a Record $12.5 Million

First Farmers and Merchants Corporation (OTC Pink: FFMH), the holding company for First Farmers and Merchants Bank, today announced double digit growth in net income for the third quarter of 2022, compared with the prior year’s third quarter.

“First Farmers’ growth in net income for the third quarter benefited from higher net interest income, lower non-interest expense, growth in our net interest margin and continued organic loan growth,” stated Brian K. Williams, Chairman and Chief Executive Officer of First Farmers. “We are on pace to report record net income for 2022 based on our year-to-date performance and our expectations for continued growth in the fourth quarter.

“Our Board of Directors recently approved a 9.5% increase in our cash dividend to $0.23 per share, highlighting our strong financial performance in 2022 and our positive outlook for the future. We believe the increase in our cash dividend and recent increases in our stock repurchases demonstrate our Board’s focus on delivering long-term shareholder value,” continued Williams.

Key highlights of First Farmers’ results for the third quarter of 2022 include:

• Net income rose 18.0% to $4.8 million in the third quarter of 2022 compared with $4.1 million in the third quarter of 2021. Net income per common share was $1.12 in the third quarter of 2022 compared with $0.94 in the third quarter of 2021. Net income rose 5.8% from $4.5 million, or $1.05 per common share, in the second quarter of 2022;
• Adjusted net income, which excludes special items, rose 22.1% to a record $4.8 million, or $1.12 per common share, compared with $3.9 million, or $0.91 per common share, for the year-earlier quarter. Third quarter adjusted net income rose 7.9% from $4.5 million, or $1.03 per common share, reported in the second quarter of 2022 (see non-GAAP reconciliation);
• Net interest income before provision increased 7.3% to $12.5 million from $11.6 million for the year-earlier quarter;
• Net loans grew 1.1% from the second quarter of 2022 (4.2% annualized) and were up 5.4% from the third quarter of 2021 after excluding SBA Paycheck Protection (“SBA PPP”) loans; and
• Total nonperforming assets dropped to $711,000, or 0.04% of total assets.

Williams continued, “First Farmers’ efficiency ratio continued to improve in the third quarter, reflecting growth in our revenue and discipline in our cost structure. During the quarter, we increased our investments in systems to support our future growth, including a new lending platform that will be rolled out over the next year. We expect the new platform to improve our service to customers, support our teams in enhancing the customer experience, and create more opportunities for future loan and deposit production.”

Robert E. Krimmel, Chief Financial Officer, added, “The majority of our year-to-date 2022 earnings were generated by our bank’s core operations and reflects the growth in our loan portfolio, higher net interest margin and lower non-interest expenses compared with last year. Our net interest margin improved to 2.61% in the third quarter and benefited from new loans added with higher interest rates. Our balance sheet remains asset sensitive, and we expect to benefit from future interest rate increases as the Federal Reserve strives to dampen inflation.

“Our asset quality is very strong and improved since last year based on the continued reduction in non-performing loans, our low loan losses and the high quality of new loans added this year. We have benefited from a strong economy in the markets we serve but remain focused on protecting our asset quality through careful underwriting of new loans, limiting our loans in higher risk segments and remaining close to our customer base as part of our early warning system to protect future earnings.”

Third Quarter 2022 Results of Operations

Net income was up $734,000 to $4.8 million, or 18.0%, from the year-earlier third quarter. The improvement in earnings was driven by growth in net interest income of $843,000 resulting from higher loan yields which contributed to expansion in our net interest margin of 15 basis points for the third quarter of 2022. The increase in interest and fees on loans was offset partially by a reduction in SBA PPP loan fees recognized during the third quarter of 2021 of $1.3 million. Non-interest expense declined by $322,000, or 3.1%, compared with the third quarter of 2021 driven by a reduction in salaries and employee benefits expense of $430,000, or 6.8%. Net income, adjusted for special items, excluded a $134,000 gain on the sale of securities (net of tax) recognized during the third quarter of 2021.

Net income increased $265,000, or 5.8%, from the sequential second quarter while adjusted net income grew $351,000, or 7.9%. The improvement in earnings was due to growth in net interest income after provision of $776,000 outpacing the growth in salaries and employee benefits expense of $298,000.

For the third quarter of 2022, securities available-for-sale declined $60 million from the sequential second quarter. Securities available-for-sale amortized cost decreased $22 million and was used to fund loan growth for the quarter while the unrealized loss adjustment for securities available-for-sale increased another $38 million for the quarter as bond prices were driven lower with higher interest rates as the Fed continued to raise short-term interest rates. Our outstanding loan balances increased $9.9 million, or 5.4% on an annualized basis, to $951 million as loan growth slowed compared with the second quarter of 2022. Total deposits decreased $48 million, or 2.5%, from the previous quarter to $1.8 billion, but increased $96 million, or 5.6%, from the year-earlier period. The decline in total deposits during the third quarter of 2022 was driven largely by the migration of certain client balances to the Company’s Trust department.

Total shareholders’ equity declined $24 million due to the unrealized loss adjustment to the available-for-sale securities portfolio that totaled $28 million, net of tax, for the third quarter. The decline is viewed as temporary by the Company since the intention is to hold these securities until maturity. Total unrealized losses related to the available-for-sale investment portfolio increased to $120 million compared to unrealized gains of $19 from the year-earlier quarter, and unrealized losses of $82 million for the second quarter of 2022. The fair market value of the Company’s available-for-sale securities portfolio is adjusted each quarter based on changes in interest rates.

Nine Months Results

Net income available to common shareholders was $13.0 million for the first nine months of 2022, up 3.8% compared with $12.5 million in the first nine months of 2021. Net income per share increased 4.9% to $3.02 for the first nine months of 2022 compared with $2.88 in the same period of 2021. The increase in earnings was driven by growth in net interest income after provision of $2.0 million, along with a decline in salaries and employee benefits of $1.2 million, offset partially by a one-time gain on the sale of Visa stock of $1.8 million recognized in the second quarter of 2021, increased software support and other computer expense of $584,000, and a reduction in mortgage banking activities of $557,000. Adjusted net income increased 21.6% to $13.1 million for the first nine months of 2022 while adjusted net income per share increased 23.1% compared to the same period in 2021.

The increase in adjusted net income benefited from a 6.1% increase in net interest income after provision for loan losses to $35.6 million supported by growth in income on investment securities of $2.8 million offset in part by a reduction in interest and fees on loans of $1.2 million. The reduction in interest and fees on loans was impacted by $3.1 million in recognized SBA PPP loan fees during the first nine months of 2021. Non-interest expenses declined 2.4% in the first nine months of 2022 to $30.3 million compared with the same period in 2021. The decrease in non-interest expenses was due mostly to lower salaries and employee benefits; offset by higher software support and other computer expense related to technology upgrades experienced during the first quarter of 2022.

Asset Quality

Nonperforming assets decreased to $711,000 at the end of the third quarter of 2022 and totaled 0.04% of total assets, down from $1.6 million, or 0.08%, in the previous quarter. Nonperforming assets were down $868,000, or 55.0% from the year-earlier third quarter. Net recoveries to average loans were 0.01% for the third quarter of 2022 compared with 0.02% for the previous quarter and net charge-offs of 0.00% for the year-earlier quarter. No adjustments were made to provision for loan and lease losses during the third quarter of 2022. The allowance for loan and lease losses represented 0.99% of total loans outstanding for the third quarter of 2022 compared with 1.00% for the previous quarter and 1.06% for the year-earlier quarter.

Capital Management Initiatives

During the third quarter of 2022, First Farmers repurchased 13,529 shares of the Company’s common stock in the open market at an average price of $31.44 per share in accordance with the Company’s stock repurchase program which represents a 95% increase compared to the second quarter of 2022. Authorization to repurchase approximately 179,000 shares remains under the current program, which is set to expire in December 2022, unless extended or otherwise completed.

About First Farmers and Merchants Corporation and First Farmers and Merchants Bank

First Farmers and Merchants Corporation is the holding company for First Farmers and Merchants Bank, a community bank serving the Middle Tennessee area through 22 offices in seven Middle Tennessee counties. As of September 30, 2022, First Farmers reported total assets of approximately $1.9 billion, total shareholders’ equity of approximately $85 million, and administered trust assets of $5.4 billion. For more information about First Farmers, visit us on the Web at www.myfirstfarmers.com under “Investor Relations.”

Cautionary Note Regarding Forward Looking Statements

This news release may contain certain “forward-looking statements” that represent First Farmers’ expectations or beliefs concerning future events and often use words or phrases such as “opportunities,” “prospects,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions. Such forward-looking statements contained herein represent the current expectations, plans or forecast of First Farmers’ and are about matters that are inherently subject to risks and uncertainties. These statements are not guarantees of future results or performance and readers are cautioned to not place undue reliance on them, whether included in this news release or made elsewhere from time to time by First Farmers or on its behalf. First Farmers disclaims any obligation to update such forward-looking statements.

Non-GAAP Financial Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. First Farmers management uses non-GAAP financial measures, including: (i) adjusted net income and (ii) adjusted basic earnings per share, in its analysis of the Company’s performance. These non-GAAP financial measures exclude the following from net income: securities gains, gain on sale of Visa stock, gain on sale of premises and equipment, one-time digital conversion fees, and the income tax effect of adjustments. Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company.

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