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, 2000
Commission file number 0-10972
First Farmers and Merchants Corporation
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Tennessee 62-1148660
___________________________________ _______________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
________________________________________ __________________________________
(Address of principal executive offices) (Zip Code)
(931) 388-3145
________________________________________________________________________________
(Registrant's telephone number, including area code)
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 2, 2001, was $147,608,260.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the issuer's common
stock, as of March 2, 2001. 2,920,000 shares
_________________
This filing contains 73 pages.
____
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 2000 Annual Stockholders Meeting of April 17, 2001.
-- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31, 2000. --
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
thirty three (233) full time employees and fifty-six (56) 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, 2000, 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) house and twenty acres fifteen miles
northwest of Columbia at 4123 Akin Ridge Road, Maury County, Tennessee, and
(3) a residential dwelling and lot at 428 First Street in Lawrenceburg,
Lawrence 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 the Bank 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, 2000.
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 17, 2001.
Executive Officers of Registrant
________________________________
The following is a list as of March 2, 2001, 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 66 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 49 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 50 None Senior Executive Vice President
and Director of FFMC and 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 Senior
Executive Vice President of FFMC
in 1999. Elected Director of FFMC
and Bank in 2000.
Martha M. McKennon 56 None Secretary of FFMC. Vice President,
Executive 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.
Named Secretary to Bank Board in
2000.
Patricia N. McClanahan 56 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:
(iii) Audit Committee Charter
(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 20, 2001
_________________________________________________
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 and Chief Operating Officer
(President and Chief Operating Officer of the Bank)
Date March 20, 2001
_________________________________________________
/s / Patricia N. McClanahan
_________________________________________________
Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
Date March 20, 2001
__________________________________________________
Signatures -- continued
/s/ Kenneth A. Abercrombie /s/ O. Rebecca Hawkins
___________________________________ _____________________________________
Kenneth A. Abercrombie, Director O. Rebecca Hawkins, Director
Date March 20, 2001 Date March 20, 2001
___________________________________ _____________________________________
/s/ James L. Bailey, Jr. /s/ Waymon L. Hickman
___________________________________ _____________________________________
James L. Bailey, Jr., Director Waymon L. Hickman, Director
Date March 20, 2001 Date March 20, 2001
____________________________________ _____________________________________
/s/ Flavius A. Barker /s/ Joseph W. Remke, III
____________________________________ _____________________________________
Flavius A. Barker, Director Joseph W. Remke, III, Director
Date March 20, 2001 Date March 20, 2001
____________________________________ _____________________________________
/s/ Hulet M. Chaney /s/ T. Randy Stevens
____________________________________ _____________________________________
Hulet M. Chaney, Director T. Randy Stevens, Director
Date March 20, 2001 Date March 20, 2001
____________________________________ _____________________________________
/s/ H. Terry Cook, Jr. /s/ John P. Tomlinson, III
_____________________________________ _____________________________________
H. Terry Cook, Jr., Director John P. Tomlinson, III, Director
Date March 20, 2001 Date March 20, 2001
_____________________________________ _____________________________________
/s/ W. J. Davis, Jr. /s/ Dan C. Wheeler
_____________________________________ _____________________________________
W. J. Davis, Jr., Director Dan C. Wheeler, Director
Date March 20, 2001 Date March 20, 2001
_____________________________________ _____________________________________
/s/ Tom Napier Gordon /s/ David I. Wise
_____________________________________ ____________________________________
Tom Napier Gordon, Director David I. Wise, Director
Date March 20, 2001 Date March 20, 2001
_____________________________________ ____________________________________
/s/ Edwin W. Halliday /s/ W. Donald Wright
_____________________________________ ____________________________________
Edwin W. Halliday, Director W. Donald Wright, Director
Date March 20, 2001 Date March 20, 2001
_____________________________________ ____________________________________
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, 2000
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, 2000, are incorporated by
reference in Item 8:
Consolidated balance sheets -- December 31, 2000 and 1999
Consolidated statements of income -- Years ended December 31, 2000,
1999, and 1998
Consolidated statements of changes in equity -- Years ended December
31, 2000, 1999, and 1998
Consolidated statements of cash flows -- Years ended December 31,
2000, 1999, and 1998
Notes to consolidated financial statements -- December 31, 2000
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
______________ ____________________
(iii) Audit Committee Charter
(13) Annual Report to Stockholders
EXHIBIT iii
___________
AUDIT COMMITTEE CHARTER
_______________________
FIRST FARMERS AND MERCHANTS CORPORATION
First Farmers and Merchants National Bank
Charter and Powers of the Audit Committee
Organization
There shall be a committee of the Board of Directors to be known as the
Audit/Compliance/CRA Committee. This committee shall be composed of directors
who are independent of the management of the Bank and are free of any
relationship that, in the opinion of the Board of Directors or Stockholders,
would interfere with their exercise of independent judgment as a committee
member.
Statement of Policy
The Audit/Compliance/CRA Committee shall provide assistance to the Board of
Directors in fulfilling their responsibility to the shareholders and potential
shareholders relating to accounting procedures, reporting practices,
regulatory compliance and quality and integrity of the financial reports of
the Bank. In so doing, it is the responsibility of the Audit/Compliance/CRA
Committee to maintain free and open means of communication between directors,
independent auditors, internal auditors, compliance personnel, financial
management, officers and employees of the Bank.
Responsibilities
The Committee's duties include basic oversight responsibilities to ensure to
the Directors and shareholders that the accounting and reporting practices of
the Bank are of the highest quality. In addition, their responsibility is to
serve in a capacity which will provide efficiency and control in a changing
and dynamic environment.
In carrying out these responsibilities, the Audit/Compliance/CRA Committee will:
* Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the Bank.
* Meet with the independent auditors and financial management of the Bank to
review the scope of the proposed audit for the current year, review the
audit procedures to be utilized in order to attain the scope, review the
results of the audit once it has been performed and ascertain that
deficiencies or inadequacies noted by the external auditors or
disagreements with management have been resolved.
* Review with the independent auditors, the internal auditor, the compliance
officer and financial management, the adequacy and effectiveness of the
accounting and financial controls of the Bank, and elicit any
recommendations for the improvement of such internal control procedures or
particular areas where new or more detailed controls or procedures are
desirable. Particular emphasis should be given to the adequacy of such
internal controls to expose transactions, or procedures that might be
deemed illegal or otherwise improper.
Further, the committee periodically should review the Bank's policy
statements to determine their adequacy.
* Monitor the internal audit function of the Bank including their
independence and authority of their reporting obligations.
* Approve the adequacy of the proposed audit plan as presented by the
internal auditor for the coming year and monitor the variances from this
plan when needed.
* Review with the Internal Auditor, the findings and recommendations for the
improvement in areas of the Bank which have been reviewed by the internal
audit staff. Ascertain that these weaknesses are improved to an
acceptable level.
* Engage outside professionals to conduct auditing procedures on areas of
the Bank which do not receive adequate, internally performed coverage.
* Review with the Compliance Officer issues involving the training of Bank
personnel and implementation of regulatory compliance requirements.
* Submit the minutes of all meetings of the committee to, or discuss the
matters discussed at each committee meeting with, the Board of Directors.
* Investigate any matter brought to its attention involving illegal or
improper action with the power to retain outside counsel for this purpose.
* Review and concur in the appointment, replacement, reassignment, or
dismissal of the Internal Auditor, Compliance Officer or outside group or
individual retained for the purpose of expressing an opinion on the
adequacy of any area of the Bank's internal control structure or financial
reporting procedures.
* Review and update the Committee's Charter annually.
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, 2000, 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. 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. The financial condition of the Corporation should be
evaluated in terms of the Bank's operations within its service area.
During 2000, First Farmers and Merchants National Bank posted a 12.3%
increase in net loans and introduced "E-Neighbor Banking", an Internet banking
service, and Free Checking. The Bank announced plans to acquire the Peoples
& Union Bank of Lewisburg, Tennessee. The regulatory approval process was
well under way at the end of 2000. This acquisition will make the Bank the
largest independent bank in Tennessee. The Bank is committed to providing
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 2000, 1999, and 1998; 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 $8.3 million for 2000 compared to $7.5
million in 1999 and $7.3 million in 1998. On a per common share basis, net
income was $2.85 for 2000 versus $2.59 for 1999 and $2.62 for 1998. The
decline in per common share income in 1999 was due to the issuance of stock to
complete the acquisition with Farmers and Merchants Bank of White Bluff in the
first quarter of 1999. The improvement in 2000's earnings resulted from an
increase in interest income that covered the rising cost of funds in an
increasingly competitive environment. Noninterest income was up covering the
increase in noninterest expenses. Additions to the allowance for loan losses
were down.
The return on beginning equity for 2000 was 11.55% compared to 11.98% for
1999 and 12.21% for 1998. The return on average assets was 1.30% for 2000
versus 1.25% for 1999 and 1.33% for 1998.
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.
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 and Interest Differential
______________________________________________________________
YEAR ENDED DECEMBER 31,
__________________________________________________________________________
2000 1999 1998
___________________________________________________________________________
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
------- ----- -------- ------- ----- -------- ------- ----- --------
ASSETS (Dollars In Thousands)
Interest earning assets
Loans, net $ 349,727 8.99% $ 31,432* $ 318,868 8.80% $ 28,054* $ 321,239 9.09% $ 29,187*
Bank deposits 626 6.55 41 22 4.55 1 4 - -
Taxable securities 170,972 6.10 10,430 163,455 6.00 9,809 123,711 6.27 7,751
Tax exempt securities 64,077 6.31 4,042* 58,956 6.47 3,814* 50,457 6.78 3,419*
Federal funds sold 8,918 6.25 557 12,105 5.11 619 12,774 5.39 689
_________ _________ _________ ________ _________ ________
TOTAL EARNING ASSETS 594,320 7.82 $ 46,502 553,406 7.64 $ 42,297 508,185 8.08 $ 41,046
_________ ________ ________
--------- -------- --------
Noninterest earning
assets
Cash and due from
banks 21,578 22,522 22,561
Bank premises and
equipment 8,262 8,139 6,686
Other assets 16,636 16,790 15,222
_________ _________ _________
TOTAL ASSETS $ 640,796 $ 600,857 $ 552,654
________________________________________________________________________________________________________
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities
Time and savings
deposits:
NOW and money
market accounts $ 183,054 3.18% $ 5,815 $ 180,838 3.06% $ 5,537 $ 175,956 3.19% $ 5,616
Savings 58,218 3.12 1,814 56,519 3.12 1,761 48,063 3.22 1,547
Time 182,979 5.79 10,599 164,359 5.00 8,218 151,006 5.28 7,966
Time over
$100,000 54,057 6.03 3,258 46,593 5.16 2,402 41,870 5.46 2,285
_________ ________ _________ _______ _________ _______
TOTAL INTEREST BEARING
DEPOSITS 478,308 4.49 21,486 448,309 4.00 17,918 416,895 4.18 17,414
Federal funds
purchased and
securities sold
under agreements
to repurchase 1,297 6.09 79 127 4.72 6 22 4.55 1
Other short-term
debt 624 6.09 38 549 4.74 26 574 5.05 29
_________ ________ _________ _______ _________ ________
TOTAL INTEREST
BEARING LIABILITIES 480,229 4.50 $ 21,603 448,985 4.00 $ 17,950 417,491 4.18 $ 17,444
________ ________ ________
-------- -------- --------
Noninterest bearing
liabilities
Demand deposits 78,077 75,956 66,474
Other liabilities 6,471 5,755 5,657
_________ _________ _________
TOTAL LIABILITIES 564,777 530,696 489,622
Stockholders' equity 76,019 70,161 63,032
_________ _________ _________
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 640,796 $ 600,857 $ 552,654
________________________________________________________________________________________________________
Spread between
combined rates earned
and combined rates
paid* 3.32% 3.64% 3.90%
Net yield on
interest-earning
assets* 4.19% 4.40% 4.64%
_______________________________________________________________________________________________________
* Taxable equivalent basis
Notes:
1. U.S. Government, government agency, 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
________________________________________________________________________________
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. 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)
2000 Compared to 1999 1999 Compared to 1998
_____________________________ _____________________________
Yield/ Net Increase Yield/ Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ------------ ------ ------ ------------
Revenue earned on
Loans, net $ 2,716 $ 662 $ 3,378 $ (215) $ (918) $ (1,133)
Bank deposits 27 13 40 - 1 1
Investment securities
Taxable securities 451 170 621 2,492 (434) 2,059
Tax-free securities 331 (103) 228 576 (181) 395
Federal funds sold (163) 101 (62) (36) (34) (70)
________ ________ ________ ________ ________ _________
Total interest earning
assets 3,362 843 4,205 2,817 (1,566) 1,251
________ ________ ________ _______ ________ _________
Interest paid on
NOW and money market
accounts 68 210 278 156 (235) (79)
Savings deposits 53 - 53 272 (58) 214
Time deposits 931 1,450 2,381 705 (453) 252
Time deposits over
$100,000 385 471 856 258 (141) 117
Federal funds purchased
and securities sold
under agreements to
repurchase 55 18 73 5 - 5
Short term debt 3 9 12 (1) (2) (3)
________ _______ _______ ________ _______ ________
Total interest-bearing
funds 1,495 2,158 3,653 1,395 (889) 506
________ _______ _______ ________ _______ ________
Net interest earnings $ 1,867 $(1,315) $ 552 $ 1,422 $ (677) $ 745
________________________________________________________________________________________
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, 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.
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 Securities Other
1998 321,239 174,172 12,774
1999 318,868 222,433 12,105
2000 349,727 235,049 9,544
Average earning assets increased 7.4% in 2000 compared to an 8.9%
increase in 1999 and a 6.0% increase in 1998. As a financial institution,
the Bank's primary earning asset is loans. At December 31, 2000, average net
loans represented 58.8% of average earning assets. Average net loans was
up 9.7% in 2000, reflecting strong loan demand compared to 1999 when average
net loans declined three quarters of a percentage point. Loans posted a 2.2%
growth from 1997 to 1998. Average investments, including federal funds sold,
made up the remaining balance of average earning assets at December 31, 2000,
increasing 4.3% from year end 1999 compared to a 25.5% increase at the end of
1999 from year end 1998, and a 13.3% increase at the end of 1998 from year end
1997. The decline in investments in 2000 is due to the increase in loans.
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 a
6.7% growth during 2000, an 8.7% growth, 4.8% without the acquisition, from
1998 to 1999, and a 4.7% growth from 1997 to 1998.
Average Funding Earning Assets
(In Thousands $)
Interest- Noninterest-
Bearing Bearing
Deposits Deposits Other
1998 416,895 66,474 6,253
1999 448,309 75,956 6,431
2000 478,308 78,077 8,392
The bank's average deposits grew during the last three years reflecting
a 6.1% during 2000, an 8.5% growth from 1998 to 1999, and a 4.3% growth from
1997 to 1998. The acquisition completed in the first quarter of 1999
accounted for 43.2% of the growth in 1999. Short and medium term rates were
less competitive compared to longer term rates during 2000 and some depositors
moved money back into certificates of deposit. Interest-bearing transaction
accounts increased 1.2% during 2000 as compared to a 2.8% increase in 1999 and
a 5.5% increase during 1998. 36.4% of the growth in interest-bearing
transaction accounts during 1999 can be attributed to the acquisition.
Certificates of deposit increased 12.4% during 2000. Certificates of deposit
increased 9.4% in 1999, with one quarter of this increase related to the
acquisition, and 4.1% in 1998. Average savings deposits increased over 3.0%
during 2000, almost 17.6% during 1999, and 9.8% during 1998. Over 56% of the
growth in 1999 was 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 14.0%
of average total deposits in 2000, 14.3% in 1999, and 13.8% in 1998. 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 uses a formal asset and liability management process to ensure
adequate liquidity and control interest rate risk. The goal of liquidity
management is to provide adequate funds to meet loan demand and any potential
unexpected deposit withdrawals. This goal is accomplished by consistent core
deposit growth, holding adequate liquid assets in the form of securities, and
maintaining unused capacity to borrow funds. The objective of interest rate
risk management is 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.
Liquidity
- ---------
At December 31, 2000, the Bank had approximately $59.8 million of cash
and due from banks, securities and other short-term investments maturing
within one year compared to $60 million as of a year earlier. In the normal
course of business, the Bank has established lines of credit for short-term
borrowings for the management of daily liquidity needs. At December 31, 2000,
the unused lines of credit were $35 million.
Interest Rate Risk
- ------------------
The Bank uses an earnings simulation model to evaluate the impact of
different interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate sensitive earning
assets to rate sensitive interest-bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the effect that
fluctuating interest rates will have on future net interest income. Rate
sensitive earning assets and interest-bearing liabilities are those which can
be repriced to current market rates within a defined time period. The
committee measures near-term (next twelve months) risk to net interest income
due to changes in interest rates. The model incorporates the Bank's assets
and liabilities, together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment to simulate the
effect of possible changes in interest rates on net interest income. 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 two hundred basis point shift in interest rates is
considered an acceptable rate risk position. At December 31, 2000, if
interest rates were to rise 300 basis points (3.0%) over the next twelve
months, net interest income would be $715 thousand less than currently
projected without interest rate movements. This would be a decline in net
interest income of 2.8% which is within policy guidelines established by the
Board of Directors.
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, 2000, 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 A - Distribution of
Assets, Liabilities, and Stockholders' Equity, Interest Rates and Interest
Differential provides details of the largest component of interest-bearing
liabilities.
The net interest margin, on a tax equivalent basis, at December 31, 2000,
1999, and 1998 was 4.19%, 4.40%, and 4.64% respectively.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
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, 2000 or Less Months Months Year Total
________ ______ ______ ______ _____
Earning assets
Federal funds sold $ - $ - $ - $ - $ -
Bank deposits 5,008 - - - 5,008
Taxable securities 4,220 7,496 17,562 131,389 160,667
Tax-exempt securities 310 925 1,499 62,666 65,400
Loans and leases, net of
deferred fees 72,517 49,102 77,844 177,629 377,092
_________ _________ _________ _________ _________
Total earning assets 82,055 57,523 96,905 371,684 608,167
_________________________________________________________________________________________
Interest-bearing liabilities
NOW and money market accounts 47,484 - - 122,471 169,955
Savings deposits - - - 55,148 55,148
Time deposits 39,179 40,659 84,194 30,265 194,297
Time deposits over $100,000 13,169 10,049 25,344 7,414 55,976
Other short-term debt 8,151 - - 135 8,286
_________ _________ _________ _________ _________
Total interest bearing
liabilities 107,983 50,708 109,538 215,433 483,662
_________ _________ _________ _________ _________
Period gap (25,928) 6,815 (12,633) 156,251 124,505
_________________________________________________________________________________________
Cumulative gap $ (25,928) $ (19,113) $ (31,746) $ 124,505 $ -
_________________________________________________________________________________________
Available-for-sale and held-to-maturity securities were combined in the
taxable securities category for purposes of this table.
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 lending activities of the Bank are subject to written underwriting
standards and policies established by the Bank's Board of Directors and
management which include loan review procedures and approvals. Applications
for loans are taken by designated employees at fifteen of the Bank's offices.
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.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
LOANS AND LOAN QUALITY (Continued)
The Bank 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. During 2000,
management expanded this review process to include semiannual reviews by an
outside party to assess the quality of the loan portfolio independently.
Management has concluded that this independent review has served to strengthen
underwriting practices. The Credit Administrator's 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, 2000.
Table D, 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 $5.4 million at December 31, 2000,
have been identified as impaired in accordance with the provisions of SFAS
114. They represent 1.4% of gross loans. Commercial loans comprised $2.0
million of the total, with loans secured by real estate accounting for $3.1
million, and installment loans $.3 million. Interest received on these loans
during 2000 was $584,000, during 1999 was $385,000, and during 1998 was
$261,000. The gross interest income that would have been recorded 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 $801, $485, and $519 thousand for the years ended December 31,
2000, 1999, and 1998 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.
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31
____ ____ ____ ____ ____
(Dollars In Thousands) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Average amount of loans outstanding $ 349,727 $ 318,868 $ 321,239 $ 314,198 $ 290,413
_______________________________________________________________________________________________
Balance of allowance for possible loan
losses at beginning of year $ 4,818 $ 3,852 $ 2,943 $ 2,926 $ 2,678
_________ _________ _________ _________ _________
Balance from acquisition - 218 - - -
_________ _________ _________ _________ _________
Loans charged off
Loans secured by real estate 190 317 619 88 368
Commercial and industrial loans 50 236 1,041 605 141
Loans to individuals 475 578 914 1,371 879
_________ _________ _________ _________ _________
TOTAL LOANS CHARGED OFF 715 1,131 2,574 2,064 1,388
_________ _________ _________ _________ _________
Recoveries of loans previously
charged off
Loans secured by real estate 221 41 1 8 111
Commercial and industrial loans 4 17 61 53 42
Loans to individuals 94 121 121 80 183
_________ _________ _________ _________ _________
TOTAL RECOVERIES 319 179 183 141 336
_________ _________ _________ _________ _________
NET LOANS CHARGED OFF 396 952 2,391 1,923 1,052
_________ _________ _________ _________ _________
Provision charged to operating expenses 900 1,700 3,300 1,940 1,300
_________ _________ _________ _________ _________
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 5,322 $ 4,818 $ 3,852 $ 2,943 $ 2,926
_______________________________________________________________________________________________
Ratio of net charge-offs during the
period to average loans outstanding 0.11% 0.30% 0.74% 0.61% 0.36%
________________________________________________________________________________________________
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of the Bank.
At December 31, 2000, the Corporation had a ratio of tier 1 capital to average
assets of 12.09%. This compares to a ratio of tier 1 capital to average
assets of 11.43% at December 31, 1999, and 11.19% at December 31, 1998.
Cash dividends declared in 2000 were 27% of net income. Additional
dividends of approximately $14.3 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, 2000, the Corporation's ratios of Tier I capital to
risk-weighted assets and total capital to risk-weighted assets were 20.1% and
21.3% respectively. At December 31, 1999, the comparable ratios were 20.7%
and 21.9%, 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
2000 76,019
________________________________________________________________________________
RESULTS OF OPERATIONS
Interest Income
- ---------------
Total interest income increased 10.3% in 2000. Interest and fees earned
on loans increased 11.9% in 2000 accounting for 67.6% of tax equivalent gross
interest income. Interest earned on securities and other investments
increased 7.2% in 2000 making up the balance of gross interest income. Total
interest income increased 2.9% in 1999 and 3.6% in 1998.
Interest Expense
- ----------------
Total interest expense increased 20.4% in 2000, compared to a 2.9%
increase in 1999, and a 1.0% increase in 1998. A rising interest rate
environment and increasing competition are behind the increase in interest
expense in 2000. 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 4.19% at the end of
2000, 4.40% at the end of 1999, and 4.64% at the end of 1998.
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.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
A pie chart is included at this point in the materials sent to our
stockholders illustrating the composition of noninterest income in 2000 and
the percentage each category is of the total. The following table is the data
illustrated by this graph in thousands of dollars.
2000 Noninterest Income
Income Category Income $ % of Total
--------------- -------- ----------
Income from Trust services 1,813 23%
Other service fees 422 5%
Deposit fees 5,136 65%
Other 566 7%
A pie chart is included at this point in the materials sent to out
stockholders illustrating the composition of noninterest expense in 2000 and
the percentage each category is of the total. The following table is the data
illustrated by this graph in thousands of dollars.
2000 Noninterest Expense
Expense Category Expense $ % of Total
---------------- --------- ----------
Personnel 9,711 51%
Furniture & Equipment 1,192 6%
Occupancy 1,485 8%
Other 6,780 35%
Noninterest Income and Expense
______________________________
Noninterest income increased 10.3% during 2000 due mostly to income from
fiduciary services provided in the Bank's Trust Department and service fees
on deposit relationships strengthened by new products. Noninterest income
decreased 4.9% in 1999 and increased 9.0% in 1998.
Noninterest expenses, excluding the provision for possible loan losses,
increased 5.9% in 2000. Salary and benefit increases contribute to this
increase. Noninterest expenses increased 10.2% in 1999 and 2.2% increase in
1998.
Net Income
__________
Net income was 10.5% higher in 2000 than in 1999. Stronger loan demand
contributed to the increase with loan income up 11.9%. Interest expense was
up 20.4%, but the increase in interest income coupled with the 47.1% decline
in allowance provisions was more than adequate to offset this increase.
Noninterest income was up 10.3% with new product fees and strong fiduciary
services income. Noninterest expenses were up 5.9% compared to last year led
by increases in salaries and benefits. Income tax expense was 7.9% higher
than last year.
________________________________________________________________________________
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL STATEMENTS
WHEN ADOPTED IN A FUTURE PERIOD
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.
Statement of Financial Accounting Standards No. 138 (SFAS 138), an
amendment of SFAS No. 133, was issued in June, 2000. The Statement amends
the accounting and reporting standards of SFAS No. 133 for certain derivatives
and hedging activities.
Statement of Financial Accounting Standards No. 140 (SFAS 140),
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment
of Liabilities", a replacement of SFAS No. 125, was issued in September, 2000.
This Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001, and is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Disclosures about securitization and
collateral accepted are not required to be reported for periods ending on or
before December 15, 2000, for which financial statements are presented for
comparative purposes.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
________________________________________________________________________________
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
The Statement is to be applied prospectively with certain exceptions.
Other than those exceptions, earlier or retroactive application of its
accounting provisions is not permitted.
None of these new pronouncements are expected to have a material effect
on future financial statements.
________________________________________________________________________________
Consolidated Statements of Income
Dollars in Thousands Except Per Share Data
2000 1999 1998 1997 1996
----------- ----------- ---------- ----------- ----------
INTEREST INCOME
Interest and fees on loans $ 31,358 $ 28,017 $ 29,155 $ 28,841 $ 27,344
___________ ___________ __________ ___________ __________
Income on investment securities
Taxable interest 10,097 9,443 7,326 6,803 6,892
Exempt from federal income tax 3,108 2,877 2,583 2,488 2,367
Dividends 278 257 300 261 257
___________ ___________ __________ ___________ __________
13,483 12,577 10,209 9,552 9,516
___________ ___________ __________ ___________ __________
Other interest income 598 620 689 254 223
___________ ___________ __________ ___________ __________
TOTAL INTEREST INCOME 45,439 41,214 40,053 38,647 37,083
___________ ___________ __________ ___________ __________
INTEREST EXPENSE
Interest on deposits 21,486 17,918 17,414 17,218 16,618
Interest on other short term
borrowings 117 32 30 86 94
___________ ___________ __________ ___________ __________
TOTAL INTEREST EXPENSE 21,603 17,950 17,444 17,304 16,712
___________ ___________ __________ ___________ __________
NET INTEREST INCOME 23,836 23,264 22,609 21,343 20,371
PROVISION FOR POSSIBLE LOAN LOSSES 900 1,700 3,300 1,940 1,300
___________ ___________ __________ ___________ __________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 22,936 21,564 19,309 19,403 19,071
___________ ___________ __________ ___________ __________
NONINTEREST INCOME
Trust department income 1,813 1,670 1,516 1,471 1,324
Service fees on deposit
accounts 5,136 4,115 3,669 3,744 3,374
Other service fees, commissions,
and fees 422 727 1,043 845 745
Other operating income 566 555 985 394 363
Securities gains - 130 351 488 -
___________ ___________ __________ ___________ __________
TOTAL NONINTEREST INCOME 7,937 7,197 7,564 6,942 5,806
___________ ___________ __________ ___________ __________
NONINTEREST EXPENSES
Salaries and employee benefits 9,711 8,645 7,776 7,319 7,030
Net occupancy expense 1,485 1,524 1,356 1,317 1,211
Furniture and equipment expense 1,192 1,251 1,472 1,500 1,581
Other operating expenses 6,780 6,675 5,816 5,927 5,299
___________ ___________ __________ ___________ __________
TOTAL NONINTEREST EXPENSES 19,168 18,095 16,420 16,063 15,121
___________ ___________ __________ ___________ __________
INCOME BEFORE PROVISION
FOR INCOME TAXES 11,705 10,666 10,453 10,282 9,756
PROVISION FOR INCOME TAXES 3,379 3,133 3,112 3,228 2,889
___________ ___________ __________ ___________ __________
NET INCOME $ 8,326 $ 7,533 $ 7,341 $ 7,054 $ 6,867
___________________________________________________________________________________________
EARNINGS PER COMMON SHARE $ 2.85 $ 2.59 $ 2.62 $ 2.52 $ 2.45
Weighted average shares
outstanding - Note 1 2,920,000 2,908,493 2,800,000 2,800,000 2,800,000
___________________________________________________________________________________________
KRAFTCPAs
Kraft Bros., Esstman Patton & Harrell, PLLC
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
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, 2000
and 1999, 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, 2000. 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, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
generally accepted accounting principles.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
February 28, 2001
P.O. Box 1559 * 610 N. Garden Street, Suite200 * Columbia, TN 38402-1559 *
(931) 388-3711 * FAX 388-9988 * www.kraftcpas.com
Also in Nashville and Lebanon, Tennessee * Independent Member BKR International
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, 2000. 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, 2000, 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, 2000.
/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
February 28, 2001
KRAFTCPAs
Kraft Bros., Esstman Patton & Harrell, PLLC
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
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, 2000, 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 28, 2001
P.O. Box 1559 * 610 N. Garden Street, Suite200 * Columbia, TN 38402-1559 *
(931) 388-3711 * FAX 388-9988 * www.kraftcpas.com
Also in Nashville and Lebanon, Tennessee * Independent Member BKR International
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
______________________________________________________________________________
December 31,
(Dollars in Thousands) 2000 1999
______________________________________________________________________________
ASSETS Cash and due from banks $ 23,029 $ 23,404
Federal funds sold - 2,300
Interest-bearing deposits in banks 5,008 -
_________ _________
Total cash and cash equivalents 28,037 25,704
_________ _________
Securities
Available-for-sale (amortized
cost $96,448 and $114,278 respectively) 96,664 111,870
Held-to-maturity (fair value $130,514
and $121,954 respectively) 129,403 124,410
_________ _________
Total securities - Note 2 226,067 236,280
_________ _________
Loans, net of deferred fees - Note 3 377,092 335,999
Allowance for possible loan losses
- Note 4 (5,322) (4,818)
_________ _________
Net loans 371,770 331,181
_________ _________
Bank premises and equipment, at cost
less allowance for depreciation - Note 5 8,077 8,306
Other assets 18,115 18,617
_________ _________
TOTAL ASSETS $ 652,066 $ 620,088
__________________________________________________________________________________
LIABILITIES Deposits
Noninterest-bearing $ 81,435 $ 78,454
Interest-bearing (including certificates
of deposit over $100,000:
2000 - $55,976; 1999 - $49,066) 475,376 462,362
_________ __________
Total deposits 556,811 540,816
Federal funds purchased and securities
sold under agreements to repurchase 7,551 236
Dividends payable 1,139 1,051
Other short term liabilities 735 733
Accounts payable and accrued liabilities 6,021 5,176
_________ _________
TOTAL LIABILITIES 572,257 548,012
_________ _________
COMMITMENTS AND CONTINGENCIES
Notes 7 and 9
__________________________________________________________________________________
STOCKHOLDERS' Common stock - $10 par value, 8,000,000 shares
EQUITY authorized; 2,920,000 shares issued and
outstanding - Note 1 29,200 29,200
Additional paid-in capital - Note 11 4,320 4,320
Retained earnings - Note 6 46,156 40,049
Accumulated other comprehensive income
(loss) 133 (1,493)
_________ __________
TOTAL STOCKHOLDERS' EQUITY 79,809 72,076
_________ __________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 652,066 $ 620,088
__________________________________________________________________________________
The accompanying notes are an integral part of the consolidated financial
statements.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands Except Per Share Data)
Years Ended December 31, 2000 1999 1998
________________________________________________________________________________________________
INTEREST & DIVIDEND INCOME Interest and fees on loans $ 31,358 $ 28,017 $ 29,155
Income on investment securities
Taxable interest 10,097 9,443 7,326
Exempt from federal income tax 3,108 2,877 2,583
Dividends 278 257 300
________ ________ ________
13,483 12,577 10,209
________ ________ ________
Other interest income 598 620 689
________ ________ ________
TOTAL INTEREST INCOME 45,439 41,214 40,053
__________________________________________________________________________________________________
INTEREST EXPENSE Interest on deposits 21,486 17,918 17,414
Interest on other short term
borrowings 117 32 30
________ ________ ________
TOTAL INTEREST EXPENSE 21,603 17,950 17,444
________ ________ ________
NET INTEREST INCOME 23,836 23,264 22,609
PROVISION FOR POSSIBLE
LOAN LOSSES - Note 4 900 1,700 3,300
________ ________ ________
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 22,936 21,564 19,309
__________________________________________________________________________________________________
NONINTEREST INCOME Trust department income 1,813 1,670 1,516
Service fees on deposit accounts 5,136 4,115 3,669
Other service fees, commissions,
and fees 422 727 1,043
Other operating income 566 555 985
Securities gains - 130 351
_______ ________ ________
TOTAL NONINTEREST INCOME 7,937 7,197 7,564
__________________________________________________________________________________________________
NONINTEREST EXPENSES Salaries and employee benefits 9,711 8,645 7,776
Net occupancy expense 1,485 1,524 1,356
Furniture and equipment expense 1,192 1,251 1,472
Other operating expenses 6,780 6,675 5,816
_______ ________ ________
TOTAL NONINTEREST EXPENSES 19,168 18,095 16,420
_______ ________ ________
INCOME BEFORE PROVISION FOR
INCOME TAXES 11,705 10,666 10,453
PROVISION FOR INCOME TAXES - Note 8 3,379 3,133 3,112
__________________________________________________________________________________________________
NET INCOME $ 8,326 $ 7,533 $ 7,341
__________________________________________________________________________________________________
EARNINGS PER SHARE Common Stock - Note 1
(Weighted average shares outstanding:
2000 - 2,920,000; 1999 - 2,908,493;
1998 - 2,800,000) $ 2.85 $ 2.59 $ 2.62
__________________________________________________________________________________________________
The accompanying notes are an integral part of the consolidated
financial statements.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
_____________________________________________________________________________________________________________
Accumulated
(Dollars In Thousands Except Per Share Data) Additional Other
Common Paid-in Retained Comprehensive
Years Ended December 31, 2000, 1999, and 1998 Stock Capital Earnings Income (Loss) Total
_____________________________________________________________________________________________________________
BALANCE AT JANUARY 1, 1998 $ 14,000 $ - $ 45,783 $ 360 $ 60,143
________
Comprehensive income
Net income 7,341 7,341
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification
adjustment and tax effects 230 230
________
Total comprehensive income 7,571
________
Two-for-one stock split - Note 1 14,000 (14,000) -
Cash dividends declared, $1.63 per share (4,564) (4,564)
_______________________________________________________________________________________________________________
BALANCE AT DECEMBER 31, 1998 28,000 - 34,560 590 63,150
_______________________________________________________________________________________________________________
Comprehensive income
Net income 7,533 7,533
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification
adjustment and tax effects (2,083) (2,083)
_________
Total comprehensive income 5,450
_________
Bank acquisition - Note 11 1,200 4,320 5,520
Cash dividends declared, $.70 per share (2,044) (2,044)
________________________________________________________________________________________________________________
BALANCE AT DECEMBER 31, 1999 29,200 4,320 40,049 (1,493) 72,076
________________________________________________________________________________________________________________
Comprehensive income
Net income 8,326 8,326
Change in net unrealized gain (loss) on securities
available-for-sale, net of reclassification
adjustment and tax effects 1,626 1,626
________
Total comprehensive income 9,952
________
Cash dividends declared, $.76 per share (2,219) (2,219)
________________________________________________________________________________________________________________
BALANCE AT DECEMBER 31, 2000 $ 29,200 $ 4,320 $ 46,156 $ 133 $ 79,809
________________________________________________________________________________________________________________
The accompanying notes are an integral part of the consolidated
financial statements.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
________________________________________________________________________________
(Dollars In Thousands)
Year Ended December 31, 2000 1999 1998
_________________________________________________________________________________
OPERATING Net income $ 8,326 $ 7,533 $ 7,341
ACTIVITIES ________ ________ ________
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of provision
for possible loan losses over
net charge offs 504 748 909
Provision for depreciation and
amortization of premises and
equipment 1,124 1,166 691
Provision for depreciation of
leased equipment 300 300 501
Amortization of intangibles 271 218 78
Amortization of investment
security premiums, net of
accretion of discounts 635 911 567
Increase in cash surrender value
of life insurance contracts (257) (184) (119)
Deferred income taxes (312) (429) (465)
(Increase) decrease in
Interest receivable (440) (267) (484)
Other assets 543 304 (290)
Increase (decrease) in
Interest payable 1,094 244 (174)
Other liabilities (115) (426) (105)
_______ _______ ________
Total Adjustments 3,347 2,585 1,109
_______ _______ ________
Net cash provided by
operating activities 11,673 10,118 8,450
__________________________________________________________________________________
INVESTING Proceeds from maturities, calls,
ACTIVITIES and sales ofavailable-for-sale
securities 27,408 28,958 18,009
Proceeds from maturities and calls
of held-to-maturity securities 8,167 15,865 11,101
Purchases of investment securities
Available-for-sale (9,995) (47,486) (52,898)
Held-to-maturity (13,378) (25,869) (29,635)
Net (increase) decrease in loans (41,093) (10,598) 11,176
Purchases of premises and equipment (895) (1,390) (1,518)
Purchase of single premium life 3
insurance contracts (600) (920) -
Cash from bank acquisition - 2,789 -
________ ________ _______
Net cash used by investing
activities (30,386) (38,651) (43,765)
__________________________________________________________________________________
FINANCING Net increase (decrease) in
ACTIVITIES noninterest-bearing and
interest-bearing deposits 15,995 22,604 30,249
Net increase (decrease) in short
term borrowings 7,182 366 -
Cash dividends (2,131) (1,888) (4,452)
________ ________ _______
Net cash provided by
financing activities 21,046 21,082 25,797
_________________________________________________________________
Increase (decrease) in cash
and cash equivalents 2,333 (7,451) (9,518)
Cash and cash equivalents at
beginning of period 25,704 33,155 42,673
________ ________ ________
Cash and cash equivalents
at end of period $ 28,037 $ 25,704 $ 33,155
__________________________________________________________________________________
Supplemental disclosures of cash
flow information
Cash paid during the period for
expenses
Interest on deposits and
borrowed funds $ 20,509 $ 17,706 $ 17,618
Income taxes 3,827 3,758 3,902
__________________________________________________________________________________
The accompanying notes are an integral part of the consolidated
financial statements.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
_______
First Farmers and Merchants Corporation, the Corporation, owns one
hundred percent of First Farmers and Merchants National Bank, the Bank. 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.
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. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, and the valuation of foreclosed real estate,
deferred tax assets, and trading activities.
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,
2000, approximately $600 thousand was required to be maintained at the
Federal Reserve Bank. Interest-bearing deposits in banks mature within one
year and are carried at cost. 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.
Cash Equivalents
________________
Cash equivalents include cash on hand, cash due from banks, and federal
funds sold. Federal funds are sold for one-day periods. Interest-bearing
deposits in banks included in cash equivalents mature within ninety days.
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 2000 or 1999.
Debt 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 not classified as held-to-maturity or trading, including
equity securities with readily determinable fair values, are classified as
available-for-sale 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
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Securities (Continued)
______________________
securities are determined using the specific identification method.
Declines in the fair value of individualavailable-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.
Most of the Bank's activities are with customers located within southern
middle Tennessee. The Bank does not have any significant concentrations in
any one industry or customer. 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 interest is not expected to be collected. 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
foreclosure, or the property is already carried at its estimated net
realizable value, any subsequent holding
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)
_____________________________
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
$474,000 at December 31, 2000, and $582,000 at December 31, 1999.
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 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.
Servicing
_________
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The present value of servicing income is
expected to approximate an adequate compensation cost for servicing these
loans. Therefore, no servicing asset has been recorded.
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 determined using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
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: 2000 - $271,000;
1999 - $218,000; and 1998 - $78,000. Note 11 discusses current acquisitions.
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, 2000, 1999, and
1998, 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.
Segment Reporting
_________________
Segments are strategic business units that offer different products and
services and are managed separately. At December 31, 2000, the Corporation
and the Bank did not have any identified segments.
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
_______________________
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses)
on available-for-sale securities $ (2,623) $ (3,360) $ 351
Reclassification adjustment for losses
(gains) realized in income 1
Tax effect - (expense) benefit 997 1,277 (122)
________ ________ _____
Net-of-tax amount $ (1,626) $ (2,083) $ 230
________ ________ _____
________ ________ _____
Table I - Components of Other Comprehensive Income
Dollars in Thousands
________________________________________________________________________________
NOTE 2 - SECURITIES
Securities with an amortized cost of $87,228,000 and $74,372,000 at
December 31, 2000 and 1999, respectively (fair value: 2000 - $87,956,000;
1999 - $73,611,000), 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, 2000, 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, 2000
Available-for-sale securities
U.S. Treasury $ 6,536 $ 29 $ 3 $ 6,562
U.S. Government agencies 86,638 635 458 86,815
Other securities 3,274 16 3 3,287
_________ _______ _______ _________
$ 96,448 $ 680 $ 464 $ 96,664
________________________________________________________________________________
Held-to-maturity securities
U.S. Treasury $ 7,091 $ 44 $ - $ 7,135
U.S. Government agencies 44,584 446 74 44,956
States and political subdivisions 66,487 988 334 67,141
Other securities 11,241 127 86 11,282
_________ _______ _______ _________
$ 129,403 $ 1,605 $ 494 $ 130,514
________________________________________________________________________________
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
________________________________________________________________________________
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, 2000, the Bank 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 III 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, 2000, 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 $27,408,000, $28,958,000, and $18,009,000 during 2000, 1999, and 1998,
respectively. Proceeds from the maturity or call of held-to-maturity
securities were $8,167,000, $15,865,000, and $11,101,000 during 2000, 1999,
and 1998, respectively. There were no gains or losses realized on the
dispositions in 2000. 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 dispositions in 1998.
Amortized Fair Yield
Cost Value (Unaudited)
_________ _______ ___________
Available-for-sale securities
U.S. Treasury
Within one year $ 2,503 $ 2,512 6.4%
After one but within five years 4,033 4,050 5.7%
U.S. Government agencies
Within one year 16,026 15,988 5.4%
After one but within five years 65,931 66,110 5.9%
After five but within ten years 4,452 4,491 6.6%
After ten years 229 226 6.2%
Other securities - equities 3,274 3,287 10.4%
__________ __________
$ 96,448 $ 96,664
_______________________________________________________________________________
Held-to-maturity securities
U.S. Treasury
Within one year $ 4,034 $ 4,056 6.5%
After one but within five years 3,057 3,079 6.0%
U.S. Government agencies
Within one year 6,519 6,529 6.4%
After one but within five years 38,065 38,427 6.3%
States and political subdivisions
Within one year 2,734 2,738 7.3%
After one but within five years 19,686 19,778 6.9%
After five but within ten years 16,815 17,059 7.3%
After ten years 27,252 27,566 7.5%
Other securities
After one but within five years 6,619 6,693 7.0%
After five but within ten years 4,622 4,589 7.1%
__________ __________
$ 129,403 $ 130,514
________________________________________________________________________________
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
2000 1999
---- ----
Commercial, financial and agricultural $ 46,691 $ 39,695
Tax exempt municipal loans 6,317 2,502
Real estate
Construction 6,561 5,170
Commercial mortgages 89,461 70,738
Residential mortgages 174,999 160,753
Other 6,304 6,304
Consumer loans 47,040 51,130
_________ _________
377,373 336,292
Less:
Net unamortized loan origination fees (281) (293)
Allowance for possible loan losses (5,322) (4,818)
__________ _________
$ 371,770 $ 331,181
________________________________________________________________________________
Table IV - Loans Outstanding by Category at December 31, 2000 and 1999
Dollars in Thousands
Within One to After
One Year Five Years Five Years Total
_________ __________ _________ _________
Fixed rate loans $ 62,669 $ 52,448 $ 85,370 $ 200,487
Variable rate loans 70,121 30,539 76,226 176,886
_________ ________ _________ _________
$ 132,790 $ 82,987 $ 161,596 $ 377,373
________________________________________________________________________________
Table V - Loan Maturities and Amounts of Loans Carrying Fixed and Variable
Interest Rates at December 31, 2000 - Dollars in Thousands
Loans having recorded investments of $5,421,000 at December 31, 2000,
have been identified as impaired. The total allowance for possible loan
losses related to these loans was $361,000. Interest received on these loans
during 2000 was $584,000, during 1999 was $385,000, and during 1998 was
$261,000. Impaired loans had recorded investments of approximately
$3,745,000 at December 31, 1999, with $1,249,000 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. An analysis of activity with respect to such loans for the years
ended December 31, 2000 and 1999, is shown in Table VI 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 2000 or 1999.
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
2000 __________ _________ _________ __________
----
Aggregate of certain party loans $ 3,500 $ 4,144 $ 4,597 $ 3,047
____________________________________________________________________________________
1999
----
Aggregate of certain party loans $ 3,591 $ 2,166 $ 2,257 $ 3,500
____________________________________________________________________________________
Table VI - Analysis of Activity in Certain Party Loans
Dollars in Thousands
_______________________________________________________________________________
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
2000 1999 1998
____ ____ ____
Balance at beginning of year $ 4,818 $ 3,852 $ 2,943
Increase due to acquisition - 218 -
Provision charged to operating expenses 900 1,700 3,300
Loan losses:
Loans charged off (715) (1,131) (2,574)
Recoveries on loans previously
charged off 319 179 183
_______ _______ _______
Balance at end of year $ 5,322 $ 4,818 $ 3,852
_______________________________________________________________________
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, 2000. 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
2000 1999
---- ----
Land $ 1,490 $ 1,455
Premises 9,012 8,566
Furniture and equipment 5,717 5,643
Leasehold improvements 1,231 1,161
________ ________
17,450 16,825
Less allowance for depreciation and amortization (9,373) (8,519)
________ ________
$ 8,077 $ 8,306
_______________________________________________________________________
Table VIII - Premises and Equipment at December 31, 2000 and 1999
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 $1,124,000 for 2000, $1,166,000 for 1999, and $691,000 for
1998. Included in premises and equipment cost and allowance for depreciation
and amortization are certain fully depreciated assets totaling approximately
$3,255,000 at December 31, 2000.
________________________________________________________________________________
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, 2000, additional dividends of approximately
$14.3 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 $32,000,
$37,000, and $580,000 for equipment leases, and $143,000, $160,000, and
$129,000 for building leases, in 2000, 1999, and 1998, respectively. Future
minimum lease commitments as of December 31, 2000, under all noncancelable
operating leases with initial terms of one year or more are shown in Table IX.
Lease
Year Payments
____________ __________
2001 $ 130
2002 109
2003 90
2004 75
2005 75
Thereafter 201
__________
Total $ 680
___________________________________
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
2000 1999 1998
---- ---- ----
Current:
Federal $ 2,954 $ 2,863 $ 2,882
State 737 699 695
_______ _______ _______
Total current 3,691 3,562 3,577
_______ _______ _______
Deferred:
Federal (265) (364) (402)
State (47) (65) (63)
_______ _______ ________
Total deferred (312) (429) (465)
Total provision for income taxes $ 3,379 $ 3,133 $ 3,112
____________________________________________________________________
Table X - Provisions for Income Taxes
Dollars in Thousands
2000 1999 1998
---- ---- ----
Allowance for possible loan losses $ 2,023 $ 1,750 $ 1,344
Deferred compensation 704 559 485
Unrealized loss on AFS securities - 915 -
Deferred loan fees 5 8 12
_______ _______ _______
Deferred tax asset 2,732 3,232 1,841
_______ _______ _______
Unrealized gain on AFS securities (82) - (362)
Other (327) (224) (175)
_______ _______ _______
Deferred tax liability (409) (224) (537)
_______ _______ _______
Net deferred tax asset $ 2,323 $ 3,008 $ 1,304
_______________________________________________________________________
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.
2000 1999 1998
---- ---- ----
Tax expense at statutory rate $ 3,980 $ 3,626 $ 3,554
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,157) (1,046) (939)
Nondeductible interest expense 164 122 111
Employee benefits (87) (63) (41)
Amortization of goodwill 50 49 -
Other nondeductible expenses
(nontaxable income) - net 13 15 13
State income taxes, net of federal
tax benefit 479 461 459
Dividend income exclusion (26) (29) (42)
Other (37) (3) (3)
________ ________ ________
Total provision for income taxes $ 3,379 $ 3,133 $ 3,112
____________________________________________________________________________
Effective tax rate 28.9% 29.4% 29.8%
____________________________________________________________________________
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, 2000, were approximately $33
million and $2.6 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 - STOCKHOLDERS' 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, 2000 and
1999, 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, 1999, 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, 2000 Amount Ratio Amount Ratio > or = Amount Ratio > or =
------ ------ ------ ------------ ------ ------------
Total Capital (to Risk Weighted
Assets) Consolidated $ 83,438 21.34% $ 31,273 8.00% $ - -
Bank 82,386 21.12% 31,211 8.00% 39,014 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 78,544 20.06% 15,661 4.00% - -
Bank 77,510 19.87% 15,605 4.00% 23,408 6.00%
Tier I Capital (to Average
Assets) Consolidated 78,544 12.09% 25,982 4.00% - -
Bank 77,510 11.96% 25,927 4.00% 32,409 5.00%
As of December 31, 1999
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%
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 thatbranch are included in the consolidated financial
statements from the acquisition date. 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
---------
Net interest income $ 23,477
Provision for loan losses 3,300
Noninterest income 7,735
Noninterest expense 17,253
Net income 7,502
Net income per share 2.57
Table XV - Summary Pro Forma Operating Information as if the
Acquisition had Occurred January 1, 1998
Dollars in Thousands Except Per Share Data
In December, 2000, the Bank entered into an agreement with First
Tennessee National Corporation and Peoples and Union Bank of Lewisburg to
purchase all of the stock of Peoples and Union Bank. Pending regulatory
approval, the merger is expected to be completed within the first quarter of
2001.
________________________________________________________________________________
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 $875,000, $792,000, and $721,000, in 2000, 1999,
and 1998, 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 (2000 - $714,000; 1999 - $688,000)
purchased in 1993 to fund the plan and the related liability (2000 - $502,000;
1999 - $507,000) were included in other assets and other liabilities,
respectively. Net noncash income recognized on these policies of $26,000 in
2000 and $16,000 in 1999 is included in the above asset values. Net noncash
income was $26,000 in 1998. 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 2000, $50,000 in 1999, and $66,000 in 1998.
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 $202,000 for 2000, $199,000 for 1999, and $208,000 for
1998 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 $600,000 in 2000 and $920,000 in 1999, were purchased for new
participants. Net noncash income recognized on these policies of $192,000 in
2000 and $124,000 in 1999 is included in the cash surrender values of
$4,321,000 and $3,529,000 reported in other assets at December 31, 2000 and
1999, respectively. Net noncash income was $109,000 in 1998.
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 (2000 - $886,000; 1999 - $848,000) is
included in other assets, and net noncash income recognized on this policy of
$38,000 in 2000, $45,000 in 1999, and net noncash expense of $16,000 in 1998
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 $11.6 million.
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
December 31, 2000 December 31, 1999
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- -------
Financial assets
Cash and due from banks $ 28,037 $ 28,037 $ 23,404 $ 23,404
Federal funds sold - - 2,300 2,300
Securities available-for-sale 96,664 96,664 111,870 111,870
Securities held-to-maturity 129,403 130,514 124,410 121,954
Loans, net 371,770 371,425 331,181 325,894
Accrued interest receivable 6,557 6,557 6,117 6,117
Financial liabilities
Deposits 556,811 558,347 540,816 534,159
Federal funds purchased and
securities sold under
agreements to repurchase 7,551 7,551 236 236
Other short term liabilities 735 735 733 733
Accrued interest payable 3,958 3,958 2,864 2,864
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, 2000, 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
------- ------- ------- ------- ----------
2000
Interest income $ 10,863 $ 11,279 $ 11,501 $ 11,796 $ 45,439
Interest expense 4,994 5,251 5,547 5,811 21,603
__________ __________ __________ __________ __________
Net interest income 5,869 6,028 5,954 5,985 23,836
Provision for possible loan losses 225 225 225 225 900
Noninterest expenses, net of
noninterest income 2,853 2,868 2,611 2,899 11,231
__________ __________ __________ __________ __________
Income before income taxes 2,791 2,935 3,118 2,861 11,705
Income taxes 757 856 946 820 3,379
__________ __________ __________ __________ __________
Net income $ 2,034 $ 2,079 $ 2,172 $ 2,041 $ 8,326
________________________________________________________________________________________________
Earnings per share $ 0.70 $ 0.71 $ 0.74 $ 0.70 $ 2.85
Weighted average shares outstanding 2,920,000 2,920,000 2,920,000 2,920,000 2,920,000
________________________________________________________________________________________________
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
________________________________________________________________________________________________
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.
2000 1999 1998
---- ---- ----
Under 3 months $ 12,959 $ 10,069 $ 13,659
3 to 12 months 35,386 33,235 23,896
Over 12 months 7,631 5,762 5,056
________ ________ ________
$ 55,976 $ 49,066 $ 42,611
__________________________________________________
Table XVIII - Maturities of Time Deposits of $100,000 or More at December 31
Dollars in Thousands
2000 $ 212,595
2001 31,093
2002 4,757
2003 1,012
2004 768
Thereafter 48
_________
$ 250,273
Table XIX - Maturities of All Time Deposits at December 31, 2000
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, 2000 and 1999
2000 1999
---- ----
Assets
Cash $ 8 $ 189
Investment in bank subsidiary - at equity 78,777 71,116
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 23
Dividends receivable from bank subsidiar y 1,164 1,051
Cash surrender value - life insurance 1,307 1,021
_________ ________
Total assets $ 81,328 $ 73,450
___________________________________________________________________________
Liabilities
Payable to directors $ 380 $ 323
Dividends payable 1,139 1,051
_________ ________
Total liabilities 1,519 1,374
_________ ________
Stockholders' equity
Common stock - $10 par value, authorized 8,000,000
shares; 2,920,000 shares issued and outstanding 29,200 29,200
Additional paid-in capital 4,320 4,320
Retained earnings 46,156 40,049
Accumulated other comprehensive income 133 (1,493)
_________ ________
Total stockholders' equity 79,809 72,076
_________ ________
Total liabilities and stockholders' equity $ 81,328 $ 73,450
____________________________________________________________________________
Table XX - Condensed Balance Sheets of Parent
Dollars in Thousands
Condensed Statements of Income
Years Ended December 31, 2000 and 1999
2000 1999
---- ----
Operating income
Dividends from bank subsidiary $ 2,264 $ 2,319
Other dividend income 61 72
Interest income 2 4
Other 67 43
Operating expenses (101) (93)
________ ________
Income before equity in undistributed net
income of bank subsidiary 2,293 2,345
Equity in undistributed net income of bank subsidiary 6,033 5,188
_______ ________
Net Income $ 8,326 $ 7,533
________________________________________________________________________
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 CORPORTATION (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2000 and 1999
2000 1999
---- ----
Operating activities
Net income for the year $ 8,326 $ 7,533
_______ _______
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank subsidiary (6,033) (5,188)
Increase in other assets (169) (190)
Increase in payables 56 53
_______ _______
Total adjustments (6,146) (5,325)
_______ _______
Net cash provided by operating activities 2,180 2,208
Investing activities
Purchase of single premium life insurance policy (230) (305)
________ ________
Net cash used by investing activities (230) (305)
________ ________
Financing activities
Cash dividends paid (2,131) (1,889)
________ ________
Increase (decrease) in cash (181) 14
Cash at beginning of year 189 175
________ ________
Cash at end of year $ 8 $ 189
________________________________________________________________________________
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, 2000 had a market value of $169.4
million and were held by 2,367 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.
Estimated Price Range and Dividends per Share
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High Low Dividend
____ ___ ________
2000 First Quarter $ 55.00 $ 55.00 $ -
Second Quarter 56.00 55.00 0.37
Third Quarter 58.00 56.00 -
Fourth Quarter 58.00 58.00 0.39
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
COMMON DIVIDEND PAYOUT RATIO
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Earnings per share $ 2.85 $ 2.59 $ 2.62 $ 2.52 $ 2.45
Cash dividends per share $ 0.76 $ 0.70 $ 1.63 $ 0.55 $ 0.49
Ratio 27% 27% 62% 22% 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 25 of the Management Discussion.
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
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COMPARATIVE DATA
(Dollars in Thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Average assets $ 640,796 $ 600,857 $ 552,654 $ 527,926 $ 502,700
Average loans (net) $ 349,747 $ 318,808 $ 321,239 $ 314,198 $ 290,413
Average deposits $ 556,385 $ 524,265 $ 483,369 $ 463,576 $ 443,902
Return on
average assets 1.30% 1.25% 1.33% 1.34% 1.37%
Return on
beginning equity 11.55% 11.98% 12.21% 12.97% 14.01%
Tier 1 capital
to average assets 12.09% 11.43% 11.19% 11.17% 10.56%
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)
2000 1999 1998 1997 1996
_________ ________ ________ ________ ________
Interest income
(tax equivalent) $ 46,502 $ 42,297 $ 41,046 $ 39,581 $ 37,986
Interest expense 21,603 17,950 17,444 17,304 16,712
_________ ________ ________ ________ ________
$ 24,899 $ 24,347 $ 23,602 $ 22,277 $ 21,274
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Net interest margin* 4.19% 4.40% 4.64% 4.65% 4.66%
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* 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.