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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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 (Zip Code)
executive offices)
(931) 388-3145
_______________________________________________________________________________
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
___________________________ ____________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
________________________________________
(Title of Class)
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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
___
The aggregate market value of the voting stock held by non-affiliates of First
Farmers and Merchants Corporation at March 3, 2000, was $135,569,500.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the issuer's common
stock, as of March 3, 2000. 2,920,000 shares
_________________
This filing contains 67 pages.
___
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 1999 Annual Stockholders Meeting of April 18, 2000.
-- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31, 1999.
-- Parts I and II
PART I
Item 1. Business.
A discussion of the general development of the business is incorporated herein
by reference to Notes to Consolidated Financial Statements which are a part of
the Annual Report to Stockholders which is included in this filing.
Employees
FFMC has no employees. Its subsidiary, the Bank had approximately two hundred
twenty eight (228) full time employees and sixty-two (62) part time employees.
Five of the Bank's officers also were officers of FFMC. Employee benefit
programs provided by the Bank include a deferred profit sharing plan, an
annual profit sharing plan, a salary continuation plan, a deferred
compensation plan, training programs, group life and health insurance and paid
vacations.
Item 2. Properties.
A discussion of the properties owned by the company is incorporated herein by
reference to Notes to Consolidated Financial Statements which are a part of
the Annual Report to Stockholders which is included in this filing. Other
real estate owned by the Bank as of December 31, 1999, included: (1) a
one-tenth interest in approximately one hundred acres known as Town Center,
located in the southern part of the town of Spring Hill, in northern Maury
County, Tennessee on US Highway 31, (2) four vacant lots in Meadow Brook
Subdivision in Columbia, Maury County, Tennessee, and (3) a commercial
building at 506 North Main Street in Columbia, Maury County, Tennessee. The
properties are not depreciated.
Item 3. Legal Proceedings.
There are no material pending legal proceedings known to the Board of
Directors in which any director or executive officer or principal stockholder
of the Corporation and its subsidiary or any business in which such persons
are participants as a material interest adverse to the Corporation and its
subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the security holders during the fourth quarter of
the fiscal year ended December 31, 1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters.
A discussion of the registrant's common stock and related security holder
matters is incorporated herein by reference to Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations which are a part of the Annual Report to Stockholders
which is included in this filing.
Item 6. Selected Financial Data.
The selected financial data is incorporated herein by reference to
Consolidated Financial Statements, Notes to Consolidated Financial Statements,
and Management's Discussion and Analysis of Financial Condition and Results of
Operation which are a part of the Annual Report to Stockholders which is
included in this filing.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's discussion and analysis of financial condition and results of
operations is incorporated herein by reference to Management's Discussion and
Analysis of Financial Condition and Results of Operations which are a part of
the Annual Report to Stockholders which is included in this filing.
Item 8. Financial Statements and Supplementary Data.
Financial statements and supplementary data are incorporated herein by
reference to Consolidated Financial Statements, Notes to Consolidated
Financial Statements, and Management's Discussion and Analysis of Financial
Condition and Results of Operation which are a part of the Annual Report to
Stockholders which is included in this filing.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to First Farmers and Merchants Corporation's definitive
Proxy Statement (incorporated herein by reference) pursuant to Regulation
14 A, Solicitation of Proxies, which involves the election of Directors. The
present terms of Directors and officers extend to April 18, 2000.
Executive Officers of Registrant
The following is a list as of March 3, 2000, showing the names and ages of all
executive officers of First Farmers and Merchants Corporation ("FFMC"), the
nature of any family relationships between them, and all positions and offices
with the Corporation held by each of them:
Family Positions and
Name Age Relationship Offices Held
Waymon L. Hickman 65 None Chairman of the Board, Chief
Executive Officer, and
Director of FFMC. Chairman of
the Board, Chief Executive
Officer, and Director of the
Bank. Employed in 1958. Named
Assistant Cashier in 1959.
Named Assistant Vice-President
in 1961, and promoted to
Vice-President in 1962.
Elected Director in 1967
and First Vice-President and
Trust Officer in 1969.
Promoted in 1973 to Executive
Vice-President and Senior
Trust Officer. Elected
President of Bank and Chief
Administrative Officer in
August 1980. Elected President
of FFMC in April, 1982.
Elected Chief Executive Officer
of the Bank in December, 1990.
Elected Chairman of the Board
of Directors of the Bank
effective December 31, 1995.
T. Randy Stevens 48 None President, Chief Operating
Officer, and Director of FFMC.
President, Chief Operating
Officer, and Director of the
Bank. Employed in 1973.
Promoted to Commercial Bank
Officer in 1974. Promoted to
Assistant Vice President in
1976. Promoted to Vice
President in 1979. Became Vice
President and Trust Officer in
1982. Promoted to First Vice
President in 1984. Promoted to
Executive Vice President and
Chief Administrative Officer in
1990. Elected as Director of
the Bank in 1991 and Director
and Vice President of FFMC in
1991. Elected President and
Chief Operating Officer of the
Bank effective December 31,
1995. Elected President and
Chief Operating Officer of FFMC
in April, 1996.
Executive Officers of Registrant-Continued
Family Positions and
Name Age Relationship Offices Held
John P. Tomlinson, III 49 None Executive Vice President of
FFMC. Senior Executive Vice
President and Manager of
Mortgage Lending of the Bank.
Employed in 1973. Promoted to
Commercial Bank Officer in 1974.
Named Assistant Vice President
in 1976. Promoted to Vice
President in 1979. Named
Manager of Mortgage Lending in
1986. Promoted to Senior Vice
President in 1990. Promoted to
Executive Vice President in
1995. Elected Secretary of
FFMC in April, 1996. Named
Vice President of FFMC December
17, 1996. Promoted to Senior
Executive Vice President of the
Bank in 1998. Named Executive
Vice President of FFMC in 1999.
Martha M. McKennon 55 None Secretary of FFMC. Vice
President, Executive Assistant,
Assistant Secretary to the
Board of the Bank. Employed in
1974. Promoted to Customer
Service Representative in 1980.
Named Executive Assistant in
1984. Promoted to Assistant
Vice President/Executive
Assistant in 1991. Named
Assistant Secretary of FFMC
December 17, 1996. Promoted to
Vice President/Executive
Assistant in 1997. Named
Secretary to FFMC in 1999.
Patricia N. McClanahan 55 None Treasurer of FFMC. Senior Vice
President and Chief Financial
Officer/Cashier of the Bank.
Employed in 1980. Promoted to
Internal Bank Auditor in 1981.
Promoted to Bank Controller in
1984. Promoted to Bank
Controller and Cashier in 1987.
Promoted to Bank Vice President
and Controller/Cashier in 1989.
Promoted to Bank Senior Vice
President and Controller/Cashier
in 1990. Elected as Treasurer of
FFMC in 1991. Named Chief
Financial Officer in 1996.
Item 11. Executive Compensation and Transactions.
Reference is made to First Farmers and Merchants Corporation's definitive
Proxy Statement (incorporated herein by reference) pursuant to Regulation
14 A, Solicitation of Proxies, which involves the election of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to First Farmers and Merchants Corporation's definitive
Proxy Statement (incorporated herein by reference) pursuant to Regulation
14 A, Solicitation of Proxies, which involves the election of Directors.
Item 13. Certain Relationships and Related Transaction.
Reference is made to First Farmers and Merchants Corporation's definitive
Proxy Statement (incorporated herein by reference) pursuant to Regulation
14 A, Solicitation of proxies, which involves the election of directors.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) and (2) - The response to this portion of Item 14 is
submitted as a separate section of this report.
(3) - The following exhibits are filed herewith:
(13) Annual report to stockholders
(d) Financial Statement Schedules - The response to this portion
of Item 14 is submitted as a separate section of this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
BY /s/ Waymon L. Hickman
_________________________________________________
Waymon L. Hickman,
Chairman of the Board and Chief Executive Officer
(Chairman of the Board and Chief Executive Officer of the Bank)
Date March 14, 2000
_______________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ T. Randy Stevens
________________________________________________
T. Randy Stevens, President
(President and Chief Operating Officer of the Bank)
Date March 14, 2000
________________________________________________
/s/ Patricia N. McClanahan
________________________________________________
Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
Date March 14, 2000
_________________________________________________
Signatures -- continued
/s/ Kenneth A. Abercrombie /s/ O. Rebecca Hawkins
______________________________ _____________________________
Kenneth A. Abercrombie, Director O. Rebecca Hawkins, Director
Date March 21, 2000 Date March 21, 2000
/s/ James L. Bailey, Jr. /s/ Waymon L. Hickman
______________________________ ______________________________
James L. Bailey, Jr., Director Waymon L. Hickman, Director
Date March 21, 2000 Date March 21, 2000
/s/ Flavius A. Barker /s/ Joe E. Lancaster
_______________________________ ________________________________
Flavius A. Barker, Director Joe E. Lancaster, Director
Date March 21, 2000 Date March 21, 2000
/s/ Hulet M. Chaney /s/ Joseph W. Remke, III
_______________________________ _________________________________
Hulet M. Chaney, Director Joseph W. Remke, III, Director
Date March 21, 2000 Date March 21, 2000
/s/ H. Terry Cook, Jr. /s/ T. Randy Stevens
_______________________________ __________________________________
H. Terry Cook, Jr., Director T. Randy Stevens, Director
Date March 21, 2000 Date March 21, 2000
/s/ W. J. Davis, Jr. /s/ Dan C. Wheeler
_______________________________ __________________________________
W. J. Davis, Jr., Director Dan C. Wheeler, Director
Date March 21, 2000 Date March 21, 2000
/s/Tom Napier Gordon /s/ David I. Wise
_______________________________ __________________________________
Tom Napier Gordon, Director David I. Wise, Director
Date March 21, 2000 Date March 21, 2000
/s/ Edwin W. Halliday /s/ W. Donald Wright
_______________________________ __________________________________
Edwin W. Halliday, Director W. Donald Wright, Director
Date March 21, 2000 Date March 21, 2000
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) and (2) ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1999
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
FORM 10-K -- ITEM 14(a)(1) and (2)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statements of First Farmers and
Merchants Corporation and Subsidiary, included in the annual report of the
registrant to its security holders for the year ended December 31, 1999, are
incorporated by reference in Item 8:
Consolidated balance sheets -- December 31, 1999 and 1998
Consolidated statements of income -- Years ended December 31, 1999,
1998, and 1997
Consolidated statements of changes in equity -- Years ended
December 31, 1999, 1998, and 1997
Consolidated statements of cash flows -- Years ended December 31, 1999,
1998, and 1997
Notes to consolidated financial statements -- December 31, 1999
The following financial statement schedules of First Farmers and Merchants
Corporation and subsidiary are included in Item 14(d):
None
All other schedules to the consolidated financial statements required by
Article 9 of Regulation S-X and all other schedules to the financial
statements of the registrant required by Article 5 of Regulation S-X are not
required under the related instructions or are inapplicable and therefore,
have been omitted.
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
Exhibit Number Title or Description
(13) Annual Report to Stockholders
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FIRST FARMERS AND MERCHANTS CORPORATION
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Farmers and Merchants Corporation (the Corporation) was
incorporated on March 31, 1982, as a Tennessee corporation. As of December
31, 1999, the only subsidiary of the Corporation was First Farmers and
Merchants National Bank (the Bank). The Bank is a national banking
association which was organized in 1954 as a successor to a state bank
organized in 1909. The resulting financial condition of the Corporation
should be evaluated in terms of the Bank's operations within its service area.
During 1999, First Farmers and Merchants National Bank celebrated ninety
years of service. In February, the Bank completed an acquisition with the
Farmers and Merchants Bank of White Bluff, Tennessee, extending its service
area into the fifth county in southern middle Tennessee. The Bank is
committed to provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the quality service of
a community bank and the safety and strength of a regional bank.
The accompanying tables plus the discussion and financial information
are presented to aid in understanding First Farmers and Merchants
Corporation's current financial position and results of operations. The
emphasis of this discussion will be on the years 1999, 1998, and 1997; however,
financial information for prior years will also be presented when appropriate.
This discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements included
elsewhere in this material.
FINANCIAL CONDITION
First Farmers and Merchants Corporation's financial condition depends on
the quality and nature of its assets, its liability and capital structure, the
market and economic conditions, and the quality of its personnel. Commercial
banking in the marketing area served by the Bank is highly competitive.
Although the Bank is ranked as the largest bank in the area in terms of total
deposits, the Bank faces substantial competition from nineteen (19) other banks,
two (2) savings and loan associations, and several credit unions located in
the marketing area. The following paragraphs provide a unique perspective on
the internal structures of the Corporation and the Bank that provide the
strength in our organization.
Summary
_______
The Bank reported net income of $7.5 million for 1999 compared to $7.3
million in 1998 and $7.1 million in 1997. On a per common share basis, net
income was $2.59 for 1999 versus $2.62 for 1998 and $2.52 for 1997. The
decline in per common share income is due to the issuance of stock to complete
the acquisition with Farmers and Merchants Bank of White Bluff in the first
quarter. The improvement in 1999's overall earnings resulted from maintaining
interest income and containing the cost of funds in an increasingly
competitive environment where deposits grew about twice as much as net loans.
Noninterest income was less than the prior year but noninterest expenses
including additions to the allowance for loan losses remained steady. The
emphasis to strengthen credit underwriting standards successfully reduced
required additions to the allowance.
The return on average equity for 1999 was 10.7% compared to 11.7% for
1998 and 12.2% for 1997. The return on average assets was 1.25% for 1999
versus 1.33% for 1998 and 1.34% for 1997.
Net Interest Margin
___________________
The net interest margin is defined as the difference between the revenue
from earning assets, primarily interest income, and interest expense related
to interest-bearing liabilities. The maintenance of the gross interest margin
at a level which, when coupled with noninterest revenues, is sufficient to
cover additions to the allowance for loan losses, noninterest expenses and
income taxes, and yield an acceptable profit is critical for success in the
banking industry. The net interest margin is a function of the average
balances of earning assets and interest-bearing liabilities and the yields
earned and rates paid on those balances.
Management activities are planned to maintain a satisfactory spread
between the yields on earning assets and the related cost of interest-bearing
funds. The gross interest spread is determined by comparing the taxable
equivalent gross interest margin to average earning assets before deducting
the allowance for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by interest-bearing sources
and those which incur no interest cost (primarily noninterest-bearing demand
deposits). This ratio is most often used when analyzing a banking
institution's overall gross margin profitability compared to that of other
financial institutions.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates Interest Differential
YEAR ENDED DECEMBER 31,
1999 1998 1997
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
Loans, net $ 318,868 8.80% $ 28,054* $ 321,239 9.09% $ 29,187* $ 314,198 9.18% $ 28,858*
Bank deposits 22 4.55 1 4 - - 1 - -
Taxable securities 163,455 6.00 9,809 123,711 6.27 7,751 113,013 6.35 7,173
Tax exempt securities 58,956 6.47 3,814* 50,457 6.78 3,419* 47,366 6.96 3,297*
Federal funds sold 12,105 5.11 619 12,774 5.39 689 4,631 5.46 253
_________ ________ _________ ________ _________ ________
TOTAL EARNING ASSETS 553,406 7.64 $ 42,297 508,185 8.08 $ 41,046 479,209 8.26 $ 39,581
________ ________ ________
________ ________ ________
Noninterest earning assets
Cash and due from banks 22,522 22,561 27,039
Bank premises and equipment 8,139 6,686 6,633
Other assets 16,790 15,222 15,045
_________ _________ _________
TOTAL ASSETS $ 600,857 $ 552,654 $ 527,926
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market
accounts $ 180,838 3.06% $ 5,537 $ 175,956 3.19% $ 5,616 $ 166,828 3.38% $ 5,634
Saving 56,519 3.12 1,761 48,063 3.22 1,547 43,776 3.37 1,476
Time 164,359 5.00 8,218 151,006 5.28 7,966 152,389 5.29 8,063
Time over $100,000 46,593 5.16 2,402 41,870 5.46 2,285 37,680 5.43 2,045
_________ ________ _________ ________ _________ ________
TOTAL INTEREST BEARING
DEPOSITS 448,309 4.00 17,918 416,895 4.18 17,414 400,673 4.30 17,218
Federal funds purchased
and securities sold
under agreements to
repurchase 127 4.72 6 22 4.55 1 1,016 5.80 59
Other short-term debt 549 4.74 26 574 5.05 29 538 5.02 27
_________ ________ _________ ________ _________ ________
TOTAL INTEREST BEARING
LIABILITIES 448,985 4.00 $ 17,950 417,491 4.18 $ 17,444 402,227 4.30 $ 17,304
________ ________ ________
________ ________ ________
Noninterest bearing
liabilities
Demand deposits 75,956 66,474 62,903
Other liabilities 5,755 5,657 4,990
_________ _________ _________
TOTAL LIABILITIES 530,696 489,622 470,120
Stockholders' equity 70,161 63,032 57,806
_________ _________ _________
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 600,857 $ 552,654 $ 527,926
Spread between combined
rates earned and combined
rates paid* 3.64% 3.90% 3.96%
Net yield on interest-earning
assets* 4.40% 4.64% 4.65%
* Taxable equivalent basis
Notes:
1. U.S. Government, government agency, taxable municipal, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable securities. Municipal debt
securities are nontaxable and classified as held-to-maturity.
2. The taxable equivalent adjustment has been computed based on a 34% federal
income tax rate and has given effect to the disallowance of Interest
expense, for federal income tax purposes, related to certain tax-free
assets. Loans include nonaccrual loans for all years presented.
3. The average balances of the amortized cost of available-for-sale
securities were used in the calculations in this table.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The incremental interest spread compares the difference between the yields on
earning assets and the cost of interest-bearing funds. This calculation and
similar ratios are used to assist in pricing decisions for interest related
products. Table A entitled Distribution of Assets, Liabilities, and
Stockholders' Equity, Interest Rates and Interest Differential presents for
each of the last three years by major categories of assets and liabilities,
the average daily balances, the components of the gross interest margin (on a
taxable equivalent basis), the yield or rate, and the incremental and gross
interest spread.
Table B sets forth, for the periods indicated, a summary of changes in
interest earned and interest paid separated into the amount generated by
volume changes and the amount generated by changes in the yield or rate.
TABLE B - Volume and Yield/Rate Variances
_________________________________________
(Taxable Equivalent Basis - In Thousands)
1999 Compared to 1998 1998 Compared to 1997
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
Loans, net $ (215) $ (918) $ (1,133) $ 646 $ (317) $ 329
Bank deposits - 1 1 - - -
Investment securities
Taxable securities 2,492 (434) 2,058 679 (101) 578
Tax-free securities 576 (181) 395 215 (93) 122
Federal funds sold (36) (34) (70) 445 (9) 436
______ _______ ________ _______ _______ _______
Total interest
earning assets 2,817 (1,566) 1,251 1,985 (520) 1,465
______ _______ ________ _______ ________ _______
Interest paid on
NOW and money market
accounts 156 (235) (79) 308 (326) (18)
Savings deposits 272 (58) 214 144 (73) 71
Time deposits 705 (453) 252 (73) (24) (97)
Time deposits over
$100,000 258 (141) 117 228 12 240
Federal funds purchased
and securities sold
under agreements
to repurchase 5 - 5 (58) - (58)
Short term debt (1) (2) (3) 2 - 2
______ ______ ________ _______ _______ _______
Total interest-bearing
funds 1,395 (889) 506 551 (411) 140
______ ______ ________ _______ _______ _______
Net interest earnings $ 1,422 $ (677) $ 745 $ 1,434 $ (109) $ 1,325
Notes:
1. The change in interest resulting from both volume and yield/rate has been
allocated to change due to volume and change due to yield/rate in
proportion to the relationship of the absolute dollar amounts of the change
in each.
2. The computation of the taxable equivalent adjustment has given effect to
the disallowance of interest expense, for federal income tax purposes,
related to certain tax-free assets.
3. U.S. Government, government agency, taxable municipal, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable securities. Bank qualified
municipal debt securities are nontaxable and classified as held-to-maturity.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our
stockholders. The first graph illustrates in thousands of dollars, the
categories of average earning assets and the portion each category is of the
total for the last three years. The second graph illustrates in thousands of
dollars, the categories of average funding of earning assets and the portion
each category is of the total for the last three years. The following tables
illustrate the data in these graphs.
AVERAGE EARNING ASSETS
(In Thousands $)
Loans Investment Securities Other
1999 $ 318,868 $ 222,433 $ 12,105
1998 321,239 174,172 12,774
1997 314,198 160,380 4,613
Average earning assets increased 8.9% in 1999 compared to a 6.0% increase
in 1998 and a 5.0% increase in 1997. As a financial institution, the Bank's
primary earning asset is loans. At December 31, 1999, average net loans
represented 57.6% of average earning assets. The growth of total average net
loans has slowed during the last three years as the diverse economies in the
Bank's service area matured and competition in the financial services arena
increased. Average net loans declined three quarters of a percentage point
from 1998 to 1999 while showing a 2.2% growth from 1997 to 1998, and an 8.2%
growth from 1996 to 1997. Average investments made up the remaining balance
of average earning assets at December 31, 1999, increasing 25.5% from year end
1998 compared to a 13.3% increase at the end of 1998 from year end 1997.
Average investments decreased .8% in 1997. The Bank completed an acquisition
of Farmers and Merchants Bank of White Bluff, Tennessee, in the first quarter
of 1999 in a noncash transaction in which 120,000 shares of Corporation common
stock were issued to acquire $5 million in net loans, $13 million in
investment securities, and certain other assets. Deposit liabilities of $17.7
million were assumed in the transaction. 27% of the increase in investments
during 1999 can be attributed to the acquisition. Average total assets
increased during the last three years as evidenced by an 8.7% growth, 4.8%
without the acquisition, from 1998 to 1999, a 4.7% growth from 1997 to 1998,
and a 5.0% growth from 1996 to 1997.
Average Funding of Earning Assets
(In Thousands $)
Interest- NonInterest-
Bearing Bearing
Deposits Deposits Other
1999 $ 448,309 $ 75,956 $ 6,431
1998 416,895 66,474 6,253
1997 400,673 62,903 6,544
The bank's average deposits grew during the last three years reflecting
an 8.5% growth from 1998 to 1999, a 4.3% growth from 1997 to 1998, and a 4.4%
growth from 1996 to 1997. The acquisition completed in the first quarter of
1999 accounted for 43.2% of this growth. Short and medium term rates were
less competitive compared to longer term rates during 1999 and some depositors
moved money back into certificates of deposit. Interest-bearing transaction
accounts increased 2.8% during 1999 as compared to a 5.5% increase in 1998
and a 5.3% increase during 1997. 36.4% of the growth in interest-bearing
transaction accounts during 1999 can be attributed to the acquisition.
Certificates of deposit increased 9.4% during 1999 with one quarter of this
increase related to the acquisition. Certificates of deposit increased 4.1%
in 1998 and 1.9% in 1997. Average savings deposits increased over 17.6%
during 1999 and almost 9.8% during 1998, and 17.0% during 1997 with over 56%
of the growth in 1999 due to the acquisition. Savings deposits have been
strong historically providing a core, low cost, source of funding. The Bank's
noninterest bearing deposits have remained consistently strong and were 14.3%
of average total deposits in 1999, 13.8% in 1998, and 13.6% in 1997. 34.4% of
the increase in noninterest bearing deposits in 1999 can be attributed to the
acquisition. This strong core of noninterest bearing funds contributed to the
maintenance of the cost of funds for the periods.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
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.
Another tool used to monitor the Bank's overall interest rate sensitivity
is a gap analysis. Table C, Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities, shows the Bank's rate sensitive position at
December 31, 1999, as measured by gap analysis (the difference between the
earning asset and interest-bearing liability amounts scheduled to be repriced
to current market rates in subsequent periods). TABLE D - Average Amounts of
Deposits and Average Rates Paid by Deposit Type at December 31 provides
details of the largest component of interest-bearing liabilities.
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 December 31, 1999, 1998, and
1997 was 4.40%, 4.64%, and 4.65% respectively.
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Includes Maturities and Scheduled Repricings)
Dollars in Thousands
3 Months 3-6 6-12 Over 1
As of December 31, 1999 or Less Months Months Year Total
Earning assets
Federal funds sold $ 2,300 $ - $ - $ - $ 2,300
Bank deposits 25 - - - 25
Taxable securities 6,510 9,018 16,464 142,732 174,724
Tax-exempt securities 400 1,060 885 59,208 61,553
Loans and leases, net of
deferred fees 48,103 39,502 55,165 193,229 335,999
_________ _________ _________ _________ _________
Total earning assets 57,338 49,580 72,514 395,169 574,601
Interest-bearing liabilities
NOW and money market accounts 55,421 - - 122,732 178,153
Savings deposits - - - 59,375 59,375
Time deposits 33,807 47,168 63,467 31,326 175,768
Time deposits over $100,000 10,854 13,314 18,919 5,979 49,066
Other short-term debt 969 - - - 969
_________ _________ ________ _________ _________
Total interest bearing
liabilities 101,051 60,482 82,386 219,412 463,331
_________ _________ ________ _________ _________
Period gap (43,713) (10,902) (9,872) 175,757 111,270
________________________________________________________________________________________________
Cumulative gap $ (43,713) $ (54,615) $ (64,487) $ 111,270 $ -
________________________________________________________________________________________________
Available-for-sale and held-to-maturity securities were combined in the
taxable securities category for purposes of this table.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - Average Amounts of Deposits and Average Rates Paid by Deposit Type
at December 31
Year Ended December 31
1999 1998 1997
Demand deposits $ 75,921 - % $ 66,474 - % $ 62,903 - %
NOW and money market
accounts 180,942 3.06 175,956 3.19 166,828 3.38
Savings deposits 56,491 3.12 48,063 3.22 43,776 3.37
Time deposits of less
than $100,000 164,290 5.00 151,006 5.28 152,389 5.29
Time deposits of
$100,000 or more 46,552 5.17 41,870 5.46 37,680 5.43
_________ ____ _________ ____ _________ ____
Total In Domestic
Offices $ 524,196 3.42% $ 483,369 3.60% $ 463,576 3.71%
LOANS AND LOAN QUALITY
As with most commercial banking institutions, 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
composition of the loan portfolio is disclosed in detail in Note 3 in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Bank follows written loan policies which include loan review
procedures and approvals. Depending primarily on the amount of the loan,
there are various approval levels including an Executive Committee of the
Board of Directors that meets weekly.
The Bank has a Loan Review Department which performs ongoing, independent
reviews of specific loans for credit quality and proper documentation. This
department is centralized and independent of the lending function. Regular
reports are made to senior management and the Executive Committee of the Board
of Directors regarding the credit quality of the loan portfolio, as well as
trends. Every loan is assigned a risk rating by the loan officer subject to
review by Loan Review. The Bank also has a Credit Administrator who is
responsible for assisting loan officers in structuring new loans, reviewing
problem loans, monitoring their status from period to period, and assisting
in their resolution. This analysis and review 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 loan losses. This review
supported management's assertion that the allowance was adequate at December
31, 1999.
Table E, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all loans
management considers to be potential problem loans, summarizes average loan
balances, and reconciles the allowance for loan losses for each year.
Additions to the allowance, which have been charged to operating expenses, are
also disclosed. Management does not believe that there is a concentration of
loans to borrowers engaged in similar activities.
Loans having recorded investments of $3.7 million at December 31, 1999,
have been identified as impaired in accordance with the provisions of SFAS
114. They represent 1.1% of gross loans. Commercial loans comprised $.2
million of the total, with loans secured by real estate accounting for $3.0
million, and installment loans $.5 million. The gross interest income that
would have been recorded during 1999 if the loans had been current in
accordance with their original terms and had been outstanding throughout the
period or since origination, if held for part of the period, was $485, $519,
and $431 thousand for the years ended December 31, 1999, 1998, and 1997
respectively. Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this material for more
information on the Bank's policy regarding loan impairment.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
(Dollars In Thousands) 1999 1998 1997 1996 1995
Average amount of loans
outstanding $ 318,868 $ 321,239 $ 314,198 $ 290,413 $ 276,166
_________ _________ _________ _________ _________
Balance of allowance for
possible loan losses at
beginning of year $ 3,852 $ 2,943 $ 2,926 $ 2,678 $ 2,342
_________ _________ _________ _________ _________
Balance from acquisition 218 - - - -
_________ _________ _________ _________ _________
Loans charged off
Loans secured by real
estate 317 619 88 368 15
Commercial and industrial
loans 236 1,041 605 141 170
Loans to individuals 578 914 1,371 879 371
________ ________ ________ ________ _________
TOTAL LOANS CHARGED OFF 1,131 2,574 2,064 1,388 556
Recoveries of loans
previously charged off
Loans secured by real
estate 41 1 8 111 97
Commercial and
industrial loans 17 61 53 42 14
Loans to individuals 121 121 80 183 111
________ ________ _________ ________ _________
TOTAL RECOVERIES 179 183 141 336 222
________ ________ _________ ________ _________
NET LOANS CHARGED OFF 952 2,391 1,923 1,052 334
________ ________ _________ ________ _________
Provision charged to
operating expenses 1,700 3,300 1,940 1,300 670
________ _________ _________ ________ _________
BALANCE OF ALLOWANCE
FOR POSSIBLE LOAN
LOSSES AT END OF
YEAR $ 4,818 $ 3,852 $ 2,943 $ 2,926 $ 2,678
__________________________________________________________________________________
Ratio of net charge-offs
during the period to
average loans outstanding 0.30% 0.74% 0.61% 0.36% 0.12%
__________________________________________________________________________________
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of the Bank.
At December 31, 1999, the Corporation had a ratio of tier 1 capital to average
assets of 11.43%. This compares to a ratio of tier 1 capital to average
assets of 11.19% at December 31, 1998, and 11.17% at December 31, 1997.
Cash dividends declared in 1999 were 27% of net income. Additional
dividends of approximately $13.8 million to the Corporation could have been
declared by the subsidiary bank without regulatory agency approval. The
Corporation plans to continue an average payout ratio over 20% while
continuing to maintain a capital to asset ratio reflecting financial strength
and adherence to regulatory guidelines.
As of December 31, 1999, the Corporation's ratios of Tier I capital to
risk-weighted assets and total capital to risk-weighted assets were 20.5% and
21.8% respectively. At December 31, 1998, the comparable ratios were 19.7%
and 20.9%, respectively. Please refer to Note 10 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to our
stockholders, illustrates the average equity of the Corporation for the last
eight years. The following table is the data illustrated by this graph in
thousands of dollars.
Average Equity
(In Thousands $)
1992 $ 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
1997 57,806
1998 63,032
1999 70,161
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
_______________
Total interest income increased 2.9% in 1999 with income from securities
increasing more than enough to offset the decline in loan income. Interest
and fees earned on loans decreased 3.9% in 1999 accounting for 66.3% of tax
equivalent gross interest income. Interest earned on securities and other
investments increased 21.1% in 1999 making up the balance of gross interest
income. Total interest income increased 3.6% in 1998 and 4.2% in 1997.
Interest Expense
________________
Total interest expense increased 2.9% in 1999, compared to a 1.0%
increase in 1998, and a 3.6% increase in 1997. The acquisition in the first
quarter of 1999 was responsible for 43.3% of the growth in interest-bearing
deposits. This extra growth, coupled with rising interest rates, is behind
the increase in interest expense in 1999. The cost of interest-bearing
deposits is monitored monthly by the Asset/Liability Committee. The net
interest margin (tax equivalent net interest income divided by average earning
assets) was 4.40% at the end of 1999, 4.64% at the end of 1998, and 4.65% at
the end of 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.
Noninterest Income and Expense
______________________________
Noninterest income decreased 4.9% during 1999 due mostly to the decline
in gains on the sale of assets and income from the rental of leased assets.
Income from fiduciary services provided in the Bank's Trust Department and
service fees on deposit relationships remained strong. Noninterest income
increased 9.0% in 1998 and a 19.6% increase in 1997.
Noninterest expenses, excluding the provision for possible loan losses,
increased 10.2% in 1999. Acquisition related costs and the opening of a new
office in the last quarter contributed to this increase. Noninterest expenses
increased 2.2% in 1998 and 6.2% increase in 1997.
A pie chart is included at this point in the materials sent to our
stockholders illustrating the composition of noninterest income in 1999 and
the percentage each category is of the total. The following table is the data
illustrated by this graph in thousands of dollars.
1999 Noninterest Income
Income Category Income $ % of Total
Income from trust services $ 1,670 23.0%
Other service fees 727 10.0%
Securities gains 130 2.0%
Fees on deposits 4,115 57.0%
Other 555 8.0%
A pie chart is included at this point in the materials sent to out
stockholders illustrating the composition of noninterest expense in 1999 and
the percentage each category is of the total. The following table is the data
illustrated by this graph in thousands of dollars.
1999 Noninterest Expense
Expense Category Expense $ % of Total
Personnel $ 8,645 48.0%
Furniture and equipment 1,251 7.0%
Occupancy 1,524 8.0%
Other 6,675 37.0%
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated Statements of Income
Dollars in Thousands Except Per Share Data
1999 1998 1997 1996 1995
INTEREST INCOME
Interest and fees on
loans $ 28,017 $ 29,155 $ 28,841 $ 27,344 $ 25,858
________ ________ ________ ________ ________
Income on investment
securities
Taxable interest 9,443 7,326 6,803 6,892 6,179
Exempt from federal
income tax 2,877 2,583 2,488 2,367 2,157
Dividends 257 300 261 257 178
________ ________ ________ _______ ________
12,577 10,209 9,552 9,516 8,514
________ ________ ________ _______ ________
Other interest income 620 689 254 223 122
________ ________ ________ _______ ________
TOTAL INTEREST INCOME 41,214 40,053 38,647 37,083 34,494
________ ________ ________ _______ ________
INTEREST EXPENSE
Interest on deposits 17,918 17,414 17,218 16,618 15,248
Interest on other short
term borrowings 32 30 86 94 174
________ _______ _______ _______ ______
TOTAL INTEREST EXPENSE 17,950 17,444 17,304 16,712 15,422
________ _______ _______ _______ ______
NET INTEREST INCOME 23,264 22,609 21,343 20,371 19,072
PROVISION FOR
POSSIBLE LOAN
LOSSES 1,700 3,300 1,940 1,300 670
________ _______ _______ _______ ______
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 21,564 19,309 19,403 19,071 18,402
________ _______ _______ _______ _______
NONINTEREST INCOME
Trust department income 1,670 1,516 1,471 1,324 1,252
Service fees on deposit
accounts 4,115 3,669 3,744 3,374 2,697
Other service fees,
commissions, and fees 727 1,043 845 745 300
Other operating income 555 985 394 363 323
Securities gains (losses) 130 351 488 - 1
________ ________ ________ ________ ________
TOTAL NONINTEREST
INCOME 7,197 7,564 6,942 5,806 4,573
________ ________ ________ ________ ________
NONINTEREST EXPENSES
Salaries and employee
benefits 8,645 7,776 7,319 7,030 6,621
Net occupancy expense 1,524 1,356 1,317 1,211 1,279
Furniture and equipment
expense 1,251 1,472 1,500 1,581 1,383
Other operating expenses 6,675 5,816 5,927 5,299 5,057
________ ________ ________ ________ ________
TOTAL NONINTEREST
EXPENSES 18,095 16,420 16,063 15,121 14,340
________ ________ ________ ________ ________
INCOME BEFORE
PROVISION FOR
INCOME TAXES 10,666 10,453 10,282 9,756 8,635
PROVISION FOR INCOME TAXES 3,133 3,112 3,228 2,889 2,519
________ ________ ________ ________ ________
NET INCOME $ 7,533 $ 7,341 $ 7,054 $ 6,867 $ 6,116
________________________________________________________________________________
EARNINGS PER COMMON SHARE $ 2.59 $ 2.62 $ 2.52 $ 2.45 $ 2.18
Weighted average shares
outstanding - Note 1 2,908,493 2,800,000 2,800,000 2,800,000 2,800,000
________________________________________________________________________________
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
__________
Net income was 2.6% higher in 1999 than in 1998. The first quarter
acquisition expanded the Bank's service area and helped to strengthen net
interest income. As indicatedearlier, the improvement in 1999's overall
earnings resulted from maintaining interest income and containing the cost of
funds in an increasingly competitive environment where deposits grew about
twice as much as net loans. Noninterest income was less than the prior year
but noninterest expenses including additions to the allowance for loan losses
remained steady. The emphasis to strengthen credit underwriting standards
successfully reduced required additions to the allowance.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL STATEMENTS
WHEN ADOPTED IN A FUTURE PERIOD
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information"
establishes guidelines for reporting financial information about an operating
segment or component of an enterprise. As of December 31, 1999, the Corporation
or the Bank did not have any reportable segments.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137 (SFAS 137), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133" which deferred implementation of FASB Statement 133 for all
fiscal quarters of all fiscal years after June 15, 2000. Statement 133 will
require entities to recognize all derivatives in their financial statements
as either assets or liabilities measured at fair value. The statement
specifies new methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged, and specifies detailed criteria to
be met to qualify for hedge accounting. Management does not believe this
statement will have any material effect on future financial statements.
YEAR 2000 COMPLIANCE TASK FORCE
A Year 2000 Compliance Task Force was established to evaluate the mission
critical software and hardware that must be compatible for continued
satisfactory data processing; representations have been obtained, and
satisfactorily tested, from our software and hardware vendors, confirming
their Year 2000 compatibility. Testing of systems' compatibility was complete
for all areas and core application processing, by December 31, 1999.
Significant expenses relating to this issue have been limited because the Bank
uses an outside core processor. However, the task force developed a budget
and expenses did not have a material impact on the financial statements of the
Corporation. The task force reported to the Board of Directors quarterly.
The Bank developed contingency plans for the most critical operational areas.
No material effect on operations was anticipated in preparing for potential
risks. All branches and internal departments were found to be Year 2000
compliant.
KRAFTCPAs
Kraft Bros., Esstman
Patton & Harrell, PLLC
Certified Public Accountants
Member BKR International
REPORT OF INDEPENDENT CERTIFIED-PUBLIC ACCOUNTANTS
Board of Directors
First Farmers and Merchants Corporation
Columbia, Tennessee
We have audited the accompanying consolidated balance sheets of First Farmers
and Merchants Corporation (the "Corporation") and its wholly-owned subsidiary,
First Farmers and Merchants National Bank (the "Bank") as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the each of the three years in the
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Farmers
and Merchants Corporation and Subsidiary as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
February 29, 2000
610 N. Garden Street, Suite200
Columbia, TN 38401-3250
Post Office Box 1559
Columbia, TN 38402-1559
(931) 388-3711 * FAX 388-9988
Also in Nashville and Lebanon
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
Report of Management
Financial Statements
____________________
The accompanying consolidated financial statements and the related notes
thereto have been prepared by the management of First Farmers and Merchants
Corporation (the "Corporation") including the Corporation's only subsidiary,
First Farmers and Merchants National Bank, in accordance with generally
accepted accounting principles and, as such, include amounts, some of which
are based oil judgments and estimates by management. Management's Discussion
and Analysis appearing elsewhere in this Annual Report is consistent with the
contents of the financial statements.
Kraft Bros., Esstman, Patton and Harrell, PLLC, the Corporation's independent
auditors, have audited the accompanying consolidated financial statements, and
their report thereon is presented herein. Such report represents that the
Corporation's consolidated financial statements, provided in this Annual
Report, present fairly, in all material respects, its financial position and
results of operation in conformity with generally accepted accounting
principles.
Internal Control Over Financial Reporting
_________________________________________
Management of the Corporation is responsible for establishing and maintaining
an effective internal control system over financial reporting presented in
conformity with generally accepted accounting principles. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies
identified.
The Audit Committee of the Board of Directors is composed of directors who are
not officers or employees of the Corporation. The Audit Committee of the
Board of Directors is responsible for ascertaining that the accounting
policies employed by management are reasonable and that internal control
systems are adequate. The Internal Audit Department conducts audits and
reviews of the Corporation's operations and reports directly to the Audit
Committee of the Board of Directors.
There are inherent limitations in the effectiveness of any internal control
system, including the possibility of human error and the possible
circumvention or overriding of controls. Accordingly, even an effective
internal control system can provide only reasonable assurance with respect to
financial statement preparation, Further, because of changes in conditions,
the effectiveness of an internal control system may vary over time.
Management assessed the Corporation's internal control system over financial
reporting presented in conformity with generally accepted accounting
principles as of December 31, 1999. This assessment was based on criteria for
effective internal control over financial reporting described in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 1999, the Corporation maintained
all effective internal control system over financial reporting presented in
conformity with generally accepted accounting principles.
Compliance With Laws and Regulations
____________________________________
Management is responsible for maintaining an effective system of' internal
controls over compliance with federal and state laws and regulations
concerning dividend restrictions and federal laws and regulations concerning
loans to insiders.
Management has assessed its compliance with the aforementioned laws and
regulations. Based on this assessment, management believes that the
Corporation's insured depository subsidiary, First Farmers and Merchants
National Bank, complied, in all material respects, with such laws and
regulations during the year ended December 31, 1999.
/s/ Waymon L. Hickman /s/ Patricia N. McClanahan
Waymon L. Hickman Patricia N. McClanahan
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
Columbia, Tennessee
March 6, 2000
KRAFTCPAs
Kraft Bros., Esstman
Patton & Harrell, PLLC
Certified Public Accountants
Member BKR International
REPORT OF INDEPENDENT CERTIFIED-PUBLIC ACCOUNTANTS
Board of Directors
First Farmers and Merchants Corporation
Columbia, Tennessee
We have examined management's assertion, included in the accompanying Report
of Management--Internal Control System Over Financial Reporting, that as of
December 31, 1999, First Farmers and Merchants Corporation maintained an
effective internal control system over financial reporting presented in
conformity with generally accepted accounting principles.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of
the internal control structure, and such other procedures as we considered
necessary in the circumstances. We believe that our examination provides a
reasonable basis for our opinion.
Because of inherent limitations in any internal control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to
future periods are subject to the risk that the internal control structure may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion referred to above is fairly stated, in
all material respects, based on the criteria described in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
February 29, 2000
610 N. Garden Street, Suite200
Columbia, TN 38401-3250
Post Office Box 1559
Columbia, TN 38402-1559
(931) 388-3711 * FAX 388-9988
Also in Nashville and Lebanon
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
_______
The Bank conducts a full-service commercial banking business through
eighteen offices in its community service area which is comprised of Maury,
Lawrence, Marshall, Hickman, Dickson, and adjacent counties in southern middle
Tennessee. Its principal office is at 816 South Garden Street, Columbia,
Maury County, Tennessee. Other offices in Maury County are Mt. Pleasant,
Spring Hill, and additional offices in Columbia at High Street, Hatcher Lane,
Northside, Shady Brook Mall, and Campbell Plaza. Offices in Lawrence County
include Lawrenceburg, Crockett in Lawrenceburg, Leoma, and Loretto. Offices
in Marshall County include Lewisburg, Lewisburg West, and Chapel Hill.
Offices in Hickman County include Centerville and East Hickman which was
opened December 6, 1999. The Bank entered Dickson County February 5, 1999,
completing an acquisition of the Farmers and Merchants Bank of White Bluff.
The Bank provides only automatic teller machine services in the Northfield
Complex at the Saturn location near Spring Hill, and in Columbia at the
Tennessee Farm Bureau, Columbia State Community College, and Maury Regional
Hospital.
Accounting Policies
___________________
The accounting principles followed and the methods of applying those
principles conform with generally accepted accounting principles and to
general practices in the banking industry. The significant policies are
summarized as follows.
Principles of Consolidation
___________________________
The accompanying consolidated financial statements present the accounts
of the Corporation and its wholly-owned subsidiary, the Bank. Material
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
___________________________________________________________
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Those
estimates and assumptions also affect disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Stock Split
___________
During 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 to
stockholders 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.
Cash and Due From Banks
_______________________
Included in cash and due from banks are legally reserved amounts which
are required to be maintained on an average basis in the form of cash and
balances due from the Federal Reserve Bank and other banks. At December 31,
1999, approximately $1.1 million was required to be maintained at the Federal
Reserve Bank.
Cash Equivalents
________________
Cash equivalents include cash on hand, cash due from banks, and federal
funds sold. Federal funds are sold for one-day periods.
Securities
__________
Trading account securities that are bought and held principally for the
purpose of selling them in the near term are carried at market value. Gains
and losses, both realized and unrealized, are included in other operating
income. There were no securities so classified in 1999 or 1998.
Securities that the Bank has the positive intent and ability to hold to
maturity are classified as held-to-maturity
and reported at amortized cost with premiums and discounts
recognized in interest income using the interest method over the
period to maturity.
Those securities that may be sold prior to maturity for asset/liability
management purposes, or that
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
may be sold in response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors, are classified
as available-for-sale securities and reported at fair value, with unrealized
gains and losses, net of deferred tax, excluded from earnings and reported in
other comprehensive income. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific identification
method.
Declines in the fair value of individual available-for-sale and
held-to-maturity securities below their cost that are other than temporary are
included in earnings as realized losses.
Loans
_____
The Bank grants mortgage, commercial, and consumer loans to customers.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff generally are stated at their outstanding
unpaid principal balances net of any deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans.
Interest on loans is accrued daily. Loan origination fees and related
direct costs are deferred and recognized as an adjustment of yield on the
interest method. Interest accruals are discontinued when loans are ninety
days past-due or when a loan is considered impaired. Interest income
previously accrued on such loans is reversed against current period interest
income. Interest income on loans in nonaccrual status is recognized only to
the extent of the excess of cash payments received over principal payments due.
Allowance for Possible Loan Losses
__________________________________
The allowance for possible loan losses is established through provisions
for loan losses charged against income. Loan quality is monitored by Loan
Review and the Credit Administrator. Portions of loans deemed to be
uncollectible are charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance account in the period such
determination is made. The adequacy of the allowance for possible loan losses
is evaluated quarterly in conjunction with loan review reports and evaluations
that are discussed in a meeting with loan officers and loan administration.
The Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this evaluation.
This process is inherently subjective as it requires material estimates that
are susceptible to significant change including the amounts and timing of
future cash flows expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by management to absorb
estimated probable inherent loan losses.
A loan is considered impaired when it is probable that the Bank will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. All loans in nonaccrual status and
loans in the two most severe Loan Review classifications are specifically
evaluated for impairment.
When a loan is collateral dependent, impairment is measured based on the
observable market price or the fair value of the collateral. For other loans,
the amount of impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. Positive
changes in the net present value of an impaired loan will in no event be used
to increase the value of a loan above the amount of the loan. The Bank
evaluates smaller balance homogeneous loans collectively for impairment.
Loans secured by one to four family residential properties, consumer
installment loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Other Real Estate
_________________
Other real estate, which is included in other assets, represents real
estate acquired through foreclosure and is stated at the lower of fair value,
net of estimated selling costs, or cost, at the date of foreclosure. If, at
the time of foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is recognized through
a charge to the allowance for possible loan losses, and the fair value becomes
the new cost for subsequent accounting. If the Bank later determines that the
cost of the property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is not in a
condition suitable for sale or use at the time of foreclosure, completion and
holding costs, including such items as real estate taxes, maintenance and
insurance, are capitalized up to the estimated net realizable value of the
property. However, when the
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate (Continued)
_____________________________
property is in a condition for sale or use at the time of foreclosure, or the
property is already carried at its estimated net realizable value, any
subsequent holding costs are expensed. Legal fees and any other direct costs
relating to foreclosures are charged to operations when incurred.
The Bank's recorded value for other real estate was approximately $582,000
at December 31, 1999, and $544,000 at December 31, 1998.
Premises and Equipment
______________________
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation is computed principally on
an accelerated cost recovery method over the estimated useful lives of the
assets, which range as follows: buildings - 15 to 50 years and equipment - 3
to 33 years. Costs of major additions and improvements are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
Gains or losses from the disposition of property are reflected in operations,
and the asset accounts and related allowances for depreciation are reduced.
Certain other equipment purchased for lease to an outside party under a
five year operating lease is included in other assets at cost less accumulated
depreciation. The equipment is being depreciated on an accelerated basis over
seven years.
Trust Department Income
_______________________
Trust department income is recognized on the accrual basis in the
applicable period earned.
Income Taxes
____________
The companies file a consolidated federal income tax return. Deferred
income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is the
tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Intangible Assets
_________________
Deposit base intangibles and goodwill identified in merger transactions
are amortized over 42 to 180 months on the straight-line method. Total
amortization expense charged to operations amounted to: 1999 - $218,000;
1998 - $78,000; and 1997 - $183,000. Note 11 discusses current acquisitions.
Significant Group Concentrations of Credit Risk
_______________________________________________
Most of the Bank's activities are with customers located within southern
middle Tennessee. Note 2 discusses the types of securities in which the Bank
invests. Note 3 discusses the types of lending in which the Bank engages.
The Bank does not have any significant concentrations in any one industry or
customer.
From time to time throughout the year, the Bank's balances due from other
financial institutions exceeded FDIC insurance limits. Management considers
this to be a normal business risk.
Earnings Per Share
__________________
Basic earnings per share represents income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed conversion. For the years ended December 31, 1999, 1998, and
1997, there were no potentially dilutive common shares issuable.
Comprehensive Income
____________________
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. A schedule of comprehensive income is
shown in Table I.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Years Ended December 31
1999 1998 1997
Unrealized holding gains (losses)
on available-for-sale securities $ (3,360) $ 348 $ 357
Tax effect - (expense) benefit 1,277 (122) (143)
_________ ________ _______
Net-of-tax amount $ (2,083) $ 227 $ 214
Table I - Components of Other Comprehensive Income
Dollars in Thousands
_______________________________________________________________________________
NOTE 2 - SECURITIES
Securities with an amortized cost of $74,372,000 and $63,155,000 at
December 31, 1999 and 1998, respectively (fair value: 1999 - $73,611,000;
1998 - $65,057,000), were pledged to secure deposits and for other purposes
as required or permitted by law. The fair value is established by an
independent pricing service as of the approximate dates indicated. The
differences between the amortized cost and fair value reflect current
interest rates and represent the potential gain (or loss) had the portfolio
been liquidated on that date. Security gains (or losses) are realized only
in the event of dispositions prior to maturity. The fair values of all
securities at December 31, 1999, either equaled or exceeded the cost of those
securities, or the decline in fair value is considered temporary.
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1999
Available-for-sale securities
U.S. Treasury $ 19,638 $ 43 $ 71 $ 19,610
U.S. Government agencies 91,507 - 2,322 89,185
Other securities 3,133 - 58 3,075
________ _______ ________ ________
$ 114,278 $ 43 $ 2,451 $ 111,870
______________________________________________________________________________
Held-to-maturity securities
U.S. Treasury $ 10,204 $ 29 $ 15 $ 10,218
U.S. Government agencies 45,741 17 689 45,069
States and political
subdivisions 62,404 211 1,790 60,825
Other securities 6,061 - 219 5,842
_________ _______ _______ _________
$ 124,410 $ 257 $ 2,713 $ 121,954
______________________________________________________________________________
December 31, 1998
Available-for-sale securities
U.S. Treasury $ 32,418 $ 510 $ - $ 32,928
U.S. Government agencies 48,136 336 69 48,403
Other securities 2,841 175 - 3,016
_________ _______ _______ _________
$ 83,395 $ 1,021 $ 69 $ 84,347
______________________________________________________________________________
Held-to-maturity securities
U.S. Treasury $ 10,322 $ 411 $ - $ 10,733
U.S. Government agencies 47,303 1,353 6 48,650
States and political
subdivisions 55,182 1,533 20 56,695
Other securities 1,841 91 - 1,932
_________ _______ _______ ________
$ 114,648 $ 3,388 $ 26 $ 118,010
______________________________________________________________________________
Table II - Amortized Cost and Fair Value of Securities
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES (Continued)
At December 31, 1999, the Corporation did not hold investment securities
of any single issuer, other than obligations of the U.S. Treasury and other
U.S. Government agencies, whose aggregate book value exceeded ten percent of
stockholders' equity.
Table II shows the amortized cost, fair value, and weighted yields (for
tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of
investment securities at December 31, 1999, by contractual maturity. Expected
maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations.
Proceeds from the maturity, call, or sale of available-for-sale
securities were $28,958,000, $18,009,000, and $11,008,000 during 1999, 1998,
and 1997, respectively. Proceeds from the maturity or call of held-to-
maturity securities were $15,865,000, $11,101,000, and $32,387,000 during 1999,
1998, and 1997, respectively. Gross gains of $130,000 and gross losses of
$-0- were realized on the dispositions in 1999. Gross gains of $351,000 and
gross losses of $-0- were realized on the dispositions in 1998. Gross gains
of $490,000 and gross losses of $2,000 were realized on dispositions in 1997.
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
Within one year $ 13,076 $ 13,097 6.0%
After one but within five years 6,562 6,513 6.0%
U.S. Government agencies
Within one year 13,939 13,867 5.6%
After one but within five years 61,068 59,365 5.5%
After five but within ten years 16,263 15,720 6.2%
After ten years 237 233 6.0%
Other securities 3,133 3,075 9.6%
_________ _________
$ 114,278 $ 111,870
_____________________________________________________________________________
Held-to-maturity securities
U.S. Treasury
Within one year $ 3,030 $ 3,042 6.5%
After one but within five years 7,174 7,176 6.3%
U.S. Government agencies
Within one year 1,998 1,999 6.5%
After one but within five years 38,720 38,146 6.2%
After five but within ten years 5,023 4,924 6.4%
States and political subdivisions
Within one year 2,345 2,354 7.2%
After one but within five years 20,109 20,079 7.0%
After five but within ten years 15,078 14,863 7.3%
After ten years 24,872 23,529 7.3%
Other securities
After one but within five years 2,005 1,972 6.6%
After five but within ten years 4,056 3,870 6.7%
_________ _________
$ 124,410 $ 121,954
______________________________________________________________________________
Table III - Contractual Maturity of Securities and Weighted Tax Equivalent Yields
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
1999 1998
____ ____
Commercial, financial and agricultural $ 39,695 $ 42,422
Tax exempt municipal loans 2,502 752
Real estate
Construction 5,170 6,848
Commercial mortgages 70,738 58,351
Residential mortgages 160,753 150,197
Other 6,304 7,071
Consumer loans 51,130 54,867
_________ _________
336,292 320,508
Less:
Net unamortized loan origination fees (293) (324)
Allowance for possible loan losses (4,818) (3,852)
_________ _________
$ 331,181 $ 316,332
___________________________________________________________________________
Table IV - Loans Outstanding by Category at December 31, 1999 and 1998
Dollars in Thousands
Within One to After
One Year Five Years Five Years Total
Fixed rate loans $ 67,614 $ 47,361 $ 65,660 $ 180,635
Variable rate loans 61,461 27,073 67,123 155,657
_________ _________ _________ _________
$ 129,075 $ 74,434 $ 132,783 $ 336,292
______________________________________________________________________________
Table V - Loan Maturities and Amounts of Loans Carrying Fixed and Variable
Interest Rates at December 31, 1999 - Dollars in Thousands
Loans having recorded investments of $3,745,000 at December 31, 1999,
have been identified as impaired. The total allowance for possible loan
losses related to these loans was $1,249,000. Interest received on these
loans during 1999 was $385,000, during 1998 was $261,000, and during 1997 was
$480,000. Impaired loans had recorded investments of approximately
$3,856,000 at December 31, 1998, with $425,000 of the allowance for possible
loan losses related to these loans.
Certain parties (principally directors and senior officers of the
Corporation or the Bank, including their affiliates, families, and companies
in which they hold ten percent or more ownership) were customers of, and had
loans and other transactions with, the Bank in the ordinary course of business.
Certain businesses that had previously been considered related parties because
of ownership interest no longer meet those criteria. An analysis of activity
with respect to such loans for the years ended December 31, 1999 and 1998, is
shown in Table V that follows.
These totals exclude loans made in the ordinary course of business to
other companies with which neither the Corporation nor the Bank has a
relationship other than the association of one of its directors in the
capacity of officer or director. These loan transactions were made on
substantially the same terms as those prevailing at the time for comparable
loans to other persons. They did not involve more than the normal risk of
collectiblity or present other unfavorable features. No related party loans
were charged off in 1999 or 1998.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Balance at Balance at
Beginning Amount End
of Year Additions Collected of Year
1999
Aggregate of certain
party loans $ 3,591 $ 2,166 $ 2,257 $ 3,500
______________________________________________________________________________
1998
Aggregate of certain
party loans $ 12,434 $ 3,796 $ 12,639 $ 3,591
______________________________________________________________________________
Table VI - Analysis of Activity in Certain Party Loans
Dollars in Thousands
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
1999 1998 1997
Balance at beginning of year $ 3,852 $ 2,943 $ 2,926
Increase due to acquisition 218 - -
Provision charged to operating expenses 1,700 3,300 1,940
Loan losses:
Loans charged off (1,131) (2,574) (2,064)
Recoveries on loans previously
charged off 179 183 141
_______ _______ _______
Balance at end of year $ 4,818 $ 3,852 $ 2,943
________________________________________________________________________
Table VII - Changes in the Allowance for Possible Loan Losses
Dollars in Thousands
In the opinion of management, based on conditions reasonably known, the
allowance was adequate at December 31, 1999. However, the allowance may be
increased or decreased based on loan growth, changes in credit quality, and
changes in general economic conditions.
NOTE 5 - BANK PREMISES AND EQUIPMENT
1999 1998
Land $ 1,455 $ 1,348
Premises 8,566 7,098
Furniture and equipment 5,643 5,247
Leasehold improvements 1,161 1,161
________ ________
16,825 14,854
Less allowance for depreciation
and amortization (8,519) (7,614)
________ ________
$ 8,306 $ 7,240
______________________________________________________
Table VIII - Premises and Equipment at December 31, 1999 and 1998
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of bank premises and
equipment total $1,166,000 for 1999, $691,000 for 1998, and $652,000 for 1997.
Included in premises and equipment cost and allowance for depreciation and
amortization are certain fully depreciated assets totaling approximately
$3,034,000 at December 31, 1999.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
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 December 31, 1999, additional dividends of approximately $13.8
million could have been declared by the Bank to the Corporation without
regulatory agency approval.
NOTE 7 - LEASES
Real property for four of the Bank's office locations and certain
equipment are leased under noncancelable operating leases expiring at various
times through 2008. In most cases, the leases provide for one or more renewal
options of five to ten years under the same or similar terms. In addition,
various items of office equipment are leased under cancelable operating leases.
Total rental expense incurred under all operating leases, including short-term
leases with terms of less than one month, amounted to $37,000, $580,000, and
$690,000 for equipment leases, and $160,000, $129,000, and $112,000 for
building leases, in 1999, 1998, and 1997, respectively. Future minimum lease
commitments as of December 31, 1999, under all noncancelable operating leases
with initial terms of one year or more are shown in Table IX.
Lease
Year Payments
___________ __________
2000 $ 130
2001 130
2002 109
2003 90
2004 75
Thereafter 276
______
Total $ 810
______________________________
Table IX - Future Minimum Lease Commitments
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
1999 1998 1997
Current:
Federal $ 2,863 $ 2,882 $ 2,417
State 699 695 557
_______ _______ _______
Total current 3,562 3,577 2,974
_______ _______ _______
Deferred:
Federal (364) (402) 216
State (65) (63) 38
_______ _______ _______
Total deferred (429) (465) 254
Total provision for
income taxes $ 3,133 $ 3,112 $ 3,228
__________________________________________________________
Table X - Provisions for Income Taxes
Dollars in Thousands
1999 1998 1997
Allowance for possible loan losses $ 1,750 $ 1,344 $ 907
Deferred compensation 559 485 404
Unrealized loss on AFS securities 915 - -
Deferred loan fees 8 12 20
_______ _______ _______
Deferred tax asset 3,232 1,841 1,331
________ ________ _______
Unrealized gain on AFS securities - (362) (240)
Other (224) (175) (131)
________ ________ _______
Deferred tax liability (224) (537) (371)
________ ________ _______
Net deferred tax asset $ 3,008 $ 1,304 $ 960
________________________________________________________________________
Table XI - Deferred Tax Effects of Principal Temporary Differences
Dollars in Thousands
The net deferred tax asset is included in other assets in the accompanying
consolidated balance sheets.
1999 1998 1997
Tax expense at statutory rate $ 3,626 $ 3,554 $ 3,496
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,046) (939) (896)
Nondeductible interest expense 122 111 106
Employee benefits (63) (41) (56)
Other real estate - - 151
Amortization of goodwill 49 - -
Other nondeductible expenses
(nontaxable income) - net 15 13 11
State income taxes, net of federal
tax benefit 461 459 368
Dividend income exclusion (29) (42) (33)
Other (3) (3) 81
________ _______ ________
Total provision for income taxes $ 3,133 $ 3,112 $ 3,228
__________________________________________________________________________
Effective tax rate 29.4% 29.8% 31.4%
__________________________________________________________________________
Table XII - Reconciliation of Total Income Taxes Reported with the Amount of
Income Taxes Computed at the Federal Statutory Rate (34% Each Year)
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
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 standby letters of credit in
the normal course of business at December 31, 1999, were approximately $37
million and $2.5 million, 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.
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will have no material effect on
the Corporation's consolidated financial statements.
NOTE 10 - SHAREHOLDERS' EQUITY
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 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 Tier
I Capital to average assets. Management believes, as of December 31, 1999 and
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 as of December 31, 1998, the date of
the most recent examination by the Office of the Comptroller of the Currency.
There are no conditions or events since that notification that management
believes have changed the institution's category. Actual capital amounts and
ratios are presented in Table XIII.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SHAREHOLDERS' EQUITY (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1999 Amount Ratio Amount Ratio > or = Amount Ratio > or =
Total Capital (to Risk
Weighted Assets)
Consolidated $ 75,717 21.96% $ 27,584 8.00% $ - -
Bank 74,742 21.71% 27,537 8.00% 34,421 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 71,400 20.68% 13,812 4.00% - -
Bank 70,439 20.46% 13,768 4.00% 20,652 6.00%
Tier I Capital (to
Average Assets)
Consolidated 71,400 11.43% 24,980 4.00% - -
Bank 70,439 11.30% 24,939 4.00% 31,174 5.00%
As of December 31, 1998
Total Capital (to Risk
Weighted Assets)
Consolidated 65,495 20.88% 25,096 8.00% - -
Bank 64,835 20.72% 25,036 8.00% 31,295 10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated 61,644 19.65% 12,548 4.00% - -
Bank 60,983 19.49% 12,518 4.00% 18,777 6.00%
Tier I Capital (to
Average Assets)
Consolidated 61,644 11.19% 22,041 4.00% - -
Bank 60,983 11.08% 22,011 4.00% 27,514 5.00%
Table XIII - Capital Amounts and Capital Adequacy Ratios
Dollars in Thousands
NOTE 11 - ACQUISITIONS
On October 26, 1998, the Bank entered into an agreement and plan to merge
the Farmers and Merchants Bank of White Bluff, Dickson County, Tennessee, with
and into the Bank as a branch office. The Office of the Comptroller of the
Currency granted approval of this transaction as did appropriate state
regulatory authorities. On February 5, 1999, the acquisition of the assets
and the assumption of certain liabilities indicated in Table XIV was completed
by the issuance of 120,000 shares of Corporation common stock at market value.
The transaction was accounted for by the purchase method of accounting.
Goodwill recorded as a result of the transaction is being amortized over ten
years on a straight-line basis. All assets, liabilities, and associated
income and expenses of that branch are included in the consolidated financial
statements from the acquisition date through December 31, 1999. Supplemental
pro forma information for prior periods is included in Table XV.
Cash $ 2,789 Deposits $ 17,682
Securities 13,024 Other liabilities 125
Loans, net 4,998
Other assets 1,045
Table XIV - Assets and Liabilities Acquired Through Acquisition
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - ACQUISITIONS - (Continued)
1998 1997
_______ _______
Net interest income $ 23,477 $ 22,217
Provision for loan losses 3,300 1,940
Noninterest income 7,735 7,100
Noninterest expense 17,253 16,831
Net income 7,502 7,216
Net income per share 2.57 2.47
Table XV - Summary Pro Forma Operating Information as if the
Acquisition had Occurred January 1, 1997
Dollars in Thousands Except Per Share Data
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Bank contributes to a defined contribution, profit-sharing plan
covering employees who meet participation requirements. The amount of the
contribution is discretionary as determined by the Board of Directors up to
the maximum deduction allowed for federal income tax purposes. Contributions
to the plan, that amounted to $792,000, $721,000, and $684,000, in 1999, 1998,
and 1997, respectively, are included in salaries and employee benefits expense.
In 1992, the Bank formalized a nonqualified salary continuation plan for
certain key officers. In connection with this plan, the value of the single
premium universal life insurance policies (1999 - $688,000; 1998 - $672,000)
purchased in 1993 to fund the plan and the related liability (1999 - $507,000;
1998 - $512,000) were included in other assets and other liabilities,
respectively. Net noncash income recognized on these policies of $16,000 in
1999 and $26,000 in 1998 is included in the above asset values. Net noncash
income was $25,000 in 1997. The principal cost of the plan is being accrued
over the anticipated remaining period of active employment, based on the
present value of the expected retirement benefit. Expense related to this
plan was $50,000 in 1999, $66,000 in 1998, and $42,000 in 1997.
The Bank also implemented a deferred compensation plan which permitted
directors, beginning in 1993, to defer their director's fees and earn interest
on the deferred amount. Liability increases for current deferred fees, net of
benefits paid out, of $199,000 for 1999, $208,000 for 1998, and $174,000 for
1997 have been recognized in the accompanying consolidated financial
statements. In connection with this plan, a single premium universal life
insurance policy was purchased on the life of each director who elected to
participate. Additional single premium universal life insurance policies,
totaling $920,000 in 1999 and $385,000 in 1997, were purchased for new
participants. Net noncash income recognized on these policies of $124,000 in
1999 and $109,000 in 1998 is included in the cash surrender values of
$3,529,000 and $2,485,000 reported in other assets at December 31, 1999 and
1998, respectively. Net noncash income was $103,000 in 1997.
In 1996, the Bank established an officer group term replacement/split
dollar plan to provide life insurance benefits that would continue after
retirement. A single premium universal life insurance policy was purchased
to fund the plan and a split dollar agreement was made with an irrevocable
trust that specified the portion of the insurance proceeds that would become
part of the trust. The value of this policy (1999 - $848,000; 1998 - $804,000)
is included in other assets, and net noncash income recognized on this policy
of $45,000 in 1999, net noncash expense of $16,000 in 1998, and net noncash
income of $34,000 in 1997 are included in the above asset values.
The Bank is beneficiary on the insurance policies that fund the salary
continuation plan, the deferred compensation plan, and the group term
replacement/split dollar plan. These policies have an aggregate current death
benefit of $8.1 million.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
December 31, 1999 December 31, 1998
__________________ ___________________
Carrying Fair Carrying Fair
Amount Value Amount Value
________ ________ _________ ______
Financial assets
Cash and due from banks $ 23,404 $ 23,404 $ 21,155 $ 21,155
Federal funds sold 2,300 2,300 12,000 12,000
Securities available for sale 111,870 111,870 84,347 84,347
Securities held to maturity 124,410 121,954 114,648 118,010
Loans, net 331,181 325,894 316,332 325,719
Accrued interest receivable 6,117 6,117 5,850 5,850
Financial liabilities
Deposits 540,816 534,159 500,531 487,536
Securities sold under agree-
ments to repurchase 236 236 - -
Other short term liabilities 733 733 602 602
Accrued interest payable 2,864 2,864 2,619 2,619
Table XVI - Summary of Fair Values of Financial Instruments
Dollars in thousands
Estimated fair values have been determined by the Bank using the best
available data. Many of the Bank's financial instruments, however, lack an
available trading market as characterized by a willing buyer and willing
seller engaging in an unforced, unforeclosed transaction. Therefore,
significant estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or the estimation
methodologies used may have a material effect on the estimated fair values
included in this note.
Financial assets - Cash and cash equivalents are considered to be carried
at their fair value and have not been valued differently from historical cost
accounting. Securities available-for-sale and securities held-to-maturity are
valued by an independent rating service and are disclosed in detail in Note 2
above. A present value discounted cash flow methodology was used to value the
net loan portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for regulatory
reporting purposes would be made. This rate was adjusted for credit loss and
assumed prepayment risk. For loans with floating interest rates it is
presumed that estimated fair values generally approximate the recorded book
balances.
Financial liabilities - Deposits with stated maturities have been valued
using a present value discounted cash flow with a discount rate approximating
the current market for similar liabilities. Financial instrument liabilities
with no stated maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For deposits with
floating interest rates it is presumed that estimated fair values generally
approximate the recorded book balances. The carrying amount of other short
term borrowings is considered to approximate its fair value.
The Bank's remaining assets and liabilities which are not considered
financial instruments have not been valued differently from historical cost
accounting. Management is concerned that reasonable comparability between
financial institutions may be distorted due to the wide range of permitted
valuation techniques and numerous estimates which must be made given the
absence of active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a greater degree
of subjectivity to these estimated fair values.
At December 31, 1999, the Bank had outstanding standby letters of credit
and commitments to extend credit. These off-balance-sheet financial
instruments are generally exercisable at the market rate prevailing at the
date the underlying transaction will be completed and, therefore, are deemed
to have no current fair value. Please refer to Note 9.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1999
Interest income $ 9,952 $ 10,209 $ 10,423 $ 10,630 $ 41,214
Interest expense 4,225 4,344 4,568 4,813 17,950
_________ __________ ___________ ___________ __________
Net interest income 5,727 5,865 5,855 5,817 23,264
Provision for possible
loan losses 650 625 200 225 1,700
Noninterest expenses,
net of noninterest
income 2,681 2,481 2,723 3,013 10,898
_________ __________ ___________ ___________ __________
Income before income
taxes 2,396 2,759 2,932 2,579 10,666
Income taxes 631 824 911 767 3,133
_________ __________ ___________ ___________ __________
Net income $ 1,765 $ 1,935 $ 2,021 $ 1,812 $ 7,533
__________________________________________________________________________________
Earnings per share $ 0.61 $ 0.66 $ 0.69 $ 0.63 $ 2.59
Weighted average
shares outstanding 2,873,333 2,920,000 2,920,000 2,920,000 2,908,493
__________________________________________________________________________________
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1998
Interest income $ 9,576 $ 10,139 $ 10,273 $ 10,065 $ 40,053
Interest expense 4,271 4,370 4,517 4,286 17,444
_________ __________ ___________ __________ __________
Net interest income 5,305 5,769 5,756 5,779 22,609
Provision for possible
loan losses 950 570 675 1,105 3,300
Noninterest expenses,
net of noninterest
income 1,939 2,408 2,387 2,122 8,856
_________ __________ ___________ __________ __________
Income before income
taxes 2,416 2,791 2,694 2,552 10,453
Income taxes 678 842 829 763 3,112
_________ __________ ___________ __________ __________
Net income $ 1,738 $ 1,949 $ 1,865 $ 1,789 $ 7,341
__________________________________________________________________________________
Earnings per share $ 0.62 $ 0.69 $ 0.67 $ 0.64 $ 2.62
Weighted average
shares outstanding 2,800,000 2,800,000 2,800,000 2,800,000 2,800,000
__________________________________________________________________________________
* These are restated First Quarter, 1998, numbers to give retroactive effect
to the 100% stock dividend paid to shareholders of record on April 21, 1998.
Table XVII - Consolidated Quarterly Results of Operations
Dollars in Thousands Except Per Share Data
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DEPOSITS
The Bank does not have any foreign offices and all deposits are serviced
in its eighteen domestic offices. Maturities of time deposits of $100,000 or
more and of all time deposits at December 31 are indicated in Table XVIII and
Table XIX, respectively.
1999 1998 1997
Under 3 months $ 10,069 $ 13,659 $ 9,308
3 to 12 months 33,235 23,896 25,981
Over 12 months 5,762 5,056 4,039
________ ________ ________
$ 49,066 $ 42,611 $ 39,328
_____________________________________________________
Taxable XVIII - Maturities of Time Deposits of $100,000 or More at December 31
Dollars in Thousands
2000 $ 188,297
2001 17,804
2002 11,185
2003 5,186
2004 1,645
Thereafter 424
_________
$ 224,541
_______________________________
Table XIX - Maturities of All Time Deposits at December 31, 1999
Dollars in Thousands
NOTE 16 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the
transaction date. Securities sold under agreements to repurchase are
reflected at the amount of cash received in connection with the transaction.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
Condensed Balance Sheets
December 31, 1999 and 1998
1999 1998
Cash $ 189 $ 175
Investment in bank subsidiary - at equity 71,116 62,490
Investment in credit life insurance company - at cost 50 50
Investment in other securities 23 25
Dividends receivable from bank subsidiary 1,051 896
Cash surrender value - life insurance 1,021 681
________ ________
Total assets $ 73,450 $ 64,317
______________________________________________________________________________
Liabilities
Payable to directors $ 323 $ 271
Dividends payable 1,051 896
________ ________
Total liabilities 1,374 1,167
________ ________
Stockholders' equity
Common stock - $10 par value, authorized 8,000,000
shares; shares issued and outstanding -
2,920,000 in 1999; 2,800,000 in 1998 - Note 29,200 28,000
Additional paid-in capital 4,320 -
Retained earnings 40,049 34,560
Accumulated other comprehensive income (1,493) 590
_______ ________
Total stockholders' equity 72,076 63,150
_______ ________
Total liabilities and stockholders' equity $ 73,450 $ 64,317
______________________________________________________________________________
Table XX - Condensed Balance Sheets of Parent
Dollars in Thousands
Condensed Statements of Income
Years Ended December 31, 1999 and 1998
1999 1998
Operating income
Dividends from bank subsidiary $ 2,319 $ 4,564
Other dividend income 72 122
Interest income 4 4
Other 43 40
Operating expenses (93) (84)
________ ________
Income before equity in undistributed net
income of bank subsidiary 2,345 4,646
Equity in undistributed net income of bank subsidiary 5,188 2,695
________ _______
Net Income $ 7,533 $ 7,341
_______________________________________________________________________________
Table XXI - Condensed Statements of Income of Parent
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1999 and 1998
1999 1998
Operating activities
Net income for the year $ 7,533 $ 7,341
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary (5,188) (2,695)
Increase in other assets (190) (142)
Increase in payables 53 51
_________ _________
Total adjustments (5,325) (2,786)
_________ _________
Net cash provided by operating activities 2,208 4,555
_________ _________
Investing activities
Purchase of single premium life insurance policy (305) -
_________ _________
Net cash used by investing activities (305) -
_________ _________
Financing activities
Cash dividends paid (1,889) (4,452)
_________ _________
Increase in cash 14 103
Cash at beginning of year 175 72
Cash at end of year $ 189 $ 175
_______________________________________________________________________________
Table XXII - Condensed Statements of Cash Flows of Parent
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SHAREHOLDER INFORMATION
The 2,920,000 shares of common stock of First Farmers & Merchants
Corporation outstanding at December 31, 1999 had a market value of $160.6
million and were held by 2,092 identifiable individuals located mostly in the
market area. A small number of additional shareholders are not identified
individually since some bank nominees, including the bank's Trust Department,
are listed as single owners when, in fact, these holdings represent large
numbers of shareholders. No single shareholder's ownership exceeded five
percent at year end.
There is no established public trading market for the stock. The table
at the right shows the high and low price of the Corporation's common stock,
as well as the semiannual dividend paid per share, in each of the last three
years. The table and the graphs below show the earnings and dividends per
share and the dividend payout ratio for the last five years. A special
dividend was paid in 1998 that makes this ratio higher than other years.
Without the special dividend, the payout ratio is in line with other years at
24%.
Estimated Price Range and Dividends per Share
High Low Dividend
1999 First Quarter $ 46.00 $ 46.00 $ -
Second Quarter 48.00 46.00 0.34
Third Quarter 50.00 48.00 -
Fourth Quarter 55.00 50.00 0.36
1998 First Quarter $ 40.00 $ 39.00 $ -
Second Quarter 45.00 40.00 0.31
Third Quarter 46.00 45.00 -
Fourth Quarter 46.00 46.00 1.32
1997 First Quarter $ 33.50 32.50 $ -
Second Quarter 34.50 34.50 0.27
Third Quarter 36.00 35.00 -
Fourth Quarter 39.00 36.00 0.28
Common Dividend Payout Ratio
1999 1998 1997 1996 1995
Earnings per share $ 2.59 $ 2.62 $ 2.52 $ 2.45 $ 2.18
Cash dividends
per share $ 0.70 $ 1.63 $ 0.55 $ 0.49 $ 0.44
Ratio 27% 62% 22% 20% 20%
Two color graphs are included at the bottom of this page in the materials
sent to our stockholders. The first one illustrates net income for the last
five years using information taken from the "FIVE YEAR CONSOLIDATED STATEMENTS
OF INCOME" table included on page 46 of the Anuual Statement. The second one
illustrates earnings per share with cash dividends for the last five years as
stated in the table COMMON DIVIDEND PAYOUT RATIO above.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARATIVE DATA
(Dollars in Thousands)
1999 1998 1997 1996 1995
Average assets $ 600,857 $ 552,654 $ 527,926 $ 502,700 $ 463,739
Average loans (net) $ 318,868 $ 321,239 $ 314,198 $ 290,413 $ 276,166
Average deposits $ 524,265 $ 483,369 $ 463,576 $ 443,902 $ 409,489
Return on
average assets 1.25% 1.33% 1.34% 1.37% 1.32%
Return on
beginning equity 11.98% 12.21% 12.97% 14.01% 13.95%
Tier 1 capital
to average assets 11.88% 11.19% 11.17% 10.56% 10.45%
Three color graphs are included below this table which was sent in the
materials sent to our stockholders. They illustrate average assets, average
net loans, and average deposits for the last five years using information from
the "COMPARATIVE DATA" table above.
NET INTEREST MARGIN
(Dollars in Thousands)
1999 1998 1997 1996 1995
Interest income
(tax equivalent) $ 42,297 $ 41,046 $ 39,581 $ 37,986 $ 35,626
Interest expense 17,950 17,444 17,304 16,712 15,422
-------- -------- -------- -------- --------
$ 24,347 $ 23,602 $ 22,277 $ 21,274 $ 20,204
_________________________________________________________________________
Net interest margin* 4.40% 4.64% 4.65% 4.66% 4.79%
_________________________________________________________________________
*Net interest margin is net interest income (tax equivalent) divided by
average earning assets.
The final graph illustrates net interest income for the last five years.
The data was taken from the net interest margin section in the "NET INTEREST
MARGIN" table above.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The Bank conducts a full-service commercial banking
business through sixteen offices in its community service area
which is comprised of Maury, Lawrence, Marshall, Hickman, and
adjacent counties in southern middle Tennessee. Its principal
office is at 816 South Garden Street, Columbia, Maury County,
Tennessee. Other offices in Maury County are Mt. Pleasant,
Spring Hill, and additional offices in Columbia at High Street,
Hatcher Lane, Northside, Shady Brook Mall, and Campbell Plaza.
Offices in Lawrence County include Lawrenceburg, Crockett in
Lawrenceburg, Leoma, and Loretto. Offices in Marshall County
include Lewisburg, Lewisburg West, and Chapel Hill. Offices in
Hickman County include Centerville and an office in the eastern
part of the county to be built in 1999. The Bank will enter
Dickson County with an office in White Bluff in early 1999. The
Bank provides only automatic teller machine services in the
Northfield Complex at the Saturn location near Spring Hill, and
in Columbia at the Tennessee Farm Bureau, Columbia State
Community College, and Maury Regional Hospital.
Accounting Policies
The accounting principles followed and the methods of
applying those principles conform with generally accepted
accounting principles and to general practices in the banking
industry. The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present
the accounts of the Corporation and its wholly-owned subsidiary,
the Bank. Material intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock Split
During 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 to stockholders 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.
Cash and Due From Banks
Included in cash and due from banks are legally reserved
amounts which are required to be maintained on an average basis
in the form of cash and balances due from the Federal Reserve
Bank and other banks. At December 31, 1998, approximately $3.8
million was required to be maintained at the Federal Reserve
Bank.
Cash Equivalents
Cash equivalents include cash on hand, cash due from
banks, and federal funds sold. Federal funds are sold for
one-day periods.
Securities
Trading account investment securities that are bought
and held principally for the purpose of selling them in the near
term are carried at market value. Gains and losses, both
realized and unrealized, are included in other operating income.
There were no securities so classified in 1998 or 1997.
Investment securities that the Bank has the positive
intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost with premiums
and discounts recognized in interest income using the interest
method over the period to maturity.
Those securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
available-for-sale securities and reported at fair value, with
unrealized gains and losses, net of deferred tax, excluded from
earnings and reported in other comprehensive income. Gains and
losses realized on the sale of available-for-sale securities are
determined using the specific identification method.
Declines in the fair value of individual
available-for-sale and held-to-maturity securities below their
cost that are other than temporary are included in earnings as
realized losses.
Loans
The Bank grants mortgage, commercial, and consumer loans
to customers. Loans that management has the intent and ability
to hold for the foreseeable future or until maturity or payoff
generally are stated at their outstanding unpaid principal
balances net of any deferred fees or costs on originated loans,
or unamortized premiums or discounts on purchased loans.
Interest on loans is accrued daily. Loan origination
fees and related direct costs are deferred and recognized as an
adjustment of yield on the interest method. Interest accruals
are discontinued when loans are ninety days past-due or when a
loan is considered impaired. Interest income previously accrued
on such loans is reversed against current period interest
income. Interest income on loans in nonaccrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established
through provisions for loan losses charged against income. Loan
quality is monitored by Loan Review and the Credit
Administrator. Portions of loans deemed to be uncollectible are
charged against the allowance for losses, and subsequent
recoveries, if any, are credited to the allowance account in the
period such determination is made. The adequacy of the
allowance for possible loan losses is evaluated quarterly in
conjunction with loan review reports and evaluations that are
discussed in a meeting with loan officers and loan
administration. The Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors are considered in this
evaluation. This process is inherently subjective as it
requires material estimates that are susceptible to significant
change including the amounts and timing of future cash flows
expected to be received on impaired loans. The allowance for
loan losses is maintained at a level believed adequate by
management to absorb estimated probable inherent loan losses.
A loan is considered impaired when it is probable that
the Bank will be unable to collect all amounts due (principal
and interest) according to the contractual terms of the loan
agreement. All loans in nonaccrual status and loans in the two
most severe Loan Review classifications are specifically
evaluated for impairment.
When a loan is collateral dependent, impairment is
measured based on the observable market price or the fair value
of the collateral. For other loans, the amount of impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate.
Positive changes in the net present value of an impaired loan
will in no event be used to increase the value of a loan above
the amount of the loan. The Bank evaluates smaller balance
homogeneous loans collectively for impairment. Loans secured by
one to four family residential properties, consumer installment
loans, and line of credit loans are considered smaller-balance
homogeneous loans.
Other Real Estate
Other real estate, which is included in other assets,
represents real estate acquired through foreclosure and is
stated at the lower of fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate (Continued)
foreclosure, or the property is already carried at its estimated
net realizable value, any subsequent holding costs are expensed.
Legal fees and any other direct costs relating to foreclosures
are charged to operations when incurred.
The Bank's recorded value for other real estate was
approximately $544,000 at December 31, 1998, and $410,000 at
December 31, 1997.
Premises and Equipment
Premises and equipment are stated at cost, less
accumulated depreciation and amortization. The provision for
depreciation is computed principally on an accelerated cost
recovery method over the estimated useful lives of the assets,
which range as follows: buildings - 15 to 50 years and
equipment - 3 to 33 years. Costs of major additions and
improvements are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains or losses
from the disposition of property are reflected in operations,
and the asset accounts and related allowances for depreciation
are reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual
basis in the applicable period earned.
Income Taxes
The companies file a consolidated federal income tax
return. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger
transactions are amortized over 42 to 180 months on the
straight-line method. Total amortization expense charged to
operations amounted to: 1998 - $78,000; 1997 - $183,000; and
1996 - $224,000.
Earnings Per Share
Basic earnings per share represents income available to
common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted earnings
per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed conversion. For the years ended December 31, 1998,
1997, and 1996, there were no potentially dilutive common shares
issuable.
Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income," as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a
separate component of the equity section of the balance sheet,
such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no
effect on the Corporation's net income or stockholders' equity.
Significant Group Concentrations of Credit Risk
Most of the Bank's activities are with customers located
within southern middle Tennessee. Note 2 discusses the types of
securities in which the Bank invests. Note 3 discusses the types
of lending in which the Bank engages. The Bank does not have any
significant concentrations to any one industry or customer.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $63,155,000 and
$116,315,000 at December 31, 1998 and 1997, respectively (fair
value: 1998 - $65,057,000; 1997 - $117,970,000), were pledged to
secure deposits and for other purposes as required or permitted
by law. The decline in pledged securities is due to the Bank's
participation in a state wide collateral pool in the last
quarter of 1998. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1998, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1998
Available-for-sale securities
U.S. Treasury $ 32,418 $ 510 $ - $ 32,928
U.S. Government agencies 48,136 336 69 48,403
Other securities 2,841 175 - 3,016
$ 83,395 $ 1,021 $ 69 $ 84,347
Held-to-maturity securities
U.S. Treasury $ 10,322 $ 411 $ - $ 10,733
U.S. Government agencies 47,303 1,353 6 48,650
States and political
subdivisions 55,182 1,533 20 56,695
Other securities 1,841 91 - 1,932
$ 114,648 $ 3,388 $ 26 $ 118,010
December 31, 1997
Available-for-sale securities
U.S. Treasury $ 22,337 $ 234 $ 15 $ 22,556
U.S. Government agencies 23,835 53 92 23,796
Other securities 2,749 422 2 3,169
$ 48,921 $ 709 $ 109 $ 49,521
Held-to-maturity securities
U.S. Treasury $ 10,433 $ 209 $ - $ 10,642
U.S. Government agencies 36,553 658 2 37,209
States and political
subdivisions 48,465 1,218 12 49,671
Other securities 815 34 - 849
$ 96,266 $ 2,119 $ 14 $ 98,371
Table I - Amortized Cost and Fair Value of Investment Securities
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1998, the Corporation did not hold
investment securities of any single issuer, other than
obligations of the U.S. Treasury and other U.S. Government
agencies, whose aggregate book value exceeded ten percent of
stockholders' equity.
Table II shows the amortized cost, fair value, and
weighted yields (for tax-exempt obligations on a fully taxable
basis assuming a 34% tax rate) of investment securities at
December 31, 1998, by contractual maturity. Expected maturities
may differ from contractual maturities because issuers may have
the right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $18,009,000, $11,008,000, and
$3,020,000 during 1998, 1997, and 1996, respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$11,101,000, $32,387,000, and $56,112,000 during 1998, 1997, and
1996, respectively. Gross gains of $351,000 and gross losses of
$-0- were realized on the dispositions in 1998. Gross gains of
$490,000 and gross losses of $2,000 were realized on
dispositions in 1997. There were no realized gains or losses in
1996.
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
Within one year $ 16,177 $ 16,275 5.6%
After one but within five years 16,241 16,653 6.1%
U.S. Government agencies
Within one year 7,057 7,075 5.7%
After one but within five years 37,818 38,047 5.5%
After five but within ten years 3,015 3,033 5.3%
After ten years 246 248 6.1%
Other securities 2,841 3,016 9.3%
$ 83,395 $ 84,347
Held-to-maturity securities
U.S. Treasury
After one but within five years $ 10,322 $ 10,733 6.4%
U.S. Government agencies
Within one year 5,499 5,531 6.8%
After one but within five years 27,500 28,178 6.3%
After five but within ten years 14,304 14,941 6.3%
States and political subdivisions
Within one year 3,044 3,062 7.4%
After one but within five years 14,028 14,348 7.3%
After five but within ten years 19,262 19,917 7.4%
After ten years 18,848 19,368 7.4%
Other securities
After one but within five years 311 314 8.0%
After five but within ten years 1,530 1,618 6.5%
$ 114,648 $ 118,010
Table II - Contractual Maturity of Investment Securities and Weighted
Tax Equivalent Yields
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
1998 1997
Commercial, financial and agricultural $ 42,422 $ 60,593
Tax exempt municipal loans 752 768
Real estate
Construction 6,848 5,862
Commercial mortgages 58,351 52,968
Residential mortgages 150,197 146,768
Other 7,071 5,870
Consumer loans 54,867 58,879
320,508 331,708
Less:
Net unamortized loan origination fees (324) (348)
Allowance for possible loan losses (3,852) (2,943)
$ 316,332 $ 328,417
Table III - Loans Outstanding by Category at December 31, 1998 and 1997
Dollars in Thousands
Within One to After
One Year Five Years Five Years Total
Fixed rate loans $ 75,334 $ 43,244 $ 50,206 $ 168,784
Variable rate loans 62,774 36,751 52,199 151,724
$ 138,108 $ 79,995 $ 102,405 $ 320,508
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1998
Dollars in Thousands
Loans having recorded investments of $3,856,000 at
December 31, 1998, have been identified as impaired. The total
allowance for possible loan losses related to these loans was
$425,000. Interest received on these loans during 1998 was
$261,000. Impaired loans had recorded investments of
approximately $2,954,000 at December 31, 1997.
Certain parties (principally directors and senior
officers of the Corporation or the Bank, including their
affiliates, families, and companies in which they hold ten
percent or more ownership) were customers of, and had loans and
other transactions with, the Bank in the ordinary course of
business. Certain businesses that had previously been
considered related parties because of ownership interest no
longer meet those criteria. An analysis of activity with
respect to such loans for the years ended December 31, 1998 and
1997, is shown in Table V that follows.
These totals exclude loans made in the ordinary course
of business to other companies with which neither the
Corporation nor the Bank has a relationship other than the
association of one of its directors in the capacity of officer
or director. These loan transactions were made on substantially
the same terms as those prevailing at the time for comparable
loans to other persons. They did not involve more than the
normal risk of collectiblity or present other unfavorable
features. No related party loans were charged off in 1998 or
1997.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Balance at Balance at
Beginning Amount End
of Year Additions Collected of Year
1998
Aggregate of certain party loans $ 12,434 $ 3,796 $ 12,639 $ 3,591
1997
Aggregate of certain party loans $ 8,222 $ 12,488 $ 8,276 $ 12,434
Table V - Analysis of Activity in Certain Party Loans
Dollars in Thousands
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
1998 1997 1996
Balance at beginning of year $ 2,943 $ 2,926 $ 2,678
Provision charged to operating expenses 3,300 1,940 1,300
Loan losses:
Loans charged off (2,574) (2,064) (1,388)
Recoveries on loans previously
charged off 183 141 336
Balance at end of year $ 3,852 $ 2,943 $ 2,926
Table VI - Changes in the Allowance for Possible Loan Losses
Dollars in Thousands
In the opinion of management, based on conditions
reasonably known, the allowance was adequate at December 31,
1998. However, the allowance may be increased or decreased
based on loan growth, changes in credit quality, and changes in
general economic conditions.
For federal income tax purposes, the allowance for
possible loan losses is maintained at the maximum allowable by
the Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
1998 1997
Land $ 1,348 $ 1,348
Premises 7,098 7,028
Furniture and equipment 5,247 3,857
Leasehold improvements 1,161 1,209
14,854 13,442
Less allowance for depreciation and amortization (7,614) (7,029)
$ 7,240 $ 6,413
Table VII - Premises and Equipment at December 31, 1998 and 1997
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT (Continued)
Annual provisions for depreciation and amortization of
bank premises and equipment total $691,000 for 1998, $652,000
for 1997, and $685,000 for 1996. Included in premises and
equipment cost and allowance for depreciation and amortization
are certain fully depreciated assets totaling approximately
$2,495,000 at December 31, 1998.
NOTE 6 - LIMITATION ON SUBSIDIARY DIVIDENDS
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
December 31, 1998, additional dividends of approximately $13.8
million could have been declared by the Bank to the Corporation
without regulatory agency approval.
NOTE 7 - LEASES
Real property for four of the Bank's office locations
and certain equipment are leased under noncancelable operating
leases expiring at various times through 2008. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $580,000,
$690,000, and $726,000 for equipment leases, and $129,000,
$112,000, and $112,000 for building leases, in 1998, 1997, and
1996, respectively. Future minimum lease commitments as of
December 31, 1998, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
Lease
Year Payments
1999 $ 148
2000 151
2001 151
2002 130
2003 131
Thereafter 133
Total $ 844
Table VIII - Future Minimum Lease Commitments
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
1998 1997 1996
Current:
Federal $ 2,882 $ 2,417 $ 2,422
State 695 557 629
Total current 3,577 2,974 3,051
Deferred:
Federal (402) 216 (138)
State (63) 38 (24)
Total deferred (465) 254 (162)
Total provision for income taxes $ 3,112 $ 3,228 $ 2,889
Table IX - Provisions for Income Taxes
Dollars in Thousands
1998 1997 1996
Allowance for possible loan losses $ 1,214 $ 776 $ 914
Write-down of other real estate - - 177
Deferred compensation 485 404 336
Deferred loan fees 12 20 27
Deferred tax asset 1,711 1,200 1,454
Unrealized gain on AFS securities (362) (240) (97)
Other (45) - -
Deferred tax liability (407) (240) (97)
Net deferred tax asset $ 1,304 $ 960 $ 1,357
Table X - Deferred Tax Effects of Principal Temporary Differences
Dollars in Thousands
1998 1997 1996
Tax expense at statutory rate $ 3,554 $ 3,496 $ 3,317
Increase (decrease) in taxes resulting from:
Tax-exempt interest (939) (896) (859)
Nondeductible interest expense 111 106 101
Employee benefits (41) (56) (35)
Other real estate 151
Other nondeductible expenses
(nontaxable income) - net 13 11 14
State income taxes, net of federal
tax benefit 418 393 399
Dividend income exclusion (42) (33) (35)
Other 38 56 (13)
Total provision for income taxes $ 3,112 $ 3,228 $ 2,889
Effective tax rate 29.8% 31.4% 29.6%
Table XI - Reconciliation of Total Income Taxes Reported with the Amount of
Income Taxes Computed at the Federal Statutory Rate (34% Each Year)
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The net deferred tax asset was included in other assets
in the accompanying consolidated balance sheets.
NOTE 9 - COMMITMENTS
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 standby letters
of credit in the normal course of business at December 31, 1998,
were approximately $28 million and $2 million, 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.
NOTE 10 - SHAREHOLDERS' EQUITY
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 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 Tier I Capital to average
assets. Management believes, as of December 31, 1998 and 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 as
of December 31, 1997, the date of the most recent examination by
the Office of the Comptroller of the Currency. There are no
conditions or events since that notification that management
believes have changed the institution's category. Actual
capital amounts and ratios are presented in Table XII.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SHAREHOLDERS' EQUITY (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1998 Amount Ratio Amount Ratio > or = Amount Ratio > or =
Total Capital (to Risk Weighted
Assets) Consolidated $ 65,495 20.88% $ 25,096 8.00% $ - -
Bank 64,835 20.72% 25,036 8.00% 31,295 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 61,644 19.65% 12,548 4.00% - -
Bank 60,983 19.49% 12,518 4.00% 18,777 6.00%
Tier I Capital (to Average Assets)
Consolidated 61,644 11.19% 22,041 4.00% - -
Bank 60,983 11.08% 22,011 4.00% 27,514 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted
Assets) Consolidated 61,732 19.68% 25,099 8.00% - -
Bank 61,154 19.54% 25,041 8.00% 31,301 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 58,789 18.74% 12,549 4.00% - -
Bank 58,211 18.60% 12,520 4.00% 18,780 6.00%
Tier I Capital (to Average Assets)
Consolidated 58,789 11.17% 21,074 4.00% - -
Bank 58,211 11.07% 21,047 4.00% 26,309 5.00%
Table XII - Capital Amounts and Capital Adequacy Ratios
Dollars in Thousands
NOTE 11 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a nonprofit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
On October 26, 1998, the Bank entered into an agreement
and plan to merge the Farmers and Merchants Bank of White Bluff,
Dickson County, Tennessee, with and into the Bank. The Office
of the Comptroller of the Currency granted approval of this
merger as did appropriate state regulatory authorities. The
purchase of the $21 million dollar bank for 120,000 shares of
Corporation common stock was completed February 5, 1999.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EMPLOYEE BENEFIT PLANS
The Bank contributes to a defined contribution,
profit-sharing plan covering employees who meet participation
requirements. The amount of the contribution is discretionary
as determined by the Board of Directors up to the maximum
deduction allowed for federal income tax purposes.
Contributions to the plan, that amounted to $721,000, $684,000,
and $661,000, in 1998, 1997, and 1996, respectively, are
included in salaries and employee benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1998 - $672,000; 1997 - $646,000) purchased
in 1993 to fund the plan and the related liability (1998 -
$512,000; 1997 - $501,000) were included in other assets and
other liabilities, respectively. Net noncash income recognized
on these policies of $26,000 in 1998 and $25,000 in 1997 is
included in the above asset values. Net noncash income was
$26,000 in 1996. The principal cost of the plan is being
accrued over the anticipated remaining period of active
employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $66,000 in
1998, $42,000 in 1997, and $64,000 in 1996.
The Bank also implemented a deferred compensation
plan which permitted directors, beginning in 1993, to defer
their director's fees and earn interest on the deferred amount.
Liability increases for current deferred fees, net of benefits
paid out, of $208,000 for 1998, $174,000 for 1997, and $173,000
for 1996 have been recognized in the accompanying consolidated
financial statements. In connection with this plan, a single
premium universal life insurance policy was purchased on the
life of each director who elected to participate. Additional
single premium universal life insurance policies, totaling
$385,000, were purchased in 1997 for new participants. Net
noncash income recognized on these policies of $109,000 in 1998
and $103,000 in 1997 is included in the cash surrender values of
$2,485,000 and $2,376,000 reported in other assets at December
31, 1998 and 1997, respectively. Net noncash income was $85,000
in 1996.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. The value of this policy (1998 -
$804,000; 1997 - $820,000) is included in other assets, and net
expense recognized on this policy of $16,000 in 1998 and net
noncash income of $34,000 in 1997 are included in the above
asset values.
The Bank is beneficiary on the insurance policies
that fund the salary continuation plan, the deferred
compensation plan, and the group term replacement/split dollar
plan. These policies have an aggregate current death benefit of
$8.1 million.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 21,155 $ 21,155 $ 29,873 $ 29,873
Federal funds sold 12,000 12,000 12,800 12,800
Securities held to maturity 114,648 118,010 96,266 98,371
Securities available for sale 84,347 84,347 49,521 49,521
Loans, net 316,332 325,719 328,417 325,323
Accrued interest receivable 5,850 5,850 5,366 5,366
Financial liabilities
Deposits 500,531 487,536 470,282 456,557
Short term borrowings 602 602 602 602
Accrued interest payable 2,619 2,619 2,794 2,794
Table XIII - Summary of Fair Values of Financial Instruments
Dollars in Thousands
Estimated fair values have been determined by the Bank
using the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are
considered to be carried at their fair value and have not been
valued differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated
maturities have been valued using a present value discounted
cash flow with a discount rate approximating the current market
for similar liabilities. Financial instrument liabilities with
no stated maturities have an estimated fair value equal to both
the amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying amount of other short term borrowings is
considered to approximate its fair value.
The Bank's remaining assets and liabilities which are
not considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1998, the Bank had outstanding standby
letters of credit and commitments to extend credit. These
off-balance-sheet financial instruments are generally
exercisable at the market rate prevailing at the date the
underlying transaction will be completed and, therefore, are
deemed to have no current fair value. Please refer to Note 9.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1998
Interest income $ 9,576 $ 10,139 $ 10,273 $ 10,065 $ 40,053
Interest expense 4,271 4,370 4,517 4,286 17,444
Net interest income 5,305 5,769 5,756 5,779 22,609
Provision for possible loan
losses 950 570 675 1,105 3,300
Noninterest expenses, net of
noninterest income 1,939 2,408 2,387 2,122 8,856
Income before income taxes 2,416 2,791 2,694 2,552 10,453
Income taxes 678 842 829 763 3,112
Net income $ 1,738 $ 1,949 $ 1,865 $ 1,789 $ 7,341
Earnings per common share
(2,800,000 shares)* $ 0.62 $ 0.69 $ 0.67 $ 0.64 $ 2.62
* These are restated First Quarter, 1998, numbers to give retroactive effect to
the 100% stock dividend paid to shareholders of record on April 21, 1998.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1997
Interest income $ 9,362 $ 9,706 $ 9,775 $ 9,804 $ 38,647
Interest expense 4,259 4,330 4,362 4,353 17,304
Net interest income 5,103 5,376 5,413 5,451 21,343
Provision for possible loan
losses 450 290 550 650 1,940
Noninterest expenses, net of
noninterest income 2,395 2,406 2,388 1,932 9,121
Income before income taxes 2,258 2,680 2,475 2,869 10,282
Income taxes 558 796 918 956 3,228
Net income $ 1,700 $ 1,884 $ 1,557 $ 1,913 $ 7,054
Earnings per common share
(2,800,000 shares)* $ 0.61 $ 0.67 $ 0.56 $ 0.68 $ 2.52
* These are restated 1997 numbers to give retroactiveeffect to the 100%
stock dividend paid to shareholders of record on April 21, 1998.
Table XIV - Consolidated Quarterly Results of Operations
Dollars in Thousands Except Per Share Data
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DEPOSITS
The Bank does not have any foreign offices and all
deposits are serviced in its sixteen domestic offices. The
average amounts of deposits and the average rates paid are
summarized in Table XV. Maturities of time deposits of
$100,000 or more at December 31 are indicated in Table XVI.
Year Ended December 31
1998 1997 1996
Demand deposits $ 66,474 - % $ 62,903 - % $ 61,509 - %
NOW and money market accounts 175,956 3.19 166,828 3.38 158,438 3.39
Savings deposits 48,063 3.22 43,776 3.37 37,428 3.22
Time deposits of less than $100,000 151,006 5.28 152,389 5.29 151,973 5.40
Time deposits of $100,000 or more 41,870 5.46 37,680 5.43 34,554 5.40
Total In Domestic Offices $ 483,369 3.60% $ 463,576 3.71% $ 443,902 3.74%
Table XV - Average Amounts of Deposits and Average Rates Paid by Deposit Type at December 31
Dollars in Thousands
1998 1997 1996
Under 3 months $ 13,659 $ 9,308 $ 11,680
3 to 12 months 23,896 25,981 22,638
Over 12 months 5,056 4,039 4,812
$ 42,611 $ 39,328 $ 39,130
Table XVI - Maturities of Time Deposits of $100,000 or More at December 31
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
Condensed Balance Sheets
December 31, 1998 and 1997
1998 1997
Cash $ 175 $ 72
Investment in bank subsidiary - at equity 62,490 59,565
Investment in credit life insurance company - at cost 50 50
Investment in other securities 25 25
Dividends receivable from bank subsidiary 896 784
Cash surrender value - life insurance 681 651
Total assets $ 64,317 $ 61,147
Liabilities
Payable to directors $ 271 $ 220
Dividends payable 896 784
Total liabilities 1,167 1,004
Stockholders' equity
Common stock - $10 par value, authorized 8,000,000
shares; 2,800,000 shares issued and outstanding - Note 1 28,000 14,000
Retained earnings 34,560 45,783
Accumulated other comprehensive income 590 360
Total stockholders' equity 63,150 60,143
Total liabilities and stockholders' equity $ 64,317 $ 61,147
Table XVII - Condensed Balance Sheets of Parent
Dollars in Thousands
Condensed Statements of Income
Years Ended December 31, 1998 and 1997
1998 1997
Operating income
Dividends from bank subsidiary $ 4,564 $ 1,526
Other dividend income 122 80
Interest income 4 8
Other 40 34
Operating expenses 84 76
Income before equity in undistributed net
income of bank subsidiary 4,646 1,572
Equity in undistributed net income of bank subsidiary 2,695 5,482
Net Income $ 7,341 $ 7,054
Table XVIII - Condensed Statements of Income of Parent
Dollars in Thousands
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1998 and 1997
1998 1997
Operating activities
Net income for the year $ 7,341 $ 7,054
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary (2,695) (5,482)
Increase in other assets (142) (98)
Increase in payables 51 47
Total adjustments (2,786) (5,533)
Net cash provided by operating activities 4,555 1,521
Net cash provided by (used in) investing activities
Purchases of investment securities - (119)
Proceeds from maturities of investment securities - 119
Purchase of single premium life insurance policy - (135)
Net cash provided by (used in) investing activities - (135)
Net cash used in financing activities
Cash dividends paid (4,452) (1,456)
Increase (decrease) in cash 103 (70)
Cash at beginning of year 72 142
Cash at end of year $ 175 $ 72
Table XIX - Condensed Statements of Cash Flows of Parent
Dollars in Thousands