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, 1995
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
incorporation or organization) No.)
816 South Garden Street
Columbia, Tennessee 38402 - 1148
(Address of principal executive offices) (Zip Code)
(615) 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 1, 1996, was none.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the
issuer's common stock, as of March 1, 1996. 1,400,000 shares
This filing contains 61 pages.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 1995 Annual Stockholders Meeting of
April 16, 1996. -- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31,
1995. -- Parts I and II
<PAGE>
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, 1995 and 1994,
and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 on 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial
statements, effective January 1, 1994, the Corporation and the
Bank changed their method of accounting for investments in debt
and equity securities. Also, as discussed in Notes 1 and 3,
effective January 1, 1995, the Corporation and the Bank adopted
the method of accounting for impaired loans prescribed in
Statement of Financial Accounting Standards No. 114, as amended
by No. 118.
Nashville, Tennessee
February 23, 1996
<PAGE>
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 attached to and made a part of
Annual Report to Stockholders which is attached hereto as
Exhibit 13.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
Employees
FFMC has no employees. Its subsidiary, the Bank had
approximately two hundred (200) full time employees and
fifty-six (56) part time employees. Six 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 attached to and made a part of
Annual Report to Stockholders which is attached hereto as
Exhibit 13. Other real estate owned by the Bank as of December
31, 1995, included: (1) a 16.88 acre truck stop located at the
Bucksnort exit of I-40 and (2) a one-tenth interest in 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 31 Highway. The properties are not depreciated.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
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 shareholder of the Corporation and its subsidiary or
any business in which such persons are participants as a
material interest adverse to the Corporation and its subsidiary.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the security holders during the
fourth quarter of the fiscal year ended December 31, 1995.
<PAGE>
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 attached to and made a part of Annual
Report to Stockholders which is attached hereto as Exhibit 13.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
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
attached hereto as Exhibit 13.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
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 attached to and made a part of
Annual Report to Stockholders which is attached hereto as
Exhibit 13.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
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 attached hereto as Exhibit 13.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and due from banks $ 31,281,706 $ 26,735,526
Securities
Available for sale (amortized cost
$10,875,527 and $12,646,156
respectively) 11,269,006 12,565,226
Held to maturity (fair value
$128,829,961 and $138,892,331
respectively) 127,662,682 143,061,031
Total securities - Note 2 138,931,688 155,626,257
Loans, net of unearned income - Note 3 291,930,311 262,694,120
Allowance for possible loan losses
- Note 4 (2,678,386) (2,342,290)
Net loans 289,251,925 260,351,830
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,397,936 6,193,080
Other assets 11,171,993 11,887,492
TOTAL ASSETS $ 477,035,248 $ 460,794,185
LIABILITIES
Deposits
Noninterest-bearing $ 67,420,536 $ 61,845,878
Interest-bearing (including
certificates of deposit over $100,000:
1995 - $30,593,803; 1994 - $26,169,831) 343,357,525 343,306,545
Total deposits 410,778,061 405,152,423
Federal funds purchased 10,000,000 7,000,000
Dividends payable 630,000 574,000
Other short term liabilities 1,955,000 600,000
Accounts payable and accrued liabilities 4,675,712 3,639,636
TOTAL LIABILITIES 428,038,773 416,966,059
COMMITMENTS AND CONTINGENCIES - Notes 7 and 9
STOCKHOLDERS' EQUITY
Common stock - $10 par value, authorized
4,000,000 shares; 1,400,000 shares issued
and outstanding - Note 1 14,000,000 14,000,000
Retained earnings - Note 6 34,760,389 29,876,683
Net unrealized loss on available-for-sale
securities, net of tax 236,086 (48,557)
TOTAL STOCKHOLDERS' EQUITY 48,996,475 43,828,126
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 477,035,248 $ 460,794,185
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 7,000,000 $ 28,201,005 $ - $ 35,201,005
Net income for the year - 5,256,252 - 5,256,252
Cash dividends declared,
$.73 per share - (1,022,000) - (1,022,000)
Net unrealized loss on mutual
fund investment - (27,684) - (27,684)
BALANCE AT DECEMBER 31, 1993 7,000,000 32,407,573 - 39,407,573
Cumulative effect of change in
accounting principle (net of
deferred income taxes of
$171,405) - Note 1 - 27,684 229,424 257,108
Two-for-one stock split - Note 1 7,000,000 (7,000,000) - -
Net income for the year - 5,561,426 - 5,561,426
Cash dividends declared, $.80
per share - (1,120,000) - (1,120,000)
Net unrealized loss on available-
for-sale securities, net of tax - - (277,981) (277,981)
BALANCE AT DECEMBER 31, 1994 14,000,000 29,876,683 (48,557) 43,828,126
Net income for the year - 6,115,706 - 6,115,706
Cash dividends declared, $.88
per share - (1,232,000) - (1,232,000)
Net unrealized gain on available-
for-sale securities, net of tax - - 284,643 284,643
BALANCE AT DECEMBER 31, 1995 $ 14,000,000 $ 34,760,389 $ 236,086 $ 48,996,475
<FN>
<F1>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742
Income on investment securities
Taxable interest 6,179,492 7,185,169 6,925,404
Exempt from federal income tax 2,156,813 2,184,666 1,857,168
Dividends 177,790 204,948 72,054
8,514,095 9,574,783 8,854,626
Other interest income 121,492 111,841 347,287
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235
Interest on other short term
borrowings 174,370 93,286 38,339
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 670,000 660,000 470,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026
Other service fees, commissions,
and fees 300,407 336,758 509,009
Other operating income 322,634 319,466 315,108
Available for sale securities
gains (losses) 1,182 (243,690) 23,896
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965
Net occupancy expense 1,279,434 1,190,678 1,070,971
Furniture and equipment expense 1,382,769 1,069,856 889,848
Loss on other real estate 50,724 4,000 103,122
Other operating expenses 5,006,292 4,996,107 4,903,949
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,634,475 7,765,172 7,477,217
PROVISION FOR INCOME TAXES - Note 8 2,518,769 2,203,746 2,220,965
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75
<FN>
<F2>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,115,706 $ 5,561,426 $ 5,256,252
Adjustments to reconcile net
income to net cash provided
by operating activities
Excess (deficiency) of
provision for possible
loan losses over net
charge offs 336,096 318,639 (230,083)
Provision for depreciation
and amortization of
premises and equipment 645,816 589,045 591,486
Amortization of deposit
base intangibles 168,020 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 641,104 678,968 747,224
Increase in cash surrender
value of life insurance
contracts (65,936) (75,287) (103,175)
Deferred income taxes (233,403) (163,907) 24,080
(Increase) decrease in
Interest receivable (255,109) (992,872) 364,303
Other assets 912,162 344,572 (1,171,225)
Increase (decrease) in
Interest payable 577,137 222,605 (206,742)
Other liabilities 458,939 287,975 38,024
TOTAL ADJUSTMENTS 3,184,826 1,377,758 221,912
NET CASH PROVIDED BY
OPERATING ACTIVITIES 9,300,532 6,939,184 5,478,164
INVESTING ACTIVITIES
Proceeds from maturities,
calls, and sales of
available-for-sale
securities 7,306,453 25,152,051 -
Proceeds from maturities and
calls of held-to-maturity
securities 18,848,992 5,092,000 30,497,983
Purchases of investment
securities
Available-for-sale (3,168,200) (16,942,994) -
Held-to-maturity (6,459,372) (19,495,987) (39,789,407)
Net increase in loans (29,236,191) (18,778,658) (18,710,584)
Purchases of premises and
equipment (850,672) (418,586) (222,279)
Proceeds from redemption of
annuities and life insur-
ance contracts 229,275
Purchase of single premium
life insurance contracts - - (730,000)
NET CASH USED BY
INVESTING ACTIVITIES (13,558,990) (25,392,174) (28,725,012)
FINANCING ACTIVITIES
Net increase in noninterest-
bearing and interest-bearing
deposits 5,625,638 16,217,348 18,384,169
Net increase (decrease) in
short term borrowings 4,355,000 7,000,000 (77,537)
Cash dividends (1,176,000) (1,071,000) (966,000)
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,804,638 22,146,348 17,340,632
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,546,180 3,693,358 (5,906,216)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 26,735,526 23,042,168 28,948,384
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 31,281,706 $ 26,735,526 $ 23,042,168
<FN>
<F3>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
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) was
incorporated on March 31, 1982, as a Tennessee corporation. On
April 13, 1982, the Board of Directors of the Corporation
adopted a resolution to execute and deliver to the Board of
Governors of the Federal Reserve System an application pursuant
to Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, for prior approval by the Board of action to be taken
by the Corporation which would result in its becoming a bank
holding company.
As of December 31, 1995, the only subsidiary of the
Corporation was the Bank. The Bank is a national banking
association which was organized in 1954 as a successor to a
state bank organized in 1909. The Bank conducts a full-service
commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at thirteen (13)
branches: High Street Branch, Northside Branch, Shady Brook
Mall Branch, Hatcher Lane Branch, and Campbell Plaza Branch in
Columbia; Mt. Pleasant Branch in Mt. Pleasant; Spring Hill
Branch in Spring Hill; Lawrenceburg Branch in Lawrenceburg;
Leoma Branch in Leoma; Loretto Branch in Loretto; Lewisburg
Branch in Lewisburg; Chapel Hill Branch in Chapel Hill; and
Centerville Branch in Centerville. The Bank provides automatic
teller machine services in the Northfield Complex at the Saturn
location near Spring Hill, and in Columbia at the Tennessee Farm
Bureau and Columbia State Community College.
The community service area of the Bank is comprised of Maury,
Lawrence, Marshall, Hickman, and adjacent counties. 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 ten (10) other banks, three (3) savings and
loan associations, and several credit unions located in the
marketing area.
Accounting Policies
The accounting principles followed and the methods of applying
those principles conform with generally accepted accounting
principles and to general practices in the banking industry.
The significant policies are summarized as follows.
Principles of Consolidation
The accompanying consolidated financial statements present the
accounts of the Corporation and its wholly-owned subsidiary, the
Bank. Material intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. Average reserve requirements for the year
ended December 31, 1995, amounted to approximately $8.3 million.
Cash Equivalents
Cash equivalents include cash on hand, cash due from banks,
and federal funds sold. Federal funds are sold for one-day
periods.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Securities
Effective January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." In
accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting
principle. The cumulative effect of the adoption was an
increase in stockholders' equity of $257,108 (net of $171,405
in deferred income taxes) to reflect the net unrealized gains on
securities classified as available-for-sale that were previously
classified as held-to-maturity. SFAS 115 establishes standards
of accounting and reporting for investments in equity securities
that have readily determinable fair values and all debt
securities. Under the Statement, all such investments are
classified in three categories and accounted for as follows:
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.
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value,
with unrealized gains and losses, net of tax, excluded from
earnings and reported as a separate component of stockholders'
equity. Gains and losses realized on the sale of
available-for-sale securities are determined using the specific
identification method.
Declines in the fair value of individual available-for-sale
and held-to-maturity securities below their cost that are other
than temporary result in write-downs of the individual
securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board
issued a guide for implementation of SFAS 115 which allowed a
bank to reassess the appropriateness of the classification of
all securities held at that date and account for resulting
reclassifications as a transfer until December 31, 1995.
Reclassification from the held-to-maturity category that
resulted from this one-time reassessment would not call into
question the intent of a bank to hold other debt securities to
maturity in the future. The Bank did not reclassify any debt
securities as a result of this one-time reassessment.
Loans
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114 (SFAS 114, as amended by
SFAS 118), "Accounting by Creditors for Impairment of a Loan".
The statement specifies how allowances for credit losses related
to certain loans should be determined and addresses the
accounting for certain loans that are restructured in a troubled
debt restructuring. A loan is considered impaired when it is
probable that an institution will be unable to collect all
amounts due (principal and interest) according to the
contractual terms of the loan agreement. 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.
Interest on loans is computed daily based on the principal
amount outstanding. 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,
in the opinion of management, it is not reasonable to expect
that such interest will be collected. Consequently, interest
accruals are discontinued on loans that are ninety days
past-due. All loans
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans (Continued)
in non-accrual status and loans in the two most severe Loan
Review classifications are specifically evaluated for
impairment. Interest income on loans in non-accrual status is
recognized only to the extent of the excess of cash payments
received over principal payments due.
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.
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 cost or fair value minus estimated cost
to sell. 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 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 $482,945 at December 31, 1995, and $544,540 at
December 31, 1994.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by
charges to operations based on the evaluation of the impairment
of loans by Loan Review, the Special Assets Committee, and the
Credit Administrator. Impairments in loans are charged to the
allowance account in the period such determination is made.
Recoveries on loans previously charged off are credited to the
allowance account in the period received. 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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3-33 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.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Split
During 1994, the Corporation amended its corporate charter to
increase the number of authorized shares of its common stock
from 2,000,000 to 4,000,000 shares and on April 12, 1994, the
Corporation's stockholders approved a two-for-one split effected
in the form of a 100% stock dividend distributed May 30, 1994,
to shareholders of record on April 12, 1994. In accordance with
State corporate legal requirements, the transaction was recorded
by a transfer from retained earnings to common stock in the
amount of $7,000,000 ($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.
Income Taxes
The companies file a consolidated federal income tax return.
They adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting For Income Taxes", effective January 1,
1993. SFAS 109 requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred
income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities. The cumulative effect, as of
January 1, 1993, of this change in the method of accounting for
income taxes was negligible.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 70 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1995 - $168,020; 1994 - $168,020; and 1993 - $168,020.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments",
requires all entities to disclose the estimated fair value of
its financial instrument assets and liabilities. For the Bank,
as for most financial institutions, almost all of its assets and
liabilities are considered financial instruments as defined in
SFAS 107. 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
The following tables reflect the amortized value and fair
value of investment securities.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Value Gain Loss Value
December 31, 1995
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 5,064,421 $ 72,679 $ - $ 5,137,100
U.S. Government agencies 3,279,968 72,268 2,570 3,349,666
Other securities 2,531,138 254,102 3,000 2,782,240
$ 10,875,527 $ 399,049 $ 5,570 $ 11,269,006
Held-to-maturity securities
U.S. Treasury $ 61,426,813 $ 295,846 $ 59,359 $ 61,663,300
U.S. Government agencies 23,498,204 267,237 48,041 23,717,400
States and political subdivisions 42,415,025 934,439 241,048 43,108,416
Other securities 322,640 18,205 - 340,845
$127,662,682 $1,515,727 $ 348,448 $128,829,961
December 31, 1994
Available-for-sale securities
U.S. Treasury $ 7,094,657 $ 4,695 $ 50,352 $ 7,049,000
U.S. Government agencies 5,551,499 3,892 39,165 5,516,226
$ 12,646,156 $ 8,587 $ 89,517 $ 12,565,226
Held-to-maturity securities
U.S. Treasury $ 71,997,419 $ 66,784 $1,862,503 $ 70,201,700
U.S. Government agencies 28,527,740 21,631 1,006,621 27,542,750
States and political subdivisions 39,786,156 493,613 1,804,009 38,475,760
Other securities 2,749,716 3,210 80,805 2,672,121
$143,061,031 $ 585,238 $4,753,938 $138,892,331
</TABLE>
Securities with an amortized value of $93,101,954 and
$81,583,779 at December 31, 1995 and 1994, respectively (fair
value: 1995 - $93,937,766; 1994 - $80,148,047), 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 value 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,
1995, either equaled or exceeded the cost of those securities,
or the decline in fair value is considered temporary.
A schedule of net gains and losses realized on the disposition
of investment securities, and the related tax effects, is
presented in the following table. All net gains realized in
1995 and net losses realized in 1994 resulted from sales of
securities which were classified as available-for-sale.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pre-tax gains (losses) $ 1,182 $(243,690) $ 23,896
Tax effect (473) 97,476 (9,558)
After-tax gains (losses) $ 709 $(146,214) $ 14,338
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
Proceeds from the maturity, call, or sale of
available-for-sale securities were $7,306,453, $25,152,051, and
$-0- during 1995, 1994, and 1993 respectively. Proceeds from
the maturity or call of held-to-maturity securities were
$18,848,992, $5,092,000, and $30,497,983 during 1995, 1994, and
1993 respectively. Gross gains of $1,182 and gross losses of
$-0- were realized on the dispositions in 1995. Gross gains of
$-0- and gross losses of $243,690 were realized on the
dispositions in 1994. Gross gains of $23,896 and gross losses
of $ -0- were realized on the dispositions in 1993. At December
31, 1995, the Corporation did not hold investment securities of
any single issuer, other than obligations of the U.S. Treasury
and other U.S. Government agencies, whose aggregate book value
exceeded ten percent of stockholders' equity.
The following table shows the amortized value, 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, 1995, by contractual maturity. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
<S> <C> <C> <C>
U.S. Treasury
Within one year $ 2,019,183 $ 2,029,400 6.2%
After one but within five years 3,045,238 3,107,700 6.5%
U.S. Government agencies
Within one year 1,000,000 1,002,500 6.1%
After one but within five years 1,996,231 2,066,000 7.6%
After ten years 283,737 281,166 6.2%
Other securities 2,531,138 2,782,240 8.9%
$ 10,875,527 $ 11,269,006
Held-to-maturity securities
U.S. Treasury
Within one year $ 39,167,894 $ 39,306,700 6.1%
After one but within five years 22,258,919 22,356,600 5.6%
U.S. Government agencies
Within one year 11,023,204 11,062,500 6.1%
After one but within five years 12,475,000 12,654,900 6.1%
After five but within ten years - - -
States and political subdivisions
Within one year 3,244,962 3,296,024 10.0%
After one but within five years 12,357,917 12,741,932 8.7%
After five but within ten years 23,148,235 23,191,943 7.6%
After ten years 3,663,911 3,678,517 7.8%
Other securities
After one but within five years 322,640 340,845 8.0%
$127,662,682 $128,629,961
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
A summary of loans outstanding by category follows.
<TABLE>
<CAPTION>
1995 1994
Loans secured by real estate
<S> <C> <C>
Loans secured by real estate
Construction and land development $ 7,399,095 $ 8,036,802
Farmland 7,849,137 7,942,187
Lines of credit 339,108 240,976
1-4 family residential property - first lien 111,016,393 100,548,761
1-4 family residential property - junior lien 7,177,285 7,219,546
Multifamily residential property 3,729,687 4,775,515
Non farm, non residential property 44,224,353 41,734,848
Subtotal 181,735,058 170,498,635
Commercial and industrial loans
Commercial and industrial 51,758,675 44,870,150
Taxable municipal loans 270,000 300,000
All other loans 88,239 187,405
Subtotal 52,116,914 45,357,555
Tax exempt municipal loans 1,485,071 748,116
Loans to individuals
Agricultural production 3,659,215 3,823,296
Lines of credit 135,230 103,249
Individuals for personal expenditures 53,026,209 42,341,597
Purchase or carry securities - 655
Subtotal 56,820,654 46,268,797
Lease financing - 1,408
292,157,697 262,874,511
Less:
Net unamortized loan origination fees (225,368) (176,606)
Unearned interest income (2,018) (3,785)
Allowance for possible loan losses (2,678,386) (2,342,290)
$289,251,925 $260,351,830
</TABLE>
A summary of loan maturities and the amounts of loans carrying
fixed and variable interest rates as of December 31, 1995,
follows.
<TABLE>
<CAPTION>
(In Thousands of Dollars)
Within One to After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Fixed rate loans $ 62,923 $ 47,100 $ 23,735 $ 133,758
Variable rate loans 113,389 26,949 18,062 158,400
$ 176,312 $ 74,049 $ 41,797 $ 292,158
</TABLE>
Loans having recorded investments of $5,856,000 at December 31,
1995, have been identified as impaired in accordance with the
provisions of SFAS 114. The total allowance for possible loan
losses related to these loans was $456,000. Interest received
on these loans during 1995 was $532,873. Prior to adoption of
SFAS 114, non-performing loans were those which were accounted
for on a non-accrual basis. Such loans had outstanding balances
of approximately $2,611,000 at December 31, 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
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, 1995 and 1994, follows.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Amount Balance at
of Year Additions Collected Written Off End of Year
<S> <C> <C> <C> <C> <C>
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,908,932 $ - $ 7,606,004
1994
Aggregate of certain party loans $ 6,563,577 $ 5,081,776 $ 5,151,082 $ - $ 6,494,271
</TABLE>
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 1995 or 1994.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 2,342,290 $ 2,023,651 $ 2,253,735
Provision charged to operating expenses 670,000 660,000 470,000
Loan losses:
Loans charged off (555,957) (422,831) (847,535)
Recoveries on loans previously
charged off 222,053 81,470 147,451
Balance at end of year $ 2,678,386 $ 2,342,290 $ 2,023,651
</TABLE>
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
NOTE 5 - BANK PREMISES AND EQUIPMENT
The components of premises and equipment are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 1,204,288 $ 1,204,288
Premises 6,648,329 6,629,567
Furniture and equipment 3,949,617 3,816,320
Leasehold improvements 879,695 474,770
12,681,929 12,124,945
Less allowance for depreciation and
amortization (6,283,993) (5,931,865)
$ 6,397,936 $ 6,193,080
</TABLE>
Annual provisions for depreciation and amortization total
$645,816 for 1995, $589,045 for 1994, and $591,486 for 1993.
Included in premises and equipment cost and allowance for
depreciation and amortization are certain fully depreciated
assets totaling $2,287,900 at December 31, 1995.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1995, additional dividends of approximately $13,500,000
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 2000. In most cases,
the leases provide for one or more renewal options of five to
ten years under the same or similar terms. In addition, various
items of teller and office equipment are leased under cancelable
and noncancelable operating leases. Total rental expense
incurred under all operating leases, including short-term leases
with terms of less than one month, amounted to $660,121,
$409,764, and $254,121 for equipment leases, and $111,649,
$97,966, and $82,030 for building leases, in 1995, 1994, and
1993, respectively. Future minimum lease commitments as of
December 31, 1995, under all noncancelable operating leases with
initial terms of one year or more follow.
<TABLE>
<S> <C>
1996 $ 671,934
1997 671,934
1998 636,511
1999 5,088
2000 5,088
Total future minimum lease payments $1,990,555
/TABLE>
NOTE 8 - FEDERAL AND STATE INCOME TAXES
The provisions for income taxes consist of the following:
</TABLE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 2,166,566 $ 1,831,848 $ 1,754,003
State 585,606 503,433 442,882
Total current 2,752,172 2,335,281 2,196,885
Deferred:
Federal (198,393) (111,805) 20,468
State (35,010) (19,730) 3,612
Total deferred (233,403) (131,535) 24,080
Total provision for
income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
The deferred tax effects of principal temporary differences
are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Allowance for possible loan losses $ 815,315 $ 682,877 $ 555,421
Installment loan reporting - - 6,865
Write-down of other real estate 177,120 159,120 157,520
Deferred compensation 256,139 156,227 76,781
Direct lease financing - 36,452 35,736
Unrealized loss on AFS securities - 32,372 18,457
Deferred loan fees 44,051 24,546 76,907
Deferred tax asset 1,292,625 1,091,594 927,687
Unrealized gain on AFS securities (157,392) - -
Deferred tax liability (157,392) - -
Net deferred tax asset $1,135,233 $1,091,594 $ 927,687
</TABLE>
A reconciliation of total income taxes reported with the
amount of income taxes computed at the federal statutory rate
(34% each year) is shown below. Total income taxes paid in
1995, 1994, and 1993 amounted to $2,756,442, $2,431,332 and
$2,564,887, respectively.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,935,722 $ 2,640,158 $ 2,542,254
Increase (decrease) in taxes resulting from:
Tax-exempt interest (783,011) (780,946) (647,575)
Nondeductible interest expense 89,491 75,019 58,457
Other nondeductible expenses
(nontaxable income) - net (28,114) (6,458) (19,962)
State income taxes, net of federal
tax benefit 363,393 319,244 292,263
Dividend income exclusion (18,324) (29,571) (15,646)
Other (40,388) (13,700) 11,174
Total provision for income taxes $ 2,518,769 $ 2,203,746 $ 2,220,965
Effective tax rate 29.2% 28.4% 29.7%
</TABLE>
A net deferred tax asset was included in other assets in the
accompanying consolidated balance sheet.
NOTE 9 - COMMITMENTS
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS (Continued)
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1995,
were $21,739,000 and $1,699,000, respectively. Loan commitments
are agreements to lend to a customer as long as there is not a
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in making a loan.
The loan portfolio is well diversified with loans generally
secured by tangible personal property, real property, or stock.
The loans are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers. Collateral
requirements for the loan portfolio are based on credit
evaluation of the customer. It is management's opinion that
there is not a concentration of credit risk in the portfolio.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on deposits and other borrowings during 1995,
1994, and 1993 amounted to $14,845,299, $12,641,299, and
$12,243,317, respectively.
NOTE 11 - 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 $633,459, $602,010, and $529,324, in 1995, 1994, and
1993, 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 assets (1995 - $594,221; 1994 -
$580,088) used to fund the plan and the related liability (1995
- - $482,272; 1994 - $400,606) were included in other assets and
other liabilities respectively. Single premium universal life
insurance policies were purchased in 1993 to replace other
policies and annuities that were redeemed. Insurance premiums
of $515,000 were paid during 1993, of which $285,725 (net of the
redemption proceeds) was capitalized. Net non-cash income of
$14,133 in 1995 and $22,448 in 1994 is also included in the
above asset values. The principal cost of this plan will be
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 $106,666
in 1995, $98,925 in 1994, and $91,916 in 1993.
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. A
liability increase and expense of $176,727 for 1995, $126,262
for 1994, and $125,036 for 1993 were recognized in the
accompanying 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. Insurance premiums of $1,425,000 were paid at the
end of 1992, of which $1,399,816 was capitalized to reflect the
cash surrender value at December 31, 1992. Additional single
premium universal life insurance policies were purchased in 1993
for new participants. Insurance premiums of $215,000 were paid
during 1993 and capitalized. Net non-cash income of $51,803 in
1995 and $52,840 in 1994 is also included in the cash surrender
values of $1,801,922 and $1,750,119 at December 31, 1995 and
1994, respectively.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan and the deferred compensation plan.
These policies have an aggregate face amount of $2,425,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the unaudited consolidated
quarterly results of operations.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1995
<S> <C> <C> <C> <C> <C>
Interest income $ 8,244,228 $ 8,640,769 $ 8,720,212 $ 8,888,360 $34,493,569
Interest expense 3,654,485 3,856,594 3,938,600 3,972,566 15,422,245
Net interest income 4,589,743 4,784,175 4,781,612 4,915,794 19,071,324
Provision for possible loan
losses 145,000 140,000 180,000 205,000 670,000
Noninterest expenses, net of
noninterest income 2,492,505 2,547,595 2,430,466 2,296,283 9,766,849
Income before income taxes 1,952,238 2,096,580 2,171,146 2,414,511 8,634,475
Income taxes 512,448 589,977 680,609 735,735 2,518,769
Net income $ 1,439,790 $ 1,506,603 $ 1,490,537 $ 1,678,776 $ 6,115,706
Earnings per common share
(1,400,000 shares) $ 1.03 $ 1.08 $ 1.06 $ 1.20 $ 4.37
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1994
<S> <C> <C> <C> <C> <C>
Interest income $ 7,176,893 $ 7,664,849 $ 7,814,500 $ 8,161,296 $30,817,538
Interest expense 2,986,012 3,148,310 3,272,217 3,457,365 12,863,904
Net interest income 4,190,881 4,516,539 4,542,283 4,703,931 17,953,634
Provision for possible loan
losses 60,000 255,000 225,000 120,000 660,000
Noninterest expenses, net of
noninterest income 2,260,734 2,254,027 2,490,717 2,522,984 9,528,462
Income before income taxes 1,870,147 2,007,512 1,826,566 2,060,947 7,765,172
Income taxes 528,638 566,493 508,942 599,673 2,203,746
Net income $ 1,341,509 $ 1,441,019 $ 1,317,624 $ 1,461,274 $ 5,561,426
Earnings per common share
(1,400,000 shares) $ 0.96 $ 1.03 $ 0.94 $ 1.04 $ 3.97
</TABLE>
NOTE 13 - SHAREHOLDERS' EQUITY
The Corporation and the Bank are subject to federal regulatory
risk-adjusted capital adequacy standards. Failure to meet
capital adequacy requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators
that could have a direct material effect on the consolidated
financial statements of the Corporation and its subsidiary, the
Bank. The regulations require the Bank to meet specific capital
adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. As of
December 31, 1995, the Bank's calculated risk-adjusted capital
ratios exceeded the minimum standard for a "well capitalized"
bank. The capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Corporation and
the Bank meet all capital requirements.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fourteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
the following table.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 56,730 - % $ 55,557 - % $ 48,697 - %
NOW and money market accounts 149,016 3.51 161,244 3.25 147,246 3.16
Savings deposits 34,629 3.00 35,036 2.87 31,216 2.76
Time deposits of less than $100,000 136,568 5.30 126,523 4.27 128,021 4.26
Time deposits of $100,000 or more 32,524 5.35 26,053 4.32 23,602 4.33
Total In Domestic Offices $409,467 3.72% $404,413 3.66% $378,782 3.17%
</TABLE>
At December 31, time deposits of $100,000 or more had the
following maturities.
<TABLE>
<CAPTION>
1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 7,877 $ 3,117 $ 3,519
3 to 12 months 18,407 18,250 17,081
Over 12 months 4,310 4,803 4,505
$30,594 $26,170 $25,105
</TABLE>
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
This summarizes the Corporation's disclosure of fair values of
financial instruments made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107 (SFAS
107), "Disclosures about Fair Value of Financial Instruments".
<TABLE>
<CAPTION>
Dollars in Thousands
December 31, 1995 December 31, 1994
Amortized Fair Amortized Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 31,282 $ 31,282 $ 26,736 $ 26,736
Securities held to maturity 127,663 128,830 143,061 138,892
Securities available for sale 10,876 11,269 12,646 12,565
Loans, net 289,252 298,076 260,352 268,870
Accrued interest receivable 5,454 5,424 5,169 5,169
Financial liabilities
Deposits 410,778 398,296 405,152 402,720
Federal funds purchased 10,000 10,000 7,000 7,000
Short term borrowings 1,955 1,955 600 600
Accrued interest payable 3,034 3,034 2,457 2,457
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Changes in assumptions or the
estimation methodologies used may have a material effect on the
estimated fair values included in this note.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount
payable on demand and the recorded book balance. For deposits
with floating interest rates it is presumed that estimated fair
values generally approximate the recorded book balances. The
carrying amounts of federal funds purchased and other short term
borrowings are considered to approximate their fair values.
The Bank's remaining assets and liabilities which are not
considered financial instruments have not been valued
differently than has been customary with historical cost
accounting. Management is concerned that reasonable
comparability between financial institutions may be distorted
due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a
greater degree of subjectivity to these estimated fair values.
At December 31, 1995, 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.
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(In Thousands of Dollars)
Assets 1995 1994
<S> <C> <C>
Cash $ 70 $ 65
Investment in bank subsidiary - at equity 48,517 43,310
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 25
Dividends receivable from bank subsidiary 630 574
Cash surrender value - life insurance 467 453
Total assets $ 49,756 $ 44,477
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 129 $ 75
Dividends payable 630 574
Total liabilities 759 649
Stockholders' equity
Common stock - $10 par value, authorized 4,000,000
shares, 1,400,000 shares issued and outstanding 14,000 14,000
Retained earnings 34,761 29,877
Net unrealized gain (loss) on available-for-sale
securities, net of tax 236 (49)
Total stockholders' equity 48,997 43,828
Total liabilities and stockholders' equity $ 49,756 $ 44,477
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
(Continued)
<TABLE>
Condensed Statements of Income
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating income
Dividends from bank subsidiary $ 1,232 $ 1,120
Other dividend income 22 61
Interest income 2 1
Other 27 30
Operating expenses 87 60
Income before equity in undistributed net
income of bank subsidiary 1,196 1,152
Equity in undistributed net income of bank
subsidiary 4,920 4,409
Net Income $ 6,116 $ 5,561
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31, 1995 and 1994
(In Thousands of Dollars)
<CAPTION>
1995 1994
<S> <C> <C>
Operating activities
Net income for the year $ 6,116 $ 5,561
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (4,920) (4,409)
Increase in other assets (69) (62)
Increase in payables 54 26
Total adjustments (4,935) (4,445)
Net cash provided by operating activities 1,181 1,116
Net cash provided by (used in) investing activities
Proceeds from sale or calls of investment securities - 18
Net cash provided by (used in) investing activities - 18
Net cash used in financing activities
Cash dividends paid (1,176) (1,071)
Increase (decrease) in cash 5 63
Cash at beginning of year 65 2
Cash at end of year $ 70 $ 65
</TABLE>
<PAGE>
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, a one-bank holding
company, was formed during 1982. Its only subsidiary, First
Farmers and Merchants National Bank, is a community bank that
was established in 1909. The resulting financial condition of
the Corporation should be evaluated in terms of the Bank's
operations within its service area.
During 1995, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits in each of the four counties
either maintained the same levels or increased while loans in
all four counties increased. To more efficiently provide
expanding services and offer the range of products that Bank
customers need and want, the Bank undertook a technology
conversion in the last quarter of 1994 involving data processing
and communication links between its fourteen offices. The Bank
is positioned to provide quality services in diverse markets and
a dynamic interest rate environment. Our customers are enjoying
the "Impact" of this change as new services such as combined,
laser printed statements; inquiring about balances, checks paid,
deposits made, and making transfers between accounts through
phone bank; extended banking hours; and a check card. The check
card was introduced in the first quarter of 1995 and increased
in usage as the year progressed to approximately 35,000
transactions per month.
The first of the following tables entitled DISTRIBUTION OF
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL, presents average daily balances,
interest income on a fully taxable equivalent basis and interest
expense, as well as the average rates earned and paid on the
major balance sheet items for the years 1995, 1994, and 1993.
The second table sets forth, for the periods indicated, a
summary of changes in interest earned and interest paid
resulting from changes in volume and changes in rates. The
rate/volume variances are allocated between rate and volume
variances in proportion to the relationship of the absolute
dollar amounts of the change in each.
These tables plus the following discussion and financial
information is presented to aid in understanding First Farmers
and Merchants' current financial position and results of
operations. The emphasis of this discussion will be on the
years 1995, 1994, and 1993; 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 National Bank'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. The following paragraphs provide
a unique perspective on the internal structures of the
Corporation and the Bank that provide the strength in our
organization.
The bank's average deposits grew during the last three years
reflecting a 1.3% growth from 1994 to 1995, a 6.8% growth from
1993 to 1994, and a 10.4% growth from 1992 to 1993. Average
transaction and limited transaction interest bearing accounts
grew during the prior two years but declined in 1995 as
investors took advantage of higher certificate of deposit rates.
The average Chairman's Club, super negotiable orders of
withdrawal, insured money market deposits, and flexible
investment accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994 and a 28.6 % increase in 1993. Average savings
deposits actually declined 1.2% in 1995 compared to a 12.2%
increase in 1994 and a 12.9% decrease in 1993. Average
certificates of deposit increased during 1995 with certificates
and other savings under $100,000 increasing 8.0% in 1995
compared to a 1.2% decline in 1994 and a 1.2.% decline in 1993.
Certificates of deposit over $100,000 increased 24.8% in 1995
compared to a 10.4% increase in 1994 and a 17.1% decline in
1993.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
Average Rate /
Balance Yield Interest
ASSETS
<S> <C> <C> <C>
Interest earning assets
Loans, net $ 276,166 9.38% $ 25,892 *
Bank time deposits 2 - -
Available-for-sale securities (AFS) 8,092 6.59 534
Held-to-maturity securities (HTM) 93,676 6.03 5,646
U.S. Treasury and Government agency securities - - -
States and political subdivisions' securities 39,139 8.06 3,156 *
Other securities 2,452 11.29 277 *
Federal funds sold 2,076 5.83 121
TOTAL EARNING ASSETS 421,603 8.45 $ 35,626
Noninterest earning assets
Cash and due from banks 24,829
Bank premises and equipment 6,246
Other assets 11,061
TOTAL ASSETS $ 463,739
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 148,993 3.51% $ 5,223
Savings 34,627 3.00 1,040
Time 136,605 5.30 7,245
Time over $100,000 32,522 5.35 1,740
TOTAL INTEREST BEARING DEPOSITS 352,747 4.32 15,248
Federal funds purchased and repurchase
agreements 2,415 5.92 143
Other short-term debt 565 5.49 31
TOTAL INTEREST BEARING LIABILITIES 355,727 4.34 $ 15,422
Noninterest bearing liabilities
Demand deposits 56,742
Other liabilities 4,515
TOTAL LIABILITIES 416,984
Stockholders' equity 46,755
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 463,739
<FN>
<F4>
Spread between combined rates earned and combined rates paid* 4.11%
</FN>
<FN>
<F5>
Net yield on interest-earning assets* 4.79%
</FN>
<FN>
<F6>
* Taxable equivalent basis.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
Average Rate / Average Rate /
Balance Yield Interest Balance Yield Interest
(Dollars In Thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net $ 247,791 8.54% $ 21,156 * $ 233,608 8.37% $ 19,543 *
Bank time deposits - - - - - -
Available-for sale-securities (AFS) 15,931 8.33 1,327 - - -
Held-to-maturity securities (HTM) 101,654 5.76 5,858 - - -
U.S. Treasury and Government agency securities - - - 106,201 6.50 6,904
States and political subdivisions 38,545 8.49 3,274 * 29,634 8.62 2,553 *
Other securities 2,375 13.15 312 * 6,164 5.34 329 *
Federal funds sold 2,998 3.73 112 4,665 2.92 136
TOTAL EARNING ASSETS 409,294 7.83 $ 32,039 380,272 7.75 $ 29,465
Noninterest earning assets
Cash and due from banks 25,945 23,406
Bank Premises and equipment 6,350 6,764
Other assets 10,364 10,318
TOTAL ASSETS $ 451,953 $ 420,760
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $ 161,244 3.25% $ 5,239 $ 147,246 3.16% $ 4,653
Savings 35,036 2.87 1,006 31,216 2.76 861
Time 126,523 4.27 5,400 128,021 4.26 5,459
Time over $100,000 26,053 4.32 1,126 23,602 4.34 1,025
TOTAL INTEREST BEARING DEPOSITS 348,856 3.66 12,771 330,085 3.63 11,998
Federal funds purchased and repurchase
agreements 1,462 4.86 71 254 3.06 8
Other short-term debt 568 3.92 22 728 4.21 31
TOTAL INTEREST BEARING LIABILITIES 350,886 3.67 $ 12,864 331,067 3.64 $ 12,037
Noninterest bearing liabilities
Demand deposits 55,557 48,697
Other liabilities 3,690 3,542
TOTAL LIABILITIES 410,133 383,306
Stockholders' equity 41,820 37,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,953 $ 420,760
<FN>
<F7>
Spread between combined rates earned and combined rates paid* 4.16% 4.11%
</FN>
<FN>
<F8>
Net yield on interest earning assets* 4.68% 4.58%
</FN>
<FN>
<F9>
Taxable equivalent basis
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2 - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
<TABLE>
<CAPTION>
*
* Total
* Taxable Nontaxable Federal Interest
Net Investment Investment Funds Earning
(Dollars in Thousands) Loans Securities Securities Sold Assets
1995 compared to 1994:
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 2,423 $ (1,103) $ 50 $ (34) $ 1,336
Rate 2,313 63 (168) 43 2,251
NET INCREASE
(DECREASE) $ 4,736 $ (1,040) $(118) $ 9 $ 3,587
1994 compared to 1993:
Increase (decrease) due to:
Volume $ 1,186 $ 537 $ 768 $ (49) $ 2,442
Rate 427 (273) (47) 25 132
NET INCREASE
(DECREASE) $ 1,613 $ 264 $ 721 $ (24) $ 2,574
(A) (A)
<FN>
<F10>
* Taxable equivalent basis
</FN>
<FN>
<F11>
(A) U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturiy categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
</FN>
</TABLE>
Average earning assets increased 3.0% in 1995 compared to an
7.6% increase in 1994 and a 9.7% increase in 1993. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1995, average net loans represented
65.5% of average earning assets. Total average net loans
increased during the last three years showing an 11.5% growth
from 1994 to 1995, a 6.1% growth from 1993 to 1994, and an 8.6%
growth from 1992 to 1993. Average investments represented 34.0%
of average earning assets at December 31, 1995, and decreased
9.6% in 1995 providing funds for the increasing loan growth.
Investments increased 11.6% in 1994, and increased 11.9% in
1993. Average total assets increased during the last three
years as evidenced by a 2.6% growth from 1994 to 1995, a 7.4%
growth from 1993 to 1994, and a 10.3% growth from 1992 to 1993.
Please refer to the color graphs at the end of this document
that illustrate this growth.
<PAGE>
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Now and Total *
Money Time Federal Short Interest Net
Market Savings Time Over Funds Term Bearing Interest
(Dollars in Thousands) Accounts Deposits Deposits $100,000 Purchased Debt Funds Earnings
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 compared to 1994:
Increase (decrease) due to:
Volume $ (398) $ (12) $ 430 $ 279 $ 46 $ - $ 345 $ 991
Rate 382 46 1,415 335 26 9 2,213 38
NET INCREASE
(DECREASE) $ (16) $ 34 $1,845 $ 614 $ 72 $ 9 $2,558 $1,029
1994 compared to 1995:
Increase (decrease) due to:
Volume $ 442 $ 105 $ (64) $ 107 $ 37 $ (7) $ 620 $1,822
Rate 144 40 5 (5) 26 (2) 208 (76)
NET INCREASE
(DECREASE) $ 586 $ 145 $ (59) $ 102 $ 63 $ (9) $ 828 $1,746
<FN>
<F12>
* Taxable equivalent basis
</FN>
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management at the Bank
is to achieve reasonable stability in net interest income
throughout interest rate cycles. This objective is achieved by
monitoring the relationship of rate sensitive earning assets to
rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the
effect that fluctuating interest rates will have on future net
interest income. Rate sensitive earning assets and interest
bearing liabilities are those which can be repriced to current
market rates within a defined time period. The following table,
Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities, shows the Bank's rate sensitive position at
December 31, 1995, 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).
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 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 adequately flexible position. The net interest
margin, on a tax equivalent basis, at December 31, 1995, 1994,
and 1993 was 4.79%, 4.68%, and 4.58% respectively.
<PAGE>
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 (Continued)
TABLE - Rate Sensitivity of Earning Assets and Interest Bearing
Liabilities
<TABLE>
<CAPTION>
(Dollars in Thousands)
3 Months 3-6 6-12 Over 1
As of December 31, 1995 or Less Months Months Year Total
<S> <C> <C> <C> <C> <C>
Earning assets
Loans and leases, net of unearned $ 64,615 $ 43,285 $ 72,506 $ 111,525 $ 291,931
Taxable investment securities 12,715 11,027 30,164 42,611 96,517
Tax-exempt investment securities 986 1,200 1,060 39,169 42,415
Total earning assets 78,316 55,512 103,730 193,305 $ 430,863
Interest-bearing liabilities
NOW and money market accounts 35,739 100,555 $ 136,294
Savings 34,133 34,133
Time 42,682 34,082 46,903 18,671 142,338
Time over $100,000 8,526 8,055 9,703 4,310 30,594
Other short-term debt 11,955 11,955
Total interest bearing
liabilities 98,902 42,137 56,606 157,669 $ 355,314
Noninterest bearing, net (75,549)
Net asset/liability funding gap (20,586) 13,375 47,124 (39,913)
Cumulative net asset/liability
funding gap $ (20,586) $ (7,211) $ 39,913 $ -
<FN>
<F13>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1995, the Corporation had a ratio of
average capital to average assets of 10.08%. This compares to a
ratio of average capital to average assets of 9.25% at December
31, 1994, and 8.9% at December 31, 1993.
Cash dividends paid in 1995 were 10.0% more than those paid in
1994. The dividend to net income ratio was 20%. Additional
dividends of approximately $13.5 million to the Corporation
could have been declared by the subsidiary bank without
regulatory agency approval. The Corporation plans to maintain
or increase the payout ratio while continuing to maintain a
capital to asset ratio reflecting financial strength and
adherence to regulatory guidelines.
Regulatory risk-adjusted capital adequacy standards were
strengthened during 1992. Equity capital (net of certain
adjustments for intangible assets and investments in
non-consolidated subsidiaries) and certain classes of preferred
stock are considered Tier 1 ("core") capital. Tier 2 ("total")
capital consists of core capital plus subordinated debt, some
types of preferred stock, and varying amounts of the Allowance
for Possible Loan Losses. The minimum standard for a "well
capitalized" bank is a risk-based core capital ratio of 6%, a
risk-based total capital ratio of 10%, and a core capital to
average total assets of 5%.
As of December 31, 1995, the Bank's core and total risk-based
ratios were 16.8% and 17.7% respectively. One year earlier, the
comparable ratios were 16.2% and 17.1%, respectively. At year
end 1995, the Bank had a ratio of average core equity to total
average assets of 9.9%, up slightly from 9.0% at year end 1994.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Interest Income
Total interest income increased 11.9% in 1995 compared to a
7.3% increase in 1994 and an decrease of .4% in 1993. Interest
and fees earned on loans increased 22.4% in 1995 compared to an
8.3% increase in 1994 and a 1.4% decrease in 1993. Interest
earned on investment securities and other investments decreased
10.9% in 1995 due to the decrease in volume compared to a 5.3%
increase in 1994 and a 1.9% increase in 1993.
Interest Expense
Total interest expense increased 19.9% in 1995 compared to a
6.9% increase in 1994 and a 10.0% decrease in 1993. The net
interest margin (tax equivalent net interest income divided by
average earning assets) increased in 1995 to 4.8% compared to
4.7% in 1994 and 4.6% in 1993 as indicated in the LIQUIDITY AND
INTEREST RATE SENSITIVITY MANAGEMENT section above.
Net interest income on a fully taxable equivalent basis is
influenced primarily by changes in: (1) the volume and mix of
earning assets and sources of funding; (2) market rates of
interest, and (3) income tax rates. The impact of some of these
factors can be controlled by management policies and actions.
External factors also can have a significant impact on changes
in net interest income from one period to another. Some
examples of such factors are: (1) the strength of credit demands
by customers; (2) Federal Reserve Board monetary policy, and (3)
fiscal and debt management policies of the federal government,
including changes in tax laws.
Noninterest Income and Expense
Noninterest income increased 14.9% during 1995 versus a 1.6%
increase in 1994 and a 12.0% increase in 1993. The new check
card generates fee income from the clearing agent for the
electronic transaction even though no service fee is charged to
Bank customers for its use. This "Impact" of our new technology
contributed to the 16.4% increase in service fees for deposit
accounts in 1995. Income from fiduciary services provided in
the Bank's Trust Department remained strong contributing 27.4%
of noninterest income.
Noninterest expenses, excluding the provision for possible loan
losses, increased 6.2% in 1995 compared to a 5.4% increase in
1994 and a 9.3% increase in 1993. Increased productivity
fostered by our technology improvements as the learning curve
diminished and cost control efforts contributed to this
improvement. Included in this category is Federal Deposit
Insurance Corporation (FDIC) insurance premiums at the rate
established for "well capitalized" institutions. This expense
was $499,709 in 1995 compared to $890,646 in 1994, a 43.9-%
reduction. Please refer to the discussion in the CAPITAL
RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
Provision for Possible Loan Losses
The provision for possible loan losses, representing amounts
charged against operating income, increased 1.5% in 1995
compared to a 40.4% increase in 1994 and a 44.1% decrease in
1993. Management regularly monitors the allowance for possible
losses and considers it to be adequate. Please refer to Note 1
in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that are
included elsewhere in this material for further discussion of
the adequacy of the allowance. The tables on the next page
summarize average loan balances and reconciliation of the
allowance for loan losses for each year. Additions to the
allowance, which have been charged to operating expenses, are
also disclosed.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for Possible Loan Losses (Continued)
The next tables present any risk elements in the loan portfolio
and include all loans management considers to be potential
problem loans. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 276,166 $ 247,791 $ 233,608 $ 215,158 $ 182,561
Balance of allowance for possible loan
losses at beginning of year $ 2,342 $ 2,024 $ 2,254 $ 1,917 $ 1,818
Loans charged-off:
Loans secured by real estate 15 135 396 245 329
Commercial and industrial loans 170 42 222 124 192
Individuals 371 246 230 249 249
TOTAL LOANS CHARGED OFF 556 423 848 618 770
Recoveries of loans previously charged off:
Loans secured by real estate 97 9 56 3 -
Commercial and industrial loans 14 36 52 80 56
Individuals 111 36 40 32 33
TOTAL RECOVERIES 222 81 148 115 89
NET LOANS CHARGED-OFF 334 342 700 503 681
Provision charged to operating expenses 670 660 470 840 780
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Ratio of net charge-offs during the
period to average loans outstanding 0.12% 0.14% 0.30% 0.23% 0.37%
</TABLE>
Loans having recorded investments of $5.8 million at December
31, 1995, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 2% of gross loans.
Commercial loans comprised $.326 million of the total, with
loans secured by real estate accounting for $4.7 million and
installment loans $.800 million. The gross interest income that
would have been recorded during 1995 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 $365, $193, and $189 thousand for
the years ended December 31, 1995, 1994, and 1993 respectively.
Impaired loans are charged-off once management has exhausted all
efforts to collect the loan. 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.
Inherent in the business of providing financial services is the
risk involved in extending credit. Management believes the
objective of a sound credit policy is to extend quality loans to
customers while reducing risk affecting shareholders' and
depositors' investments. Risk reduction is achieved through
diversity of the loan portfolio as to type, borrower, and
industry concentration as well as sound credit policy guidelines
and procedures.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
FIVE YEAR COMPARISON
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 25,857,982 $ 21,130,914 $ 19,518,742 $ 19,791,548 $ 19,571,295
Income on investment securities
Taxable interest 6,179,492 7,012,626 6,925,404 6,898,114 5,218,446
Exempt from federal income tax 2,156,813 2,184,666 1,857,168 1,825,869 1,828,738
Dividends 177,790 204,948 72,054 110,874 150,823
8,514,095 9,402,240 8,854,626 8,834,857 7,198,007
Other interest income 121,492 284,384 347,287 195,744 279,165
TOTAL INTEREST INCOME 34,493,569 30,817,538 28,720,655 28,822,149 27,048,467
INTEREST EXPENSE
Interest on deposits 15,247,875 12,770,618 11,998,235 13,329,557 14,212,771
Interest on other short term
borrowings 174,370 93,286 38,339 47,449 63,994
TOTAL INTEREST EXPENSE 15,422,245 12,863,904 12,036,574 13,377,006 14,276,765
NET INTEREST INCOME 19,071,324 17,953,634 16,684,081 15,445,143 12,771,702
PROVISION FOR POSSIBLE LOAN LOSSES 670,000 660,000 470,000 840,000 780,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,401,324 17,293,634 16,214,081 14,605,143 11,991,702
NONINTEREST INCOME
Trust department income 1,251,642 1,249,359 863,952 753,239 603,701
Service fees on deposit accounts 2,697,332 2,317,992 2,206,026 2,123,096 1,893,355
Other service fees, commissions,
and fees 300,407 336,758 509,009 401,618 237,755
Other operating income 322,634 319,466 315,108 191,363 91,440
Available for sale securities
gains (losses) 1,182 (243,690) 23,896 28,434 15,862
TOTAL NONINTEREST INCOME 4,573,197 3,979,885 3,917,991 3,497,750 2,842,113
NONINTEREST EXPENSES
Salaries and employee benefits 6,620,827 6,247,706 5,686,965 5,283,086 4,407,072
Net occupancy expense 1,279,434 1,190,678 1,070,971 984,650 797,466
Furniture and equipment expense 1,382,769 1,069,856 889,848 801,453 935,821
Loss on other real estate 50,724 4,000 103,122 312,064 48,398
Other operating expenses 5,006,292 4,996,107 4,903,949 4,460,696 3,572,881
TOTAL NONINTEREST EXPENSES 14,340,046 13,508,347 12,654,855 11,841,949 9,761,638
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,634,475 7,765,172 7,477,217 6,260,944 5,072,177
PROVISION FOR INCOME TAXES 2,518,769 2,203,746 2,220,965 1,768,840 1,341,130
NET INCOME $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104 $ 3,731,047
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net Income
Net income was 10.0% higher in 1995 than in 1994, 5.8% higher
in 1994 than in 1993, and 17.0% higher in 1993 than in 1992. As
indicated by the table, Comparative Data, the Corporation's
return on average assets was 1.32% in 1995, 1.23% in 1994, and
1.25% in 1993. The return on equity remains strong at 13.95% in
1995, 14.11% in 1994, and 14.93% in 1993.
Net Interest Margin
The bottom graph on the last page of this document illustrates
an increasing net interest margin during the five years shown.
As mentioned in the LIQUIDITY AND INTEREST RATE SENSITIVITY
MANAGEMENT section earlier, the Bank's Asset/Liability Committee
monitors interest rate sensitivity monthly. Through the use of
simulation analysis to estimate future net interest income under
varying interest rate conditions, the committee can establish
pricing and maturity strategies to maintain that steady net
interest margin. The simulation analysis uses the repricing
information indicated in the table, Rate Sensitivity of Earning
Assets and Interest Bearing Liabilities, and adjusts the current
balance sheet to reflect the impact of different interest rate
movements.
EFFECTS OF ECONOMY
Current economic conditions have had a definite effect on the
reported financial condition and results of operation. The
stock market closed out its worst performance and the bond
market experienced its largest calendar year decline in modern
history during 1994. However, the market was much stronger
during 1995 experiencing considerable gains compared to 1994.
Many Bank customers had used transaction and limited transaction
interest bearing accounts as holding vehicles to watch rate
movements during 1994 trying to determine the best time to lock
in a rate on a longer term product. During 1995, many of these
customers decided that the time was right and transferred
investments to longer term certificate of deposits from
transaction and limited transaction interest bearing accounts.
As Bank customers felt more comfortable with the economy, loan
demand increased strongly resulting in a shift of Bank earning
assets from investment securities to higher yielding loans.
Historically, noninterest bearing demand deposits and regular
savings accounts have provided a relatively fixed rate source of
funding for earning assets. This was illustrated again in 1995
and 1994 as these fixed rate and noninterest bearing deposits
continued to provide a relatively stable cost from this funding
source.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued two
standards that have not been adopted by the Bank but are
required to adopted after December 31, 1995. The Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting
for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" establishes guidance on when to
recognize and how to measure impairment losses on long-lived
assets and certain identifiable intangibles. The statement also
offers guidance on how to value long-lived assets that
management has committed to a plan to dispose of the assets. An
asset that an entity will hold and use should be reviewed for
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. In such
situations, an impairment loss is recognized if the sum of
undiscounted future cash flows expected to be generated by the
asset is less than the carrying amount of the asset.
Measurement of the impairment loss, however, is based on the
fair value of the asset. Management does not believe this
statement will have any material effect on future income.
The second standard, Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Certain Mortgage
Banking Activities" requires recognition of rights to service
mortgage loans for others as separate assets, regardless of how
the servicing rights are acquired. This Statement prescribes a
single procedure for the capitalization of those rights acquired
either through loan origination or through purchase transactions
where a mortgage banking enterprise buys the servicing rights.
Mortgage servicing rights are to be assessed for impairment
<PAGE>
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 ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD (Continued)
based on their fair value. Impairment is recognized through a
valuation allowance for each impaired group of mortgage
servicing rights. Rights capitalized after adoption of this
statement should be grouped based on the risk characteristics of
the underlying loans. Management does not believe this
statement will have any material effect on future income.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1995, had a
market value of $75.6 million and were held by 1,514
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 following table lists 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.
<TABLE>
SHAREHOLDER INFORMATION
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
First quarter $ 36.00 $ 36.00 $
Second quarter 37.00 37.00 0.36
1993 Third quarter 38.00 37.00
Fourth quarter 38.00 38.00 0.37
$ 0.73
First quarter $ 40.00 $ 36.00 $
Second quarter 42.00 37.00 0.39
1994 Third quarter 43.00 37.00
Fourth quarter 45.00 38.00 0.41
$ 0.80
First quarter $ 45.00 $ 45.00 $
Second quarter 48.00 45.00 0.43
1995 Third quarter 50.00 48.00
Fourth quarter 54.00 50.00 0.45
$ 0.88
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
COMPARATIVE DATA
(In Thousands of Dollars)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 463,739 $ 451,953 $ 420,760 $ 381,379 $ 303,851
AVERAGE LOANS (NET) $ 276,166 $ 247,791 $ 233,609 $ 215,158 $ 182,561
AVERAGE DEPOSITS $ 409,489 $ 404,412 $ 378,782 $ 343,128 $ 268,495
RETURN ON EQUITY
AND ASSETS
Return on average assets 1.32% 1.23% 1.25% 1.18% 1.23%
Return on beginning equity 13.95% 14.11% 14.93% 14.21% 13.01%
Average equity to
average assets 10.08% 9.25% 8.90% 8.76% 9.94%
COMMON DIVIDEND
PAYOUT RATIO
Earnings per share $ 4.37 $ 3.97 $ 3.75 $ 3.21 $ 2.67
Cash dividends per share $ 0.88 $ 0.80 $ 0.73 $ 0.64 $ 0.58
Ratio 20% 20% 19% 20% 22%
</TABLE>
<TABLE>
NET INTEREST MARGIN
<CAPTION>
1995 1994 1993 1992 1991
(In Thousands of Dollars)
<C> <C> <C> <C> <C> <C>
INTEREST INCOME
(TAX EQUIVALENT) $ 35,626 $ 32,039 $ 29,465 $ 29,564 $ 27,736
INTEREST EXPENSE 15,422 12,864 12,037 13,377 14,277
$ 20,204 $ 19,175 $ 17,428 $ 16,187 $ 13,459
NET INTEREST MARGIN* 4.79% 4.68% 4.58% 4.67% 4.84%
<FN>
<F14>
*Net interest margin is net interest income (tax equivalent)
divided by average earnings assets.
</FN>
</TABLE>
In summary, the graphs on the following page illustrate the
presentation in the preceding pages, a unique perspective on the
internal structures of the Corporation and the Bank. Each
shareholder can be proud of this performance. Our shareholders
are the real support of our organization. Thank you for your
help and support.
Nine color graphs were included on the last page of this report.
One - The first graph used the information presented above in the Five
Year Comparison table to illustrate the growth in net income.
Two - The second graph used information from the Comparative Data on the
previous page to illustrate a return on average assets of 1.18% and above
for the last five years.
Three - The third graph used information from the Comparative Data on the
previous page to illustrate a return on beginning stockholders' equity
over 13% for the last five years.
Four - The fourth graph used information from the Comparative Data on the
previous page to illustrate earnings per share and cash dividends per share
for the last five years.
Five - The fifth graph used information from the Consolidated Statements of
Stockholders' Equity to illustrate the growth in stockholders' equity for
the last five years.
Six - The sixth graph used information from the Consolidated Balance Sheets
to illustrate the growth in net loans for the last five years.
Seven - The seventh graph used information from the Consolidated Balance
Sheets to illustrate the growth in deposits for the last five years.
Eight - The eighth graph used information from the Consolidated Balance Sheets
to illustrate the growth in total assets for the last five years.
Nine - The nineth graph used information from the Five Year Comparison table
above to illustrate interest income, interest expense and net interest income
for the last five years.
<PAGE>
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 16, 1996.
<PAGE>
Executive Officers of Registrant
The following is a list as of March 1, 1996, 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:
<TABLE>
<CAPTION>
Family Positions and
Name Age Relationship Offices Held
<S> <C> <C> <C>
Virgil H. Moore, Jr. 70 None Senior Chairman of the Board of Directors
of FFMC and the Bank. Employed in 1954
as Assistant to President. Named
Vice President in 1955. Named
Vice President and Cashier in 1956.
Promoted to First Vice President in 1958.
Elected Director in 1959 and President in
1965. Elected Chairman and Chief Executive
Officer of the Bank, August 1980. Elected
Chairman of the Board of FFMC April,
1982. Relinquished position as Chief
Executive Officer of the Bank on December
31, 1990. Relinquished position as an officer
of the Bank on December 31, 1992. Retired
as Chairman of the Board of Directors
of the Bank on December 31. 1995. Elected
Senior Chairman of the Board of Directors of
the Bank effective December 31, 1995.
Waymon L. Hickman 61 None President and Chief Executive Officer of
FFMC. Chairman and Chief Executive
Officer 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.
</TABLE>
<PAGE>
Executive Officers of Registrant-Continued
<TABLE>
<CAPTION>
Family Positions and
Name Age Relationship Offices Held
<S> <C> <C> <C>
Thomas Randall Stevens 44 None President and Chief Operating Officer and
Director of the Bank. Director and Vice
President of FFMC. 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.
O'Neill D. Moore 64 None Senior Executive Vice President of Bank and
Secretary to the Board of Directors of
FFMC and the Bank. Employed in 1955.
Named Assistant Cashier in 1957,
and Cashier in 1958. Elected Secretary to the
Board of Directors of the Bank in 1959. In
1967 promoted to Vice President and
Cashier. Promoted to Senior Vice President
in 1973. Elected Secretary of FFMC in
1982. Elected Senior Executive
Vice President of Bank effective December
31, 1995.
David I. Wise 64 None Senior Executive Vice President, Loan
Review Officer, Security Officer and
Director of the Bank and FFMC. Employed
in 1957. Named Assistant Cashier in 1957.
Promoted to Assistant Vice President in
1961. Elected Director of the Bank in 1968.
Promoted to Senior Vice President in 1973.
Elected Director and Vice President of
FFMC in April, 1982. Named Compliance
Officer of the Bank in 1987. Named Loan
Review Officer of the Bank in 1993. Elected
Senior Executive Vice President of Bank
effective December 31, 1995.
</TABLE>
<PAGE>
Executive Officers of Registrant-Continued
<TABLE>
<CAPTION>
Family Positions and
Name Age Relationship Offices Held
<S> <C> <C> <C>
Edward A. Cox 73 None Senior Vice President and Director of
Planning and Training of the Bank and Vice
President of FFMC. Employed in 1982. In
1989 promoted to Vice President of Bank.
Elected Assistant Secretary of FFMC in
March 1987. Promoted to Senior Vice
President of the Bank in December, 1990.
Elected Vice President of FFMC in 1991.
Patricia N. McClanahan 51 None Senior Vice President and Controller/
Cashier of the Bank and Treasurer of FFMC.
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.
</TABLE>
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.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.*
(a) (1) and (2) - The response to this portion of Item 14 is
submitted as a separate section of this report.
(3) - The following exhibits are filed herewith:
(13) Annual report to stockholders
(d) Financial Statement Schedules - The response to this
portion of Item 14 is submitted as a separate section of this
report.
By-laws remain the same as those included in the Form 10-K
submitted for the fiscal year ended December 31, 1990. In
addition, a Form 8-K was completed and submitted separately
regarding a purchase that was consummated January 24, 1992.
<PAGE>
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,
President and Chief Executive Officer
(Chairman of the Board and Chief Executive Officer of the Bank)
Date March 26, 1996
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 / Thomas Randall Stevens
Thomas Randall Stevens, Vice President
(President and Chief Operating Officer of the Bank)
Date March 26, 1996
/s / Patricia N. McClanahan
Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
Date March 26, 1996
<PAGE>
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
/s/ Kenneth A. Abercrombie /s/ Sam D. Kennedy
Kenneth A. Abercrombie, Director Sam D. Kennedy, Director
Date March 26, 1996 Date March 26, 1996
/s/ James L. Bailey, Jr. /s/ Tillman Knox
James L. Bailey, Jr., Dir Tillman Knox, Director
Date March 26, 1996 Date March 26, 1996
/s/ Harlan D. Bowsher /s/ Joe E. Lancaster
Harlan D. Bowsher, Director Joe E. Lancaster, Director
Date March 26, 1996 Date March 26, 1996
/s/ H. Terry Cook, Jr. /s/ Virgil H. Moore, Jr.
H. Terry Cook, Jr., Director Virgil H. Moore, Jr., Director
Date March 26, 1996 Date March 26, 1996
/s/ W. J. Davis, Jr. /s/ Thomas Randall Stevens
W. J. Davis, Jr., Director Thomas Randall Stevens, Director
Date March 26, 1996 Date March 26, 1996
/s/ Tom Napier Gordon /s/ Dan C. Wheeler
Tom Napier Gordon, Director Dan C. Wheeler, Director
Date March 26, 1996 Date March 26, 1996
/s/ Edwin W. Halliday /s/ David I. Wise
Edwin W. Halliday, Director David I. Wise, Director
Date March 26, 1996 Date March 26, 1996
/s/ Waymon L. Hickman /s/ W. Donald Wright
Waymon L. Hickman, Director W. Donald Wright, Director
Date March 26, 1996 Date March 26, 1996
<PAGE>
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, 1995
FIRST FARMERS AND MERCHANTS CORPORATION
COLUMBIA, TENNESSEE
<PAGE>
FORM 10-K -- ITEM 14(a)(1) and (2)
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
LIST OF FINANACIAL STATEMENS AND FINANACIAL 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, 1995, are incorporated by reference in Item 8:
Consolidated balance sheets -- December 31, 1995 and 1994
Consolidated statements of income -- Years ended December 31,
1995, 1994, and 1993
Consolidated statements of cash flows -- Years ended December 31,
1995, 1994, and 1993
Notes to consolidated financial statements -- December 31, 1995
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.
<PAGE>
EXHIBIT INDEX
FIRST FARMERS AND MERCHANTS CORPORATION
Exhibit Number Title or Description
(13) Annual Report to Stockholders
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
FIRST FARMERS AND MERCHANTS CORPORATION
<PAGE>
This is a draft of the annual report to the Securities and
Exchange Commission (SEC), Form 10-K, as of December 31, 1993.
This page of manual signatures is required to be filed with one
copy of this report. Page 10 in the draft will be filed with
the other copies sent to the SEC and the Federal Reserve Bank.
Thank you for your help in completing this reporting requirement.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 31,281,072
<INT-BEARING-DEPOSITS> 634
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,269,006
<INVESTMENTS-CARRYING> 127,662,682
<INVESTMENTS-MARKET> 128,829,961
<LOANS> 291,930,311
<ALLOWANCE> (2,678,386)
<TOTAL-ASSETS> 477,035,248
<DEPOSITS> 410,778,061
<SHORT-TERM> 11,955,000
<LIABILITIES-OTHER> 5,305,712
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 34,996,475
<TOTAL-LIABILITIES-AND-EQUITY> 477,035,248
<INTEREST-LOAN> 25,857,982
<INTEREST-INVEST> 8,514,095
<INTEREST-OTHER> 121,492
<INTEREST-TOTAL> 34,493,569
<INTEREST-DEPOSIT> 15,247,875
<INTEREST-EXPENSE> 15,422,245
<INTEREST-INCOME-NET> 19,071,324
<LOAN-LOSSES> 670,000
<SECURITIES-GAINS> 1,182
<EXPENSE-OTHER> 5,006,292
<INCOME-PRETAX> 8,634,475
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,115,706
<EPS-PRIMARY> 0
<EPS-DILUTED> 4.37
<YIELD-ACTUAL> 8.84
<LOANS-NON> 5,855,849
<LOANS-PAST> 1,144
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,342,290
<CHARGE-OFFS> 555,957
<RECOVERIES> 222,053
<ALLOWANCE-CLOSE> 2,678,386
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
