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, 1996
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
incorporation or organization) (I.R.S. Employer Identification No.)
816 South Garden Street
Columbia, Tennessee 38402-1148
(Address of principal executive offices) (Zip Code)
(615) 388-3145
(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, 1997, 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, 1997. 1,400,000 shares
This filing contains 62 pages.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for 1996 Annual Stockholders Meeting of
April 15, 1997. -- Parts I and III
(2) Annual Report to Stockholders for Year Ended December 31,
1996. -- Parts I and II
KRAFTCPAs
Kraft Bros., Esstman
Patton & Harrell, PLLC
Certified Public Accountants
Member of BKR International
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Farmers and Merchants Corporation
Columbia, Tennessee
We have audited the accompanying consolidated
balance sheets of First Farmers and Merchants Corporation (the
"Corporation") and its wholly-owned subsidiary, First Farmers
and Merchants National Bank (the "Bank"), as of December 31,
1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting
principles.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
February 7, 1997
610 N. Garden Street, Suite 200
Columbia, TN 38401-3250
(615) 388-3711 * FAX 242-4152
Also in Nashville, Tennessee
<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, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,916,507 $ 31,281,706
Securities
Available for sale (amortized cost
$55,898,299 and $10,875,527 respectively) 56,141,535 11,269,006
Held to maturity (fair value $119,226,021
and $128,829,961 respectively) 118,541,750 127,662,682
Total securities - Note 2 174,683,285 138,931,688
Loans, net of unearned income - Note 3 303,732,044 291,930,311
Allowance for possible loan losses - Note 4 (2,926,063) (2,678,386)
Net loans 300,805,981 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,829,475 6,397,936
Other assets 15,094,426 11,171,993
TOTAL ASSETS $ 525,329,674 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 75,589,511 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $39,129,547; 1995 - $30,593,803) 384,983,050 343,357,525
Total deposits 460,572,561 410,778,061
Federal funds purchased 5,000,000 10,000,000
Dividends payable 714,000 630,000
Other short term liabilities 522,928 1,955,000
Accounts payable and accrued liabilities 4,119,059 4,675,712
TOTAL LIABILITIES 470,928,548 428,038,773
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 40,255,185 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax 145,941 236,086
TOTAL STOCKHOLDERS' EQUITY 54,401,126 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 525,329,674 $ 477,035,248
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year - 6,866,796 - 6,866,796
Cash dividends declared, $.98 per share - (1,372,000) - (1,372,000)
Net unrealized loss on available-for-sale
securities, net of tax - - (90,145) (90,145)
BALANCE AT DECEMBER 31, 1996 $ 14,000,000 $ 40,255,185 $ 145,941 $ 54,401,126
<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, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 27,343,817 $ 25,857,982 $ 21,130,914
Interest on investment securities
Taxable interest 6,892,118 6,179,492 7,185,169
Exempt from federal income tax 2,366,764 2,156,813 2,184,666
Dividends 256,951 177,790 204,948
9,515,833 8,514,095 9,574,783
Other interest income 223,019 121,492 111,841
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618
Interest on other short term
borrowings 94,232 174,370 93,286
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 1,300,000 670,000 660,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992
Other service fees, commissions,
and fees 745,523 300,407 336,758
Other operating income 363,430 322,634 319,466
Available for sale securities
gains (losses) - 1,182 (243,690)
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706
Net occupancy expense 1,211,067 1,279,434 1,190,678
Furniture and equipment expense 1,580,753 1,382,769 1,069,856
Deposit insurance 6,549 499,709 890,646
Loss on other real estate - 50,724 4,000
Other operating expenses 5,292,103 4,506,583 4,105,461
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,756,135 8,634,475 7,765,172
PROVISION FOR INCOME TAXES - Note 8 2,889,339 2,518,769 2,203,746
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97
<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, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,866,796 $ 6,115,706 $ 5,561,426
Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 247,677 336,096 318,639
Provision for depreciation and
amortization of premises and
equipment 685,005 645,816 589,045
Provision for depreciation of
leased equipment 521,500 - -
Amortization of deposit base
intangibles 224,212 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 553,355 641,104 678,968
Increase in cash surrender value
of life insurance contracts (111,685) (65,936) (75,287)
Deferred income taxes (161,999) (233,403) (163,907)
(Increase) decrease in
Interest receivable (125,119) (255,109) (992,872)
Other assets 307,844 912,162 344,572
Increase (decrease) in
Interest payable (494,950) 577,137 222,605
Other liabilities (61,704) 458,939 287,975
TOTAL ADJUSTMENTS 1,584,136 3,184,826 1,377,758
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,450,932 9,300,532 6,939,184
INVESTING ACTIVITIES
Proceeds from maturities, calls, and
sales of available-for-sale securities 3,020,054 7,306,453 25,152,051
Proceeds from maturities and calls of
held-to-maturity securities 56,112,000 18,848,992 5,092,000
Purchases of investment securities
Available-for-sale (48,222,295) (3,168,200) (16,942,994)
Held-to-maturity (47,364,954) (6,459,372) (19,495,987)
Net increase in loans (11,801,733) (29,236,191) (18,778,658)
Purchases of premises and equipment (1,116,543) (850,672) (418,586)
Purchase of equipment leased (2,607,500) - -
Purchase of deposit base intangibles (1,124,258) - -
Purchase of single premium life
insurance contract (785,330) - -
NET CASH USED BY INVESTING
ACTIVITIES (53,890,559) (13,558,990) (25,392,174)
FINANCING ACTIVITIES
Net increase in noninterest-bearing
and interest-bearing deposits 29,930,577 5,625,638 16,217,348
Assumption of deposit liabilities
- Note 12 19,863,923 - -
Net increase (decrease) in short
term borrowings (6,432,072) 4,355,000 7,000,000
Cash dividends (1,288,000) (1,176,000) (1,071,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,074,428 8,804,638 22,146,348
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,365,199) 4,546,180 3,693,358
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,281,706 26,735,526 23,042,168
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 27,916,507 $ 31,281,706 $ 26,735,526
<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, 1996, 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 fourteen (14)
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 and Lewisburg West 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, Columbia State
Community College, and Maury Regional Hospital.
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 fourteen (14) other banks, two (2) 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, 1996, amounted to approximately $8.9 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.
Securities
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
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 that may be sold prior to maturity
for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as 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 are included in earnings as realized losses.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are stated at their outstanding unpaid principal balances net of
any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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
loans are ninety days past-due or when a loan is considered
impaired. All loans 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 fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of foreclosure, or the property is already carried at
its estimated net realizable value, any subsequent holding 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 $450 thousand at December 31, 1996, and $483
thousand at December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
believed adequate by management to absorb estimated probable
inherent loan losses. Loan quality is monitored by Loan
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
Review, the Special Assets Committee, and the Credit
Administrator. The amount by which a loan is determined to be
impaired is added 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. The Bank's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated
value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors are considered in this evaluation. This process is
inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and
timing of future cash flows expected to be received on impaired
loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
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.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1996 - $224,212; 1995 - $168,020; and 1994 - $168,020.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $103,540,673 and
$93,101,954 at December 31, 1996 and 1995, respectively (fair
value: 1996 - $104,061,311; 1995 - $93,937,766), were pledged
to secure deposits and for other purposes as required or
permitted by law. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1996, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1996
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 26,412,520 $ 162,913 $ 63,634 $ 26,511,799
U.S. Government agencies 26,850,441 45,866 318,203 26,578,104
Other securities 2,635,338 565,044 148,750 3,051,632
$ 55,898,299 $ 773,823 $ 530,587 $ 56,141,535
Held-to-maturity securities
U.S. Treasury $ 30,504,935 $ 106,345 $ 22,080 $ 30,589,200
U.S. Government agencies 39,679,582 245,034 87,434 39,837,182
States and political subdivisions 47,538,074 700,948 283,420 47,955,602
Other securities 819,159 24,878 - 844,037
$ 118,541,750 $ 1,077,205 $ 392,934 $ 119,226,021
December 31, 1995
Available-for-sale securities
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
<FN>
<F4>
Table I - Amortized Cost and Fair Value of Investment Securities.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1996, the Corporation did not hold investment
securities of any single issuer, other than obligations of the
U.S. Treasury and other U.S. Government agencies, whose
aggregate book value exceeded ten percent of stockholders'
equity.
Table II shows the amortized cost, fair value, and weighted
yields (for tax-exempt obligations on a fully taxable basis
assuming a 34% tax rate) of investment securities at December
31, 1996, by contractual maturity. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $3,020,054, $7,306,453, and
$25,152,051 during 1996, 1995, and 1994 respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$56,112,000, $18,848,992, and $5,092,000 during 1996, 1995, and
1994 respectively. There were no gains or losses in 1996.
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.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
<S> <C> <C> <C>
Within one year $ 16,189,997 $ 16,176,499 5.6%
After one but within five years 9,171,798 9,274,000 6.3%
After five but within ten years 1,050,725 1,061,300 6.4%
U.S. Government agencies
Within one year 1,000,000 1,021,300 8.0%
After one but within five years 24,543,375 24,255,710 5.9%
After five but within ten years 1,043,738 1,038,400 6.2%
After ten years 263,328 262,694 6.1%
Other securities 2,635,338 3,051,632 8.9%
$ 55,898,299 $ 56,141,535
Held-to-maturity securities
U.S. Treasury
Within one year $ 22,067,254 $ 22,103,400 5.6%
After one but within five years 5,238,326 5,301,900 6.4%
After five but within ten years 3,199,355 3,183,900 6.0%
U.S. Government agencies
Within one year 4,504,421 4,512,100 6.1%
After one but within five years 17,076,622 17,210,700 6.4%
After five but within ten years 18,098,539 18,114,382 6.4%
States and political subdivisions
Within one year 3,015,087 3,061,625 10.0%
After one but within five years 12,976,264 13,229,979 8.1%
After five but within ten years 20,837,173 20,940,923 7.4%
After ten years 10,709,550 10,723,075 7.8%
Other securities
After one but within five years 319,159 330,087 8.0%
After five but within ten years 500,000 513,950 7.3%
$ 118,541,750 $ 119,226,021
<FN>
<F5>
Table II - Contractual Maturity of Investment Securities and
Weighted Tax Equivalent Yields
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
<CAPTION>
1996 1995
Loans secured by real estate
<S> <C> <C>
Construction and land development $ 8,751,021 $ 7,399,095
Farmland 6,923,739 7,849,137
Lines of credit 192,010 339,108
1-4 family residential property - first lien 116,905,803 111,016,393
1-4 family residential property - junior lien 6,461,497 7,177,285
Multifamily residential property 2,487,453 3,729,687
Non farm, non residential property 46,114,930 44,224,353
Subtotal 187,836,453 181,735,058
Commercial and industrial loans
Commercial and industrial 53,577,210 51,758,675
Taxable municipal loans 240,000 270,000
All other loans 748,125 88,239
Subtotal 54,565,335 52,116,914
Tax exempt municipal loans 605,933 1,485,071
Loans to individuals
Agricultural production 2,894,845 3,659,215
Lines of credit 200,903 135,230
Individuals for personal expenditures 57,897,835 53,026,209
Subtotal 60,993,583 56,820,654
304,001,304 292,157,697
Less:
Net unamortized loan origination fees (269,260) (225,368)
Unearned interest income - (2,018)
Allowance for possible loan losses (2,926,063) (2,678,386)
$ 300,805,981 $ 289,251,925
<FN>
<F6>
Table III - Loans Outstanding by Category at December 31, 1996
and 1995
</FN>
</TABLE>
<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 $ 66,689 $ 51,604 $ 25,824 $ 144,117
Variable rate loans 99,680 32,963 27,241 159,884
$ 166,369 $ 84,567 $ 53,065 $ 304,001
<FN>
<F7>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans having recorded investments of $5,136,286 at December
31, 1996, 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 $1,146,000. Interest
received on these loans during 1996 was $504,840. Impaired
loans had recorded investments of approximately $5,856,000 at
December 31, 1995.
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, 1996 and 1995, is shown in Table V that
follows.
These totals exclude loans made in the ordinary course of
business to other companies with which neither the Corporation
nor the Bank has a relationship other than the association of
one of its directors in the capacity of officer or director.
These loan transactions were made on substantially the same
terms as those prevailing at the time for comparable loans to
other persons. They did not involve more than the normal risk
of collectiblity or present other unfavorable features. No
related party loans were charged off in 1996 or 1995.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
1996
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,808,932 $ 7,706,004
<FN>
<F8>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 2,678,386 $ 2,342,290 $ 2,023,651
Provision charged to operating expenses 1,300,000 670,000 660,000
Loan losses:
Loans charged off (1,388,422) (555,957) (422,831)
Recoveries on loans previously
charged off 336,099 222,053 81,470
Balance at end of year $ 2,926,063 $ 2,678,386 $ 2,342,290
<FN>
<F9>
Table VI - Changes in the Allowance for Possible Loan Losses
</FN>
</TABLE>
In the opinion of management, based on conditions reasonably
known, the allowance was adequate at December 31, 1996.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 1,348,288 $ 1,204,288
Premises 7,013,942 6,648,329
Furniture and equipment 4,068,373 3,949,617
Leasehold improvements 1,149,732 879,695
13,580,335 12,681,929
Less allowance for depreciation and amortization (6,750,860) (6,283,993)
$ 6,829,475 $ 6,397,936
</TABLE>
Annual provisions for depreciation and amortization of bank
premises and equipment total $685,005 for 1996, $645,816 for
1995, and $589,045 for 1994. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling $2,590,066 at December 31,
1996.
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, 1996, additional dividends of approximately $14,800,000
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 2013. 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 $726,337,
$660,121, and $409,764 for equipment leases, and $112,384,
$111,649, and $97,966 for building leases, in 1996, 1995, and
1994, respectively. Future minimum lease commitments as of
December 31, 1996, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<S> <S> <C>
1997 $ 784,704
1998 714,848
1999 383,334
2000 123,758
2001 123,758
Total future minimum lease payments $ 2,130,402
<FN>
<F9>
Table VIII - Future Minimum Lease Commitments
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 2,422,550 $ 2,166,566 $ 1,831,848
State 628,788 585,606 503,433
Total current 3,051,338 2,752,172 2,335,281
Deferred:
Federal (137,700) (198,393) (111,805)
State (24,299) (35,010) (19,730)
Total deferred (161,999) (233,403) (131,535)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
<FN>
<F10>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses $ 914,386 $ 815,315 $ 682,877
Write-down of other real estate 177,120 177,120 159,120
Deferred compensation 336,255 256,139 156,227
Direct lease financing - - 36,452
Unrealized loss on AFS securities - - 32,372
Deferred loan fees 26,863 44,051 24,546
Deferred tax asset 1,454,624 1,292,625 1,091,594
Unrealized gain on AFS securities (97,294) (157,392) -
Deferred tax liability (97,294) (157,392) -
Net deferred tax asset $ 1,357,330 $ 1,135,233 $ 1,091,594
<FN>
<F11>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,317,086 $ 2,935,722 $ 2,640,158
Increase (decrease) in taxes resulting from:
Tax-exempt interest (859,383) (783,011) (780,946)
Nondeductible interest expense 101,534 89,491 75,019
Other nondeductible expenses
(nontaxable income) - net (21,170) (28,114) (6,458)
State income taxes, net of federal
tax benefit 398,963 363,393 319,244
Dividend income exclusion (34,855) (18,324) (29,571)
Other (12,836) (40,388) (13,700)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
Effective tax rate 29.6% 29.2% 28.4%
<FN>
<F12>
Table XI - Reconciliation of Total Income Taxes Reported with
the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
Total income taxes paid in 1996, 1995, and 1994 amounted to
$3,140,000, $2,756,442 and $2,431,332, respectively.
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.
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1996,
were $25,605,000 and $2,283,000, 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
Interest paid on deposits and other borrowings during 1996,
1995, and 1994 amounted to $17,206,708, $14,845,107, and
$12,641,299, respectively.
NOTE 11 - 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. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1996 and 1995,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 1996, the Bank's calculated risk-adjusted
capital ratios exceeded the minimum standard for a "well
capitalized" bank and this classification is confirmed by the
most recent notification from the Office of the Comptroller of
the Currency. There are no conditions or events since that
notification that management believes have changed the
institution's category. Actual capital amounts and ratios are
presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<s > <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 56,004,592 18.69% 23,972,003 8.00% 29,965,004 10.00%
Bank 55,472,014 18.55% 23,923,241 8.00% 29,904,051 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 53,078,528 17.71% 11,986,300 4.00% 17,979,450 6.00%
Bank 52,545,950 17.57% 11,962,652 4.00% 17,943,978 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 52,066,624 10.36% 20,107,993 4.00% 25,134,992 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted
Assets) Consolidated 51,162,164 17.87% 22,901,838 8.00% 28,627,297 10.00%
Bank 50,682,365 17.74% 22,855,632 8.00% 28,569,541 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 48,483,778 16.94% 11,450,919 4.00% 17,176,378 6.00%
Bank 48,003,979 16.80% 11,429,519 4.00% 17,144,278 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 46,754,542 10.08% 18,549,574 4.00% 23,186,967 5.00%
Bank 45,891,248 9.91% 18,523,208 4.00% 23,154,010 5.00%
<FN>
<F13>
Table XII - Capital Amounts and Capital Adequacy
</FN>
</TABLE>
NOTE 12 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a non-profit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $661,307, $633,459 and $602,010, in 1996, 1995, and
1994, respectively, are included in salaries and employee
benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1996 - $620,657; 1995 - $594,221) purchased
in 1993 to fund the plan and the related liability (1996 -
$513,792; 1995 - $482,272) were included in other assets and
other liabilities, respectively. Net non-cash income recognized
on these policies of $26,436 in 1996 and $14,133 in 1995 is
included in the above asset values. The principal cost of the
plan is being accrued over the anticipated remaining period of
active employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $64,024 in
1996, $106,066 in 1995, and $98,925 in 1994.
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 $172,871 for 1996, $176,727
for 1995, and $126,262 for 1994 are 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. Net non-cash income recognized on these policies
of $85,249 in 1996 and $51,803 in 1995 is included in the cash
surrender values of $1,887,171 and $1,801,922 reported in other
assets at December 31, 1996 and 1995, respectively.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. An insurance premium of $795,000 was
paid in November, 1996, of which $785,330 is the cash surrender
value at December 31, 1996, and is included in other assets, and
net expense of $9,670 is included in other operating expense.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replace- ment/split dollar plan. These
policies have an aggregate face amount of $2,875,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,917 $ 27,917 $ 31,282 $ 31,282
Securities held to maturity 118,542 119,226 127,663 128,830
Securities available for sale 55,898 56,142 10,876 11,269
Loans, net 300,806 309,401 289,252 298,076
Accrued interest receivable 5,549 5,549 5,424 5,424
Financial liabilities
Deposits 460,573 449,129 410,778 398,296
Federal funds purchased 5,000 5,000 10,000 10,000
Short term borrowings 523 523 1,955 1,955
Accrued interest payable 2,539 2,539 3,034 3,034
<FN>
<F14>
Table XIII - Summary of Fair Values of Financial Instruments
</FN>
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying 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, 1996, 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996
<S> <C> <C> <C> <C> <C>
Interest income $ 9,052,224 $ 9,280,303 $ 9,249,133 $ 9,501,009 $37,082,669
Interest expense 3,989,386 4,153,059 4,260,324 4,308,988 16,711,757
Net interest income 5,062,838 5,127,244 4,988,809 5,192,021 20,370,912
Provision for possible loan
losses 250,000 300,000 200,000 550,000 1,300,000
Noninterest expenses, net of
noninterest income 2,327,604 2,234,505 2,335,349 2,417,319 9,314,777
Income before income taxes 2,485,234 2,592,739 2,453,460 2,224,702 9,756,135
Income taxes 777,319 776,659 694,636 640,725 2,889,339
Net income $ 1,707,915 $ 1,816,080 $ 1,758,824 $ 1,583,977 $ 6,866,796
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.30 $ 1.25 $ 1.13 $ 4.90
</TABLE>
<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
<FN>
<F15>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fifteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,509 - % $ 56,730 - % $ 55,557 - %
NOW and money market accounts 158,450 3.37 149,016 3.51 161,244 3.25
Savings deposits 37,421 3.22 34,629 3.00 35,036 2.87
Time deposits of less than $100,000 151,952 5.40 136,568 5.30 126,523 4.27
Time deposits of $100,000 or more 34,539 5.41 32,524 5.35 26,053 4.32
Total In Domestic Offices $ 443,871 3.74% $ 409,467 3.72% $ 404,413 3.66%
<FN>
<F16>
Table XV - Average Amounts of Deposits and Average Rates Paid by
Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 11,680 $ 7,877 $ 3,117
3 to 12 months 22,638 18,407 18,250
Over 12 months 4,812 4,310 4,803
$ 39,130 $ 30,594 $ 26,170
<FN>
<F17>
Table XVI - Maturities of Time Deposits of $100,00 or More at
December 31
</FN>
</TABLE>
NOTE 17- CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
December 31, 1996 and 1995
(In Thousands of Dollars)
Assets 1996 1995
<S> <C> <C>
Cash $ 142 $ 70
Investment in bank subsidiary - at equity 53,870 48,517
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 22
Dividends receivable from bank subsidiary 714 630
Cash surrender value - life insurance 489 466
Other assets 1 1
Total assets $ 55,288 $ 49,756
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 173 $ 129
Dividends payable 714 630
Total liabilities 887 759
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 40,255 34,761
Net unrealized gain (loss) on available-for-sale
securities, net of tax 146 236
Total stockholders' equity 54,401 48,997
Total liabilities and stockholders' equity $ 55,288 $ 49,756
<FN>
<F18>
Table XVII - Condensed Balance Sheets of Parent
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 1,372 $ 1,232
Other dividend income 85 22
Interest income 6 2
Other 28 27
Operating expenses 68 87
Income before equity in undistributed net
income of bank subsidiary 1,423 1,196
Equity in undistributed net income of bank
subsidiary 5,444 4,920
Net Income $ 6,867 $ 6,116
<FN>
<F19>
Table XVIII - Condensed Statements of Income of Parent
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating activities
<S> <C> <C>
Net income for the year $ 6,867 $ 6,116
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (5,444) (4,920)
Increase in other assets (111) (69)
Increase in payables 44 54
Total adjustments (5,511) (4,935)
Net cash provided by operating activities 1,356 1,181
Net cash provided by (used in) investing activities
Purchases of investment securities (133) -
Proceeds from maturities of investment securities 137 -
Net cash provided by (used in) investing activities 4 -
Net cash used in financing activities
Cash dividends paid (1,288) (1,176)
Increase (decrease) in cash 72 5
Cash at beginning of year 70 65
Cash at end of year $ 142 $ 70
<FN>
<F20>
Table XIX - Condensed Statements of Cash Flows of Parent
</FN>
</TABLE>
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 1996, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits and loans in each of the
four counties increased. Internal growth was the challenge for
the year to all directors, officers, and employees who were
reminded that the bank was large enough to perform yet small
enough to care about customer needs. The Bank is positioned to
provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the
quality service of a community bank and the safety and strength
of a regional bank.
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 1996, 1995, and 1994; 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.
Summary
The Bank reported net income of $6.9 million for 1996 compared
to $6.1 million in 1995 and $5.6 million in 1994. On a per
common share basis, net income was $4.90 for 1996 versus $4.37
for 1995 and $3.97 for 1994. The improvement in 1996's earnings
resulted from a wider gross margin, an increase in noninterest
income sufficient to cover a smaller increase in noninterest
expenses, and the increase in taxes. The smaller increase in
noninterest expenses is due in part to the significant decrease
in deposit insurance. These improve- ments were partially
offset by higher additions to the allowance for loan losses.
The return on average equity for 1996 was 13.23% compared to
13.08% for 1995 and 13.30% for 1994. The return on average
assets was 1.37% for 1996 versus 1.32% for 1995 and 1.23% for
1994.
Gross Interest Margin
The gross interest margin is defined as the difference between
the revenue from earning assets, primarily interest income, and
interest expense related to interest-bearing liabilities. The
maintenance of the gross interest margin at a level which, when
coupled with noninterest revenues, is sufficient to cover
additions to the allowance for loan losses, noninterest expenses
and income taxes, and yield an acceptable profit is critical for
success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and
interest-bearing liabilities and the yields earned and rates
paid on those balances.
Management activities are planned to maintain a satisfactory
spread between the yields on earning assets and the related cost
of interest-bearing funds. The gross interest spread is
determined by comparing the taxable equivalent gross interest
margin to average earning assets before deducting the allowance
for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by
interest-bearing sources and those which incur no interest cost
(primarily noninterest-bearing demand deposits). This ratio is
most often used when analyzing a banking institution's overall
gross margin profitability compared to that of other financial
institutions. The incremental interest spread compares the
difference between the yields on earning assets and the cost of
interest-bearing funds. This calculation and similar ratios are
used to assist in pricing decisions for interest related
products.
Table A entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
presents for each of the last three years by major categories of
assets and liabilities, the average daily balances, the
components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross
interest spread.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $290,413 9.43% $ 27,373* $276,166 9.38% $ 25,892* $247,791 8.54% $ 21,156*
Bank time deposits 1 - - 2 - - - - -
Taxable securities 118,030 6.15 7,256 104,220 6.20 6,457 119,960 6.25 7,497
Tax exempt securities 44,158 7.10 3,134* 39,139 8.06 3,156* 38,545 8.49 3,274*
Federal funds sold 4,198 5.31 223 2,076 5.83 121 2,998 3.73 112
TOTAL EARNING ASSETS 456,800 8.32 $ 37,986 421,603 8.45 $ 35,626 409,294 7.83 $ 32,039
Noninterest earning assets
Cash and due from banks 25,760 24,829 25,945
Bank premises and equipment 6,708 6,246 6,350
Other assets 13,432 11,061 10,364
TOTAL ASSETS $502,700 $463,739 $451,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $158,438 3.37% $ 5,338 $148,993 3.51% $ 5,223 $161,244 3.25% $ 5,239
Savings 37,428 3.22 1,204 34,627 3.00 1,040 35,036 2.87 1,006
Time 151,973 5.40 8,210 136,605 5.30 7,245 126,523 4.27 5,400
Time over $100,000 34,554 5.40 1,866 32,522 5.35 1,740 26,053 4.32 1,126
TOTAL INTEREST BEARING
DEPOSITS 382,393 4.35 16,618 352,747 4.32 15,248 348,856 3.66 12,771
Federal funds purchased 1,043 5.56 58 2,415 5.92 143 1,462 4.86 71
Other short-term debt 622 5.79 36 565 5.49 31 568 3.92 22
TOTAL INTEREST BEARING
LIABILITIES 384,058 4.35 $ 16,712 355,727 4.34 $ 15,422 350,886 3.67 $ 12,864
Noninterest bearing liabilities
Demand deposits 61,509 56,742 55,557
Other liabilities 5,066 4,515 3,690
TOTAL LIABILITIES 450,633 416,984 410,133
Stockholders' equity 52,067 46,755 41,820
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $502,700 $463,739 $451,953
Spread between combined
rates earned and combined
rates paid* 3.97% 4.11% 4.16%
Net yield on interest-
earning assets* 4.66% 4.79% 4.68%
<FN>
<F21>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
2. The taxable equivalent adjustment has been computed based on
a 34% federal income tax rate and has given effect to the
disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets. Loans include
nonaccrual loans for all years presented.
3. The average balances of the fair values of available-for-sale
securities were used in the calculations in this table.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE B - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
Table B sets forth, for the periods indicated, a summary of
changes in interest earned and interest paid separated into the
amount generated by volume changes and the amount generated by
changes in the yield or rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Volume and Yield/Rate Variances Yield/ Net Increase Yield/ Net Increase
(Taxable Equivalent Basis - In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 1,336 $ 145 $ 1,481 $ 2,423 $ 2,313 $ 4,736
Investment securities
Taxable securities 856 (57) 799 (984) (56) (1,040)
Tax-free securities 405 (427) (22) 50 (168) (118)
Federal funds sold 124 (22) 102 (34) 43 9
Total interest earning assets 2,721 (361) 2,360 1,455 2,132 3,587
Interest paid on
NOW and money market accounts 331 (216) 115 (398) 382 (16)
Savings deposits 84 80 164 (12) 46 34
Time deposits 815 150 965 430 1,415 1,845
Time over $100,000 109 17 126 279 335 614
Federal funds purchased (81) (4) (85) 46 26 72
Short term debt 3 2 5 - 9 9
Total interest-bearing funds 1,261 29 1,290 345 2,213 2,558
Net interest earnings $ 1,460 $ (390) $ 1,070 $ 1,110 $ (81) $ 1,029
</TABLE>
Notes:
1. The change in interest resulting from both volume and
yield/rate has been allocated to change due to volume and change
due to yield/rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
2. The computation of the taxable equivalent adjustment has
given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
3. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our stock-
holders. The first graph illustrates the categories of average earning
assets and the portion each category is of the total for the
last three years. The following table is the data illustrated
by this graph.
<TABLE>
<CAPTION>
Loans Investment Securities Other
<S> <C> <C> <C>
1996 $290,413 $162,188 $4,199
1995 276,166 143,358 2,078
1994 247,791 158,505 2,998
</TABLE>
The second graph illustrates the average balances by category of
liabilities that fund earning assets. The following table is
the data illustrated by this graph in thousands of dollars.
<TABLE>
<CAPTION>
Interest-Bearing Deposits Noninterest-Bearing Deposits Other
<S> <C> <C> <C>
1996 $382,393 $61,509 $1,043
1995 352,747 56,742 2,415
1994 348,856 55,557 1,462
</TABLE>
Average earning assets increased 8.4% in 1996 compared to an
3.0% increase in 1995 and a 7.6% increase in 1994. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1996, average net loans represented
63.6% of average earning assets. Total average net loans
increased during the last three years showing an 5.2% growth
from 1995 to 1996, an 11.5% growth from 1994 to 1995, and a 6.1%
growth from 1993 to 1994. Average investments represented 36.4%
of average earning assets at December 31, 1996, and increased
14.5% in 1996. The Bank purchased certain assets and assumed
certain deposit liabilities of the Mt. Pleasant, Maury County,
Tennessee, and Lewisburg, Marshall County, Tennessee, branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The assets purchased were buildings and equipment and not
earning assets. Most of the increase in investments can be
attributed to the assumption of those deposit liabilities that
were not used for the increasing loan growth. Investments
decreased 9.6% in 1995, and increased 11.6% in 1994. Average
total assets increased during the last three years as evidenced
by an 8.4% growth from 1995 to 1996, a 2.6% growth from 1994 to
1995, and a 7.4% growth from 1993 to 1994. Please refer to the
color graphs at the end of this document that illustrate this
growth.
The bank's average deposits grew during the last three years
reflecting an 8.4% growth from 1995 to 1996, a 1.3% growth from
1994 to 1995, and a 6.8% growth from 1993 to 1994.
Approximately half of the increase in average deposits can be
attributed to the acquisition discussed earlier in this section.
Short and medium term rates were more competitive compared to
longer term rates during the first half of 1996 and some
depositors moved money back into interest-bearing transaction
accounts, which increased 6.3% during 1996 but had declined in
1995 as investors took advantage of higher certificate of
deposit rates. Over half of the increase during 1996 was
attributable to the acquisition. Average interest-bearing
checking accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994. Average savings deposits increased 8.1%
during 1996, over 54% from the acquisition. Savings deposits
have been strong historically providing a core, low cost, source
of funding. Average savings deposits declined 1.2% in 1995
compared to a 12.2% increase in 1994. Average certificates of
deposit under $100,000 increased 11.3% during 1996, 60.0% from
the acquisition, increased 8.0% in 1995, and declined 1.2.% in
1994. Certificates of deposit over $100,000 increased 6.3% in
1996, 87.8% from the acquisition, compared to a 24.8% increase
in 1995 and a 10.4% increase in 1994.
<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
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1996, 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 negative dollar change in net
interest income for a twelve month period of less than 3% of net
interest income given a three hundred basis point shift in
interest rates is considered an acceptable rate risk position.
The net interest margin, on a tax equivalent basis, at December
31, 1996, 1995, and 1994 was 4.66%, 4.79%, and 4.68%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1996 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Loans and leases, net of unearned $ 58,045 $ 42,594 $ 65,730 $ 137,632 $ 304,001
Taxable investment securities 13,855 10,000 13,500 90,061 127,416
Tax-exempt investment securities 1,000 1,100 900 44,271 47,271
Total earning assets 72,900 53,694 80,130 271,964 $ 478,688
Interest-bearing liabilities
NOW and money market accounts 45,590 - 64,588 43,136 $ 153,314
Savings - - 41,594 - 41,594
Time 41,547 33,805 50,657 25,077 151,086
Time over $100,000 11,680 9,813 12,825 4,812 39,130
Other short-term debt 5,523 - - - 5,523
Total interest bearing liabilities 104,340 43,618 169,664 73,025 $ 390,647
Noninterest-bearing, net (88,041)
Net asset/liability funding gap (31,440) 10,076 (89,534) 110,898
Cumulative net asset/liability
funding gap $ (31,440) $ (21,364) $(110,898) $ -
<FN>
<F22>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include loan
review procedures and approvals. Depending primarily on the
amount of the loan, there are various approval levels including
an Executive Committee of the Board of Directors that meets
weekly.
The Bank has a Loan Review Department which performs ongoing,
independent reviews of specific loans for credit quality and
proper documentation. This department is centralized and
independent of the lending function. Regular reports are made
to senior management and the Executive Committee of the Board of
Directors regarding the credit quality of the loan portfolio, as
well as trends. Every loan is assigned a risk rating by the
loan officer subject to review by Loan Review. The Bank also
has a Credit Administrator who is responsible for assisting loan
officers in structuring new loans, reviewing problem loans,
monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a
formal review that is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the
allowance for loans losses. This review supported management's
assertion that the allowance was adequate at December 31, 1996.
Table D, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all
loans management considers to be potential problem loans,
summarizes average loan balances, and reconciles the allowance
for loan losses for each year. Additions to the allowance,
which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
Loans having recorded investments of $5.1 million at December
31, 1996, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 1.7% of gross loans.
Commercial loans comprised $.384 million of the total, with
loans secured by real estate accounting for $3.6 million, and
installment loans $1.1 million. The gross interest income that
would have been recorded during 1996 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 $374, $365, and $193 thousand for
the years ended December 31, 1996, 1995, and 1994 respectively.
Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this
material for more information on the Bank's policy regarding
loan impairment.
A graph on the bottom of this page is included in the materials
sent to the stockholders that illustrates the increase in
average net loans and the ratio of net loan charge offs to
average loans for the last eight years. The ratio at December
31, 1996 was .36%. This ratio, although higher than 1994 and
1995 ratios, is well below industry levels. The following
table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1989 $163,003 0.0032%
1990 172,749 0.0030
1991 182,561 0.0037
1992 215,158 0.0023
1993 233,608 0.0030
1994 247,791 0.0014
1995 276,166 0.0012
1996 290,413 0.0036
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 290,413 $ 276,166 $ 247,791 $ 233,608 $ 215,158
Balance of allowance for possible loan
losses at beginning of year $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Loans charged-off:
Loans secured by real estate 368 15 135 396 245
Commercial and industrial loans 141 170 42 222 124
Individuals 879 371 246 230 249
TOTAL LOANS CHARGED OFF 1,388 556 423 848 618
Recoveries of loans previously charged off:
Loans secured by real estate 111 97 9 56 3
Commercial and industrial loans 42 14 36 52 80
Individuals 183 111 36 40 32
TOTAL RECOVERIES 336 222 81 148 115
NET LOANS CHARGED-OFF 1,052 334 342 700 503
Provision charged to operating expenses 1,300 670 660 470 840
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Ratio of net charge-offs during the
period to average loans outstanding 0.36% 0.12% 0.14% 0.30% 0.23%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1996, the Corporation had a ratio of
average capital to average assets of 10.36%. This compares to a
ratio of average capital to average assets of 10.08% at December
31, 1995, and 9.25% at December 31, 1994.
Cash dividends declared in 1996 were 11.4% more than those paid
in 1995. The dividend to net income ratio was 20%. Additional
dividends of approximately $14.8 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.
As of December 31, 1996, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 17.7% and 18.7% respectively. One
year earlier, the comparable ratios were 16.9% and 17.9%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to
our stockholders, illustrates the average equity of the Corporation
for the last six years. The following table is the data illustrated
by this graph in thousands of dollars.
<TABLE>
<S> <C>
1990 $27,358
1991 30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
</TABLE>
<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 7.5% in 1996 due to a wider
gross margin that was enhanced by loan growth in all the market
areas the Bank serves. Interest and fees earned on loans
increased 5.8% in 1996 accounting for 73.7% of gross interest
income. Interest earned on investment securities and other
investments increased 12.8% in 1996 rounding out gross interest
income contributing 26.3%. Total interest income increased
11.9% in 1995 and 7.3% in 1994.
Interest Expense
Total interest expense increased 8.4% in 1996 due mostly to the
increase in interest-bearing deposits, about half of which can
be attributed to the acquisition indicated earlier. This
increase compares favorably to a 19.9% increase in 1995 and a
6.9% increase in 1994. The cost of interest-bearing deposits
remained steady all year under monthly monitoring by the
Asset/Liability Committee. This contributed to the wider gross
margin achieved during 1996. The net interest margin (tax
equivalent net interest income divided by average earning
assets) was 4.7% at the end of 1996 compared to 4.8% in 1995 and
4.7% in 1994.
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 28.4% during 1996 led by the
increase in service charges from new and acquired customers.
This compares to a 14.9% increase in 1995 and a 1.6% increase in
1994. Use of the Bank's 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. Income
from fiduciary services provided in the Bank's Trust Department
remained strong.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1996 and the percentage each category is of the total.
The following table is the data illustrated by this graph in
thousands of dollars.
<TABLE>
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,324 22.8%
Service fees on deposits 3,374 58.1%
Other service fees 746 12.8%
Other 363 6.3%
</TABLE>
Noninterest expenses, excluding the provision for possible
loan losses, increased 5.8% in 1996 which is a much smaller
increase than the 6.2% increase in 1995. The increase in 1994
was 5.4% for a smaller corporation. 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 $6 thousand in 1996 compared to $500 thousand in 1995 and
$891 thousand in 1994. Please refer to the discussion in the
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
expense in 1996 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,031 46.5%
Occupancy 1,211 8.0%
Furniture and equipment 1,581 10.5%
FDIC insurance 7 0%
Other 5,292 35.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - FIVE YEAR COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $27,343,817 $25,857,982 $21,130,914 $19,518,742 $19,791,548
Income on investment securities
Taxable interest 6,892,118 6,179,492 7,012,626 6,925,404 6,898,114
Exempt from federal income tax 2,366,764 2,156,813 2,184,666 1,857,168 1,825,869
Dividends 256,951 177,790 204,948 72,054 110,874
9,515,833 8,514,095 9,402,240 8,854,626 8,834,857
Other interest income 223,019 121,492 284,384 347,287 195,744
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538 28,720,655 28,822,149
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618 11,998,235 13,329,557
Interest on other short term
borrowings 94,232 174,370 93,286 38,339 47,449
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904 12,036,574 13,377,006
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634 16,684,081 15,445,143
PROVISION FOR POSSIBLE LOAN LOSSES 1,300,000 670,000 660,000 470,000 840,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634 16,214,081 14,605,143
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359 863,952 753,239
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992 2,206,026 2,123,096
Other service fees, commissions,
and fees 745,523 300,407 336,758 509,009 401,618
Other operating income 363,430 322,634 319,466 315,108 191,363
Available for sale securities
gains (losses) - 1,182 (243,690) 23,896 28,434
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885 3,917,991 3,497,750
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706 5,686,965 5,283,086
Net occupancy expense 1,211,067 1,279,434 1,190,678 1,070,971 984,650
Furniture and equipment expense 1,580,753 1,382,769 1,069,856 889,848 801,453
Loss on other real estate - 50,724 4,000 103,122 312,064
Other operating expenses 5,298,652 5,006,292 4,996,107 4,903,949 4,460,696
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347 12,654,855 11,841,949
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,756,135 8,634,475 7,765,172 7,477,217 6,260,944
PROVISION FOR INCOME TAXES 2,889,339 2,518,769 2,203,746 2,220,965 1,768,840
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
</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 12.3% higher in 1996 than in 1995. As indicated
earlier, the improvement in 1996's earnings resulted from a
wider gross margin, an increase in noninterest income sufficient
to cover a smaller increase in noninterest expenses, and the
increase in taxes. The smaller increase in noninterest expenses
is due in part to the significant decrease in deposit insurance.
These improvements were partially offset by higher additions to
the allowance for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has not been adopted by the Bank but is required
to adopted after December 31, 1996. The Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" establishes guidance on when to recognize and
how to measure these financial assets and liabilities. The
statement is effective prospectively for transfers and servicing
of financial assets and extinguishment of liabilities occurring
after December 31, 1996. It supersedes Statement No. 122,
"Accounting for Mortgage Servicing Rights", which was effective
for fiscal years beginning after December 15, 1995. Management
does not believe this statement will have any material effect on
future issues.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1996, had a
market value of $91 million and were held by 1,525 identifiable
individuals located mostly in the market area. A small number
of additional shareholders are not identified individually since
some bank nominees, including the bank's Trust Department, are
listed as single owners when, in fact, these holdings represent
large numbers of shareholders. No single shareholder's
ownership exceeded five percent at year end.
There is no established public trading market for the stock.
The table on the right 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>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
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
First quarter $ 56.00 $ 56.00 $
Second quarter 58.00 56.00 0.47
1996 Third quarter 63.00 60.00
Fourth quarter 65.00 63.00 0.51
$ 0.98
</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)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 502,700 $ 463,739 $ 451,953 $ 420,760 $ 381,379
AVERAGE LOANS (NET) $ 290,413 $ 276,166 $ 247,791 $ 233,609 $ 215,158
AVERAGE DEPOSITS $ 443,902 $ 409,489 $ 404,412 $ 378,782 $ 343,128
RETURN ON EQUITY AND ASSETS
Return on average assets 1.37% 1.32% 1.23% 1.25% 1.18%
Return on beginning equity 14.06% 13.95% 14.11% 14.93% 14.21%
Average equity to
average assets 10.36% 10.08% 9.25% 8.90% 8.76%
COMMON DIVIDEND PAYOUT RATIO
Earnings per share $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
Cash dividends per share $ 0.98 $ 0.88 $ 0.80 $ 0.73 $ 0.64
Ratio 20% 20% 20% 19% 20%
</TABLE>
<TABLE>
NET INTEREST MARGIN
(In Thousands of Dollars)
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
(TAX EQUIVALENT) $ 37,985 $ 35,626 $ 32,039 $ 29,465 $ 29,564
INTEREST EXPENSE 16,712 15,422 12,864 12,037 13,377
$ 21,273 $ 20,204 $ 19,175 $ 17,428 $ 16,187
NET INTEREST MARGIN* 4.66% 4.79% 4.68% 4.58% 4.67%
<FN>
<F23>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
<PAGE>
Nine color graphs are included on the following page in the
materials sent to our stockholders. The first one illustrates
net income for the last five years using information taken from
the "FIVE YEAR COMPARISON" table included above. The second one
illustrates return on average assets for the last five years
using information from the "COMPARATIVE DATA" table on the
previous page. The third, fourth and fifth graphs illustrate
return on stockholders' equity, earnings per share with cash
dividends and stockholder's equity for the last five years.
The sixth graph illustrates average net loans for the last five
years. The seventh and eighth graphs illustrate deposits and
assets for the last five years. The information for these
graphs was taken from the "COMPARATIVE DATA" table on the
previous page. The final graph which illustrates net interest
income for the last five years was taken from the net interest
margin section in the "COMPARATIVE DATA" table on the previous
page.
Employees
FFMC has no employees. Its subsidiary, the Bank had
approximately two hundred and four (204) full time employees and
fifty-five (55) 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, 1996, included: (1) a 16.88 acre truck stop located at the
Bucksnort exit of I-40 and (2) a one-tenth interest in
approximately one hundred acres known as Town Center, located in
the southern part of the town of Spring Hill, in northern Maury
County, Tennessee on US 31 Highway. The properties are not
depreciated.
<TABLE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,916,507 $ 31,281,706
Securities
Available for sale (amortized cost
$55,898,299 and $10,875,527 respectively) 56,141,535 11,269,006
Held to maturity (fair value $119,226,021
and $128,829,961 respectively) 118,541,750 127,662,682
Total securities - Note 2 174,683,285 138,931,688
Loans, net of unearned income - Note 3 303,732,044 291,930,311
Allowance for possible loan losses - Note 4 (2,926,063) (2,678,386)
Net loans 300,805,981 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,829,475 6,397,936
Other assets 15,094,426 11,171,993
TOTAL ASSETS $ 525,329,674 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 75,589,511 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $39,129,547; 1995 - $30,593,803) 384,983,050 343,357,525
Total deposits 460,572,561 410,778,061
Federal funds purchased 5,000,000 10,000,000
Dividends payable 714,000 630,000
Other short term liabilities 522,928 1,955,000
Accounts payable and accrued liabilities 4,119,059 4,675,712
TOTAL LIABILITIES 470,928,548 428,038,773
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 40,255,185 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax 145,941 236,086
TOTAL STOCKHOLDERS' EQUITY 54,401,126 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 525,329,674 $ 477,035,248
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year - 6,866,796 - 6,866,796
Cash dividends declared, $.98 per share - (1,372,000) - (1,372,000)
Net unrealized loss on available-for-sale
securities, net of tax - - (90,145) (90,145)
BALANCE AT DECEMBER 31, 1996 $ 14,000,000 $ 40,255,185 $ 145,941 $ 54,401,126
<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, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 27,343,817 $ 25,857,982 $ 21,130,914
Interest on investment securities
Taxable interest 6,892,118 6,179,492 7,185,169
Exempt from federal income tax 2,366,764 2,156,813 2,184,666
Dividends 256,951 177,790 204,948
9,515,833 8,514,095 9,574,783
Other interest income 223,019 121,492 111,841
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618
Interest on other short term
borrowings 94,232 174,370 93,286
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 1,300,000 670,000 660,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992
Other service fees, commissions,
and fees 745,523 300,407 336,758
Other operating income 363,430 322,634 319,466
Available for sale securities
gains (losses) - 1,182 (243,690)
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706
Net occupancy expense 1,211,067 1,279,434 1,190,678
Furniture and equipment expense 1,580,753 1,382,769 1,069,856
Deposit insurance 6,549 499,709 890,646
Loss on other real estate - 50,724 4,000
Other operating expenses 5,292,103 4,506,583 4,105,461
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,756,135 8,634,475 7,765,172
PROVISION FOR INCOME TAXES - Note 8 2,889,339 2,518,769 2,203,746
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97
<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, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,866,796 $ 6,115,706 $ 5,561,426
Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 247,677 336,096 318,639
Provision for depreciation and
amortization of premises and
equipment 685,005 645,816 589,045
Provision for depreciation of
leased equipment 521,500 - -
Amortization of deposit base
intangibles 224,212 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 553,355 641,104 678,968
Increase in cash surrender value
of life insurance contracts (111,685) (65,936) (75,287)
Deferred income taxes (161,999) (233,403) (163,907)
(Increase) decrease in
Interest receivable (125,119) (255,109) (992,872)
Other assets 307,844 912,162 344,572
Increase (decrease) in
Interest payable (494,950) 577,137 222,605
Other liabilities (61,704) 458,939 287,975
TOTAL ADJUSTMENTS 1,584,136 3,184,826 1,377,758
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,450,932 9,300,532 6,939,184
INVESTING ACTIVITIES
Proceeds from maturities, calls, and
sales of available-for-sale securities 3,020,054 7,306,453 25,152,051
Proceeds from maturities and calls of
held-to-maturity securities 56,112,000 18,848,992 5,092,000
Purchases of investment securities
Available-for-sale (48,222,295) (3,168,200) (16,942,994)
Held-to-maturity (47,364,954) (6,459,372) (19,495,987)
Net increase in loans (11,801,733) (29,236,191) (18,778,658)
Purchases of premises and equipment (1,116,543) (850,672) (418,586)
Purchase of equipment leased (2,607,500) - -
Purchase of deposit base intangibles (1,124,258) - -
Purchase of single premium life
insurance contract (785,330) - -
NET CASH USED BY INVESTING
ACTIVITIES (53,890,559) (13,558,990) (25,392,174)
FINANCING ACTIVITIES
Net increase in noninterest-bearing
and interest-bearing deposits 29,930,577 5,625,638 16,217,348
Assumption of deposit liabilities
- Note 12 19,863,923 - -
Net increase (decrease) in short
term borrowings (6,432,072) 4,355,000 7,000,000
Cash dividends (1,288,000) (1,176,000) (1,071,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,074,428 8,804,638 22,146,348
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,365,199) 4,546,180 3,693,358
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,281,706 26,735,526 23,042,168
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 27,916,507 $ 31,281,706 $ 26,735,526
<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, 1996, 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 fourteen (14)
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 and Lewisburg West 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, Columbia State
Community College, and Maury Regional Hospital.
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 fourteen (14) other banks, two (2) 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, 1996, amounted to approximately $8.9 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.
Securities
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
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 that may be sold prior to maturity
for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as 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 are included in earnings as realized losses.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are stated at their outstanding unpaid principal balances net of
any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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
loans are ninety days past-due or when a loan is considered
impaired. All loans 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 fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of foreclosure, or the property is already carried at
its estimated net realizable value, any subsequent holding 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 $450 thousand at December 31, 1996, and $483
thousand at December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
believed adequate by management to absorb estimated probable
inherent loan losses. Loan quality is monitored by Loan
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
Review, the Special Assets Committee, and the Credit
Administrator. The amount by which a loan is determined to be
impaired is added 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. The Bank's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated
value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors are considered in this evaluation. This process is
inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and
timing of future cash flows expected to be received on impaired
loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
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.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1996 - $224,212; 1995 - $168,020; and 1994 - $168,020.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $103,540,673 and
$93,101,954 at December 31, 1996 and 1995, respectively (fair
value: 1996 - $104,061,311; 1995 - $93,937,766), were pledged
to secure deposits and for other purposes as required or
permitted by law. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1996, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1996
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 26,412,520 $ 162,913 $ 63,634 $ 26,511,799
U.S. Government agencies 26,850,441 45,866 318,203 26,578,104
Other securities 2,635,338 565,044 148,750 3,051,632
$ 55,898,299 $ 773,823 $ 530,587 $ 56,141,535
Held-to-maturity securities
U.S. Treasury $ 30,504,935 $ 106,345 $ 22,080 $ 30,589,200
U.S. Government agencies 39,679,582 245,034 87,434 39,837,182
States and political subdivisions 47,538,074 700,948 283,420 47,955,602
Other securities 819,159 24,878 - 844,037
$ 118,541,750 $ 1,077,205 $ 392,934 $ 119,226,021
December 31, 1995
Available-for-sale securities
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
<FN>
<F4>
Table I - Amortized Cost and Fair Value of Investment Securities.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1996, the Corporation did not hold investment
securities of any single issuer, other than obligations of the
U.S. Treasury and other U.S. Government agencies, whose
aggregate book value exceeded ten percent of stockholders'
equity.
Table II shows the amortized cost, fair value, and weighted
yields (for tax-exempt obligations on a fully taxable basis
assuming a 34% tax rate) of investment securities at December
31, 1996, by contractual maturity. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $3,020,054, $7,306,453, and
$25,152,051 during 1996, 1995, and 1994 respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$56,112,000, $18,848,992, and $5,092,000 during 1996, 1995, and
1994 respectively. There were no gains or losses in 1996.
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.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
<S> <C> <C> <C>
Within one year $ 16,189,997 $ 16,176,499 5.6%
After one but within five years 9,171,798 9,274,000 6.3%
After five but within ten years 1,050,725 1,061,300 6.4%
U.S. Government agencies
Within one year 1,000,000 1,021,300 8.0%
After one but within five years 24,543,375 24,255,710 5.9%
After five but within ten years 1,043,738 1,038,400 6.2%
After ten years 263,328 262,694 6.1%
Other securities 2,635,338 3,051,632 8.9%
$ 55,898,299 $ 56,141,535
Held-to-maturity securities
U.S. Treasury
Within one year $ 22,067,254 $ 22,103,400 5.6%
After one but within five years 5,238,326 5,301,900 6.4%
After five but within ten years 3,199,355 3,183,900 6.0%
U.S. Government agencies
Within one year 4,504,421 4,512,100 6.1%
After one but within five years 17,076,622 17,210,700 6.4%
After five but within ten years 18,098,539 18,114,382 6.4%
States and political subdivisions
Within one year 3,015,087 3,061,625 10.0%
After one but within five years 12,976,264 13,229,979 8.1%
After five but within ten years 20,837,173 20,940,923 7.4%
After ten years 10,709,550 10,723,075 7.8%
Other securities
After one but within five years 319,159 330,087 8.0%
After five but within ten years 500,000 513,950 7.3%
$ 118,541,750 $ 119,226,021
<FN>
<F5>
Table II - Contractual Maturity of Investment Securities and
Weighted Tax Equivalent Yields
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
<CAPTION>
1996 1995
Loans secured by real estate
<S> <C> <C>
Construction and land development $ 8,751,021 $ 7,399,095
Farmland 6,923,739 7,849,137
Lines of credit 192,010 339,108
1-4 family residential property - first lien 116,905,803 111,016,393
1-4 family residential property - junior lien 6,461,497 7,177,285
Multifamily residential property 2,487,453 3,729,687
Non farm, non residential property 46,114,930 44,224,353
Subtotal 187,836,453 181,735,058
Commercial and industrial loans
Commercial and industrial 53,577,210 51,758,675
Taxable municipal loans 240,000 270,000
All other loans 748,125 88,239
Subtotal 54,565,335 52,116,914
Tax exempt municipal loans 605,933 1,485,071
Loans to individuals
Agricultural production 2,894,845 3,659,215
Lines of credit 200,903 135,230
Individuals for personal expenditures 57,897,835 53,026,209
Subtotal 60,993,583 56,820,654
304,001,304 292,157,697
Less:
Net unamortized loan origination fees (269,260) (225,368)
Unearned interest income - (2,018)
Allowance for possible loan losses (2,926,063) (2,678,386)
$ 300,805,981 $ 289,251,925
<FN>
<F6>
Table III - Loans Outstanding by Category at December 31, 1996
and 1995
</FN>
</TABLE>
<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 $ 66,689 $ 51,604 $ 25,824 $ 144,117
Variable rate loans 99,680 32,963 27,241 159,884
$ 166,369 $ 84,567 $ 53,065 $ 304,001
<FN>
<F7>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans having recorded investments of $5,136,286 at December
31, 1996, 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 $1,146,000. Interest
received on these loans during 1996 was $504,840. Impaired
loans had recorded investments of approximately $5,856,000 at
December 31, 1995.
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, 1996 and 1995, is shown in Table V that
follows.
These totals exclude loans made in the ordinary course of
business to other companies with which neither the Corporation
nor the Bank has a relationship other than the association of
one of its directors in the capacity of officer or director.
These loan transactions were made on substantially the same
terms as those prevailing at the time for comparable loans to
other persons. They did not involve more than the normal risk
of collectiblity or present other unfavorable features. No
related party loans were charged off in 1996 or 1995.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
1996
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,808,932 $ 7,706,004
<FN>
<F8>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 2,678,386 $ 2,342,290 $ 2,023,651
Provision charged to operating expenses 1,300,000 670,000 660,000
Loan losses:
Loans charged off (1,388,422) (555,957) (422,831)
Recoveries on loans previously
charged off 336,099 222,053 81,470
Balance at end of year $ 2,926,063 $ 2,678,386 $ 2,342,290
<FN>
<F9>
Table VI - Changes in the Allowance for Possible Loan Losses
</FN>
</TABLE>
In the opinion of management, based on conditions reasonably
known, the allowance was adequate at December 31, 1996.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 1,348,288 $ 1,204,288
Premises 7,013,942 6,648,329
Furniture and equipment 4,068,373 3,949,617
Leasehold improvements 1,149,732 879,695
13,580,335 12,681,929
Less allowance for depreciation and amortization (6,750,860) (6,283,993)
$ 6,829,475 $ 6,397,936
</TABLE>
Annual provisions for depreciation and amortization of bank
premises and equipment total $685,005 for 1996, $645,816 for
1995, and $589,045 for 1994. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling $2,590,066 at December 31,
1996.
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, 1996, additional dividends of approximately $14,800,000
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 2013. 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 $726,337,
$660,121, and $409,764 for equipment leases, and $112,384,
$111,649, and $97,966 for building leases, in 1996, 1995, and
1994, respectively. Future minimum lease commitments as of
December 31, 1996, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<S> <S> <C>
1997 $ 784,704
1998 714,848
1999 383,334
2000 123,758
2001 123,758
Total future minimum lease payments $ 2,130,402
<FN>
<F9>
Table VIII - Future Minimum Lease Commitments
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 2,422,550 $ 2,166,566 $ 1,831,848
State 628,788 585,606 503,433
Total current 3,051,338 2,752,172 2,335,281
Deferred:
Federal (137,700) (198,393) (111,805)
State (24,299) (35,010) (19,730)
Total deferred (161,999) (233,403) (131,535)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
<FN>
<F10>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses $ 914,386 $ 815,315 $ 682,877
Write-down of other real estate 177,120 177,120 159,120
Deferred compensation 336,255 256,139 156,227
Direct lease financing - - 36,452
Unrealized loss on AFS securities - - 32,372
Deferred loan fees 26,863 44,051 24,546
Deferred tax asset 1,454,624 1,292,625 1,091,594
Unrealized gain on AFS securities (97,294) (157,392) -
Deferred tax liability (97,294) (157,392) -
Net deferred tax asset $ 1,357,330 $ 1,135,233 $ 1,091,594
<FN>
<F11>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,317,086 $ 2,935,722 $ 2,640,158
Increase (decrease) in taxes resulting from:
Tax-exempt interest (859,383) (783,011) (780,946)
Nondeductible interest expense 101,534 89,491 75,019
Other nondeductible expenses
(nontaxable income) - net (21,170) (28,114) (6,458)
State income taxes, net of federal
tax benefit 398,963 363,393 319,244
Dividend income exclusion (34,855) (18,324) (29,571)
Other (12,836) (40,388) (13,700)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
Effective tax rate 29.6% 29.2% 28.4%
<FN>
<F12>
Table XI - Reconciliation of Total Income Taxes Reported with
the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
Total income taxes paid in 1996, 1995, and 1994 amounted to
$3,140,000, $2,756,442 and $2,431,332, respectively.
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.
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1996,
were $25,605,000 and $2,283,000, 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
Interest paid on deposits and other borrowings during 1996,
1995, and 1994 amounted to $17,206,708, $14,845,107, and
$12,641,299, respectively.
NOTE 11 - 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. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1996 and 1995,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 1996, the Bank's calculated risk-adjusted
capital ratios exceeded the minimum standard for a "well
capitalized" bank and this classification is confirmed by the
most recent notification from the Office of the Comptroller of
the Currency. There are no conditions or events since that
notification that management believes have changed the
institution's category. Actual capital amounts and ratios are
presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<s > <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 56,004,592 18.69% 23,972,003 8.00% 29,965,004 10.00%
Bank 55,472,014 18.55% 23,923,241 8.00% 29,904,051 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 53,078,528 17.71% 11,986,300 4.00% 17,979,450 6.00%
Bank 52,545,950 17.57% 11,962,652 4.00% 17,943,978 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 52,066,624 10.36% 20,107,993 4.00% 25,134,992 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted
Assets) Consolidated 51,162,164 17.87% 22,901,838 8.00% 28,627,297 10.00%
Bank 50,682,365 17.74% 22,855,632 8.00% 28,569,541 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 48,483,778 16.94% 11,450,919 4.00% 17,176,378 6.00%
Bank 48,003,979 16.80% 11,429,519 4.00% 17,144,278 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 46,754,542 10.08% 18,549,574 4.00% 23,186,967 5.00%
Bank 45,891,248 9.91% 18,523,208 4.00% 23,154,010 5.00%
<FN>
<F13>
Table XII - Capital Amounts and Capital Adequacy
</FN>
</TABLE>
NOTE 12 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a non-profit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $661,307, $633,459 and $602,010, in 1996, 1995, and
1994, respectively, are included in salaries and employee
benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1996 - $620,657; 1995 - $594,221) purchased
in 1993 to fund the plan and the related liability (1996 -
$513,792; 1995 - $482,272) were included in other assets and
other liabilities, respectively. Net non-cash income recognized
on these policies of $26,436 in 1996 and $14,133 in 1995 is
included in the above asset values. The principal cost of the
plan is being accrued over the anticipated remaining period of
active employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $64,024 in
1996, $106,066 in 1995, and $98,925 in 1994.
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 $172,871 for 1996, $176,727
for 1995, and $126,262 for 1994 are 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. Net non-cash income recognized on these policies
of $85,249 in 1996 and $51,803 in 1995 is included in the cash
surrender values of $1,887,171 and $1,801,922 reported in other
assets at December 31, 1996 and 1995, respectively.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. An insurance premium of $795,000 was
paid in November, 1996, of which $785,330 is the cash surrender
value at December 31, 1996, and is included in other assets, and
net expense of $9,670 is included in other operating expense.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replace- ment/split dollar plan. These
policies have an aggregate face amount of $2,875,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,917 $ 27,917 $ 31,282 $ 31,282
Securities held to maturity 118,542 119,226 127,663 128,830
Securities available for sale 55,898 56,142 10,876 11,269
Loans, net 300,806 309,401 289,252 298,076
Accrued interest receivable 5,549 5,549 5,424 5,424
Financial liabilities
Deposits 460,573 449,129 410,778 398,296
Federal funds purchased 5,000 5,000 10,000 10,000
Short term borrowings 523 523 1,955 1,955
Accrued interest payable 2,539 2,539 3,034 3,034
<FN>
<F14>
Table XIII - Summary of Fair Values of Financial Instruments
</FN>
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying 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, 1996, 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996
<S> <C> <C> <C> <C> <C>
Interest income $ 9,052,224 $ 9,280,303 $ 9,249,133 $ 9,501,009 $37,082,669
Interest expense 3,989,386 4,153,059 4,260,324 4,308,988 16,711,757
Net interest income 5,062,838 5,127,244 4,988,809 5,192,021 20,370,912
Provision for possible loan
losses 250,000 300,000 200,000 550,000 1,300,000
Noninterest expenses, net of
noninterest income 2,327,604 2,234,505 2,335,349 2,417,319 9,314,777
Income before income taxes 2,485,234 2,592,739 2,453,460 2,224,702 9,756,135
Income taxes 777,319 776,659 694,636 640,725 2,889,339
Net income $ 1,707,915 $ 1,816,080 $ 1,758,824 $ 1,583,977 $ 6,866,796
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.30 $ 1.25 $ 1.13 $ 4.90
</TABLE>
<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
<FN>
<F15>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fifteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,509 - % $ 56,730 - % $ 55,557 - %
NOW and money market accounts 158,450 3.37 149,016 3.51 161,244 3.25
Savings deposits 37,421 3.22 34,629 3.00 35,036 2.87
Time deposits of less than $100,000 151,952 5.40 136,568 5.30 126,523 4.27
Time deposits of $100,000 or more 34,539 5.41 32,524 5.35 26,053 4.32
Total In Domestic Offices $ 443,871 3.74% $ 409,467 3.72% $ 404,413 3.66%
<FN>
<F16>
Table XV - Average Amounts of Deposits and Average Rates Paid by
Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 11,680 $ 7,877 $ 3,117
3 to 12 months 22,638 18,407 18,250
Over 12 months 4,812 4,310 4,803
$ 39,130 $ 30,594 $ 26,170
<FN>
<F17>
Table XVI - Maturities of Time Deposits of $100,00 or More at
December 31
</FN>
</TABLE>
NOTE 17- CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
December 31, 1996 and 1995
(In Thousands of Dollars)
Assets 1996 1995
<S> <C> <C>
Cash $ 142 $ 70
Investment in bank subsidiary - at equity 53,870 48,517
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 22
Dividends receivable from bank subsidiary 714 630
Cash surrender value - life insurance 489 466
Other assets 1 1
Total assets $ 55,288 $ 49,756
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 173 $ 129
Dividends payable 714 630
Total liabilities 887 759
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 40,255 34,761
Net unrealized gain (loss) on available-for-sale
securities, net of tax 146 236
Total stockholders' equity 54,401 48,997
Total liabilities and stockholders' equity $ 55,288 $ 49,756
<FN>
<F18>
Table XVII - Condensed Balance Sheets of Parent
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 1,372 $ 1,232
Other dividend income 85 22
Interest income 6 2
Other 28 27
Operating expenses 68 87
Income before equity in undistributed net
income of bank subsidiary 1,423 1,196
Equity in undistributed net income of bank
subsidiary 5,444 4,920
Net Income $ 6,867 $ 6,116
<FN>
<F19>
Table XVIII - Condensed Statements of Income of Parent
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating activities
<S> <C> <C>
Net income for the year $ 6,867 $ 6,116
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (5,444) (4,920)
Increase in other assets (111) (69)
Increase in payables 44 54
Total adjustments (5,511) (4,935)
Net cash provided by operating activities 1,356 1,181
Net cash provided by (used in) investing activities
Purchases of investment securities (133) -
Proceeds from maturities of investment securities 137 -
Net cash provided by (used in) investing activities 4 -
Net cash used in financing activities
Cash dividends paid (1,288) (1,176)
Increase (decrease) in cash 72 5
Cash at beginning of year 70 65
Cash at end of year $ 142 $ 70
<FN>
<F20>
Table XIX - Condensed Statements of Cash Flows of Parent
</FN>
</TABLE>
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, 1996.
<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, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,916,507 $ 31,281,706
Securities
Available for sale (amortized cost
$55,898,299 and $10,875,527 respectively) 56,141,535 11,269,006
Held to maturity (fair value $119,226,021
and $128,829,961 respectively) 118,541,750 127,662,682
Total securities - Note 2 174,683,285 138,931,688
Loans, net of unearned income - Note 3 303,732,044 291,930,311
Allowance for possible loan losses - Note 4 (2,926,063) (2,678,386)
Net loans 300,805,981 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,829,475 6,397,936
Other assets 15,094,426 11,171,993
TOTAL ASSETS $ 525,329,674 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 75,589,511 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $39,129,547; 1995 - $30,593,803) 384,983,050 343,357,525
Total deposits 460,572,561 410,778,061
Federal funds purchased 5,000,000 10,000,000
Dividends payable 714,000 630,000
Other short term liabilities 522,928 1,955,000
Accounts payable and accrued liabilities 4,119,059 4,675,712
TOTAL LIABILITIES 470,928,548 428,038,773
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 40,255,185 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax 145,941 236,086
TOTAL STOCKHOLDERS' EQUITY 54,401,126 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 525,329,674 $ 477,035,248
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year - 6,866,796 - 6,866,796
Cash dividends declared, $.98 per share - (1,372,000) - (1,372,000)
Net unrealized loss on available-for-sale
securities, net of tax - - (90,145) (90,145)
BALANCE AT DECEMBER 31, 1996 $ 14,000,000 $ 40,255,185 $ 145,941 $ 54,401,126
<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, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 27,343,817 $ 25,857,982 $ 21,130,914
Interest on investment securities
Taxable interest 6,892,118 6,179,492 7,185,169
Exempt from federal income tax 2,366,764 2,156,813 2,184,666
Dividends 256,951 177,790 204,948
9,515,833 8,514,095 9,574,783
Other interest income 223,019 121,492 111,841
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618
Interest on other short term
borrowings 94,232 174,370 93,286
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 1,300,000 670,000 660,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992
Other service fees, commissions,
and fees 745,523 300,407 336,758
Other operating income 363,430 322,634 319,466
Available for sale securities
gains (losses) - 1,182 (243,690)
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706
Net occupancy expense 1,211,067 1,279,434 1,190,678
Furniture and equipment expense 1,580,753 1,382,769 1,069,856
Deposit insurance 6,549 499,709 890,646
Loss on other real estate - 50,724 4,000
Other operating expenses 5,292,103 4,506,583 4,105,461
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,756,135 8,634,475 7,765,172
PROVISION FOR INCOME TAXES - Note 8 2,889,339 2,518,769 2,203,746
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97
<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, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,866,796 $ 6,115,706 $ 5,561,426
Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 247,677 336,096 318,639
Provision for depreciation and
amortization of premises and
equipment 685,005 645,816 589,045
Provision for depreciation of
leased equipment 521,500 - -
Amortization of deposit base
intangibles 224,212 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 553,355 641,104 678,968
Increase in cash surrender value
of life insurance contracts (111,685) (65,936) (75,287)
Deferred income taxes (161,999) (233,403) (163,907)
(Increase) decrease in
Interest receivable (125,119) (255,109) (992,872)
Other assets 307,844 912,162 344,572
Increase (decrease) in
Interest payable (494,950) 577,137 222,605
Other liabilities (61,704) 458,939 287,975
TOTAL ADJUSTMENTS 1,584,136 3,184,826 1,377,758
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,450,932 9,300,532 6,939,184
INVESTING ACTIVITIES
Proceeds from maturities, calls, and
sales of available-for-sale securities 3,020,054 7,306,453 25,152,051
Proceeds from maturities and calls of
held-to-maturity securities 56,112,000 18,848,992 5,092,000
Purchases of investment securities
Available-for-sale (48,222,295) (3,168,200) (16,942,994)
Held-to-maturity (47,364,954) (6,459,372) (19,495,987)
Net increase in loans (11,801,733) (29,236,191) (18,778,658)
Purchases of premises and equipment (1,116,543) (850,672) (418,586)
Purchase of equipment leased (2,607,500) - -
Purchase of deposit base intangibles (1,124,258) - -
Purchase of single premium life
insurance contract (785,330) - -
NET CASH USED BY INVESTING
ACTIVITIES (53,890,559) (13,558,990) (25,392,174)
FINANCING ACTIVITIES
Net increase in noninterest-bearing
and interest-bearing deposits 29,930,577 5,625,638 16,217,348
Assumption of deposit liabilities
- Note 12 19,863,923 - -
Net increase (decrease) in short
term borrowings (6,432,072) 4,355,000 7,000,000
Cash dividends (1,288,000) (1,176,000) (1,071,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,074,428 8,804,638 22,146,348
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,365,199) 4,546,180 3,693,358
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,281,706 26,735,526 23,042,168
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 27,916,507 $ 31,281,706 $ 26,735,526
<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, 1996, 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 fourteen (14)
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 and Lewisburg West 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, Columbia State
Community College, and Maury Regional Hospital.
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 fourteen (14) other banks, two (2) 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, 1996, amounted to approximately $8.9 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.
Securities
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
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 that may be sold prior to maturity
for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as 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 are included in earnings as realized losses.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are stated at their outstanding unpaid principal balances net of
any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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
loans are ninety days past-due or when a loan is considered
impaired. All loans 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 fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of foreclosure, or the property is already carried at
its estimated net realizable value, any subsequent holding 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 $450 thousand at December 31, 1996, and $483
thousand at December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
believed adequate by management to absorb estimated probable
inherent loan losses. Loan quality is monitored by Loan
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
Review, the Special Assets Committee, and the Credit
Administrator. The amount by which a loan is determined to be
impaired is added 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. The Bank's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated
value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors are considered in this evaluation. This process is
inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and
timing of future cash flows expected to be received on impaired
loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
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.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1996 - $224,212; 1995 - $168,020; and 1994 - $168,020.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $103,540,673 and
$93,101,954 at December 31, 1996 and 1995, respectively (fair
value: 1996 - $104,061,311; 1995 - $93,937,766), were pledged
to secure deposits and for other purposes as required or
permitted by law. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1996, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1996
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 26,412,520 $ 162,913 $ 63,634 $ 26,511,799
U.S. Government agencies 26,850,441 45,866 318,203 26,578,104
Other securities 2,635,338 565,044 148,750 3,051,632
$ 55,898,299 $ 773,823 $ 530,587 $ 56,141,535
Held-to-maturity securities
U.S. Treasury $ 30,504,935 $ 106,345 $ 22,080 $ 30,589,200
U.S. Government agencies 39,679,582 245,034 87,434 39,837,182
States and political subdivisions 47,538,074 700,948 283,420 47,955,602
Other securities 819,159 24,878 - 844,037
$ 118,541,750 $ 1,077,205 $ 392,934 $ 119,226,021
December 31, 1995
Available-for-sale securities
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
<FN>
<F4>
Table I - Amortized Cost and Fair Value of Investment Securities.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1996, the Corporation did not hold investment
securities of any single issuer, other than obligations of the
U.S. Treasury and other U.S. Government agencies, whose
aggregate book value exceeded ten percent of stockholders'
equity.
Table II shows the amortized cost, fair value, and weighted
yields (for tax-exempt obligations on a fully taxable basis
assuming a 34% tax rate) of investment securities at December
31, 1996, by contractual maturity. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $3,020,054, $7,306,453, and
$25,152,051 during 1996, 1995, and 1994 respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$56,112,000, $18,848,992, and $5,092,000 during 1996, 1995, and
1994 respectively. There were no gains or losses in 1996.
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.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
<S> <C> <C> <C>
Within one year $ 16,189,997 $ 16,176,499 5.6%
After one but within five years 9,171,798 9,274,000 6.3%
After five but within ten years 1,050,725 1,061,300 6.4%
U.S. Government agencies
Within one year 1,000,000 1,021,300 8.0%
After one but within five years 24,543,375 24,255,710 5.9%
After five but within ten years 1,043,738 1,038,400 6.2%
After ten years 263,328 262,694 6.1%
Other securities 2,635,338 3,051,632 8.9%
$ 55,898,299 $ 56,141,535
Held-to-maturity securities
U.S. Treasury
Within one year $ 22,067,254 $ 22,103,400 5.6%
After one but within five years 5,238,326 5,301,900 6.4%
After five but within ten years 3,199,355 3,183,900 6.0%
U.S. Government agencies
Within one year 4,504,421 4,512,100 6.1%
After one but within five years 17,076,622 17,210,700 6.4%
After five but within ten years 18,098,539 18,114,382 6.4%
States and political subdivisions
Within one year 3,015,087 3,061,625 10.0%
After one but within five years 12,976,264 13,229,979 8.1%
After five but within ten years 20,837,173 20,940,923 7.4%
After ten years 10,709,550 10,723,075 7.8%
Other securities
After one but within five years 319,159 330,087 8.0%
After five but within ten years 500,000 513,950 7.3%
$ 118,541,750 $ 119,226,021
<FN>
<F5>
Table II - Contractual Maturity of Investment Securities and
Weighted Tax Equivalent Yields
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
<CAPTION>
1996 1995
Loans secured by real estate
<S> <C> <C>
Construction and land development $ 8,751,021 $ 7,399,095
Farmland 6,923,739 7,849,137
Lines of credit 192,010 339,108
1-4 family residential property - first lien 116,905,803 111,016,393
1-4 family residential property - junior lien 6,461,497 7,177,285
Multifamily residential property 2,487,453 3,729,687
Non farm, non residential property 46,114,930 44,224,353
Subtotal 187,836,453 181,735,058
Commercial and industrial loans
Commercial and industrial 53,577,210 51,758,675
Taxable municipal loans 240,000 270,000
All other loans 748,125 88,239
Subtotal 54,565,335 52,116,914
Tax exempt municipal loans 605,933 1,485,071
Loans to individuals
Agricultural production 2,894,845 3,659,215
Lines of credit 200,903 135,230
Individuals for personal expenditures 57,897,835 53,026,209
Subtotal 60,993,583 56,820,654
304,001,304 292,157,697
Less:
Net unamortized loan origination fees (269,260) (225,368)
Unearned interest income - (2,018)
Allowance for possible loan losses (2,926,063) (2,678,386)
$ 300,805,981 $ 289,251,925
<FN>
<F6>
Table III - Loans Outstanding by Category at December 31, 1996
and 1995
</FN>
</TABLE>
<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 $ 66,689 $ 51,604 $ 25,824 $ 144,117
Variable rate loans 99,680 32,963 27,241 159,884
$ 166,369 $ 84,567 $ 53,065 $ 304,001
<FN>
<F7>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans having recorded investments of $5,136,286 at December
31, 1996, 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 $1,146,000. Interest
received on these loans during 1996 was $504,840. Impaired
loans had recorded investments of approximately $5,856,000 at
December 31, 1995.
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, 1996 and 1995, is shown in Table V that
follows.
These totals exclude loans made in the ordinary course of
business to other companies with which neither the Corporation
nor the Bank has a relationship other than the association of
one of its directors in the capacity of officer or director.
These loan transactions were made on substantially the same
terms as those prevailing at the time for comparable loans to
other persons. They did not involve more than the normal risk
of collectiblity or present other unfavorable features. No
related party loans were charged off in 1996 or 1995.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
1996
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,808,932 $ 7,706,004
<FN>
<F8>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 2,678,386 $ 2,342,290 $ 2,023,651
Provision charged to operating expenses 1,300,000 670,000 660,000
Loan losses:
Loans charged off (1,388,422) (555,957) (422,831)
Recoveries on loans previously
charged off 336,099 222,053 81,470
Balance at end of year $ 2,926,063 $ 2,678,386 $ 2,342,290
<FN>
<F9>
Table VI - Changes in the Allowance for Possible Loan Losses
</FN>
</TABLE>
In the opinion of management, based on conditions reasonably
known, the allowance was adequate at December 31, 1996.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 1,348,288 $ 1,204,288
Premises 7,013,942 6,648,329
Furniture and equipment 4,068,373 3,949,617
Leasehold improvements 1,149,732 879,695
13,580,335 12,681,929
Less allowance for depreciation and amortization (6,750,860) (6,283,993)
$ 6,829,475 $ 6,397,936
</TABLE>
Annual provisions for depreciation and amortization of bank
premises and equipment total $685,005 for 1996, $645,816 for
1995, and $589,045 for 1994. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling $2,590,066 at December 31,
1996.
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, 1996, additional dividends of approximately $14,800,000
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 2013. 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 $726,337,
$660,121, and $409,764 for equipment leases, and $112,384,
$111,649, and $97,966 for building leases, in 1996, 1995, and
1994, respectively. Future minimum lease commitments as of
December 31, 1996, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<S> <S> <C>
1997 $ 784,704
1998 714,848
1999 383,334
2000 123,758
2001 123,758
Total future minimum lease payments $ 2,130,402
<FN>
<F9>
Table VIII - Future Minimum Lease Commitments
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 2,422,550 $ 2,166,566 $ 1,831,848
State 628,788 585,606 503,433
Total current 3,051,338 2,752,172 2,335,281
Deferred:
Federal (137,700) (198,393) (111,805)
State (24,299) (35,010) (19,730)
Total deferred (161,999) (233,403) (131,535)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
<FN>
<F10>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses $ 914,386 $ 815,315 $ 682,877
Write-down of other real estate 177,120 177,120 159,120
Deferred compensation 336,255 256,139 156,227
Direct lease financing - - 36,452
Unrealized loss on AFS securities - - 32,372
Deferred loan fees 26,863 44,051 24,546
Deferred tax asset 1,454,624 1,292,625 1,091,594
Unrealized gain on AFS securities (97,294) (157,392) -
Deferred tax liability (97,294) (157,392) -
Net deferred tax asset $ 1,357,330 $ 1,135,233 $ 1,091,594
<FN>
<F11>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,317,086 $ 2,935,722 $ 2,640,158
Increase (decrease) in taxes resulting from:
Tax-exempt interest (859,383) (783,011) (780,946)
Nondeductible interest expense 101,534 89,491 75,019
Other nondeductible expenses
(nontaxable income) - net (21,170) (28,114) (6,458)
State income taxes, net of federal
tax benefit 398,963 363,393 319,244
Dividend income exclusion (34,855) (18,324) (29,571)
Other (12,836) (40,388) (13,700)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
Effective tax rate 29.6% 29.2% 28.4%
<FN>
<F12>
Table XI - Reconciliation of Total Income Taxes Reported with
the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
Total income taxes paid in 1996, 1995, and 1994 amounted to
$3,140,000, $2,756,442 and $2,431,332, respectively.
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.
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1996,
were $25,605,000 and $2,283,000, 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
Interest paid on deposits and other borrowings during 1996,
1995, and 1994 amounted to $17,206,708, $14,845,107, and
$12,641,299, respectively.
NOTE 11 - 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. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1996 and 1995,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 1996, the Bank's calculated risk-adjusted
capital ratios exceeded the minimum standard for a "well
capitalized" bank and this classification is confirmed by the
most recent notification from the Office of the Comptroller of
the Currency. There are no conditions or events since that
notification that management believes have changed the
institution's category. Actual capital amounts and ratios are
presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<s > <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 56,004,592 18.69% 23,972,003 8.00% 29,965,004 10.00%
Bank 55,472,014 18.55% 23,923,241 8.00% 29,904,051 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 53,078,528 17.71% 11,986,300 4.00% 17,979,450 6.00%
Bank 52,545,950 17.57% 11,962,652 4.00% 17,943,978 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 52,066,624 10.36% 20,107,993 4.00% 25,134,992 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted
Assets) Consolidated 51,162,164 17.87% 22,901,838 8.00% 28,627,297 10.00%
Bank 50,682,365 17.74% 22,855,632 8.00% 28,569,541 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 48,483,778 16.94% 11,450,919 4.00% 17,176,378 6.00%
Bank 48,003,979 16.80% 11,429,519 4.00% 17,144,278 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 46,754,542 10.08% 18,549,574 4.00% 23,186,967 5.00%
Bank 45,891,248 9.91% 18,523,208 4.00% 23,154,010 5.00%
<FN>
<F13>
Table XII - Capital Amounts and Capital Adequacy
</FN>
</TABLE>
NOTE 12 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a non-profit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $661,307, $633,459 and $602,010, in 1996, 1995, and
1994, respectively, are included in salaries and employee
benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1996 - $620,657; 1995 - $594,221) purchased
in 1993 to fund the plan and the related liability (1996 -
$513,792; 1995 - $482,272) were included in other assets and
other liabilities, respectively. Net non-cash income recognized
on these policies of $26,436 in 1996 and $14,133 in 1995 is
included in the above asset values. The principal cost of the
plan is being accrued over the anticipated remaining period of
active employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $64,024 in
1996, $106,066 in 1995, and $98,925 in 1994.
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 $172,871 for 1996, $176,727
for 1995, and $126,262 for 1994 are 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. Net non-cash income recognized on these policies
of $85,249 in 1996 and $51,803 in 1995 is included in the cash
surrender values of $1,887,171 and $1,801,922 reported in other
assets at December 31, 1996 and 1995, respectively.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. An insurance premium of $795,000 was
paid in November, 1996, of which $785,330 is the cash surrender
value at December 31, 1996, and is included in other assets, and
net expense of $9,670 is included in other operating expense.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replace- ment/split dollar plan. These
policies have an aggregate face amount of $2,875,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,917 $ 27,917 $ 31,282 $ 31,282
Securities held to maturity 118,542 119,226 127,663 128,830
Securities available for sale 55,898 56,142 10,876 11,269
Loans, net 300,806 309,401 289,252 298,076
Accrued interest receivable 5,549 5,549 5,424 5,424
Financial liabilities
Deposits 460,573 449,129 410,778 398,296
Federal funds purchased 5,000 5,000 10,000 10,000
Short term borrowings 523 523 1,955 1,955
Accrued interest payable 2,539 2,539 3,034 3,034
<FN>
<F14>
Table XIII - Summary of Fair Values of Financial Instruments
</FN>
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying 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, 1996, 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996
<S> <C> <C> <C> <C> <C>
Interest income $ 9,052,224 $ 9,280,303 $ 9,249,133 $ 9,501,009 $37,082,669
Interest expense 3,989,386 4,153,059 4,260,324 4,308,988 16,711,757
Net interest income 5,062,838 5,127,244 4,988,809 5,192,021 20,370,912
Provision for possible loan
losses 250,000 300,000 200,000 550,000 1,300,000
Noninterest expenses, net of
noninterest income 2,327,604 2,234,505 2,335,349 2,417,319 9,314,777
Income before income taxes 2,485,234 2,592,739 2,453,460 2,224,702 9,756,135
Income taxes 777,319 776,659 694,636 640,725 2,889,339
Net income $ 1,707,915 $ 1,816,080 $ 1,758,824 $ 1,583,977 $ 6,866,796
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.30 $ 1.25 $ 1.13 $ 4.90
</TABLE>
<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
<FN>
<F15>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fifteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,509 - % $ 56,730 - % $ 55,557 - %
NOW and money market accounts 158,450 3.37 149,016 3.51 161,244 3.25
Savings deposits 37,421 3.22 34,629 3.00 35,036 2.87
Time deposits of less than $100,000 151,952 5.40 136,568 5.30 126,523 4.27
Time deposits of $100,000 or more 34,539 5.41 32,524 5.35 26,053 4.32
Total In Domestic Offices $ 443,871 3.74% $ 409,467 3.72% $ 404,413 3.66%
<FN>
<F16>
Table XV - Average Amounts of Deposits and Average Rates Paid by
Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 11,680 $ 7,877 $ 3,117
3 to 12 months 22,638 18,407 18,250
Over 12 months 4,812 4,310 4,803
$ 39,130 $ 30,594 $ 26,170
<FN>
<F17>
Table XVI - Maturities of Time Deposits of $100,00 or More at
December 31
</FN>
</TABLE>
NOTE 17- CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
December 31, 1996 and 1995
(In Thousands of Dollars)
Assets 1996 1995
<S> <C> <C>
Cash $ 142 $ 70
Investment in bank subsidiary - at equity 53,870 48,517
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 22
Dividends receivable from bank subsidiary 714 630
Cash surrender value - life insurance 489 466
Other assets 1 1
Total assets $ 55,288 $ 49,756
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 173 $ 129
Dividends payable 714 630
Total liabilities 887 759
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 40,255 34,761
Net unrealized gain (loss) on available-for-sale
securities, net of tax 146 236
Total stockholders' equity 54,401 48,997
Total liabilities and stockholders' equity $ 55,288 $ 49,756
<FN>
<F18>
Table XVII - Condensed Balance Sheets of Parent
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 1,372 $ 1,232
Other dividend income 85 22
Interest income 6 2
Other 28 27
Operating expenses 68 87
Income before equity in undistributed net
income of bank subsidiary 1,423 1,196
Equity in undistributed net income of bank
subsidiary 5,444 4,920
Net Income $ 6,867 $ 6,116
<FN>
<F19>
Table XVIII - Condensed Statements of Income of Parent
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating activities
<S> <C> <C>
Net income for the year $ 6,867 $ 6,116
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (5,444) (4,920)
Increase in other assets (111) (69)
Increase in payables 44 54
Total adjustments (5,511) (4,935)
Net cash provided by operating activities 1,356 1,181
Net cash provided by (used in) investing activities
Purchases of investment securities (133) -
Proceeds from maturities of investment securities 137 -
Net cash provided by (used in) investing activities 4 -
Net cash used in financing activities
Cash dividends paid (1,288) (1,176)
Increase (decrease) in cash 72 5
Cash at beginning of year 70 65
Cash at end of year $ 142 $ 70
<FN>
<F20>
Table XIX - Condensed Statements of Cash Flows of Parent
</FN>
</TABLE>
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 1996, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits and loans in each of the
four counties increased. Internal growth was the challenge for
the year to all directors, officers, and employees who were
reminded that the bank was large enough to perform yet small
enough to care about customer needs. The Bank is positioned to
provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the
quality service of a community bank and the safety and strength
of a regional bank.
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 1996, 1995, and 1994; 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.
Summary
The Bank reported net income of $6.9 million for 1996 compared
to $6.1 million in 1995 and $5.6 million in 1994. On a per
common share basis, net income was $4.90 for 1996 versus $4.37
for 1995 and $3.97 for 1994. The improvement in 1996's earnings
resulted from a wider gross margin, an increase in noninterest
income sufficient to cover a smaller increase in noninterest
expenses, and the increase in taxes. The smaller increase in
noninterest expenses is due in part to the significant decrease
in deposit insurance. These improve- ments were partially
offset by higher additions to the allowance for loan losses.
The return on average equity for 1996 was 13.23% compared to
13.08% for 1995 and 13.30% for 1994. The return on average
assets was 1.37% for 1996 versus 1.32% for 1995 and 1.23% for
1994.
Gross Interest Margin
The gross interest margin is defined as the difference between
the revenue from earning assets, primarily interest income, and
interest expense related to interest-bearing liabilities. The
maintenance of the gross interest margin at a level which, when
coupled with noninterest revenues, is sufficient to cover
additions to the allowance for loan losses, noninterest expenses
and income taxes, and yield an acceptable profit is critical for
success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and
interest-bearing liabilities and the yields earned and rates
paid on those balances.
Management activities are planned to maintain a satisfactory
spread between the yields on earning assets and the related cost
of interest-bearing funds. The gross interest spread is
determined by comparing the taxable equivalent gross interest
margin to average earning assets before deducting the allowance
for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by
interest-bearing sources and those which incur no interest cost
(primarily noninterest-bearing demand deposits). This ratio is
most often used when analyzing a banking institution's overall
gross margin profitability compared to that of other financial
institutions. The incremental interest spread compares the
difference between the yields on earning assets and the cost of
interest-bearing funds. This calculation and similar ratios are
used to assist in pricing decisions for interest related
products.
Table A entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
presents for each of the last three years by major categories of
assets and liabilities, the average daily balances, the
components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross
interest spread.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $290,413 9.43% $ 27,373* $276,166 9.38% $ 25,892* $247,791 8.54% $ 21,156*
Bank time deposits 1 - - 2 - - - - -
Taxable securities 118,030 6.15 7,256 104,220 6.20 6,457 119,960 6.25 7,497
Tax exempt securities 44,158 7.10 3,134* 39,139 8.06 3,156* 38,545 8.49 3,274*
Federal funds sold 4,198 5.31 223 2,076 5.83 121 2,998 3.73 112
TOTAL EARNING ASSETS 456,800 8.32 $ 37,986 421,603 8.45 $ 35,626 409,294 7.83 $ 32,039
Noninterest earning assets
Cash and due from banks 25,760 24,829 25,945
Bank premises and equipment 6,708 6,246 6,350
Other assets 13,432 11,061 10,364
TOTAL ASSETS $502,700 $463,739 $451,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $158,438 3.37% $ 5,338 $148,993 3.51% $ 5,223 $161,244 3.25% $ 5,239
Savings 37,428 3.22 1,204 34,627 3.00 1,040 35,036 2.87 1,006
Time 151,973 5.40 8,210 136,605 5.30 7,245 126,523 4.27 5,400
Time over $100,000 34,554 5.40 1,866 32,522 5.35 1,740 26,053 4.32 1,126
TOTAL INTEREST BEARING
DEPOSITS 382,393 4.35 16,618 352,747 4.32 15,248 348,856 3.66 12,771
Federal funds purchased 1,043 5.56 58 2,415 5.92 143 1,462 4.86 71
Other short-term debt 622 5.79 36 565 5.49 31 568 3.92 22
TOTAL INTEREST BEARING
LIABILITIES 384,058 4.35 $ 16,712 355,727 4.34 $ 15,422 350,886 3.67 $ 12,864
Noninterest bearing liabilities
Demand deposits 61,509 56,742 55,557
Other liabilities 5,066 4,515 3,690
TOTAL LIABILITIES 450,633 416,984 410,133
Stockholders' equity 52,067 46,755 41,820
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $502,700 $463,739 $451,953
Spread between combined
rates earned and combined
rates paid* 3.97% 4.11% 4.16%
Net yield on interest-
earning assets* 4.66% 4.79% 4.68%
<FN>
<F21>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
2. The taxable equivalent adjustment has been computed based on
a 34% federal income tax rate and has given effect to the
disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets. Loans include
nonaccrual loans for all years presented.
3. The average balances of the fair values of available-for-sale
securities were used in the calculations in this table.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE B - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
Table B sets forth, for the periods indicated, a summary of
changes in interest earned and interest paid separated into the
amount generated by volume changes and the amount generated by
changes in the yield or rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Volume and Yield/Rate Variances Yield/ Net Increase Yield/ Net Increase
(Taxable Equivalent Basis - In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 1,336 $ 145 $ 1,481 $ 2,423 $ 2,313 $ 4,736
Investment securities
Taxable securities 856 (57) 799 (984) (56) (1,040)
Tax-free securities 405 (427) (22) 50 (168) (118)
Federal funds sold 124 (22) 102 (34) 43 9
Total interest earning assets 2,721 (361) 2,360 1,455 2,132 3,587
Interest paid on
NOW and money market accounts 331 (216) 115 (398) 382 (16)
Savings deposits 84 80 164 (12) 46 34
Time deposits 815 150 965 430 1,415 1,845
Time over $100,000 109 17 126 279 335 614
Federal funds purchased (81) (4) (85) 46 26 72
Short term debt 3 2 5 - 9 9
Total interest-bearing funds 1,261 29 1,290 345 2,213 2,558
Net interest earnings $ 1,460 $ (390) $ 1,070 $ 1,110 $ (81) $ 1,029
</TABLE>
Notes:
1. The change in interest resulting from both volume and
yield/rate has been allocated to change due to volume and change
due to yield/rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
2. The computation of the taxable equivalent adjustment has
given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
3. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our stock-
holders. The first graph illustrates the categories of average earning
assets and the portion each category is of the total for the
last three years. The following table is the data illustrated
by this graph.
<TABLE>
<CAPTION>
Loans Investment Securities Other
<S> <C> <C> <C>
1996 $290,413 $162,188 $4,199
1995 276,166 143,358 2,078
1994 247,791 158,505 2,998
</TABLE>
The second graph illustrates the average balances by category of
liabilities that fund earning assets. The following table is
the data illustrated by this graph in thousands of dollars.
<TABLE>
<CAPTION>
Interest-Bearing Deposits Noninterest-Bearing Deposits Other
<S> <C> <C> <C>
1996 $382,393 $61,509 $1,043
1995 352,747 56,742 2,415
1994 348,856 55,557 1,462
</TABLE>
Average earning assets increased 8.4% in 1996 compared to an
3.0% increase in 1995 and a 7.6% increase in 1994. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1996, average net loans represented
63.6% of average earning assets. Total average net loans
increased during the last three years showing an 5.2% growth
from 1995 to 1996, an 11.5% growth from 1994 to 1995, and a 6.1%
growth from 1993 to 1994. Average investments represented 36.4%
of average earning assets at December 31, 1996, and increased
14.5% in 1996. The Bank purchased certain assets and assumed
certain deposit liabilities of the Mt. Pleasant, Maury County,
Tennessee, and Lewisburg, Marshall County, Tennessee, branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The assets purchased were buildings and equipment and not
earning assets. Most of the increase in investments can be
attributed to the assumption of those deposit liabilities that
were not used for the increasing loan growth. Investments
decreased 9.6% in 1995, and increased 11.6% in 1994. Average
total assets increased during the last three years as evidenced
by an 8.4% growth from 1995 to 1996, a 2.6% growth from 1994 to
1995, and a 7.4% growth from 1993 to 1994. Please refer to the
color graphs at the end of this document that illustrate this
growth.
The bank's average deposits grew during the last three years
reflecting an 8.4% growth from 1995 to 1996, a 1.3% growth from
1994 to 1995, and a 6.8% growth from 1993 to 1994.
Approximately half of the increase in average deposits can be
attributed to the acquisition discussed earlier in this section.
Short and medium term rates were more competitive compared to
longer term rates during the first half of 1996 and some
depositors moved money back into interest-bearing transaction
accounts, which increased 6.3% during 1996 but had declined in
1995 as investors took advantage of higher certificate of
deposit rates. Over half of the increase during 1996 was
attributable to the acquisition. Average interest-bearing
checking accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994. Average savings deposits increased 8.1%
during 1996, over 54% from the acquisition. Savings deposits
have been strong historically providing a core, low cost, source
of funding. Average savings deposits declined 1.2% in 1995
compared to a 12.2% increase in 1994. Average certificates of
deposit under $100,000 increased 11.3% during 1996, 60.0% from
the acquisition, increased 8.0% in 1995, and declined 1.2.% in
1994. Certificates of deposit over $100,000 increased 6.3% in
1996, 87.8% from the acquisition, compared to a 24.8% increase
in 1995 and a 10.4% increase in 1994.
<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
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1996, 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 negative dollar change in net
interest income for a twelve month period of less than 3% of net
interest income given a three hundred basis point shift in
interest rates is considered an acceptable rate risk position.
The net interest margin, on a tax equivalent basis, at December
31, 1996, 1995, and 1994 was 4.66%, 4.79%, and 4.68%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1996 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Loans and leases, net of unearned $ 58,045 $ 42,594 $ 65,730 $ 137,632 $ 304,001
Taxable investment securities 13,855 10,000 13,500 90,061 127,416
Tax-exempt investment securities 1,000 1,100 900 44,271 47,271
Total earning assets 72,900 53,694 80,130 271,964 $ 478,688
Interest-bearing liabilities
NOW and money market accounts 45,590 - 64,588 43,136 $ 153,314
Savings - - 41,594 - 41,594
Time 41,547 33,805 50,657 25,077 151,086
Time over $100,000 11,680 9,813 12,825 4,812 39,130
Other short-term debt 5,523 - - - 5,523
Total interest bearing liabilities 104,340 43,618 169,664 73,025 $ 390,647
Noninterest-bearing, net (88,041)
Net asset/liability funding gap (31,440) 10,076 (89,534) 110,898
Cumulative net asset/liability
funding gap $ (31,440) $ (21,364) $(110,898) $ -
<FN>
<F22>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include loan
review procedures and approvals. Depending primarily on the
amount of the loan, there are various approval levels including
an Executive Committee of the Board of Directors that meets
weekly.
The Bank has a Loan Review Department which performs ongoing,
independent reviews of specific loans for credit quality and
proper documentation. This department is centralized and
independent of the lending function. Regular reports are made
to senior management and the Executive Committee of the Board of
Directors regarding the credit quality of the loan portfolio, as
well as trends. Every loan is assigned a risk rating by the
loan officer subject to review by Loan Review. The Bank also
has a Credit Administrator who is responsible for assisting loan
officers in structuring new loans, reviewing problem loans,
monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a
formal review that is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the
allowance for loans losses. This review supported management's
assertion that the allowance was adequate at December 31, 1996.
Table D, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all
loans management considers to be potential problem loans,
summarizes average loan balances, and reconciles the allowance
for loan losses for each year. Additions to the allowance,
which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
Loans having recorded investments of $5.1 million at December
31, 1996, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 1.7% of gross loans.
Commercial loans comprised $.384 million of the total, with
loans secured by real estate accounting for $3.6 million, and
installment loans $1.1 million. The gross interest income that
would have been recorded during 1996 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 $374, $365, and $193 thousand for
the years ended December 31, 1996, 1995, and 1994 respectively.
Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this
material for more information on the Bank's policy regarding
loan impairment.
A graph on the bottom of this page is included in the materials
sent to the stockholders that illustrates the increase in
average net loans and the ratio of net loan charge offs to
average loans for the last eight years. The ratio at December
31, 1996 was .36%. This ratio, although higher than 1994 and
1995 ratios, is well below industry levels. The following
table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1989 $163,003 0.0032%
1990 172,749 0.0030
1991 182,561 0.0037
1992 215,158 0.0023
1993 233,608 0.0030
1994 247,791 0.0014
1995 276,166 0.0012
1996 290,413 0.0036
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 290,413 $ 276,166 $ 247,791 $ 233,608 $ 215,158
Balance of allowance for possible loan
losses at beginning of year $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Loans charged-off:
Loans secured by real estate 368 15 135 396 245
Commercial and industrial loans 141 170 42 222 124
Individuals 879 371 246 230 249
TOTAL LOANS CHARGED OFF 1,388 556 423 848 618
Recoveries of loans previously charged off:
Loans secured by real estate 111 97 9 56 3
Commercial and industrial loans 42 14 36 52 80
Individuals 183 111 36 40 32
TOTAL RECOVERIES 336 222 81 148 115
NET LOANS CHARGED-OFF 1,052 334 342 700 503
Provision charged to operating expenses 1,300 670 660 470 840
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Ratio of net charge-offs during the
period to average loans outstanding 0.36% 0.12% 0.14% 0.30% 0.23%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1996, the Corporation had a ratio of
average capital to average assets of 10.36%. This compares to a
ratio of average capital to average assets of 10.08% at December
31, 1995, and 9.25% at December 31, 1994.
Cash dividends declared in 1996 were 11.4% more than those paid
in 1995. The dividend to net income ratio was 20%. Additional
dividends of approximately $14.8 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.
As of December 31, 1996, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 17.7% and 18.7% respectively. One
year earlier, the comparable ratios were 16.9% and 17.9%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to
our stockholders, illustrates the average equity of the Corporation
for the last six years. The following table is the data illustrated
by this graph in thousands of dollars.
<TABLE>
<S> <C>
1990 $27,358
1991 30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
</TABLE>
<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 7.5% in 1996 due to a wider
gross margin that was enhanced by loan growth in all the market
areas the Bank serves. Interest and fees earned on loans
increased 5.8% in 1996 accounting for 73.7% of gross interest
income. Interest earned on investment securities and other
investments increased 12.8% in 1996 rounding out gross interest
income contributing 26.3%. Total interest income increased
11.9% in 1995 and 7.3% in 1994.
Interest Expense
Total interest expense increased 8.4% in 1996 due mostly to the
increase in interest-bearing deposits, about half of which can
be attributed to the acquisition indicated earlier. This
increase compares favorably to a 19.9% increase in 1995 and a
6.9% increase in 1994. The cost of interest-bearing deposits
remained steady all year under monthly monitoring by the
Asset/Liability Committee. This contributed to the wider gross
margin achieved during 1996. The net interest margin (tax
equivalent net interest income divided by average earning
assets) was 4.7% at the end of 1996 compared to 4.8% in 1995 and
4.7% in 1994.
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 28.4% during 1996 led by the
increase in service charges from new and acquired customers.
This compares to a 14.9% increase in 1995 and a 1.6% increase in
1994. Use of the Bank's 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. Income
from fiduciary services provided in the Bank's Trust Department
remained strong.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1996 and the percentage each category is of the total.
The following table is the data illustrated by this graph in
thousands of dollars.
<TABLE>
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,324 22.8%
Service fees on deposits 3,374 58.1%
Other service fees 746 12.8%
Other 363 6.3%
</TABLE>
Noninterest expenses, excluding the provision for possible
loan losses, increased 5.8% in 1996 which is a much smaller
increase than the 6.2% increase in 1995. The increase in 1994
was 5.4% for a smaller corporation. 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 $6 thousand in 1996 compared to $500 thousand in 1995 and
$891 thousand in 1994. Please refer to the discussion in the
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
expense in 1996 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,031 46.5%
Occupancy 1,211 8.0%
Furniture and equipment 1,581 10.5%
FDIC insurance 7 0%
Other 5,292 35.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - FIVE YEAR COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $27,343,817 $25,857,982 $21,130,914 $19,518,742 $19,791,548
Income on investment securities
Taxable interest 6,892,118 6,179,492 7,012,626 6,925,404 6,898,114
Exempt from federal income tax 2,366,764 2,156,813 2,184,666 1,857,168 1,825,869
Dividends 256,951 177,790 204,948 72,054 110,874
9,515,833 8,514,095 9,402,240 8,854,626 8,834,857
Other interest income 223,019 121,492 284,384 347,287 195,744
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538 28,720,655 28,822,149
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618 11,998,235 13,329,557
Interest on other short term
borrowings 94,232 174,370 93,286 38,339 47,449
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904 12,036,574 13,377,006
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634 16,684,081 15,445,143
PROVISION FOR POSSIBLE LOAN LOSSES 1,300,000 670,000 660,000 470,000 840,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634 16,214,081 14,605,143
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359 863,952 753,239
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992 2,206,026 2,123,096
Other service fees, commissions,
and fees 745,523 300,407 336,758 509,009 401,618
Other operating income 363,430 322,634 319,466 315,108 191,363
Available for sale securities
gains (losses) - 1,182 (243,690) 23,896 28,434
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885 3,917,991 3,497,750
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706 5,686,965 5,283,086
Net occupancy expense 1,211,067 1,279,434 1,190,678 1,070,971 984,650
Furniture and equipment expense 1,580,753 1,382,769 1,069,856 889,848 801,453
Loss on other real estate - 50,724 4,000 103,122 312,064
Other operating expenses 5,298,652 5,006,292 4,996,107 4,903,949 4,460,696
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347 12,654,855 11,841,949
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,756,135 8,634,475 7,765,172 7,477,217 6,260,944
PROVISION FOR INCOME TAXES 2,889,339 2,518,769 2,203,746 2,220,965 1,768,840
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
</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 12.3% higher in 1996 than in 1995. As indicated
earlier, the improvement in 1996's earnings resulted from a
wider gross margin, an increase in noninterest income sufficient
to cover a smaller increase in noninterest expenses, and the
increase in taxes. The smaller increase in noninterest expenses
is due in part to the significant decrease in deposit insurance.
These improvements were partially offset by higher additions to
the allowance for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has not been adopted by the Bank but is required
to adopted after December 31, 1996. The Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" establishes guidance on when to recognize and
how to measure these financial assets and liabilities. The
statement is effective prospectively for transfers and servicing
of financial assets and extinguishment of liabilities occurring
after December 31, 1996. It supersedes Statement No. 122,
"Accounting for Mortgage Servicing Rights", which was effective
for fiscal years beginning after December 15, 1995. Management
does not believe this statement will have any material effect on
future issues.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1996, had a
market value of $91 million and were held by 1,525 identifiable
individuals located mostly in the market area. A small number
of additional shareholders are not identified individually since
some bank nominees, including the bank's Trust Department, are
listed as single owners when, in fact, these holdings represent
large numbers of shareholders. No single shareholder's
ownership exceeded five percent at year end.
There is no established public trading market for the stock.
The table on the right 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>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
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
First quarter $ 56.00 $ 56.00 $
Second quarter 58.00 56.00 0.47
1996 Third quarter 63.00 60.00
Fourth quarter 65.00 63.00 0.51
$ 0.98
</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)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 502,700 $ 463,739 $ 451,953 $ 420,760 $ 381,379
AVERAGE LOANS (NET) $ 290,413 $ 276,166 $ 247,791 $ 233,609 $ 215,158
AVERAGE DEPOSITS $ 443,902 $ 409,489 $ 404,412 $ 378,782 $ 343,128
RETURN ON EQUITY AND ASSETS
Return on average assets 1.37% 1.32% 1.23% 1.25% 1.18%
Return on beginning equity 14.06% 13.95% 14.11% 14.93% 14.21%
Average equity to
average assets 10.36% 10.08% 9.25% 8.90% 8.76%
COMMON DIVIDEND PAYOUT RATIO
Earnings per share $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
Cash dividends per share $ 0.98 $ 0.88 $ 0.80 $ 0.73 $ 0.64
Ratio 20% 20% 20% 19% 20%
</TABLE>
<TABLE>
NET INTEREST MARGIN
(In Thousands of Dollars)
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
(TAX EQUIVALENT) $ 37,985 $ 35,626 $ 32,039 $ 29,465 $ 29,564
INTEREST EXPENSE 16,712 15,422 12,864 12,037 13,377
$ 21,273 $ 20,204 $ 19,175 $ 17,428 $ 16,187
NET INTEREST MARGIN* 4.66% 4.79% 4.68% 4.58% 4.67%
<FN>
<F23>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
<PAGE>
Nine color graphs are included on the following page in the
materials sent to our stockholders. The first one illustrates
net income for the last five years using information taken from
the "FIVE YEAR COMPARISON" table included above. The second one
illustrates return on average assets for the last five years
using information from the "COMPARATIVE DATA" table on the
previous page. The third, fourth and fifth graphs illustrate
return on stockholders' equity, earnings per share with cash
dividends and stockholder's equity for the last five years.
The sixth graph illustrates average net loans for the last five
years. The seventh and eighth graphs illustrate deposits and
assets for the last five years. The information for these
graphs was taken from the "COMPARATIVE DATA" table on the
previous page. The final graph which illustrates net interest
income for the last five years was taken from the net interest
margin section in the "COMPARATIVE DATA" table on the previous
page.
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, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,916,507 $ 31,281,706
Securities
Available for sale (amortized cost
$55,898,299 and $10,875,527 respectively) 56,141,535 11,269,006
Held to maturity (fair value $119,226,021
and $128,829,961 respectively) 118,541,750 127,662,682
Total securities - Note 2 174,683,285 138,931,688
Loans, net of unearned income - Note 3 303,732,044 291,930,311
Allowance for possible loan losses - Note 4 (2,926,063) (2,678,386)
Net loans 300,805,981 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,829,475 6,397,936
Other assets 15,094,426 11,171,993
TOTAL ASSETS $ 525,329,674 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 75,589,511 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $39,129,547; 1995 - $30,593,803) 384,983,050 343,357,525
Total deposits 460,572,561 410,778,061
Federal funds purchased 5,000,000 10,000,000
Dividends payable 714,000 630,000
Other short term liabilities 522,928 1,955,000
Accounts payable and accrued liabilities 4,119,059 4,675,712
TOTAL LIABILITIES 470,928,548 428,038,773
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 40,255,185 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax 145,941 236,086
TOTAL STOCKHOLDERS' EQUITY 54,401,126 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 525,329,674 $ 477,035,248
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year - 6,866,796 - 6,866,796
Cash dividends declared, $.98 per share - (1,372,000) - (1,372,000)
Net unrealized loss on available-for-sale
securities, net of tax - - (90,145) (90,145)
BALANCE AT DECEMBER 31, 1996 $ 14,000,000 $ 40,255,185 $ 145,941 $ 54,401,126
<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, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 27,343,817 $ 25,857,982 $ 21,130,914
Interest on investment securities
Taxable interest 6,892,118 6,179,492 7,185,169
Exempt from federal income tax 2,366,764 2,156,813 2,184,666
Dividends 256,951 177,790 204,948
9,515,833 8,514,095 9,574,783
Other interest income 223,019 121,492 111,841
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618
Interest on other short term
borrowings 94,232 174,370 93,286
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 1,300,000 670,000 660,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992
Other service fees, commissions,
and fees 745,523 300,407 336,758
Other operating income 363,430 322,634 319,466
Available for sale securities
gains (losses) - 1,182 (243,690)
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706
Net occupancy expense 1,211,067 1,279,434 1,190,678
Furniture and equipment expense 1,580,753 1,382,769 1,069,856
Deposit insurance 6,549 499,709 890,646
Loss on other real estate - 50,724 4,000
Other operating expenses 5,292,103 4,506,583 4,105,461
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,756,135 8,634,475 7,765,172
PROVISION FOR INCOME TAXES - Note 8 2,889,339 2,518,769 2,203,746
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97
<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, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,866,796 $ 6,115,706 $ 5,561,426
Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 247,677 336,096 318,639
Provision for depreciation and
amortization of premises and
equipment 685,005 645,816 589,045
Provision for depreciation of
leased equipment 521,500 - -
Amortization of deposit base
intangibles 224,212 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 553,355 641,104 678,968
Increase in cash surrender value
of life insurance contracts (111,685) (65,936) (75,287)
Deferred income taxes (161,999) (233,403) (163,907)
(Increase) decrease in
Interest receivable (125,119) (255,109) (992,872)
Other assets 307,844 912,162 344,572
Increase (decrease) in
Interest payable (494,950) 577,137 222,605
Other liabilities (61,704) 458,939 287,975
TOTAL ADJUSTMENTS 1,584,136 3,184,826 1,377,758
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,450,932 9,300,532 6,939,184
INVESTING ACTIVITIES
Proceeds from maturities, calls, and
sales of available-for-sale securities 3,020,054 7,306,453 25,152,051
Proceeds from maturities and calls of
held-to-maturity securities 56,112,000 18,848,992 5,092,000
Purchases of investment securities
Available-for-sale (48,222,295) (3,168,200) (16,942,994)
Held-to-maturity (47,364,954) (6,459,372) (19,495,987)
Net increase in loans (11,801,733) (29,236,191) (18,778,658)
Purchases of premises and equipment (1,116,543) (850,672) (418,586)
Purchase of equipment leased (2,607,500) - -
Purchase of deposit base intangibles (1,124,258) - -
Purchase of single premium life
insurance contract (785,330) - -
NET CASH USED BY INVESTING
ACTIVITIES (53,890,559) (13,558,990) (25,392,174)
FINANCING ACTIVITIES
Net increase in noninterest-bearing
and interest-bearing deposits 29,930,577 5,625,638 16,217,348
Assumption of deposit liabilities
- Note 12 19,863,923 - -
Net increase (decrease) in short
term borrowings (6,432,072) 4,355,000 7,000,000
Cash dividends (1,288,000) (1,176,000) (1,071,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,074,428 8,804,638 22,146,348
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,365,199) 4,546,180 3,693,358
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,281,706 26,735,526 23,042,168
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 27,916,507 $ 31,281,706 $ 26,735,526
<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, 1996, 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 fourteen (14)
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 and Lewisburg West 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, Columbia State
Community College, and Maury Regional Hospital.
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 fourteen (14) other banks, two (2) 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, 1996, amounted to approximately $8.9 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.
Securities
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
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 that may be sold prior to maturity
for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as 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 are included in earnings as realized losses.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are stated at their outstanding unpaid principal balances net of
any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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
loans are ninety days past-due or when a loan is considered
impaired. All loans 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 fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of foreclosure, or the property is already carried at
its estimated net realizable value, any subsequent holding 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 $450 thousand at December 31, 1996, and $483
thousand at December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
believed adequate by management to absorb estimated probable
inherent loan losses. Loan quality is monitored by Loan
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
Review, the Special Assets Committee, and the Credit
Administrator. The amount by which a loan is determined to be
impaired is added 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. The Bank's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated
value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors are considered in this evaluation. This process is
inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and
timing of future cash flows expected to be received on impaired
loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
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.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1996 - $224,212; 1995 - $168,020; and 1994 - $168,020.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $103,540,673 and
$93,101,954 at December 31, 1996 and 1995, respectively (fair
value: 1996 - $104,061,311; 1995 - $93,937,766), were pledged
to secure deposits and for other purposes as required or
permitted by law. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1996, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1996
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 26,412,520 $ 162,913 $ 63,634 $ 26,511,799
U.S. Government agencies 26,850,441 45,866 318,203 26,578,104
Other securities 2,635,338 565,044 148,750 3,051,632
$ 55,898,299 $ 773,823 $ 530,587 $ 56,141,535
Held-to-maturity securities
U.S. Treasury $ 30,504,935 $ 106,345 $ 22,080 $ 30,589,200
U.S. Government agencies 39,679,582 245,034 87,434 39,837,182
States and political subdivisions 47,538,074 700,948 283,420 47,955,602
Other securities 819,159 24,878 - 844,037
$ 118,541,750 $ 1,077,205 $ 392,934 $ 119,226,021
December 31, 1995
Available-for-sale securities
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
<FN>
<F4>
Table I - Amortized Cost and Fair Value of Investment Securities.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1996, the Corporation did not hold investment
securities of any single issuer, other than obligations of the
U.S. Treasury and other U.S. Government agencies, whose
aggregate book value exceeded ten percent of stockholders'
equity.
Table II shows the amortized cost, fair value, and weighted
yields (for tax-exempt obligations on a fully taxable basis
assuming a 34% tax rate) of investment securities at December
31, 1996, by contractual maturity. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $3,020,054, $7,306,453, and
$25,152,051 during 1996, 1995, and 1994 respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$56,112,000, $18,848,992, and $5,092,000 during 1996, 1995, and
1994 respectively. There were no gains or losses in 1996.
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.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
<S> <C> <C> <C>
Within one year $ 16,189,997 $ 16,176,499 5.6%
After one but within five years 9,171,798 9,274,000 6.3%
After five but within ten years 1,050,725 1,061,300 6.4%
U.S. Government agencies
Within one year 1,000,000 1,021,300 8.0%
After one but within five years 24,543,375 24,255,710 5.9%
After five but within ten years 1,043,738 1,038,400 6.2%
After ten years 263,328 262,694 6.1%
Other securities 2,635,338 3,051,632 8.9%
$ 55,898,299 $ 56,141,535
Held-to-maturity securities
U.S. Treasury
Within one year $ 22,067,254 $ 22,103,400 5.6%
After one but within five years 5,238,326 5,301,900 6.4%
After five but within ten years 3,199,355 3,183,900 6.0%
U.S. Government agencies
Within one year 4,504,421 4,512,100 6.1%
After one but within five years 17,076,622 17,210,700 6.4%
After five but within ten years 18,098,539 18,114,382 6.4%
States and political subdivisions
Within one year 3,015,087 3,061,625 10.0%
After one but within five years 12,976,264 13,229,979 8.1%
After five but within ten years 20,837,173 20,940,923 7.4%
After ten years 10,709,550 10,723,075 7.8%
Other securities
After one but within five years 319,159 330,087 8.0%
After five but within ten years 500,000 513,950 7.3%
$ 118,541,750 $ 119,226,021
<FN>
<F5>
Table II - Contractual Maturity of Investment Securities and
Weighted Tax Equivalent Yields
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
<CAPTION>
1996 1995
Loans secured by real estate
<S> <C> <C>
Construction and land development $ 8,751,021 $ 7,399,095
Farmland 6,923,739 7,849,137
Lines of credit 192,010 339,108
1-4 family residential property - first lien 116,905,803 111,016,393
1-4 family residential property - junior lien 6,461,497 7,177,285
Multifamily residential property 2,487,453 3,729,687
Non farm, non residential property 46,114,930 44,224,353
Subtotal 187,836,453 181,735,058
Commercial and industrial loans
Commercial and industrial 53,577,210 51,758,675
Taxable municipal loans 240,000 270,000
All other loans 748,125 88,239
Subtotal 54,565,335 52,116,914
Tax exempt municipal loans 605,933 1,485,071
Loans to individuals
Agricultural production 2,894,845 3,659,215
Lines of credit 200,903 135,230
Individuals for personal expenditures 57,897,835 53,026,209
Subtotal 60,993,583 56,820,654
304,001,304 292,157,697
Less:
Net unamortized loan origination fees (269,260) (225,368)
Unearned interest income - (2,018)
Allowance for possible loan losses (2,926,063) (2,678,386)
$ 300,805,981 $ 289,251,925
<FN>
<F6>
Table III - Loans Outstanding by Category at December 31, 1996
and 1995
</FN>
</TABLE>
<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 $ 66,689 $ 51,604 $ 25,824 $ 144,117
Variable rate loans 99,680 32,963 27,241 159,884
$ 166,369 $ 84,567 $ 53,065 $ 304,001
<FN>
<F7>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans having recorded investments of $5,136,286 at December
31, 1996, 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 $1,146,000. Interest
received on these loans during 1996 was $504,840. Impaired
loans had recorded investments of approximately $5,856,000 at
December 31, 1995.
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, 1996 and 1995, is shown in Table V that
follows.
These totals exclude loans made in the ordinary course of
business to other companies with which neither the Corporation
nor the Bank has a relationship other than the association of
one of its directors in the capacity of officer or director.
These loan transactions were made on substantially the same
terms as those prevailing at the time for comparable loans to
other persons. They did not involve more than the normal risk
of collectiblity or present other unfavorable features. No
related party loans were charged off in 1996 or 1995.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
1996
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,808,932 $ 7,706,004
<FN>
<F8>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 2,678,386 $ 2,342,290 $ 2,023,651
Provision charged to operating expenses 1,300,000 670,000 660,000
Loan losses:
Loans charged off (1,388,422) (555,957) (422,831)
Recoveries on loans previously
charged off 336,099 222,053 81,470
Balance at end of year $ 2,926,063 $ 2,678,386 $ 2,342,290
<FN>
<F9>
Table VI - Changes in the Allowance for Possible Loan Losses
</FN>
</TABLE>
In the opinion of management, based on conditions reasonably
known, the allowance was adequate at December 31, 1996.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 1,348,288 $ 1,204,288
Premises 7,013,942 6,648,329
Furniture and equipment 4,068,373 3,949,617
Leasehold improvements 1,149,732 879,695
13,580,335 12,681,929
Less allowance for depreciation and amortization (6,750,860) (6,283,993)
$ 6,829,475 $ 6,397,936
</TABLE>
Annual provisions for depreciation and amortization of bank
premises and equipment total $685,005 for 1996, $645,816 for
1995, and $589,045 for 1994. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling $2,590,066 at December 31,
1996.
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, 1996, additional dividends of approximately $14,800,000
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 2013. 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 $726,337,
$660,121, and $409,764 for equipment leases, and $112,384,
$111,649, and $97,966 for building leases, in 1996, 1995, and
1994, respectively. Future minimum lease commitments as of
December 31, 1996, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<S> <S> <C>
1997 $ 784,704
1998 714,848
1999 383,334
2000 123,758
2001 123,758
Total future minimum lease payments $ 2,130,402
<FN>
<F9>
Table VIII - Future Minimum Lease Commitments
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 2,422,550 $ 2,166,566 $ 1,831,848
State 628,788 585,606 503,433
Total current 3,051,338 2,752,172 2,335,281
Deferred:
Federal (137,700) (198,393) (111,805)
State (24,299) (35,010) (19,730)
Total deferred (161,999) (233,403) (131,535)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
<FN>
<F10>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses $ 914,386 $ 815,315 $ 682,877
Write-down of other real estate 177,120 177,120 159,120
Deferred compensation 336,255 256,139 156,227
Direct lease financing - - 36,452
Unrealized loss on AFS securities - - 32,372
Deferred loan fees 26,863 44,051 24,546
Deferred tax asset 1,454,624 1,292,625 1,091,594
Unrealized gain on AFS securities (97,294) (157,392) -
Deferred tax liability (97,294) (157,392) -
Net deferred tax asset $ 1,357,330 $ 1,135,233 $ 1,091,594
<FN>
<F11>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,317,086 $ 2,935,722 $ 2,640,158
Increase (decrease) in taxes resulting from:
Tax-exempt interest (859,383) (783,011) (780,946)
Nondeductible interest expense 101,534 89,491 75,019
Other nondeductible expenses
(nontaxable income) - net (21,170) (28,114) (6,458)
State income taxes, net of federal
tax benefit 398,963 363,393 319,244
Dividend income exclusion (34,855) (18,324) (29,571)
Other (12,836) (40,388) (13,700)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
Effective tax rate 29.6% 29.2% 28.4%
<FN>
<F12>
Table XI - Reconciliation of Total Income Taxes Reported with
the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
Total income taxes paid in 1996, 1995, and 1994 amounted to
$3,140,000, $2,756,442 and $2,431,332, respectively.
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.
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1996,
were $25,605,000 and $2,283,000, 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
Interest paid on deposits and other borrowings during 1996,
1995, and 1994 amounted to $17,206,708, $14,845,107, and
$12,641,299, respectively.
NOTE 11 - 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. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1996 and 1995,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 1996, the Bank's calculated risk-adjusted
capital ratios exceeded the minimum standard for a "well
capitalized" bank and this classification is confirmed by the
most recent notification from the Office of the Comptroller of
the Currency. There are no conditions or events since that
notification that management believes have changed the
institution's category. Actual capital amounts and ratios are
presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<s > <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 56,004,592 18.69% 23,972,003 8.00% 29,965,004 10.00%
Bank 55,472,014 18.55% 23,923,241 8.00% 29,904,051 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 53,078,528 17.71% 11,986,300 4.00% 17,979,450 6.00%
Bank 52,545,950 17.57% 11,962,652 4.00% 17,943,978 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 52,066,624 10.36% 20,107,993 4.00% 25,134,992 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted
Assets) Consolidated 51,162,164 17.87% 22,901,838 8.00% 28,627,297 10.00%
Bank 50,682,365 17.74% 22,855,632 8.00% 28,569,541 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 48,483,778 16.94% 11,450,919 4.00% 17,176,378 6.00%
Bank 48,003,979 16.80% 11,429,519 4.00% 17,144,278 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 46,754,542 10.08% 18,549,574 4.00% 23,186,967 5.00%
Bank 45,891,248 9.91% 18,523,208 4.00% 23,154,010 5.00%
<FN>
<F13>
Table XII - Capital Amounts and Capital Adequacy
</FN>
</TABLE>
NOTE 12 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a non-profit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $661,307, $633,459 and $602,010, in 1996, 1995, and
1994, respectively, are included in salaries and employee
benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1996 - $620,657; 1995 - $594,221) purchased
in 1993 to fund the plan and the related liability (1996 -
$513,792; 1995 - $482,272) were included in other assets and
other liabilities, respectively. Net non-cash income recognized
on these policies of $26,436 in 1996 and $14,133 in 1995 is
included in the above asset values. The principal cost of the
plan is being accrued over the anticipated remaining period of
active employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $64,024 in
1996, $106,066 in 1995, and $98,925 in 1994.
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 $172,871 for 1996, $176,727
for 1995, and $126,262 for 1994 are 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. Net non-cash income recognized on these policies
of $85,249 in 1996 and $51,803 in 1995 is included in the cash
surrender values of $1,887,171 and $1,801,922 reported in other
assets at December 31, 1996 and 1995, respectively.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. An insurance premium of $795,000 was
paid in November, 1996, of which $785,330 is the cash surrender
value at December 31, 1996, and is included in other assets, and
net expense of $9,670 is included in other operating expense.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replace- ment/split dollar plan. These
policies have an aggregate face amount of $2,875,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,917 $ 27,917 $ 31,282 $ 31,282
Securities held to maturity 118,542 119,226 127,663 128,830
Securities available for sale 55,898 56,142 10,876 11,269
Loans, net 300,806 309,401 289,252 298,076
Accrued interest receivable 5,549 5,549 5,424 5,424
Financial liabilities
Deposits 460,573 449,129 410,778 398,296
Federal funds purchased 5,000 5,000 10,000 10,000
Short term borrowings 523 523 1,955 1,955
Accrued interest payable 2,539 2,539 3,034 3,034
<FN>
<F14>
Table XIII - Summary of Fair Values of Financial Instruments
</FN>
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying 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, 1996, 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996
<S> <C> <C> <C> <C> <C>
Interest income $ 9,052,224 $ 9,280,303 $ 9,249,133 $ 9,501,009 $37,082,669
Interest expense 3,989,386 4,153,059 4,260,324 4,308,988 16,711,757
Net interest income 5,062,838 5,127,244 4,988,809 5,192,021 20,370,912
Provision for possible loan
losses 250,000 300,000 200,000 550,000 1,300,000
Noninterest expenses, net of
noninterest income 2,327,604 2,234,505 2,335,349 2,417,319 9,314,777
Income before income taxes 2,485,234 2,592,739 2,453,460 2,224,702 9,756,135
Income taxes 777,319 776,659 694,636 640,725 2,889,339
Net income $ 1,707,915 $ 1,816,080 $ 1,758,824 $ 1,583,977 $ 6,866,796
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.30 $ 1.25 $ 1.13 $ 4.90
</TABLE>
<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
<FN>
<F15>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fifteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,509 - % $ 56,730 - % $ 55,557 - %
NOW and money market accounts 158,450 3.37 149,016 3.51 161,244 3.25
Savings deposits 37,421 3.22 34,629 3.00 35,036 2.87
Time deposits of less than $100,000 151,952 5.40 136,568 5.30 126,523 4.27
Time deposits of $100,000 or more 34,539 5.41 32,524 5.35 26,053 4.32
Total In Domestic Offices $ 443,871 3.74% $ 409,467 3.72% $ 404,413 3.66%
<FN>
<F16>
Table XV - Average Amounts of Deposits and Average Rates Paid by
Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 11,680 $ 7,877 $ 3,117
3 to 12 months 22,638 18,407 18,250
Over 12 months 4,812 4,310 4,803
$ 39,130 $ 30,594 $ 26,170
<FN>
<F17>
Table XVI - Maturities of Time Deposits of $100,00 or More at
December 31
</FN>
</TABLE>
NOTE 17- CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
December 31, 1996 and 1995
(In Thousands of Dollars)
Assets 1996 1995
<S> <C> <C>
Cash $ 142 $ 70
Investment in bank subsidiary - at equity 53,870 48,517
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 22
Dividends receivable from bank subsidiary 714 630
Cash surrender value - life insurance 489 466
Other assets 1 1
Total assets $ 55,288 $ 49,756
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 173 $ 129
Dividends payable 714 630
Total liabilities 887 759
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 40,255 34,761
Net unrealized gain (loss) on available-for-sale
securities, net of tax 146 236
Total stockholders' equity 54,401 48,997
Total liabilities and stockholders' equity $ 55,288 $ 49,756
<FN>
<F18>
Table XVII - Condensed Balance Sheets of Parent
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 1,372 $ 1,232
Other dividend income 85 22
Interest income 6 2
Other 28 27
Operating expenses 68 87
Income before equity in undistributed net
income of bank subsidiary 1,423 1,196
Equity in undistributed net income of bank
subsidiary 5,444 4,920
Net Income $ 6,867 $ 6,116
<FN>
<F19>
Table XVIII - Condensed Statements of Income of Parent
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating activities
<S> <C> <C>
Net income for the year $ 6,867 $ 6,116
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (5,444) (4,920)
Increase in other assets (111) (69)
Increase in payables 44 54
Total adjustments (5,511) (4,935)
Net cash provided by operating activities 1,356 1,181
Net cash provided by (used in) investing activities
Purchases of investment securities (133) -
Proceeds from maturities of investment securities 137 -
Net cash provided by (used in) investing activities 4 -
Net cash used in financing activities
Cash dividends paid (1,288) (1,176)
Increase (decrease) in cash 72 5
Cash at beginning of year 70 65
Cash at end of year $ 142 $ 70
<FN>
<F20>
Table XIX - Condensed Statements of Cash Flows of Parent
</FN>
</TABLE>
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 1996, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits and loans in each of the
four counties increased. Internal growth was the challenge for
the year to all directors, officers, and employees who were
reminded that the bank was large enough to perform yet small
enough to care about customer needs. The Bank is positioned to
provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the
quality service of a community bank and the safety and strength
of a regional bank.
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 1996, 1995, and 1994; 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.
Summary
The Bank reported net income of $6.9 million for 1996 compared
to $6.1 million in 1995 and $5.6 million in 1994. On a per
common share basis, net income was $4.90 for 1996 versus $4.37
for 1995 and $3.97 for 1994. The improvement in 1996's earnings
resulted from a wider gross margin, an increase in noninterest
income sufficient to cover a smaller increase in noninterest
expenses, and the increase in taxes. The smaller increase in
noninterest expenses is due in part to the significant decrease
in deposit insurance. These improve- ments were partially
offset by higher additions to the allowance for loan losses.
The return on average equity for 1996 was 13.23% compared to
13.08% for 1995 and 13.30% for 1994. The return on average
assets was 1.37% for 1996 versus 1.32% for 1995 and 1.23% for
1994.
Gross Interest Margin
The gross interest margin is defined as the difference between
the revenue from earning assets, primarily interest income, and
interest expense related to interest-bearing liabilities. The
maintenance of the gross interest margin at a level which, when
coupled with noninterest revenues, is sufficient to cover
additions to the allowance for loan losses, noninterest expenses
and income taxes, and yield an acceptable profit is critical for
success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and
interest-bearing liabilities and the yields earned and rates
paid on those balances.
Management activities are planned to maintain a satisfactory
spread between the yields on earning assets and the related cost
of interest-bearing funds. The gross interest spread is
determined by comparing the taxable equivalent gross interest
margin to average earning assets before deducting the allowance
for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by
interest-bearing sources and those which incur no interest cost
(primarily noninterest-bearing demand deposits). This ratio is
most often used when analyzing a banking institution's overall
gross margin profitability compared to that of other financial
institutions. The incremental interest spread compares the
difference between the yields on earning assets and the cost of
interest-bearing funds. This calculation and similar ratios are
used to assist in pricing decisions for interest related
products.
Table A entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
presents for each of the last three years by major categories of
assets and liabilities, the average daily balances, the
components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross
interest spread.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $290,413 9.43% $ 27,373* $276,166 9.38% $ 25,892* $247,791 8.54% $ 21,156*
Bank time deposits 1 - - 2 - - - - -
Taxable securities 118,030 6.15 7,256 104,220 6.20 6,457 119,960 6.25 7,497
Tax exempt securities 44,158 7.10 3,134* 39,139 8.06 3,156* 38,545 8.49 3,274*
Federal funds sold 4,198 5.31 223 2,076 5.83 121 2,998 3.73 112
TOTAL EARNING ASSETS 456,800 8.32 $ 37,986 421,603 8.45 $ 35,626 409,294 7.83 $ 32,039
Noninterest earning assets
Cash and due from banks 25,760 24,829 25,945
Bank premises and equipment 6,708 6,246 6,350
Other assets 13,432 11,061 10,364
TOTAL ASSETS $502,700 $463,739 $451,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $158,438 3.37% $ 5,338 $148,993 3.51% $ 5,223 $161,244 3.25% $ 5,239
Savings 37,428 3.22 1,204 34,627 3.00 1,040 35,036 2.87 1,006
Time 151,973 5.40 8,210 136,605 5.30 7,245 126,523 4.27 5,400
Time over $100,000 34,554 5.40 1,866 32,522 5.35 1,740 26,053 4.32 1,126
TOTAL INTEREST BEARING
DEPOSITS 382,393 4.35 16,618 352,747 4.32 15,248 348,856 3.66 12,771
Federal funds purchased 1,043 5.56 58 2,415 5.92 143 1,462 4.86 71
Other short-term debt 622 5.79 36 565 5.49 31 568 3.92 22
TOTAL INTEREST BEARING
LIABILITIES 384,058 4.35 $ 16,712 355,727 4.34 $ 15,422 350,886 3.67 $ 12,864
Noninterest bearing liabilities
Demand deposits 61,509 56,742 55,557
Other liabilities 5,066 4,515 3,690
TOTAL LIABILITIES 450,633 416,984 410,133
Stockholders' equity 52,067 46,755 41,820
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $502,700 $463,739 $451,953
Spread between combined
rates earned and combined
rates paid* 3.97% 4.11% 4.16%
Net yield on interest-
earning assets* 4.66% 4.79% 4.68%
<FN>
<F21>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
2. The taxable equivalent adjustment has been computed based on
a 34% federal income tax rate and has given effect to the
disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets. Loans include
nonaccrual loans for all years presented.
3. The average balances of the fair values of available-for-sale
securities were used in the calculations in this table.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE B - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
Table B sets forth, for the periods indicated, a summary of
changes in interest earned and interest paid separated into the
amount generated by volume changes and the amount generated by
changes in the yield or rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Volume and Yield/Rate Variances Yield/ Net Increase Yield/ Net Increase
(Taxable Equivalent Basis - In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 1,336 $ 145 $ 1,481 $ 2,423 $ 2,313 $ 4,736
Investment securities
Taxable securities 856 (57) 799 (984) (56) (1,040)
Tax-free securities 405 (427) (22) 50 (168) (118)
Federal funds sold 124 (22) 102 (34) 43 9
Total interest earning assets 2,721 (361) 2,360 1,455 2,132 3,587
Interest paid on
NOW and money market accounts 331 (216) 115 (398) 382 (16)
Savings deposits 84 80 164 (12) 46 34
Time deposits 815 150 965 430 1,415 1,845
Time over $100,000 109 17 126 279 335 614
Federal funds purchased (81) (4) (85) 46 26 72
Short term debt 3 2 5 - 9 9
Total interest-bearing funds 1,261 29 1,290 345 2,213 2,558
Net interest earnings $ 1,460 $ (390) $ 1,070 $ 1,110 $ (81) $ 1,029
</TABLE>
Notes:
1. The change in interest resulting from both volume and
yield/rate has been allocated to change due to volume and change
due to yield/rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
2. The computation of the taxable equivalent adjustment has
given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
3. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our stock-
holders. The first graph illustrates the categories of average earning
assets and the portion each category is of the total for the
last three years. The following table is the data illustrated
by this graph.
<TABLE>
<CAPTION>
Loans Investment Securities Other
<S> <C> <C> <C>
1996 $290,413 $162,188 $4,199
1995 276,166 143,358 2,078
1994 247,791 158,505 2,998
</TABLE>
The second graph illustrates the average balances by category of
liabilities that fund earning assets. The following table is
the data illustrated by this graph in thousands of dollars.
<TABLE>
<CAPTION>
Interest-Bearing Deposits Noninterest-Bearing Deposits Other
<S> <C> <C> <C>
1996 $382,393 $61,509 $1,043
1995 352,747 56,742 2,415
1994 348,856 55,557 1,462
</TABLE>
Average earning assets increased 8.4% in 1996 compared to an
3.0% increase in 1995 and a 7.6% increase in 1994. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1996, average net loans represented
63.6% of average earning assets. Total average net loans
increased during the last three years showing an 5.2% growth
from 1995 to 1996, an 11.5% growth from 1994 to 1995, and a 6.1%
growth from 1993 to 1994. Average investments represented 36.4%
of average earning assets at December 31, 1996, and increased
14.5% in 1996. The Bank purchased certain assets and assumed
certain deposit liabilities of the Mt. Pleasant, Maury County,
Tennessee, and Lewisburg, Marshall County, Tennessee, branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The assets purchased were buildings and equipment and not
earning assets. Most of the increase in investments can be
attributed to the assumption of those deposit liabilities that
were not used for the increasing loan growth. Investments
decreased 9.6% in 1995, and increased 11.6% in 1994. Average
total assets increased during the last three years as evidenced
by an 8.4% growth from 1995 to 1996, a 2.6% growth from 1994 to
1995, and a 7.4% growth from 1993 to 1994. Please refer to the
color graphs at the end of this document that illustrate this
growth.
The bank's average deposits grew during the last three years
reflecting an 8.4% growth from 1995 to 1996, a 1.3% growth from
1994 to 1995, and a 6.8% growth from 1993 to 1994.
Approximately half of the increase in average deposits can be
attributed to the acquisition discussed earlier in this section.
Short and medium term rates were more competitive compared to
longer term rates during the first half of 1996 and some
depositors moved money back into interest-bearing transaction
accounts, which increased 6.3% during 1996 but had declined in
1995 as investors took advantage of higher certificate of
deposit rates. Over half of the increase during 1996 was
attributable to the acquisition. Average interest-bearing
checking accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994. Average savings deposits increased 8.1%
during 1996, over 54% from the acquisition. Savings deposits
have been strong historically providing a core, low cost, source
of funding. Average savings deposits declined 1.2% in 1995
compared to a 12.2% increase in 1994. Average certificates of
deposit under $100,000 increased 11.3% during 1996, 60.0% from
the acquisition, increased 8.0% in 1995, and declined 1.2.% in
1994. Certificates of deposit over $100,000 increased 6.3% in
1996, 87.8% from the acquisition, compared to a 24.8% increase
in 1995 and a 10.4% increase in 1994.
<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
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1996, 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 negative dollar change in net
interest income for a twelve month period of less than 3% of net
interest income given a three hundred basis point shift in
interest rates is considered an acceptable rate risk position.
The net interest margin, on a tax equivalent basis, at December
31, 1996, 1995, and 1994 was 4.66%, 4.79%, and 4.68%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1996 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Loans and leases, net of unearned $ 58,045 $ 42,594 $ 65,730 $ 137,632 $ 304,001
Taxable investment securities 13,855 10,000 13,500 90,061 127,416
Tax-exempt investment securities 1,000 1,100 900 44,271 47,271
Total earning assets 72,900 53,694 80,130 271,964 $ 478,688
Interest-bearing liabilities
NOW and money market accounts 45,590 - 64,588 43,136 $ 153,314
Savings - - 41,594 - 41,594
Time 41,547 33,805 50,657 25,077 151,086
Time over $100,000 11,680 9,813 12,825 4,812 39,130
Other short-term debt 5,523 - - - 5,523
Total interest bearing liabilities 104,340 43,618 169,664 73,025 $ 390,647
Noninterest-bearing, net (88,041)
Net asset/liability funding gap (31,440) 10,076 (89,534) 110,898
Cumulative net asset/liability
funding gap $ (31,440) $ (21,364) $(110,898) $ -
<FN>
<F22>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include loan
review procedures and approvals. Depending primarily on the
amount of the loan, there are various approval levels including
an Executive Committee of the Board of Directors that meets
weekly.
The Bank has a Loan Review Department which performs ongoing,
independent reviews of specific loans for credit quality and
proper documentation. This department is centralized and
independent of the lending function. Regular reports are made
to senior management and the Executive Committee of the Board of
Directors regarding the credit quality of the loan portfolio, as
well as trends. Every loan is assigned a risk rating by the
loan officer subject to review by Loan Review. The Bank also
has a Credit Administrator who is responsible for assisting loan
officers in structuring new loans, reviewing problem loans,
monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a
formal review that is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the
allowance for loans losses. This review supported management's
assertion that the allowance was adequate at December 31, 1996.
Table D, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all
loans management considers to be potential problem loans,
summarizes average loan balances, and reconciles the allowance
for loan losses for each year. Additions to the allowance,
which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
Loans having recorded investments of $5.1 million at December
31, 1996, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 1.7% of gross loans.
Commercial loans comprised $.384 million of the total, with
loans secured by real estate accounting for $3.6 million, and
installment loans $1.1 million. The gross interest income that
would have been recorded during 1996 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 $374, $365, and $193 thousand for
the years ended December 31, 1996, 1995, and 1994 respectively.
Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this
material for more information on the Bank's policy regarding
loan impairment.
A graph on the bottom of this page is included in the materials
sent to the stockholders that illustrates the increase in
average net loans and the ratio of net loan charge offs to
average loans for the last eight years. The ratio at December
31, 1996 was .36%. This ratio, although higher than 1994 and
1995 ratios, is well below industry levels. The following
table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1989 $163,003 0.0032%
1990 172,749 0.0030
1991 182,561 0.0037
1992 215,158 0.0023
1993 233,608 0.0030
1994 247,791 0.0014
1995 276,166 0.0012
1996 290,413 0.0036
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 290,413 $ 276,166 $ 247,791 $ 233,608 $ 215,158
Balance of allowance for possible loan
losses at beginning of year $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Loans charged-off:
Loans secured by real estate 368 15 135 396 245
Commercial and industrial loans 141 170 42 222 124
Individuals 879 371 246 230 249
TOTAL LOANS CHARGED OFF 1,388 556 423 848 618
Recoveries of loans previously charged off:
Loans secured by real estate 111 97 9 56 3
Commercial and industrial loans 42 14 36 52 80
Individuals 183 111 36 40 32
TOTAL RECOVERIES 336 222 81 148 115
NET LOANS CHARGED-OFF 1,052 334 342 700 503
Provision charged to operating expenses 1,300 670 660 470 840
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Ratio of net charge-offs during the
period to average loans outstanding 0.36% 0.12% 0.14% 0.30% 0.23%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1996, the Corporation had a ratio of
average capital to average assets of 10.36%. This compares to a
ratio of average capital to average assets of 10.08% at December
31, 1995, and 9.25% at December 31, 1994.
Cash dividends declared in 1996 were 11.4% more than those paid
in 1995. The dividend to net income ratio was 20%. Additional
dividends of approximately $14.8 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.
As of December 31, 1996, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 17.7% and 18.7% respectively. One
year earlier, the comparable ratios were 16.9% and 17.9%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to
our stockholders, illustrates the average equity of the Corporation
for the last six years. The following table is the data illustrated
by this graph in thousands of dollars.
<TABLE>
<S> <C>
1990 $27,358
1991 30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
</TABLE>
<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 7.5% in 1996 due to a wider
gross margin that was enhanced by loan growth in all the market
areas the Bank serves. Interest and fees earned on loans
increased 5.8% in 1996 accounting for 73.7% of gross interest
income. Interest earned on investment securities and other
investments increased 12.8% in 1996 rounding out gross interest
income contributing 26.3%. Total interest income increased
11.9% in 1995 and 7.3% in 1994.
Interest Expense
Total interest expense increased 8.4% in 1996 due mostly to the
increase in interest-bearing deposits, about half of which can
be attributed to the acquisition indicated earlier. This
increase compares favorably to a 19.9% increase in 1995 and a
6.9% increase in 1994. The cost of interest-bearing deposits
remained steady all year under monthly monitoring by the
Asset/Liability Committee. This contributed to the wider gross
margin achieved during 1996. The net interest margin (tax
equivalent net interest income divided by average earning
assets) was 4.7% at the end of 1996 compared to 4.8% in 1995 and
4.7% in 1994.
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 28.4% during 1996 led by the
increase in service charges from new and acquired customers.
This compares to a 14.9% increase in 1995 and a 1.6% increase in
1994. Use of the Bank's 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. Income
from fiduciary services provided in the Bank's Trust Department
remained strong.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1996 and the percentage each category is of the total.
The following table is the data illustrated by this graph in
thousands of dollars.
<TABLE>
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,324 22.8%
Service fees on deposits 3,374 58.1%
Other service fees 746 12.8%
Other 363 6.3%
</TABLE>
Noninterest expenses, excluding the provision for possible
loan losses, increased 5.8% in 1996 which is a much smaller
increase than the 6.2% increase in 1995. The increase in 1994
was 5.4% for a smaller corporation. 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 $6 thousand in 1996 compared to $500 thousand in 1995 and
$891 thousand in 1994. Please refer to the discussion in the
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
expense in 1996 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,031 46.5%
Occupancy 1,211 8.0%
Furniture and equipment 1,581 10.5%
FDIC insurance 7 0%
Other 5,292 35.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - FIVE YEAR COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $27,343,817 $25,857,982 $21,130,914 $19,518,742 $19,791,548
Income on investment securities
Taxable interest 6,892,118 6,179,492 7,012,626 6,925,404 6,898,114
Exempt from federal income tax 2,366,764 2,156,813 2,184,666 1,857,168 1,825,869
Dividends 256,951 177,790 204,948 72,054 110,874
9,515,833 8,514,095 9,402,240 8,854,626 8,834,857
Other interest income 223,019 121,492 284,384 347,287 195,744
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538 28,720,655 28,822,149
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618 11,998,235 13,329,557
Interest on other short term
borrowings 94,232 174,370 93,286 38,339 47,449
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904 12,036,574 13,377,006
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634 16,684,081 15,445,143
PROVISION FOR POSSIBLE LOAN LOSSES 1,300,000 670,000 660,000 470,000 840,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634 16,214,081 14,605,143
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359 863,952 753,239
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992 2,206,026 2,123,096
Other service fees, commissions,
and fees 745,523 300,407 336,758 509,009 401,618
Other operating income 363,430 322,634 319,466 315,108 191,363
Available for sale securities
gains (losses) - 1,182 (243,690) 23,896 28,434
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885 3,917,991 3,497,750
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706 5,686,965 5,283,086
Net occupancy expense 1,211,067 1,279,434 1,190,678 1,070,971 984,650
Furniture and equipment expense 1,580,753 1,382,769 1,069,856 889,848 801,453
Loss on other real estate - 50,724 4,000 103,122 312,064
Other operating expenses 5,298,652 5,006,292 4,996,107 4,903,949 4,460,696
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347 12,654,855 11,841,949
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,756,135 8,634,475 7,765,172 7,477,217 6,260,944
PROVISION FOR INCOME TAXES 2,889,339 2,518,769 2,203,746 2,220,965 1,768,840
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
</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 12.3% higher in 1996 than in 1995. As indicated
earlier, the improvement in 1996's earnings resulted from a
wider gross margin, an increase in noninterest income sufficient
to cover a smaller increase in noninterest expenses, and the
increase in taxes. The smaller increase in noninterest expenses
is due in part to the significant decrease in deposit insurance.
These improvements were partially offset by higher additions to
the allowance for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has not been adopted by the Bank but is required
to adopted after December 31, 1996. The Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" establishes guidance on when to recognize and
how to measure these financial assets and liabilities. The
statement is effective prospectively for transfers and servicing
of financial assets and extinguishment of liabilities occurring
after December 31, 1996. It supersedes Statement No. 122,
"Accounting for Mortgage Servicing Rights", which was effective
for fiscal years beginning after December 15, 1995. Management
does not believe this statement will have any material effect on
future issues.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1996, had a
market value of $91 million and were held by 1,525 identifiable
individuals located mostly in the market area. A small number
of additional shareholders are not identified individually since
some bank nominees, including the bank's Trust Department, are
listed as single owners when, in fact, these holdings represent
large numbers of shareholders. No single shareholder's
ownership exceeded five percent at year end.
There is no established public trading market for the stock.
The table on the right 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>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
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
First quarter $ 56.00 $ 56.00 $
Second quarter 58.00 56.00 0.47
1996 Third quarter 63.00 60.00
Fourth quarter 65.00 63.00 0.51
$ 0.98
</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)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 502,700 $ 463,739 $ 451,953 $ 420,760 $ 381,379
AVERAGE LOANS (NET) $ 290,413 $ 276,166 $ 247,791 $ 233,609 $ 215,158
AVERAGE DEPOSITS $ 443,902 $ 409,489 $ 404,412 $ 378,782 $ 343,128
RETURN ON EQUITY AND ASSETS
Return on average assets 1.37% 1.32% 1.23% 1.25% 1.18%
Return on beginning equity 14.06% 13.95% 14.11% 14.93% 14.21%
Average equity to
average assets 10.36% 10.08% 9.25% 8.90% 8.76%
COMMON DIVIDEND PAYOUT RATIO
Earnings per share $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
Cash dividends per share $ 0.98 $ 0.88 $ 0.80 $ 0.73 $ 0.64
Ratio 20% 20% 20% 19% 20%
</TABLE>
<TABLE>
NET INTEREST MARGIN
(In Thousands of Dollars)
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
(TAX EQUIVALENT) $ 37,985 $ 35,626 $ 32,039 $ 29,465 $ 29,564
INTEREST EXPENSE 16,712 15,422 12,864 12,037 13,377
$ 21,273 $ 20,204 $ 19,175 $ 17,428 $ 16,187
NET INTEREST MARGIN* 4.66% 4.79% 4.68% 4.58% 4.67%
<FN>
<F23>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
<PAGE>
Nine color graphs are included on the following page in the
materials sent to our stockholders. The first one illustrates
net income for the last five years using information taken from
the "FIVE YEAR COMPARISON" table included above. The second one
illustrates return on average assets for the last five years
using information from the "COMPARATIVE DATA" table on the
previous page. The third, fourth and fifth graphs illustrate
return on stockholders' equity, earnings per share with cash
dividends and stockholder's equity for the last five years.
The sixth graph illustrates average net loans for the last five
years. The seventh and eighth graphs illustrate deposits and
assets for the last five years. The information for these
graphs was taken from the "COMPARATIVE DATA" table on the
previous page. The final graph which illustrates net interest
income for the last five years was taken from the net interest
margin section in the "COMPARATIVE DATA" table on the previous
page.
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.
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 1996, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits and loans in each of the
four counties increased. Internal growth was the challenge for
the year to all directors, officers, and employees who were
reminded that the bank was large enough to perform yet small
enough to care about customer needs. The Bank is positioned to
provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the
quality service of a community bank and the safety and strength
of a regional bank.
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 1996, 1995, and 1994; 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.
Summary
The Bank reported net income of $6.9 million for 1996 compared
to $6.1 million in 1995 and $5.6 million in 1994. On a per
common share basis, net income was $4.90 for 1996 versus $4.37
for 1995 and $3.97 for 1994. The improvement in 1996's earnings
resulted from a wider gross margin, an increase in noninterest
income sufficient to cover a smaller increase in noninterest
expenses, and the increase in taxes. The smaller increase in
noninterest expenses is due in part to the significant decrease
in deposit insurance. These improve- ments were partially
offset by higher additions to the allowance for loan losses.
The return on average equity for 1996 was 13.23% compared to
13.08% for 1995 and 13.30% for 1994. The return on average
assets was 1.37% for 1996 versus 1.32% for 1995 and 1.23% for
1994.
Gross Interest Margin
The gross interest margin is defined as the difference between
the revenue from earning assets, primarily interest income, and
interest expense related to interest-bearing liabilities. The
maintenance of the gross interest margin at a level which, when
coupled with noninterest revenues, is sufficient to cover
additions to the allowance for loan losses, noninterest expenses
and income taxes, and yield an acceptable profit is critical for
success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and
interest-bearing liabilities and the yields earned and rates
paid on those balances.
Management activities are planned to maintain a satisfactory
spread between the yields on earning assets and the related cost
of interest-bearing funds. The gross interest spread is
determined by comparing the taxable equivalent gross interest
margin to average earning assets before deducting the allowance
for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by
interest-bearing sources and those which incur no interest cost
(primarily noninterest-bearing demand deposits). This ratio is
most often used when analyzing a banking institution's overall
gross margin profitability compared to that of other financial
institutions. The incremental interest spread compares the
difference between the yields on earning assets and the cost of
interest-bearing funds. This calculation and similar ratios are
used to assist in pricing decisions for interest related
products.
Table A entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
presents for each of the last three years by major categories of
assets and liabilities, the average daily balances, the
components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross
interest spread.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $290,413 9.43% $ 27,373* $276,166 9.38% $ 25,892* $247,791 8.54% $ 21,156*
Bank time deposits 1 - - 2 - - - - -
Taxable securities 118,030 6.15 7,256 104,220 6.20 6,457 119,960 6.25 7,497
Tax exempt securities 44,158 7.10 3,134* 39,139 8.06 3,156* 38,545 8.49 3,274*
Federal funds sold 4,198 5.31 223 2,076 5.83 121 2,998 3.73 112
TOTAL EARNING ASSETS 456,800 8.32 $ 37,986 421,603 8.45 $ 35,626 409,294 7.83 $ 32,039
Noninterest earning assets
Cash and due from banks 25,760 24,829 25,945
Bank premises and equipment 6,708 6,246 6,350
Other assets 13,432 11,061 10,364
TOTAL ASSETS $502,700 $463,739 $451,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $158,438 3.37% $ 5,338 $148,993 3.51% $ 5,223 $161,244 3.25% $ 5,239
Savings 37,428 3.22 1,204 34,627 3.00 1,040 35,036 2.87 1,006
Time 151,973 5.40 8,210 136,605 5.30 7,245 126,523 4.27 5,400
Time over $100,000 34,554 5.40 1,866 32,522 5.35 1,740 26,053 4.32 1,126
TOTAL INTEREST BEARING
DEPOSITS 382,393 4.35 16,618 352,747 4.32 15,248 348,856 3.66 12,771
Federal funds purchased 1,043 5.56 58 2,415 5.92 143 1,462 4.86 71
Other short-term debt 622 5.79 36 565 5.49 31 568 3.92 22
TOTAL INTEREST BEARING
LIABILITIES 384,058 4.35 $ 16,712 355,727 4.34 $ 15,422 350,886 3.67 $ 12,864
Noninterest bearing liabilities
Demand deposits 61,509 56,742 55,557
Other liabilities 5,066 4,515 3,690
TOTAL LIABILITIES 450,633 416,984 410,133
Stockholders' equity 52,067 46,755 41,820
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $502,700 $463,739 $451,953
Spread between combined
rates earned and combined
rates paid* 3.97% 4.11% 4.16%
Net yield on interest-
earning assets* 4.66% 4.79% 4.68%
<FN>
<F21>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
2. The taxable equivalent adjustment has been computed based on
a 34% federal income tax rate and has given effect to the
disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets. Loans include
nonaccrual loans for all years presented.
3. The average balances of the fair values of available-for-sale
securities were used in the calculations in this table.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE B - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
Table B sets forth, for the periods indicated, a summary of
changes in interest earned and interest paid separated into the
amount generated by volume changes and the amount generated by
changes in the yield or rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Volume and Yield/Rate Variances Yield/ Net Increase Yield/ Net Increase
(Taxable Equivalent Basis - In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 1,336 $ 145 $ 1,481 $ 2,423 $ 2,313 $ 4,736
Investment securities
Taxable securities 856 (57) 799 (984) (56) (1,040)
Tax-free securities 405 (427) (22) 50 (168) (118)
Federal funds sold 124 (22) 102 (34) 43 9
Total interest earning assets 2,721 (361) 2,360 1,455 2,132 3,587
Interest paid on
NOW and money market accounts 331 (216) 115 (398) 382 (16)
Savings deposits 84 80 164 (12) 46 34
Time deposits 815 150 965 430 1,415 1,845
Time over $100,000 109 17 126 279 335 614
Federal funds purchased (81) (4) (85) 46 26 72
Short term debt 3 2 5 - 9 9
Total interest-bearing funds 1,261 29 1,290 345 2,213 2,558
Net interest earnings $ 1,460 $ (390) $ 1,070 $ 1,110 $ (81) $ 1,029
</TABLE>
Notes:
1. The change in interest resulting from both volume and
yield/rate has been allocated to change due to volume and change
due to yield/rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
2. The computation of the taxable equivalent adjustment has
given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
3. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our stock-
holders. The first graph illustrates the categories of average earning
assets and the portion each category is of the total for the
last three years. The following table is the data illustrated
by this graph.
<TABLE>
<CAPTION>
Loans Investment Securities Other
<S> <C> <C> <C>
1996 $290,413 $162,188 $4,199
1995 276,166 143,358 2,078
1994 247,791 158,505 2,998
</TABLE>
The second graph illustrates the average balances by category of
liabilities that fund earning assets. The following table is
the data illustrated by this graph in thousands of dollars.
<TABLE>
<CAPTION>
Interest-Bearing Deposits Noninterest-Bearing Deposits Other
<S> <C> <C> <C>
1996 $382,393 $61,509 $1,043
1995 352,747 56,742 2,415
1994 348,856 55,557 1,462
</TABLE>
Average earning assets increased 8.4% in 1996 compared to an
3.0% increase in 1995 and a 7.6% increase in 1994. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1996, average net loans represented
63.6% of average earning assets. Total average net loans
increased during the last three years showing an 5.2% growth
from 1995 to 1996, an 11.5% growth from 1994 to 1995, and a 6.1%
growth from 1993 to 1994. Average investments represented 36.4%
of average earning assets at December 31, 1996, and increased
14.5% in 1996. The Bank purchased certain assets and assumed
certain deposit liabilities of the Mt. Pleasant, Maury County,
Tennessee, and Lewisburg, Marshall County, Tennessee, branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The assets purchased were buildings and equipment and not
earning assets. Most of the increase in investments can be
attributed to the assumption of those deposit liabilities that
were not used for the increasing loan growth. Investments
decreased 9.6% in 1995, and increased 11.6% in 1994. Average
total assets increased during the last three years as evidenced
by an 8.4% growth from 1995 to 1996, a 2.6% growth from 1994 to
1995, and a 7.4% growth from 1993 to 1994. Please refer to the
color graphs at the end of this document that illustrate this
growth.
The bank's average deposits grew during the last three years
reflecting an 8.4% growth from 1995 to 1996, a 1.3% growth from
1994 to 1995, and a 6.8% growth from 1993 to 1994.
Approximately half of the increase in average deposits can be
attributed to the acquisition discussed earlier in this section.
Short and medium term rates were more competitive compared to
longer term rates during the first half of 1996 and some
depositors moved money back into interest-bearing transaction
accounts, which increased 6.3% during 1996 but had declined in
1995 as investors took advantage of higher certificate of
deposit rates. Over half of the increase during 1996 was
attributable to the acquisition. Average interest-bearing
checking accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994. Average savings deposits increased 8.1%
during 1996, over 54% from the acquisition. Savings deposits
have been strong historically providing a core, low cost, source
of funding. Average savings deposits declined 1.2% in 1995
compared to a 12.2% increase in 1994. Average certificates of
deposit under $100,000 increased 11.3% during 1996, 60.0% from
the acquisition, increased 8.0% in 1995, and declined 1.2.% in
1994. Certificates of deposit over $100,000 increased 6.3% in
1996, 87.8% from the acquisition, compared to a 24.8% increase
in 1995 and a 10.4% increase in 1994.
<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
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1996, 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 negative dollar change in net
interest income for a twelve month period of less than 3% of net
interest income given a three hundred basis point shift in
interest rates is considered an acceptable rate risk position.
The net interest margin, on a tax equivalent basis, at December
31, 1996, 1995, and 1994 was 4.66%, 4.79%, and 4.68%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1996 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Loans and leases, net of unearned $ 58,045 $ 42,594 $ 65,730 $ 137,632 $ 304,001
Taxable investment securities 13,855 10,000 13,500 90,061 127,416
Tax-exempt investment securities 1,000 1,100 900 44,271 47,271
Total earning assets 72,900 53,694 80,130 271,964 $ 478,688
Interest-bearing liabilities
NOW and money market accounts 45,590 - 64,588 43,136 $ 153,314
Savings - - 41,594 - 41,594
Time 41,547 33,805 50,657 25,077 151,086
Time over $100,000 11,680 9,813 12,825 4,812 39,130
Other short-term debt 5,523 - - - 5,523
Total interest bearing liabilities 104,340 43,618 169,664 73,025 $ 390,647
Noninterest-bearing, net (88,041)
Net asset/liability funding gap (31,440) 10,076 (89,534) 110,898
Cumulative net asset/liability
funding gap $ (31,440) $ (21,364) $(110,898) $ -
<FN>
<F22>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include loan
review procedures and approvals. Depending primarily on the
amount of the loan, there are various approval levels including
an Executive Committee of the Board of Directors that meets
weekly.
The Bank has a Loan Review Department which performs ongoing,
independent reviews of specific loans for credit quality and
proper documentation. This department is centralized and
independent of the lending function. Regular reports are made
to senior management and the Executive Committee of the Board of
Directors regarding the credit quality of the loan portfolio, as
well as trends. Every loan is assigned a risk rating by the
loan officer subject to review by Loan Review. The Bank also
has a Credit Administrator who is responsible for assisting loan
officers in structuring new loans, reviewing problem loans,
monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a
formal review that is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the
allowance for loans losses. This review supported management's
assertion that the allowance was adequate at December 31, 1996.
Table D, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all
loans management considers to be potential problem loans,
summarizes average loan balances, and reconciles the allowance
for loan losses for each year. Additions to the allowance,
which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
Loans having recorded investments of $5.1 million at December
31, 1996, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 1.7% of gross loans.
Commercial loans comprised $.384 million of the total, with
loans secured by real estate accounting for $3.6 million, and
installment loans $1.1 million. The gross interest income that
would have been recorded during 1996 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 $374, $365, and $193 thousand for
the years ended December 31, 1996, 1995, and 1994 respectively.
Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this
material for more information on the Bank's policy regarding
loan impairment.
A graph on the bottom of this page is included in the materials
sent to the stockholders that illustrates the increase in
average net loans and the ratio of net loan charge offs to
average loans for the last eight years. The ratio at December
31, 1996 was .36%. This ratio, although higher than 1994 and
1995 ratios, is well below industry levels. The following
table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1989 $163,003 0.0032%
1990 172,749 0.0030
1991 182,561 0.0037
1992 215,158 0.0023
1993 233,608 0.0030
1994 247,791 0.0014
1995 276,166 0.0012
1996 290,413 0.0036
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 290,413 $ 276,166 $ 247,791 $ 233,608 $ 215,158
Balance of allowance for possible loan
losses at beginning of year $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Loans charged-off:
Loans secured by real estate 368 15 135 396 245
Commercial and industrial loans 141 170 42 222 124
Individuals 879 371 246 230 249
TOTAL LOANS CHARGED OFF 1,388 556 423 848 618
Recoveries of loans previously charged off:
Loans secured by real estate 111 97 9 56 3
Commercial and industrial loans 42 14 36 52 80
Individuals 183 111 36 40 32
TOTAL RECOVERIES 336 222 81 148 115
NET LOANS CHARGED-OFF 1,052 334 342 700 503
Provision charged to operating expenses 1,300 670 660 470 840
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Ratio of net charge-offs during the
period to average loans outstanding 0.36% 0.12% 0.14% 0.30% 0.23%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1996, the Corporation had a ratio of
average capital to average assets of 10.36%. This compares to a
ratio of average capital to average assets of 10.08% at December
31, 1995, and 9.25% at December 31, 1994.
Cash dividends declared in 1996 were 11.4% more than those paid
in 1995. The dividend to net income ratio was 20%. Additional
dividends of approximately $14.8 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.
As of December 31, 1996, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 17.7% and 18.7% respectively. One
year earlier, the comparable ratios were 16.9% and 17.9%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to
our stockholders, illustrates the average equity of the Corporation
for the last six years. The following table is the data illustrated
by this graph in thousands of dollars.
<TABLE>
<S> <C>
1990 $27,358
1991 30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
</TABLE>
<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 7.5% in 1996 due to a wider
gross margin that was enhanced by loan growth in all the market
areas the Bank serves. Interest and fees earned on loans
increased 5.8% in 1996 accounting for 73.7% of gross interest
income. Interest earned on investment securities and other
investments increased 12.8% in 1996 rounding out gross interest
income contributing 26.3%. Total interest income increased
11.9% in 1995 and 7.3% in 1994.
Interest Expense
Total interest expense increased 8.4% in 1996 due mostly to the
increase in interest-bearing deposits, about half of which can
be attributed to the acquisition indicated earlier. This
increase compares favorably to a 19.9% increase in 1995 and a
6.9% increase in 1994. The cost of interest-bearing deposits
remained steady all year under monthly monitoring by the
Asset/Liability Committee. This contributed to the wider gross
margin achieved during 1996. The net interest margin (tax
equivalent net interest income divided by average earning
assets) was 4.7% at the end of 1996 compared to 4.8% in 1995 and
4.7% in 1994.
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 28.4% during 1996 led by the
increase in service charges from new and acquired customers.
This compares to a 14.9% increase in 1995 and a 1.6% increase in
1994. Use of the Bank's 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. Income
from fiduciary services provided in the Bank's Trust Department
remained strong.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1996 and the percentage each category is of the total.
The following table is the data illustrated by this graph in
thousands of dollars.
<TABLE>
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,324 22.8%
Service fees on deposits 3,374 58.1%
Other service fees 746 12.8%
Other 363 6.3%
</TABLE>
Noninterest expenses, excluding the provision for possible
loan losses, increased 5.8% in 1996 which is a much smaller
increase than the 6.2% increase in 1995. The increase in 1994
was 5.4% for a smaller corporation. 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 $6 thousand in 1996 compared to $500 thousand in 1995 and
$891 thousand in 1994. Please refer to the discussion in the
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
expense in 1996 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,031 46.5%
Occupancy 1,211 8.0%
Furniture and equipment 1,581 10.5%
FDIC insurance 7 0%
Other 5,292 35.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - FIVE YEAR COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $27,343,817 $25,857,982 $21,130,914 $19,518,742 $19,791,548
Income on investment securities
Taxable interest 6,892,118 6,179,492 7,012,626 6,925,404 6,898,114
Exempt from federal income tax 2,366,764 2,156,813 2,184,666 1,857,168 1,825,869
Dividends 256,951 177,790 204,948 72,054 110,874
9,515,833 8,514,095 9,402,240 8,854,626 8,834,857
Other interest income 223,019 121,492 284,384 347,287 195,744
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538 28,720,655 28,822,149
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618 11,998,235 13,329,557
Interest on other short term
borrowings 94,232 174,370 93,286 38,339 47,449
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904 12,036,574 13,377,006
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634 16,684,081 15,445,143
PROVISION FOR POSSIBLE LOAN LOSSES 1,300,000 670,000 660,000 470,000 840,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634 16,214,081 14,605,143
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359 863,952 753,239
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992 2,206,026 2,123,096
Other service fees, commissions,
and fees 745,523 300,407 336,758 509,009 401,618
Other operating income 363,430 322,634 319,466 315,108 191,363
Available for sale securities
gains (losses) - 1,182 (243,690) 23,896 28,434
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885 3,917,991 3,497,750
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706 5,686,965 5,283,086
Net occupancy expense 1,211,067 1,279,434 1,190,678 1,070,971 984,650
Furniture and equipment expense 1,580,753 1,382,769 1,069,856 889,848 801,453
Loss on other real estate - 50,724 4,000 103,122 312,064
Other operating expenses 5,298,652 5,006,292 4,996,107 4,903,949 4,460,696
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347 12,654,855 11,841,949
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,756,135 8,634,475 7,765,172 7,477,217 6,260,944
PROVISION FOR INCOME TAXES 2,889,339 2,518,769 2,203,746 2,220,965 1,768,840
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
</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 12.3% higher in 1996 than in 1995. As indicated
earlier, the improvement in 1996's earnings resulted from a
wider gross margin, an increase in noninterest income sufficient
to cover a smaller increase in noninterest expenses, and the
increase in taxes. The smaller increase in noninterest expenses
is due in part to the significant decrease in deposit insurance.
These improvements were partially offset by higher additions to
the allowance for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has not been adopted by the Bank but is required
to adopted after December 31, 1996. The Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" establishes guidance on when to recognize and
how to measure these financial assets and liabilities. The
statement is effective prospectively for transfers and servicing
of financial assets and extinguishment of liabilities occurring
after December 31, 1996. It supersedes Statement No. 122,
"Accounting for Mortgage Servicing Rights", which was effective
for fiscal years beginning after December 15, 1995. Management
does not believe this statement will have any material effect on
future issues.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1996, had a
market value of $91 million and were held by 1,525 identifiable
individuals located mostly in the market area. A small number
of additional shareholders are not identified individually since
some bank nominees, including the bank's Trust Department, are
listed as single owners when, in fact, these holdings represent
large numbers of shareholders. No single shareholder's
ownership exceeded five percent at year end.
There is no established public trading market for the stock.
The table on the right 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>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
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
First quarter $ 56.00 $ 56.00 $
Second quarter 58.00 56.00 0.47
1996 Third quarter 63.00 60.00
Fourth quarter 65.00 63.00 0.51
$ 0.98
</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)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 502,700 $ 463,739 $ 451,953 $ 420,760 $ 381,379
AVERAGE LOANS (NET) $ 290,413 $ 276,166 $ 247,791 $ 233,609 $ 215,158
AVERAGE DEPOSITS $ 443,902 $ 409,489 $ 404,412 $ 378,782 $ 343,128
RETURN ON EQUITY AND ASSETS
Return on average assets 1.37% 1.32% 1.23% 1.25% 1.18%
Return on beginning equity 14.06% 13.95% 14.11% 14.93% 14.21%
Average equity to
average assets 10.36% 10.08% 9.25% 8.90% 8.76%
COMMON DIVIDEND PAYOUT RATIO
Earnings per share $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
Cash dividends per share $ 0.98 $ 0.88 $ 0.80 $ 0.73 $ 0.64
Ratio 20% 20% 20% 19% 20%
</TABLE>
<TABLE>
NET INTEREST MARGIN
(In Thousands of Dollars)
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
(TAX EQUIVALENT) $ 37,985 $ 35,626 $ 32,039 $ 29,465 $ 29,564
INTEREST EXPENSE 16,712 15,422 12,864 12,037 13,377
$ 21,273 $ 20,204 $ 19,175 $ 17,428 $ 16,187
NET INTEREST MARGIN* 4.66% 4.79% 4.68% 4.58% 4.67%
<FN>
<F23>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
<PAGE>
Nine color graphs are included on the following page in the
materials sent to our stockholders. The first one illustrates
net income for the last five years using information taken from
the "FIVE YEAR COMPARISON" table included above. The second one
illustrates return on average assets for the last five years
using information from the "COMPARATIVE DATA" table on the
previous page. The third, fourth and fifth graphs illustrate
return on stockholders' equity, earnings per share with cash
dividends and stockholder's equity for the last five years.
The sixth graph illustrates average net loans for the last five
years. The seventh and eighth graphs illustrate deposits and
assets for the last five years. The information for these
graphs was taken from the "COMPARATIVE DATA" table on the
previous page. The final graph which illustrates net interest
income for the last five years was taken from the net interest
margin section in the "COMPARATIVE DATA" table on the previous
page.
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, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 27,916,507 $ 31,281,706
Securities
Available for sale (amortized cost
$55,898,299 and $10,875,527 respectively) 56,141,535 11,269,006
Held to maturity (fair value $119,226,021
and $128,829,961 respectively) 118,541,750 127,662,682
Total securities - Note 2 174,683,285 138,931,688
Loans, net of unearned income - Note 3 303,732,044 291,930,311
Allowance for possible loan losses - Note 4 (2,926,063) (2,678,386)
Net loans 300,805,981 289,251,925
Bank premises and equipment, at cost less
allowance for depreciation and
amortization - Note 5 6,829,475 6,397,936
Other assets 15,094,426 11,171,993
TOTAL ASSETS $ 525,329,674 $ 477,035,248
LIABILITIES
Deposits
Noninterest-bearing $ 75,589,511 $ 67,420,536
Interest-bearing (including certificates
of deposit over $100,000:
1996 - $39,129,547; 1995 - $30,593,803) 384,983,050 343,357,525
Total deposits 460,572,561 410,778,061
Federal funds purchased 5,000,000 10,000,000
Dividends payable 714,000 630,000
Other short term liabilities 522,928 1,955,000
Accounts payable and accrued liabilities 4,119,059 4,675,712
TOTAL LIABILITIES 470,928,548 428,038,773
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 40,255,185 34,760,389
Net unrealized loss on available-for-sale
securities, net of tax 145,941 236,086
TOTAL STOCKHOLDERS' EQUITY 54,401,126 48,996,475
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 525,329,674 $ 477,035,248
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Net Unrealized
Gain (Loss) On
Common Retained Available-for-sale
Stock Earnings Securities Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year - 6,866,796 - 6,866,796
Cash dividends declared, $.98 per share - (1,372,000) - (1,372,000)
Net unrealized loss on available-for-sale
securities, net of tax - - (90,145) (90,145)
BALANCE AT DECEMBER 31, 1996 $ 14,000,000 $ 40,255,185 $ 145,941 $ 54,401,126
<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, 1996, 1995, AND 1994
<CAPTION>
1996 1995 1994
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 27,343,817 $ 25,857,982 $ 21,130,914
Interest on investment securities
Taxable interest 6,892,118 6,179,492 7,185,169
Exempt from federal income tax 2,366,764 2,156,813 2,184,666
Dividends 256,951 177,790 204,948
9,515,833 8,514,095 9,574,783
Other interest income 223,019 121,492 111,841
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618
Interest on other short term
borrowings 94,232 174,370 93,286
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634
PROVISION FOR POSSIBLE LOAN
LOSSES - Note 4 1,300,000 670,000 660,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992
Other service fees, commissions,
and fees 745,523 300,407 336,758
Other operating income 363,430 322,634 319,466
Available for sale securities
gains (losses) - 1,182 (243,690)
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706
Net occupancy expense 1,211,067 1,279,434 1,190,678
Furniture and equipment expense 1,580,753 1,382,769 1,069,856
Deposit insurance 6,549 499,709 890,646
Loss on other real estate - 50,724 4,000
Other operating expenses 5,292,103 4,506,583 4,105,461
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347
INCOME BEFORE PROVISION FOR
INCOME TAXES 9,756,135 8,634,475 7,765,172
PROVISION FOR INCOME TAXES - Note 8 2,889,339 2,518,769 2,203,746
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426
EARNINGS PER COMMON SHARE - Note 1
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97
<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, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 6,866,796 $ 6,115,706 $ 5,561,426
Adjustments to reconcile net income
to net cash provided by operating
activities
Excess of provision for possible
loan losses over net charge offs 247,677 336,096 318,639
Provision for depreciation and
amortization of premises and
equipment 685,005 645,816 589,045
Provision for depreciation of
leased equipment 521,500 - -
Amortization of deposit base
intangibles 224,212 168,020 168,020
Amortization of investment
security premiums, net of
accretion of discounts 553,355 641,104 678,968
Increase in cash surrender value
of life insurance contracts (111,685) (65,936) (75,287)
Deferred income taxes (161,999) (233,403) (163,907)
(Increase) decrease in
Interest receivable (125,119) (255,109) (992,872)
Other assets 307,844 912,162 344,572
Increase (decrease) in
Interest payable (494,950) 577,137 222,605
Other liabilities (61,704) 458,939 287,975
TOTAL ADJUSTMENTS 1,584,136 3,184,826 1,377,758
NET CASH PROVIDED BY OPERATING
ACTIVITIES 8,450,932 9,300,532 6,939,184
INVESTING ACTIVITIES
Proceeds from maturities, calls, and
sales of available-for-sale securities 3,020,054 7,306,453 25,152,051
Proceeds from maturities and calls of
held-to-maturity securities 56,112,000 18,848,992 5,092,000
Purchases of investment securities
Available-for-sale (48,222,295) (3,168,200) (16,942,994)
Held-to-maturity (47,364,954) (6,459,372) (19,495,987)
Net increase in loans (11,801,733) (29,236,191) (18,778,658)
Purchases of premises and equipment (1,116,543) (850,672) (418,586)
Purchase of equipment leased (2,607,500) - -
Purchase of deposit base intangibles (1,124,258) - -
Purchase of single premium life
insurance contract (785,330) - -
NET CASH USED BY INVESTING
ACTIVITIES (53,890,559) (13,558,990) (25,392,174)
FINANCING ACTIVITIES
Net increase in noninterest-bearing
and interest-bearing deposits 29,930,577 5,625,638 16,217,348
Assumption of deposit liabilities
- Note 12 19,863,923 - -
Net increase (decrease) in short
term borrowings (6,432,072) 4,355,000 7,000,000
Cash dividends (1,288,000) (1,176,000) (1,071,000)
NET CASH PROVIDED BY FINANCING
ACTIVITIES 42,074,428 8,804,638 22,146,348
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,365,199) 4,546,180 3,693,358
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 31,281,706 26,735,526 23,042,168
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 27,916,507 $ 31,281,706 $ 26,735,526
<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, 1996, 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 fourteen (14)
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 and Lewisburg West 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, Columbia State
Community College, and Maury Regional Hospital.
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 fourteen (14) other banks, two (2) 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, 1996, amounted to approximately $8.9 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.
Securities
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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
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 that may be sold prior to maturity
for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors,
are classified as 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 are included in earnings as realized losses.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are stated at their outstanding unpaid principal balances net of
any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. 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
loans are ninety days past-due or when a loan is considered
impaired. All loans 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 fair value, net of estimated selling
costs, or cost, at the date of foreclosure. If, at the time of
foreclosure, the fair value of the real estate is less than the
Bank's carrying value of the related loan, a write-down is
recognized through a charge to the allowance for possible loan
losses, and the fair value becomes the new cost for subsequent
accounting. If the Bank later determines that the cost of the
property cannot be recovered through sale or use, a write-down
is recognized by a charge to operations. When the property is
not in a condition suitable for sale or use at the time of
foreclosure, completion and holding costs, including such items
as real estate taxes, maintenance and insurance, are capitalized
up to the estimated net realizable value of the property.
However, when the property is in a condition for sale or use at
the time of foreclosure, or the property is already carried at
its estimated net realizable value, any subsequent holding 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 $450 thousand at December 31, 1996, and $483
thousand at December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
believed adequate by management to absorb estimated probable
inherent loan losses. Loan quality is monitored by Loan
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Possible Loan Losses (Continued)
Review, the Special Assets Committee, and the Credit
Administrator. The amount by which a loan is determined to be
impaired is added 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. The Bank's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated
value of any underlying collateral, composition of the loan
portfolio, current economic conditions, and other relevant
factors are considered in this evaluation. This process is
inherently subjective as it requires material estimates that are
susceptible to significant change including the amounts and
timing of future cash flows expected to be received on impaired
loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. The provision for depreciation
is computed principally on an accelerated cost recovery method
over the estimated useful lives of the assets, which range as
follows: buildings - 15 to 50 years and equipment - 3 to 33
years. Costs of major additions and improvements are
capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses from the
disposition of property are reflected in operations, and the
asset accounts and related allowances for depreciation are
reduced.
Certain other equipment purchased for lease to an outside
party under a five year operating lease is included in other
assets at cost less accumulated depreciation. The equipment is
being depreciated on an accelerated basis over seven years.
Trust Department Income
Trust department income is recognized on the accrual basis in
the applicable period earned.
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.
Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected
to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
Intangible Assets
Deposit base intangibles identified in merger transactions are
amortized over 42 to 180 months on the straight-line method.
Total amortization expense charged to operations amounted to:
1996 - $224,212; 1995 - $168,020; and 1994 - $168,020.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES
Securities with an amortized cost of $103,540,673 and
$93,101,954 at December 31, 1996 and 1995, respectively (fair
value: 1996 - $104,061,311; 1995 - $93,937,766), were pledged
to secure deposits and for other purposes as required or
permitted by law. The fair value is established by an
independent pricing service as of the approximate dates
indicated. The differences between the amortized cost and fair
value reflect current interest rates and represent the potential
gain (or loss) had the portfolio been liquidated on that date.
Security gains (or losses) are realized only in the event of
dispositions prior to maturity. The fair values of all
securities at December 31, 1996, either equaled or exceeded the
cost of those securities, or the decline in fair value is
considered temporary.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gain Loss Value
December 31, 1996
Available-for-sale securities
<S> <C> <C> <C> <C>
U.S. Treasury $ 26,412,520 $ 162,913 $ 63,634 $ 26,511,799
U.S. Government agencies 26,850,441 45,866 318,203 26,578,104
Other securities 2,635,338 565,044 148,750 3,051,632
$ 55,898,299 $ 773,823 $ 530,587 $ 56,141,535
Held-to-maturity securities
U.S. Treasury $ 30,504,935 $ 106,345 $ 22,080 $ 30,589,200
U.S. Government agencies 39,679,582 245,034 87,434 39,837,182
States and political subdivisions 47,538,074 700,948 283,420 47,955,602
Other securities 819,159 24,878 - 844,037
$ 118,541,750 $ 1,077,205 $ 392,934 $ 119,226,021
December 31, 1995
Available-for-sale securities
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
<FN>
<F4>
Table I - Amortized Cost and Fair Value of Investment Securities.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVESTMENT SECURITIES (Continued)
At December 31, 1996, the Corporation did not hold investment
securities of any single issuer, other than obligations of the
U.S. Treasury and other U.S. Government agencies, whose
aggregate book value exceeded ten percent of stockholders'
equity.
Table II shows the amortized cost, fair value, and weighted
yields (for tax-exempt obligations on a fully taxable basis
assuming a 34% tax rate) of investment securities at December
31, 1996, by contractual maturity. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations.
Proceeds from the maturity, call, or sale of
available-for-sale securities were $3,020,054, $7,306,453, and
$25,152,051 during 1996, 1995, and 1994 respectively. Proceeds
from the maturity or call of held-to-maturity securities were
$56,112,000, $18,848,992, and $5,092,000 during 1996, 1995, and
1994 respectively. There were no gains or losses in 1996.
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.
<TABLE>
<CAPTION>
Amortized Fair Yield
Cost Value (Unaudited)
Available-for-sale securities
U.S. Treasury
<S> <C> <C> <C>
Within one year $ 16,189,997 $ 16,176,499 5.6%
After one but within five years 9,171,798 9,274,000 6.3%
After five but within ten years 1,050,725 1,061,300 6.4%
U.S. Government agencies
Within one year 1,000,000 1,021,300 8.0%
After one but within five years 24,543,375 24,255,710 5.9%
After five but within ten years 1,043,738 1,038,400 6.2%
After ten years 263,328 262,694 6.1%
Other securities 2,635,338 3,051,632 8.9%
$ 55,898,299 $ 56,141,535
Held-to-maturity securities
U.S. Treasury
Within one year $ 22,067,254 $ 22,103,400 5.6%
After one but within five years 5,238,326 5,301,900 6.4%
After five but within ten years 3,199,355 3,183,900 6.0%
U.S. Government agencies
Within one year 4,504,421 4,512,100 6.1%
After one but within five years 17,076,622 17,210,700 6.4%
After five but within ten years 18,098,539 18,114,382 6.4%
States and political subdivisions
Within one year 3,015,087 3,061,625 10.0%
After one but within five years 12,976,264 13,229,979 8.1%
After five but within ten years 20,837,173 20,940,923 7.4%
After ten years 10,709,550 10,723,075 7.8%
Other securities
After one but within five years 319,159 330,087 8.0%
After five but within ten years 500,000 513,950 7.3%
$ 118,541,750 $ 119,226,021
<FN>
<F5>
Table II - Contractual Maturity of Investment Securities and
Weighted Tax Equivalent Yields
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS
<TABLE>
<CAPTION>
1996 1995
Loans secured by real estate
<S> <C> <C>
Construction and land development $ 8,751,021 $ 7,399,095
Farmland 6,923,739 7,849,137
Lines of credit 192,010 339,108
1-4 family residential property - first lien 116,905,803 111,016,393
1-4 family residential property - junior lien 6,461,497 7,177,285
Multifamily residential property 2,487,453 3,729,687
Non farm, non residential property 46,114,930 44,224,353
Subtotal 187,836,453 181,735,058
Commercial and industrial loans
Commercial and industrial 53,577,210 51,758,675
Taxable municipal loans 240,000 270,000
All other loans 748,125 88,239
Subtotal 54,565,335 52,116,914
Tax exempt municipal loans 605,933 1,485,071
Loans to individuals
Agricultural production 2,894,845 3,659,215
Lines of credit 200,903 135,230
Individuals for personal expenditures 57,897,835 53,026,209
Subtotal 60,993,583 56,820,654
304,001,304 292,157,697
Less:
Net unamortized loan origination fees (269,260) (225,368)
Unearned interest income - (2,018)
Allowance for possible loan losses (2,926,063) (2,678,386)
$ 300,805,981 $ 289,251,925
<FN>
<F6>
Table III - Loans Outstanding by Category at December 31, 1996
and 1995
</FN>
</TABLE>
<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 $ 66,689 $ 51,604 $ 25,824 $ 144,117
Variable rate loans 99,680 32,963 27,241 159,884
$ 166,369 $ 84,567 $ 53,065 $ 304,001
<FN>
<F7>
Table IV - Loan Maturities and Amounts of Loans Carrying Fixed
and Variable Interest Rates at December 31, 1996
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans having recorded investments of $5,136,286 at December
31, 1996, 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 $1,146,000. Interest
received on these loans during 1996 was $504,840. Impaired
loans had recorded investments of approximately $5,856,000 at
December 31, 1995.
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, 1996 and 1995, is shown in Table V that
follows.
These totals exclude loans made in the ordinary course of
business to other companies with which neither the Corporation
nor the Bank has a relationship other than the association of
one of its directors in the capacity of officer or director.
These loan transactions were made on substantially the same
terms as those prevailing at the time for comparable loans to
other persons. They did not involve more than the normal risk
of collectiblity or present other unfavorable features. No
related party loans were charged off in 1996 or 1995.
<TABLE>
<CAPTION>
Balance at
Beginning Amount Balance at
of Year Additions Collected End of Year
1996
<S> <C> <C> <C> <C>
Aggregate of certain party loans $ 7,706,004 $ 8,454,247 $ 7,937,989 $ 8,222,262
1995
Aggregate of certain party loans $ 6,494,271 $ 7,020,665 $ 5,808,932 $ 7,706,004
<FN>
<F8>
Table V - Analysis of Activity in Certain Party Loans
</FN>
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 2,678,386 $ 2,342,290 $ 2,023,651
Provision charged to operating expenses 1,300,000 670,000 660,000
Loan losses:
Loans charged off (1,388,422) (555,957) (422,831)
Recoveries on loans previously
charged off 336,099 222,053 81,470
Balance at end of year $ 2,926,063 $ 2,678,386 $ 2,342,290
<FN>
<F9>
Table VI - Changes in the Allowance for Possible Loan Losses
</FN>
</TABLE>
In the opinion of management, based on conditions reasonably
known, the allowance was adequate at December 31, 1996.
However, the allowance may be increased or decreased based on
loan growth, changes in credit quality, and changes in general
economic conditions.
For federal income tax purposes, the allowance for possible
loan losses is maintained at the maximum allowable by the
Internal Revenue Code.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 1,348,288 $ 1,204,288
Premises 7,013,942 6,648,329
Furniture and equipment 4,068,373 3,949,617
Leasehold improvements 1,149,732 879,695
13,580,335 12,681,929
Less allowance for depreciation and amortization (6,750,860) (6,283,993)
$ 6,829,475 $ 6,397,936
</TABLE>
Annual provisions for depreciation and amortization of bank
premises and equipment total $685,005 for 1996, $645,816 for
1995, and $589,045 for 1994. Included in premises and equipment
cost and allowance for depreciation and amortization are certain
fully depreciated assets totaling $2,590,066 at December 31,
1996.
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, 1996, additional dividends of approximately $14,800,000
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 2013. 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 $726,337,
$660,121, and $409,764 for equipment leases, and $112,384,
$111,649, and $97,966 for building leases, in 1996, 1995, and
1994, respectively. Future minimum lease commitments as of
December 31, 1996, under all noncancelable operating leases with
initial terms of one year or more are shown in Table VIII.
<TABLE>
<S> <S> <C>
1997 $ 784,704
1998 714,848
1999 383,334
2000 123,758
2001 123,758
Total future minimum lease payments $ 2,130,402
<FN>
<F9>
Table VIII - Future Minimum Lease Commitments
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 2,422,550 $ 2,166,566 $ 1,831,848
State 628,788 585,606 503,433
Total current 3,051,338 2,752,172 2,335,281
Deferred:
Federal (137,700) (198,393) (111,805)
State (24,299) (35,010) (19,730)
Total deferred (161,999) (233,403) (131,535)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
<FN>
<F10>
Table IX - Provisions for Income Taxes
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Allowance for possible loan losses $ 914,386 $ 815,315 $ 682,877
Write-down of other real estate 177,120 177,120 159,120
Deferred compensation 336,255 256,139 156,227
Direct lease financing - - 36,452
Unrealized loss on AFS securities - - 32,372
Deferred loan fees 26,863 44,051 24,546
Deferred tax asset 1,454,624 1,292,625 1,091,594
Unrealized gain on AFS securities (97,294) (157,392) -
Deferred tax liability (97,294) (157,392) -
Net deferred tax asset $ 1,357,330 $ 1,135,233 $ 1,091,594
<FN>
<F11>
Table X - Deferred Tax Effects of Principal Temporary Differences
</FN>
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rate $ 3,317,086 $ 2,935,722 $ 2,640,158
Increase (decrease) in taxes resulting from:
Tax-exempt interest (859,383) (783,011) (780,946)
Nondeductible interest expense 101,534 89,491 75,019
Other nondeductible expenses
(nontaxable income) - net (21,170) (28,114) (6,458)
State income taxes, net of federal
tax benefit 398,963 363,393 319,244
Dividend income exclusion (34,855) (18,324) (29,571)
Other (12,836) (40,388) (13,700)
Total provision for income taxes $ 2,889,339 $ 2,518,769 $ 2,203,746
Effective tax rate 29.6% 29.2% 28.4%
<FN>
<F12>
Table XI - Reconciliation of Total Income Taxes Reported with
the Amount of Income Taxes Computed at the
Federal Statutory Rate (34% Each Year)
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - FEDERAL AND STATE INCOME TAXES (Continued)
Total income taxes paid in 1996, 1995, and 1994 amounted to
$3,140,000, $2,756,442 and $2,431,332, respectively.
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.
The total outstanding loan commitments and stand-by letters of
credit in the normal course of business at December 31, 1996,
were $25,605,000 and $2,283,000, 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
Interest paid on deposits and other borrowings during 1996,
1995, and 1994 amounted to $17,206,708, $14,845,107, and
$12,641,299, respectively.
NOTE 11 - 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. The capital
classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios of Total Capital and Tier I
Capital to risk-weighted assets and of Tier I Capital to average
assets. Management believes, as of December 31, 1996 and 1995,
that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of June 30, 1996, the Bank's calculated risk-adjusted
capital ratios exceeded the minimum standard for a "well
capitalized" bank and this classification is confirmed by the
most recent notification from the Office of the Comptroller of
the Currency. There are no conditions or events since that
notification that management believes have changed the
institution's category. Actual capital amounts and ratios are
presented in Table XII.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1996 Amount Ratio Amount Ratio > or = Amount Ratio > or =
<s > <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) Consolidated 56,004,592 18.69% 23,972,003 8.00% 29,965,004 10.00%
Bank 55,472,014 18.55% 23,923,241 8.00% 29,904,051 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 53,078,528 17.71% 11,986,300 4.00% 17,979,450 6.00%
Bank 52,545,950 17.57% 11,962,652 4.00% 17,943,978 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 52,066,624 10.36% 20,107,993 4.00% 25,134,992 5.00%
Bank 50,574,336 10.07% 20,089,111 4.00% 25,111,388 5.00%
As of December 31, 1995
Total Capital (to Risk Weighted
Assets) Consolidated 51,162,164 17.87% 22,901,838 8.00% 28,627,297 10.00%
Bank 50,682,365 17.74% 22,855,632 8.00% 28,569,541 10.00%
Tier I Capital (to Risk Weighted
Assets) Consolidated 48,483,778 16.94% 11,450,919 4.00% 17,176,378 6.00%
Bank 48,003,979 16.80% 11,429,519 4.00% 17,144,278 6.00%
Tier I Capital (Average) (to Average
Assets) Consolidated 46,754,542 10.08% 18,549,574 4.00% 23,186,967 5.00%
Bank 45,891,248 9.91% 18,523,208 4.00% 23,154,010 5.00%
<FN>
<F13>
Table XII - Capital Amounts and Capital Adequacy
</FN>
</TABLE>
NOTE 12 - ACQUISITIONS
On April 1, 1996, the Bank purchased certain assets and
assumed certain deposit liabilities of the Mt. Pleasant, Maury
County, Tennessee, and Lewisburg, Marshall County, Tennessee,
branches of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee. The Office of the
Comptroller of the Currency granted approval of this
acquisition. Deposit liabilities totaling $19.9 million were
assumed in the transaction in exchange for other assets acquired
totaling $1.6 million and cash for the balance. The Mt.
Pleasant branch was combined with the Bank's office there and
the building was donated to the Mt. Pleasant-Maury Phosphate
Museum, a non-profit organization dedicated to preserving the
rich history of the phosphate industry in this area and actively
promoting tourism and economic development. The Lewisburg
branch gave the Bank a second location in Lewisburg
complementing the market penetration in Marshall County.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 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 $661,307, $633,459 and $602,010, in 1996, 1995, and
1994, respectively, are included in salaries and employee
benefits expense.
In 1992, the Bank formalized a nonqualified salary
continuation plan for certain key officers. In connection with
this plan, the value of the single premium universal life
insurance policies (1996 - $620,657; 1995 - $594,221) purchased
in 1993 to fund the plan and the related liability (1996 -
$513,792; 1995 - $482,272) were included in other assets and
other liabilities, respectively. Net non-cash income recognized
on these policies of $26,436 in 1996 and $14,133 in 1995 is
included in the above asset values. The principal cost of the
plan is being accrued over the anticipated remaining period of
active employment, based on the present value of the expected
retirement benefit. Expense related to this plan was $64,024 in
1996, $106,066 in 1995, and $98,925 in 1994.
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 $172,871 for 1996, $176,727
for 1995, and $126,262 for 1994 are 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. Net non-cash income recognized on these policies
of $85,249 in 1996 and $51,803 in 1995 is included in the cash
surrender values of $1,887,171 and $1,801,922 reported in other
assets at December 31, 1996 and 1995, respectively.
In 1996, the Bank established an officer group term
replacement/split dollar plan to provide life insurance benefits
that would continue after retirement. A single premium
universal life insurance policy was purchased to fund the plan
and a split dollar agreement was made with an irrevocable trust
that specified the portion of the insurance proceeds that would
become part of the trust. An insurance premium of $795,000 was
paid in November, 1996, of which $785,330 is the cash surrender
value at December 31, 1996, and is included in other assets, and
net expense of $9,670 is included in other operating expense.
The Bank is beneficiary on the insurance policies that fund
the salary continuation plan, the deferred compensation plan,
and the group term replace- ment/split dollar plan. These
policies have an aggregate face amount of $2,875,000.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in Thousands)
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 27,917 $ 27,917 $ 31,282 $ 31,282
Securities held to maturity 118,542 119,226 127,663 128,830
Securities available for sale 55,898 56,142 10,876 11,269
Loans, net 300,806 309,401 289,252 298,076
Accrued interest receivable 5,549 5,549 5,424 5,424
Financial liabilities
Deposits 460,573 449,129 410,778 398,296
Federal funds purchased 5,000 5,000 10,000 10,000
Short term borrowings 523 523 1,955 1,955
Accrued interest payable 2,539 2,539 3,034 3,034
<FN>
<F14>
Table XIII - Summary of Fair Values of Financial Instruments
</FN>
</TABLE>
Estimated fair values have been determined by the Bank using
the best available data. Many of the Bank's financial
instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in
an unforced, unforeclosed transaction. Therefore, significant
estimations and present value calculations were used by the Bank
for the purposes of this disclosure. Changes in assumptions or
the estimation methodologies used may have a material effect on
the estimated fair values included in this note.
Financial assets - Cash and cash equivalents are considered to
be carried at their fair value and have not been valued
differently than has been customary with historical cost
accounting. Securities available-for-sale and securities
held-to-maturity are valued by an independent rating service and
are disclosed in detail in Note 2 above. A present value
discounted cash flow methodology was used to value the net loan
portfolio. The discount rate used in these calculations was the
current rate at which new loans in the same classification for
regulatory reporting purposes would be made. This rate was
adjusted for credit loss and assumed prepayment risk. For
loans with floating interest rates it is presumed that estimated
fair values generally approximate the recorded book balances.
Financial liabilities - Deposits with stated maturities have
been valued using a present value discounted cash flow with a
discount rate approximating the current market for similar
liabilities. Financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the
amount payable on demand and the recorded book balance. For
deposits with floating interest rates it is presumed that
estimated fair values generally approximate the recorded book
balances. The carrying 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, 1996, 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.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
1996
<S> <C> <C> <C> <C> <C>
Interest income $ 9,052,224 $ 9,280,303 $ 9,249,133 $ 9,501,009 $37,082,669
Interest expense 3,989,386 4,153,059 4,260,324 4,308,988 16,711,757
Net interest income 5,062,838 5,127,244 4,988,809 5,192,021 20,370,912
Provision for possible loan
losses 250,000 300,000 200,000 550,000 1,300,000
Noninterest expenses, net of
noninterest income 2,327,604 2,234,505 2,335,349 2,417,319 9,314,777
Income before income taxes 2,485,234 2,592,739 2,453,460 2,224,702 9,756,135
Income taxes 777,319 776,659 694,636 640,725 2,889,339
Net income $ 1,707,915 $ 1,816,080 $ 1,758,824 $ 1,583,977 $ 6,866,796
Earnings per common share
(1,400,000 shares) $ 1.22 $ 1.30 $ 1.25 $ 1.13 $ 4.90
</TABLE>
<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
<FN>
<F15>
Table XIV - Consolidated Quarterly Results of Operations
</FN>
</TABLE>
NOTE 16 - DEPOSITS
The Bank does not have any foreign offices and all deposits
are serviced in its fifteen domestic offices. The average
amounts of deposits and the average rates paid are summarized in
Table XV. Maturities of time deposits of $100,000 or more at
December 31 are indicated in Table XVI.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - DEPOSITS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 61,509 - % $ 56,730 - % $ 55,557 - %
NOW and money market accounts 158,450 3.37 149,016 3.51 161,244 3.25
Savings deposits 37,421 3.22 34,629 3.00 35,036 2.87
Time deposits of less than $100,000 151,952 5.40 136,568 5.30 126,523 4.27
Time deposits of $100,000 or more 34,539 5.41 32,524 5.35 26,053 4.32
Total In Domestic Offices $ 443,871 3.74% $ 409,467 3.72% $ 404,413 3.66%
<FN>
<F16>
Table XV - Average Amounts of Deposits and Average Rates Paid by
Deposit Type at December 31
</FN>
</TABLE>
<TABLE>
1996 1995 1994
(Dollars In Thousands)
<S> <C> <C> <C>
Under 3 months $ 11,680 $ 7,877 $ 3,117
3 to 12 months 22,638 18,407 18,250
Over 12 months 4,812 4,310 4,803
$ 39,130 $ 30,594 $ 26,170
<FN>
<F17>
Table XVI - Maturities of Time Deposits of $100,00 or More at
December 31
</FN>
</TABLE>
NOTE 17- CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION
<TABLE>
<CAPTION>
December 31, 1996 and 1995
(In Thousands of Dollars)
Assets 1996 1995
<S> <C> <C>
Cash $ 142 $ 70
Investment in bank subsidiary - at equity 53,870 48,517
Investment in credit life insurance company - at cost 50 50
Investment in other securities 22 22
Dividends receivable from bank subsidiary 714 630
Cash surrender value - life insurance 489 466
Other assets 1 1
Total assets $ 55,288 $ 49,756
Liabilities and Stockholders' Equity
Liabilities
Payable to directors $ 173 $ 129
Dividends payable 714 630
Total liabilities 887 759
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 40,255 34,761
Net unrealized gain (loss) on available-for-sale
securities, net of tax 146 236
Total stockholders' equity 54,401 48,997
Total liabilities and stockholders' equity $ 55,288 $ 49,756
<FN>
<F18>
Table XVII - Condensed Balance Sheets of Parent
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - CONDENSED FINANCIAL INFORMATION OF PARENT CORPORATION (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating income
<S> <C> <C>
Dividends from bank subsidiary $ 1,372 $ 1,232
Other dividend income 85 22
Interest income 6 2
Other 28 27
Operating expenses 68 87
Income before equity in undistributed net
income of bank subsidiary 1,423 1,196
Equity in undistributed net income of bank
subsidiary 5,444 4,920
Net Income $ 6,867 $ 6,116
<FN>
<F19>
Table XVIII - Condensed Statements of Income of Parent
</FN>
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
(In Thousands of Dollars)
1996 1995
Operating activities
<S> <C> <C>
Net income for the year $ 6,867 $ 6,116
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of bank
subsidiary (5,444) (4,920)
Increase in other assets (111) (69)
Increase in payables 44 54
Total adjustments (5,511) (4,935)
Net cash provided by operating activities 1,356 1,181
Net cash provided by (used in) investing activities
Purchases of investment securities (133) -
Proceeds from maturities of investment securities 137 -
Net cash provided by (used in) investing activities 4 -
Net cash used in financing activities
Cash dividends paid (1,288) (1,176)
Increase (decrease) in cash 72 5
Cash at beginning of year 70 65
Cash at end of year $ 142 $ 70
<FN>
<F20>
Table XIX - Condensed Statements of Cash Flows of Parent
</FN>
</TABLE>
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 1996, First Farmers and Merchants National Bank
strengthened its presence in the four counties in middle
Tennessee that it serves. Deposits and loans in each of the
four counties increased. Internal growth was the challenge for
the year to all directors, officers, and employees who were
reminded that the bank was large enough to perform yet small
enough to care about customer needs. The Bank is positioned to
provide quality services in diverse markets and a dynamic
interest rate environment. Our customers are enjoying the
quality service of a community bank and the safety and strength
of a regional bank.
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 1996, 1995, and 1994; 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.
Summary
The Bank reported net income of $6.9 million for 1996 compared
to $6.1 million in 1995 and $5.6 million in 1994. On a per
common share basis, net income was $4.90 for 1996 versus $4.37
for 1995 and $3.97 for 1994. The improvement in 1996's earnings
resulted from a wider gross margin, an increase in noninterest
income sufficient to cover a smaller increase in noninterest
expenses, and the increase in taxes. The smaller increase in
noninterest expenses is due in part to the significant decrease
in deposit insurance. These improve- ments were partially
offset by higher additions to the allowance for loan losses.
The return on average equity for 1996 was 13.23% compared to
13.08% for 1995 and 13.30% for 1994. The return on average
assets was 1.37% for 1996 versus 1.32% for 1995 and 1.23% for
1994.
Gross Interest Margin
The gross interest margin is defined as the difference between
the revenue from earning assets, primarily interest income, and
interest expense related to interest-bearing liabilities. The
maintenance of the gross interest margin at a level which, when
coupled with noninterest revenues, is sufficient to cover
additions to the allowance for loan losses, noninterest expenses
and income taxes, and yield an acceptable profit is critical for
success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and
interest-bearing liabilities and the yields earned and rates
paid on those balances.
Management activities are planned to maintain a satisfactory
spread between the yields on earning assets and the related cost
of interest-bearing funds. The gross interest spread is
determined by comparing the taxable equivalent gross interest
margin to average earning assets before deducting the allowance
for loan losses. This ratio reflects the overall profitability
of earning assets, including both those funded by
interest-bearing sources and those which incur no interest cost
(primarily noninterest-bearing demand deposits). This ratio is
most often used when analyzing a banking institution's overall
gross margin profitability compared to that of other financial
institutions. The incremental interest spread compares the
difference between the yields on earning assets and the cost of
interest-bearing funds. This calculation and similar ratios are
used to assist in pricing decisions for interest related
products.
Table A entitled DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
presents for each of the last three years by major categories of
assets and liabilities, the average daily balances, the
components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross
interest spread.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE A - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
Average Rate/ Average Rate/ Average Rate/
Balance Yield Interest Balance Yield Interest Balance Yield Interest
ASSETS (Dollars In Thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net $290,413 9.43% $ 27,373* $276,166 9.38% $ 25,892* $247,791 8.54% $ 21,156*
Bank time deposits 1 - - 2 - - - - -
Taxable securities 118,030 6.15 7,256 104,220 6.20 6,457 119,960 6.25 7,497
Tax exempt securities 44,158 7.10 3,134* 39,139 8.06 3,156* 38,545 8.49 3,274*
Federal funds sold 4,198 5.31 223 2,076 5.83 121 2,998 3.73 112
TOTAL EARNING ASSETS 456,800 8.32 $ 37,986 421,603 8.45 $ 35,626 409,294 7.83 $ 32,039
Noninterest earning assets
Cash and due from banks 25,760 24,829 25,945
Bank premises and equipment 6,708 6,246 6,350
Other assets 13,432 11,061 10,364
TOTAL ASSETS $502,700 $463,739 $451,953
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities
Time and savings deposits:
NOW and money market accounts $158,438 3.37% $ 5,338 $148,993 3.51% $ 5,223 $161,244 3.25% $ 5,239
Savings 37,428 3.22 1,204 34,627 3.00 1,040 35,036 2.87 1,006
Time 151,973 5.40 8,210 136,605 5.30 7,245 126,523 4.27 5,400
Time over $100,000 34,554 5.40 1,866 32,522 5.35 1,740 26,053 4.32 1,126
TOTAL INTEREST BEARING
DEPOSITS 382,393 4.35 16,618 352,747 4.32 15,248 348,856 3.66 12,771
Federal funds purchased 1,043 5.56 58 2,415 5.92 143 1,462 4.86 71
Other short-term debt 622 5.79 36 565 5.49 31 568 3.92 22
TOTAL INTEREST BEARING
LIABILITIES 384,058 4.35 $ 16,712 355,727 4.34 $ 15,422 350,886 3.67 $ 12,864
Noninterest bearing liabilities
Demand deposits 61,509 56,742 55,557
Other liabilities 5,066 4,515 3,690
TOTAL LIABILITIES 450,633 416,984 410,133
Stockholders' equity 52,067 46,755 41,820
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $502,700 $463,739 $451,953
Spread between combined
rates earned and combined
rates paid* 3.97% 4.11% 4.16%
Net yield on interest-
earning assets* 4.66% 4.79% 4.68%
<FN>
<F21>
* Taxable equivalent basis
</FN>
</TABLE>
Notes:
1. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
2. The taxable equivalent adjustment has been computed based on
a 34% federal income tax rate and has given effect to the
disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets. Loans include
nonaccrual loans for all years presented.
3. The average balances of the fair values of available-for-sale
securities were used in the calculations in this table.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE B - Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential (Continued)
Table B sets forth, for the periods indicated, a summary of
changes in interest earned and interest paid separated into the
amount generated by volume changes and the amount generated by
changes in the yield or rate.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Volume and Yield/Rate Variances Yield/ Net Increase Yield/ Net Increase
(Taxable Equivalent Basis - In Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Revenue earned on
<S> <C> <C> <C> <C> <C> <C>
Net loans $ 1,336 $ 145 $ 1,481 $ 2,423 $ 2,313 $ 4,736
Investment securities
Taxable securities 856 (57) 799 (984) (56) (1,040)
Tax-free securities 405 (427) (22) 50 (168) (118)
Federal funds sold 124 (22) 102 (34) 43 9
Total interest earning assets 2,721 (361) 2,360 1,455 2,132 3,587
Interest paid on
NOW and money market accounts 331 (216) 115 (398) 382 (16)
Savings deposits 84 80 164 (12) 46 34
Time deposits 815 150 965 430 1,415 1,845
Time over $100,000 109 17 126 279 335 614
Federal funds purchased (81) (4) (85) 46 26 72
Short term debt 3 2 5 - 9 9
Total interest-bearing funds 1,261 29 1,290 345 2,213 2,558
Net interest earnings $ 1,460 $ (390) $ 1,070 $ 1,110 $ (81) $ 1,029
</TABLE>
Notes:
1. The change in interest resulting from both volume and
yield/rate has been allocated to change due to volume and change
due to yield/rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
2. The computation of the taxable equivalent adjustment has
given effect to the disallowance of interest expense, for
federal income tax purposes, related to certain tax-free assets.
3. U.S. Government, government agency, and corporate debt
securities plus equity securities in the available-for-sale and
held-to-maturity categories are taxable investment securities.
Municipal debt securities are nontaxable and classified as
held-to-maturity.
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Two graphs are included at this point in the material mailed to our stock-
holders. The first graph illustrates the categories of average earning
assets and the portion each category is of the total for the
last three years. The following table is the data illustrated
by this graph.
<TABLE>
<CAPTION>
Loans Investment Securities Other
<S> <C> <C> <C>
1996 $290,413 $162,188 $4,199
1995 276,166 143,358 2,078
1994 247,791 158,505 2,998
</TABLE>
The second graph illustrates the average balances by category of
liabilities that fund earning assets. The following table is
the data illustrated by this graph in thousands of dollars.
<TABLE>
<CAPTION>
Interest-Bearing Deposits Noninterest-Bearing Deposits Other
<S> <C> <C> <C>
1996 $382,393 $61,509 $1,043
1995 352,747 56,742 2,415
1994 348,856 55,557 1,462
</TABLE>
Average earning assets increased 8.4% in 1996 compared to an
3.0% increase in 1995 and a 7.6% increase in 1994. As a
financial institution, the Bank's primary earning asset is
loans. At December 31, 1996, average net loans represented
63.6% of average earning assets. Total average net loans
increased during the last three years showing an 5.2% growth
from 1995 to 1996, an 11.5% growth from 1994 to 1995, and a 6.1%
growth from 1993 to 1994. Average investments represented 36.4%
of average earning assets at December 31, 1996, and increased
14.5% in 1996. The Bank purchased certain assets and assumed
certain deposit liabilities of the Mt. Pleasant, Maury County,
Tennessee, and Lewisburg, Marshall County, Tennessee, branches
of Union Planters Bank of Middle Tennessee, National
Association, Nashville, Tennessee, effective as of April 1,
1996. The assets purchased were buildings and equipment and not
earning assets. Most of the increase in investments can be
attributed to the assumption of those deposit liabilities that
were not used for the increasing loan growth. Investments
decreased 9.6% in 1995, and increased 11.6% in 1994. Average
total assets increased during the last three years as evidenced
by an 8.4% growth from 1995 to 1996, a 2.6% growth from 1994 to
1995, and a 7.4% growth from 1993 to 1994. Please refer to the
color graphs at the end of this document that illustrate this
growth.
The bank's average deposits grew during the last three years
reflecting an 8.4% growth from 1995 to 1996, a 1.3% growth from
1994 to 1995, and a 6.8% growth from 1993 to 1994.
Approximately half of the increase in average deposits can be
attributed to the acquisition discussed earlier in this section.
Short and medium term rates were more competitive compared to
longer term rates during the first half of 1996 and some
depositors moved money back into interest-bearing transaction
accounts, which increased 6.3% during 1996 but had declined in
1995 as investors took advantage of higher certificate of
deposit rates. Over half of the increase during 1996 was
attributable to the acquisition. Average interest-bearing
checking accounts decreased 7.6 % in 1995 compared to a 9.5%
increase in 1994. Average savings deposits increased 8.1%
during 1996, over 54% from the acquisition. Savings deposits
have been strong historically providing a core, low cost, source
of funding. Average savings deposits declined 1.2% in 1995
compared to a 12.2% increase in 1994. Average certificates of
deposit under $100,000 increased 11.3% during 1996, 60.0% from
the acquisition, increased 8.0% in 1995, and declined 1.2.% in
1994. Certificates of deposit over $100,000 increased 6.3% in
1996, 87.8% from the acquisition, compared to a 24.8% increase
in 1995 and a 10.4% increase in 1994.
<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
The Bank maintains a formal asset and liability management
process to control interest rate risk and assist management in
maintaining reasonable stability in the gross interest margin as
a result of changes in the level of interest rates and/or the
spread relationships among interest rates. The Bank uses an
earnings simulation model to evaluate the impact of different
interest rate scenarios on the gross margin. Each month, the
Asset/Liability Committee monitors the relationship of rate
sensitive earning assets to rate sensitive interest bearing
liabilities (interest rate sensitivity) which is the principal
factor in determining the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning
assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor the Bank's overall interest rate
sensitivity is a gap analysis. Table C, Rate Sensitivity of
Earning Assets and Interest-Bearing Liabilities, shows the
Bank's rate sensitive position at December 31, 1996, 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 negative dollar change in net
interest income for a twelve month period of less than 3% of net
interest income given a three hundred basis point shift in
interest rates is considered an acceptable rate risk position.
The net interest margin, on a tax equivalent basis, at December
31, 1996, 1995, and 1994 was 4.66%, 4.79%, and 4.68%
respectively.
<TABLE>
TABLE C - Rate Sensitivity of Earning Assets and Interest-Bearing Liabilities
(Dollars in Thousands)
<CAPTION>
3 Months 3-6 6-12 Over 1
As of December 31, 1996 or Less Months Months Year Total
Earning assets
<S> <C> <C> <C> <C> <C>
Loans and leases, net of unearned $ 58,045 $ 42,594 $ 65,730 $ 137,632 $ 304,001
Taxable investment securities 13,855 10,000 13,500 90,061 127,416
Tax-exempt investment securities 1,000 1,100 900 44,271 47,271
Total earning assets 72,900 53,694 80,130 271,964 $ 478,688
Interest-bearing liabilities
NOW and money market accounts 45,590 - 64,588 43,136 $ 153,314
Savings - - 41,594 - 41,594
Time 41,547 33,805 50,657 25,077 151,086
Time over $100,000 11,680 9,813 12,825 4,812 39,130
Other short-term debt 5,523 - - - 5,523
Total interest bearing liabilities 104,340 43,618 169,664 73,025 $ 390,647
Noninterest-bearing, net (88,041)
Net asset/liability funding gap (31,440) 10,076 (89,534) 110,898
Cumulative net asset/liability
funding gap $ (31,440) $ (21,364) $(110,898) $ -
<FN>
<F22>
Available-for-sale and held-to-maturity securities were combined
in the taxable investment securities category for purposes of
this table.
</FN>
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan
portfolio is the largest component of earning assets and
consequently provides the highest amount of revenues. The loan
portfolio also contains, as a result of credit quality, the
highest exposure to risk. When analyzing potential loans,
management assesses both interest rate objectives and credit
quality objectives in determining whether to make a given loan
and the appropriate pricing for that loan. The Bank maintains a
diversified portfolio in order to spread its risk and reduce its
exposure to economic downturns which may occur in different
segments of the economy or in particular industries. The
composition of the loan portfolio is disclosed in detail in Note
3 in the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
accompanying financial statements.
The Bank follows written loan policies which include loan
review procedures and approvals. Depending primarily on the
amount of the loan, there are various approval levels including
an Executive Committee of the Board of Directors that meets
weekly.
The Bank has a Loan Review Department which performs ongoing,
independent reviews of specific loans for credit quality and
proper documentation. This department is centralized and
independent of the lending function. Regular reports are made
to senior management and the Executive Committee of the Board of
Directors regarding the credit quality of the loan portfolio, as
well as trends. Every loan is assigned a risk rating by the
loan officer subject to review by Loan Review. The Bank also
has a Credit Administrator who is responsible for assisting loan
officers in structuring new loans, reviewing problem loans,
monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a
formal review that is prepared quarterly to assess the risk in
the loan portfolio and to determine the adequacy of the
allowance for loans losses. This review supported management's
assertion that the allowance was adequate at December 31, 1996.
Table D, RISK ELEMENTS IN THE LOAN PORTFOLIO, includes all
loans management considers to be potential problem loans,
summarizes average loan balances, and reconciles the allowance
for loan losses for each year. Additions to the allowance,
which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged
in similar activities.
Loans having recorded investments of $5.1 million at December
31, 1996, have been identified as impaired in accordance with
the provisions of SFAS 114. They represent 1.7% of gross loans.
Commercial loans comprised $.384 million of the total, with
loans secured by real estate accounting for $3.6 million, and
installment loans $1.1 million. The gross interest income that
would have been recorded during 1996 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 $374, $365, and $193 thousand for
the years ended December 31, 1996, 1995, and 1994 respectively.
Please refer to Note 1 and Note 3 in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS that are included elsewhere in this
material for more information on the Bank's policy regarding
loan impairment.
A graph on the bottom of this page is included in the materials
sent to the stockholders that illustrates the increase in
average net loans and the ratio of net loan charge offs to
average loans for the last eight years. The ratio at December
31, 1996 was .36%. This ratio, although higher than 1994 and
1995 ratios, is well below industry levels. The following
table is the data illustrated by this graph.
<TABLE>
<CAPTION>
Avg Loans Ratio Net
Outstanding CO/Avg Ln
<S> <C> <C>
1989 $163,003 0.0032%
1990 172,749 0.0030
1991 182,561 0.0037
1992 215,158 0.0023
1993 233,608 0.0030
1994 247,791 0.0014
1995 276,166 0.0012
1996 290,413 0.0036
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE D - RISK ELEMENTS IN THE LOAN PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 290,413 $ 276,166 $ 247,791 $ 233,608 $ 215,158
Balance of allowance for possible loan
losses at beginning of year $ 2,678 $ 2,342 $ 2,024 $ 2,254 $ 1,917
Loans charged-off:
Loans secured by real estate 368 15 135 396 245
Commercial and industrial loans 141 170 42 222 124
Individuals 879 371 246 230 249
TOTAL LOANS CHARGED OFF 1,388 556 423 848 618
Recoveries of loans previously charged off:
Loans secured by real estate 111 97 9 56 3
Commercial and industrial loans 42 14 36 52 80
Individuals 183 111 36 40 32
TOTAL RECOVERIES 336 222 81 148 115
NET LOANS CHARGED-OFF 1,052 334 342 700 503
Provision charged to operating expenses 1,300 670 660 470 840
BALANCE OF ALLOWANCE FOR
POSSIBLE LOAN LOSSES AT
END OF YEAR $ 2,926 $ 2,678 $ 2,342 $ 2,024 $ 2,254
Ratio of net charge-offs during the
period to average loans outstanding 0.36% 0.12% 0.14% 0.30% 0.23%
</TABLE>
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS
Historically, internal growth has financed the capital needs of
the Bank. At December 31, 1996, the Corporation had a ratio of
average capital to average assets of 10.36%. This compares to a
ratio of average capital to average assets of 10.08% at December
31, 1995, and 9.25% at December 31, 1994.
Cash dividends declared in 1996 were 11.4% more than those paid
in 1995. The dividend to net income ratio was 20%. Additional
dividends of approximately $14.8 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.
As of December 31, 1996, the Corporation's ratios of Tier I
capital to risk-weighted assets and total capital to
risk-weighted assets were 17.7% and 18.7% respectively. One
year earlier, the comparable ratios were 16.9% and 17.9%,
respectively. Please refer to Note 11 in the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the accompanying financial
statements for more information on the capital strength of the
Corporation and the Bank.
A bar graph at the bottom of this page, in the materials sent to
our stockholders, illustrates the average equity of the Corporation
for the last six years. The following table is the data illustrated
by this graph in thousands of dollars.
<TABLE>
<S> <C>
1990 $27,358
1991 30,194
1992 33,414
1993 37,454
1994 41,820
1995 46,755
1996 52,067
</TABLE>
<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 7.5% in 1996 due to a wider
gross margin that was enhanced by loan growth in all the market
areas the Bank serves. Interest and fees earned on loans
increased 5.8% in 1996 accounting for 73.7% of gross interest
income. Interest earned on investment securities and other
investments increased 12.8% in 1996 rounding out gross interest
income contributing 26.3%. Total interest income increased
11.9% in 1995 and 7.3% in 1994.
Interest Expense
Total interest expense increased 8.4% in 1996 due mostly to the
increase in interest-bearing deposits, about half of which can
be attributed to the acquisition indicated earlier. This
increase compares favorably to a 19.9% increase in 1995 and a
6.9% increase in 1994. The cost of interest-bearing deposits
remained steady all year under monthly monitoring by the
Asset/Liability Committee. This contributed to the wider gross
margin achieved during 1996. The net interest margin (tax
equivalent net interest income divided by average earning
assets) was 4.7% at the end of 1996 compared to 4.8% in 1995 and
4.7% in 1994.
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 28.4% during 1996 led by the
increase in service charges from new and acquired customers.
This compares to a 14.9% increase in 1995 and a 1.6% increase in
1994. Use of the Bank's 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. Income
from fiduciary services provided in the Bank's Trust Department
remained strong.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
income in 1996 and the percentage each category is of the total.
The following table is the data illustrated by this graph in
thousands of dollars.
<TABLE>
<CAPTION>
Income Category Income $ % of Total
<S> <C> <C>
Income from trust services $1,324 22.8%
Service fees on deposits 3,374 58.1%
Other service fees 746 12.8%
Other 363 6.3%
</TABLE>
Noninterest expenses, excluding the provision for possible
loan losses, increased 5.8% in 1996 which is a much smaller
increase than the 6.2% increase in 1995. The increase in 1994
was 5.4% for a smaller corporation. 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 $6 thousand in 1996 compared to $500 thousand in 1995 and
$891 thousand in 1994. Please refer to the discussion in the
CAPITAL RESOURCES, CAPITAL, AND DIVIDENDS section above for more
information concerning the bank's capitalization.
A pie chart is included at this point in the materials sent to
our stockholders illustrating the composition of noninterest
expense in 1996 and the percentage each category is of the
total. The following table is the data illustrated by this
graph in thousands of dollars.
<TABLE>
<CAPTION>
Expense Category Expense $ % of Total
<S> <C> <C>
Personnel $7,031 46.5%
Occupancy 1,211 8.0%
Furniture and equipment 1,581 10.5%
FDIC insurance 7 0%
Other 5,292 35.0%
</TABLE>
<PAGE>
FIRST FARMERS AND MERCHANTS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE E - FIVE YEAR COMPARISON
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $27,343,817 $25,857,982 $21,130,914 $19,518,742 $19,791,548
Income on investment securities
Taxable interest 6,892,118 6,179,492 7,012,626 6,925,404 6,898,114
Exempt from federal income tax 2,366,764 2,156,813 2,184,666 1,857,168 1,825,869
Dividends 256,951 177,790 204,948 72,054 110,874
9,515,833 8,514,095 9,402,240 8,854,626 8,834,857
Other interest income 223,019 121,492 284,384 347,287 195,744
TOTAL INTEREST INCOME 37,082,669 34,493,569 30,817,538 28,720,655 28,822,149
INTEREST EXPENSE
Interest on deposits 16,617,525 15,247,875 12,770,618 11,998,235 13,329,557
Interest on other short term
borrowings 94,232 174,370 93,286 38,339 47,449
TOTAL INTEREST EXPENSE 16,711,757 15,422,245 12,863,904 12,036,574 13,377,006
NET INTEREST INCOME 20,370,912 19,071,324 17,953,634 16,684,081 15,445,143
PROVISION FOR POSSIBLE LOAN LOSSES 1,300,000 670,000 660,000 470,000 840,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,070,912 18,401,324 17,293,634 16,214,081 14,605,143
NONINTEREST INCOME
Trust department income 1,323,525 1,251,642 1,249,359 863,952 753,239
Service fees on deposit accounts 3,373,805 2,697,332 2,317,992 2,206,026 2,123,096
Other service fees, commissions,
and fees 745,523 300,407 336,758 509,009 401,618
Other operating income 363,430 322,634 319,466 315,108 191,363
Available for sale securities
gains (losses) - 1,182 (243,690) 23,896 28,434
TOTAL NONINTEREST INCOME 5,806,283 4,573,197 3,979,885 3,917,991 3,497,750
NONINTEREST EXPENSES
Salaries and employee benefits 7,030,588 6,620,827 6,247,706 5,686,965 5,283,086
Net occupancy expense 1,211,067 1,279,434 1,190,678 1,070,971 984,650
Furniture and equipment expense 1,580,753 1,382,769 1,069,856 889,848 801,453
Loss on other real estate - 50,724 4,000 103,122 312,064
Other operating expenses 5,298,652 5,006,292 4,996,107 4,903,949 4,460,696
TOTAL NONINTEREST EXPENSES 15,121,060 14,340,046 13,508,347 12,654,855 11,841,949
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,756,135 8,634,475 7,765,172 7,477,217 6,260,944
PROVISION FOR INCOME TAXES 2,889,339 2,518,769 2,203,746 2,220,965 1,768,840
NET INCOME $ 6,866,796 $ 6,115,706 $ 5,561,426 $ 5,256,252 $ 4,492,104
EARNINGS PER COMMON SHARE
(1,400,000 outstanding shares) $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
</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 12.3% higher in 1996 than in 1995. As indicated
earlier, the improvement in 1996's earnings resulted from a
wider gross margin, an increase in noninterest income sufficient
to cover a smaller increase in noninterest expenses, and the
increase in taxes. The smaller increase in noninterest expenses
is due in part to the significant decrease in deposit insurance.
These improvements were partially offset by higher additions to
the allowance for loan losses.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN A FUTURE PERIOD
The Financial Accounting Standards Board has issued one
standard that has not been adopted by the Bank but is required
to adopted after December 31, 1996. The Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" establishes guidance on when to recognize and
how to measure these financial assets and liabilities. The
statement is effective prospectively for transfers and servicing
of financial assets and extinguishment of liabilities occurring
after December 31, 1996. It supersedes Statement No. 122,
"Accounting for Mortgage Servicing Rights", which was effective
for fiscal years beginning after December 15, 1995. Management
does not believe this statement will have any material effect on
future issues.
SHAREHOLDER INFORMATION
The 1,400,000 shares of common stock of First Farmers &
Merchants Corporation outstanding at December 31, 1996, had a
market value of $91 million and were held by 1,525 identifiable
individuals located mostly in the market area. A small number
of additional shareholders are not identified individually since
some bank nominees, including the bank's Trust Department, are
listed as single owners when, in fact, these holdings represent
large numbers of shareholders. No single shareholder's
ownership exceeded five percent at year end.
There is no established public trading market for the stock.
The table on the right 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>
<CAPTION>
Price Range of Dividend
Common Stock Paid
High Low Per Share
<S> <S> <C> <C> <C>
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
First quarter $ 56.00 $ 56.00 $
Second quarter 58.00 56.00 0.47
1996 Third quarter 63.00 60.00
Fourth quarter 65.00 63.00 0.51
$ 0.98
</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)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS $ 502,700 $ 463,739 $ 451,953 $ 420,760 $ 381,379
AVERAGE LOANS (NET) $ 290,413 $ 276,166 $ 247,791 $ 233,609 $ 215,158
AVERAGE DEPOSITS $ 443,902 $ 409,489 $ 404,412 $ 378,782 $ 343,128
RETURN ON EQUITY AND ASSETS
Return on average assets 1.37% 1.32% 1.23% 1.25% 1.18%
Return on beginning equity 14.06% 13.95% 14.11% 14.93% 14.21%
Average equity to
average assets 10.36% 10.08% 9.25% 8.90% 8.76%
COMMON DIVIDEND PAYOUT RATIO
Earnings per share $ 4.90 $ 4.37 $ 3.97 $ 3.75 $ 3.21
Cash dividends per share $ 0.98 $ 0.88 $ 0.80 $ 0.73 $ 0.64
Ratio 20% 20% 20% 19% 20%
</TABLE>
<TABLE>
NET INTEREST MARGIN
(In Thousands of Dollars)
<CAPTION>
1996 1995 1994 1993 1992
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
(TAX EQUIVALENT) $ 37,985 $ 35,626 $ 32,039 $ 29,465 $ 29,564
INTEREST EXPENSE 16,712 15,422 12,864 12,037 13,377
$ 21,273 $ 20,204 $ 19,175 $ 17,428 $ 16,187
NET INTEREST MARGIN* 4.66% 4.79% 4.68% 4.58% 4.67%
<FN>
<F23>
*Net interest margin is net interest income (tax equivalent)
divided by average earning assets.
</FN>
</TABLE>
<PAGE>
Nine color graphs are included on the following page in the
materials sent to our stockholders. The first one illustrates
net income for the last five years using information taken from
the "FIVE YEAR COMPARISON" table included above. The second one
illustrates return on average assets for the last five years
using information from the "COMPARATIVE DATA" table on the
previous page. The third, fourth and fifth graphs illustrate
return on stockholders' equity, earnings per share with cash
dividends and stockholder's equity for the last five years.
The sixth graph illustrates average net loans for the last five
years. The seventh and eighth graphs illustrate deposits and
assets for the last five years. The information for these
graphs was taken from the "COMPARATIVE DATA" table on the
previous page. The final graph which illustrates net interest
income for the last five years was taken from the net interest
margin section in the "COMPARATIVE DATA" table on the previous
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 15, 1997.
<PAGE>
Executive Officers of Registrant
The following is a list as of March 1, 1997, 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>
Waymon L. Hickman 62 None Chairman of the Board 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.
Thomas Randall Stevens 45 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 Admin-
istrative 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.
</TABLE>
<PAGE>
Executive Officers of Registrant-Continued
<TABLE>
<CAPTION>
Family Positions and
Name Age Relationship Offices Held
<S> <C> <C> <C>
Edward A. Cox 74 None Vice President of FFMC. Senior
Vice President and Director of
Planning and Training of the Bank.
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.
John P. Tomlinson, III 46 None Vice President/Secretary ofFFMC.
Executive Vice President and
Manager of Mortgage Lending of
the Bank. Employed in 1973.
Promoted to Commercial Bank
Officer in 1974. Named
Assistant Vice President in 1976.
Promoted to Vice President in
1979. Named Manager of Mortgage
Lending in 1986. Promoted to
Senior Vice President in 1990.
Promoted to Executive Vice
President in 1995. Elected
Secretary of FFMC in April, 1996.
Named Vice President of FFMC
December 17, 1996.
Martha M. McKennon 52 None Assistant Secretary of FFMC.
Assistant Vice President and
Executive Assistant of the Bank.
Employed in 1974. Promoted to
Customer Service Representative
in 1980. Named Executive
Assistant in 1984. Promoted to
Assistant Vice President/Executive
Assistant in 1991. Named Assistant
Secretary of FFMC December 17, 1996.
</TABLE>
<PAGE>
Executive Officers of Registrant-Continued
<TABLE>
<CAPTION>
Family Positions and
Name Age Relationship Offices Held
<S> <C> <C> <C>
Patricia N. McClanahan 52 None Senior Vice President and Chief
Financial Officer/ 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. Named Chief
Financial Officer in 1996.
</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.
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,
Chairman of the Board and Chief Executive Officer
(Chairman of the Board and Chief Executive Officer of the Bank)
Date March 18, 1997
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, President
(President and Chief Operating Officer of the Bank)
Date March 18, 1997
/s / Patricia N. McClanahan
Patricia N. McClanahan, Treasurer
(Principal Accounting Officer)
Date March 18, 1997
<PAGE>
Signatures -- continued
/s/ Kenneth A. Abercrombie /s/ Sam D. Kennedy
Kenneth A. Abercrombie, Director Sam D. Kennedy, Director
Date March 18, 1997 Date March 18, 1997
/s/ James L. Bailey, Jr. /s/Tillman Knox
James L. Bailey, Jr., Director Tillman Knox, Director
Date March 18, 1997 Date March 18, 1997
/s/ Harlan D. Bowsher /s/ Joe E. Lancaster
Harlan D. Bowsher, Director Joe E. Lancaster, Director
Date March 18, 1997 Date March 18, 1997
/s/ H. Terry Cook, Jr. /s/ Flavius Barker
H. Terry Cook, Jr., Director Flavius Barker, Director
Date March 18, 1997 Date March 18, 1997
/s/ W. J. Davis, Jr. /s/ Thomas Randall Stevens
W. J. Davis, Jr., Director Thomas Randall Stevens, Director
Date March 18, 1997 Date March 18, 1997
/s/ Tom Napier Gordon /s/ Dan C. Wheeler
Tom Napier Gordon, Director Dan C. Wheeler, Director
Date March 18, 1997 Date March 18, 1997
/s/ Edwin W. Halliday /s/ David I. Wise
Edwin W. Halliday, Director David I. Wise, Director
Date March 18, 1997 Date March 18, 1997
/s/ Waymon L. Hickman /s/ W. Donald Wright
Waymon L. Hickman, Director W. Donald Wright, Director
Date March 18, 1997 Date March 18, 1997
<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, 1996
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 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statements of First Farmers
and Merchants Corporation and Subsidiary, included in the annual
report of the registrant to its security holders for the year
ended December 31, 1996, are incorporated by reference in Item 8:
Consolidated balance sheets -- December 31, 1996 and 1995
Consolidated statements of income -- Years ended December 31,
1996, 1995, and 1994
Consolidated statements of cash flows -- Years ended December
31, 1996, 1995, and 1994
Notes to consolidated financial statements -- December 31, 1996
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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,915,610
<INT-BEARING-DEPOSITS> 897
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,141,535
<INVESTMENTS-CARRYING> 118,541,750
<INVESTMENTS-MARKET> 119,226,021
<LOANS> 303,732,044
<ALLOWANCE> (2,926,063)
<TOTAL-ASSETS> 525,329,674
<DEPOSITS> 460,572,561
<SHORT-TERM> 5,522,928
<LIABILITIES-OTHER> 4,833,059
<LONG-TERM> 0
0
0
<COMMON> 14,000,000
<OTHER-SE> 40,401,126
<TOTAL-LIABILITIES-AND-EQUITY> 525,329,674
<INTEREST-LOAN> 27,343,817
<INTEREST-INVEST> 9,515,833
<INTEREST-OTHER> 223,019
<INTEREST-TOTAL> 37,082,669
<INTEREST-DEPOSIT> 16,617,525
<INTEREST-EXPENSE> 16,711,757
<INTEREST-INCOME-NET> 23,370,912
<LOAN-LOSSES> 1,300,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,121,060
<INCOME-PRETAX> 9,756,135
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,866,796
<EPS-PRIMARY> 4.90
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.66
<LOANS-NON> 5,136,286
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,678,386
<CHARGE-OFFS> 1,388,422
<RECOVERIES> 336,099
<ALLOWANCE-CLOSE> 2,926,063
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
